U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
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 $5,444,056.
The aggregate market value of the common equity held by non-affiliates was
$18,773,201 as of February 25, 2005, based on a sales price of $13.50 per share
of Common Stock, which is the sales price at which the Common Stock was last
traded on February 25, 2005 as reported by the Nasdaq SmallCap Market.
The number of shares outstanding of the issuer's Common Stock was 1,783,894.5 as
of March 21, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2005 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.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
OLD LINE BANCSHARES, INC.
ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
PAGE #
PART I
Item 1. Description of Business............................................ 1
Item 2. Description of Property............................................ 14
Item 3. Legal Proceedings.................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders................ 15
PART II
Item 5. Market for Common Equity and Related Stock Matters................. 15
Item 6. Management's Discussion and Analysis of Financial Condition
And Results of Operations.......................................... 18
Item 7. Financial Statements............................................... 42
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets December 31, 2004, 2003 and 2002
Consolidated Statements of Income for the years ended
December 31, 2004, 2003 and 2002
Consolidated Statement of Changes in Stockholders' Equity
For the years ended December 31, 2002, 2003 and 2004
Consolidated Statements of Cash Flows For the years ended
December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting
And Financial Disclosure........................................... 70
Item 8A. Controls and Procedures............................................ 70
Item 8B. Other Information.................................................. 70
PART III
Item 9. Directors, Executive Officers, Promoters, Control Persons,
Compliance with Section 16 (a) of the Exchange Act................. 70
Item 10. Executive Compensation............................................. 70
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters........................................ 70
Item 12. Certain Relationships and Related Transactions..................... 71
Item 13. Exhibits and Reports on Form 8-K................................... 71
Item 14. Principal Accountant Fees and Services............................. 72
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS OF OLD LINE BANCSHARES, INC.
Old Line Bancshares, Inc. was incorporated under the laws of the State of
Maryland on April 11, 2003 to serve as the holding company of Old Line Bank.
On May 22, 2003, the stockholders of Old Line Bank approved the
reorganization of Old Line Bank into a holding company structure. The
reorganization became effective at 12:01 a.m. on September 15, 2003. In
connection with the reorganization, (i) Old Line Bank became a wholly-owned
subsidiary of Old Line Bancshares, Inc., and (ii) each outstanding share (or
fraction thereof) of Old Line Bank common stock was converted into one share (or
fraction thereof) of Old Line Bancshares, Inc. common stock, and the former
holders of Old Line Bank common stock became the holders of all the outstanding
shares of Old Line Bancshares, Inc. common stock.
The primary business of Old Line Bancshares, Inc. is owning all of the
capital stock of Old Line Bank. Old Line Bancshares also has a $550,000 equity
investment in a real estate investment limited liability company named Pointer
Ridge Office Investment ("Pointer Ridge"). Old Line Bancshares, Inc. owns 50% of
Pointer Ridge. Frank Lucente, a director of Old Line Bancshares, Inc. and Old
Line Bank, controls twenty five percent of Pointer Ridge and controls the
manager of Pointer Ridge. See "Item 11-Security Ownership of Certain Beneficial
Owners and Management related Stockholder Matters". The purpose of Pointer Ridge
is to acquire, own, hold for profit, sell, assign, transfer, operate, lease,
develop, mortgage, refinance, pledge and otherwise deal with real property
located at the intersection of Pointer Ridge Road and Route 301 in Bowie,
Maryland. Pointer Ridge has acquired the property and plans to construct a
commercial office building containing approximately 40,000 square feet. Old Line
Bancshares, Inc. plans to lease approximately 50% of this building for its main
office (moving its existing main office from Waldorf, Maryland) and a branch of
Old Line Bank.
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. The $6.9 million in net
offering proceeds provided Old Line Bank the capital necessary to retain higher
percentages of loans that it previously participated to other financial
institutions. It also allowed Old Line Bank to maintain its well capitalized
status with the bank regulatory authorities. We have also used these funds for
expansion efforts as described below and investing in Pointer Ridge as outlined
above.
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
1
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.
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 National Bank and to have a local primary regulator.
Prior to the conversion, Old Line Bank's primary regulator was the Office of the
Comptroller of the Currency. Currently, Old Line Bank's primary regulator is the
Maryland Commissioner of Financial Regulation.
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.
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.
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. In the first
quarter of 2006, we expect to move our headquarters location from Waldorf,
Maryland to the Pointer Ridge location in Bowie, Maryland in Prince George's
County. We also plan to establish a new branch at the Pointer Ridge location.
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 we
will continue to expand 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 also 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 acquisitions of existing financial
institutions or branches thereof.
As part of our expansion efforts, in July 2004, Old Line Bank executed a
lease and applied to regulatory authorities to open a branch at 1641 State Route
3 North, Crofton, Maryland in Anne Arundel County, approximately 10 miles north
of the anticipated new Bowie, Maryland main office. In August 2004, we received
regulatory authority to open the branch in Crofton, Maryland. We anticipate that
construction of the building in
2
which we will locate the branch will begin during the second or third quarter of
2005. We expect the branch will open in the fourth quarter of 2005 or the first
quarter of 2006, although the lease and the branch are subject to completion of
construction.
We intend to use the Internet and technology to augment our growth plans.
Currently, we offer our customers image technology, telephone banking and
Internet banking with on line 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. 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, 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
3
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.
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
construction costs in excess of loan proceeds, and the value of the collateral.
During construction, we advance funds on these loans on a percentage of
completion basis. We inspect each project as needed prior to advancing funds
during the term of the construction loan.
Residential Real Estate Lending. We offer a variety of consumer-oriented
residential real estate loans. The bulk of our portfolio is made up of home
equity loans to individuals with a loan to value not exceeding 85%. We also
offer fixed rate home improvement loans. Our home equity and home improvement
loan portfolio gives us a diverse client base. Although most of these loans are
in our primary market area, the diversity of the individual loans in the
portfolio reduces our potential risk. Usually, we secure our home equity loans
and lines of credit with a security interest in the borrower's primary or
secondary residence. Our initial underwriting includes an analysis of the
borrower's debt/income ratio which generally may not exceed 40%, collateral
value, length of employment and prior credit history.
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 ($20.8 million or 97.20% of the consumer
loans, excluding consumer real estate, and 25.40% of gross loans at December 31,
2004). 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
4
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.
Since inception and currently, boat loans have originated from brokers and
Old Line Bank has paid a fee to the broker for the origination. In 2005, we plan
to establish a boat brokerage division within Old Line Bank. This division will
originate boat loans for Old Line Bank as well as for sale to other lenders. Old
Line Bank does not plan to increase its purchases of boat loans with the
establishment of this division. Old Line Bank does expect that it will increase
its fee income because of boat loan sales this division originates.
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 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, 2004, our legal lending limit for loans
to one borrower was approximately $2,049,000. 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, we provide Internet banking capabilities to
our customers. With our Internet banking service, our customers may view their
accounts on-line and electronically remit bill payments. Our commercial account
services include direct deposit of payroll for our commercial clients' employees
and an overnight sweep service.
5
DEPOSIT ACTIVITIES
Deposits are the major source of our funding. We offer a broad array of
deposit products that include demand, NOW, money market and savings accounts as
well as certificates of deposit. We believe that we pay competitive rates on our
interest bearing deposits. As a relationship-oriented organization, we generally
seek to obtain deposit relationships with our loan clients.
As our overall balance sheet position dictates, we may become more or less
competitive in our interest rate structure. 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 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 February 25, 2005, Old Line Bank had 33 full time and 3 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
6
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 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
7
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 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.
8
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 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
9
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.
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 11(c)(5) of the FDIA, a conservator or
receiver may be appointed for an institution where: (i) an institution's
obligations exceed its assets; (ii) there is substantial dissipation of the
institution's assets or earnings as a result of any violation of law or any
unsafe or unsound practice; (iii) the institution is in an unsafe or unsound
condition; (iv) there is a willful violation of a cease-and-desist order; (v)
the institution is unable to pay its obligations in the ordinary course of
business; (vi) losses or threatened losses deplete all or substantially all of
an institution's capital, and there is no reasonable prospect of becoming
"adequately capitalized" without assistance; (vii) there is any violation of law
or unsafe or unsound practice or condition that is likely to cause insolvency or
substantial dissipation of assets or earnings, weaken the institution's
condition, or
10
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 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.
We have entered into banking transactions with our directors and executive
officers and the business and professional organizations in which they are
associated in the ordinary course of business. Any loans and loan commitments
are made in accordance with all applicable laws.
LOANS TO ONE BORROWER
Old Line Bank is subject to the statutory and regulatory limits on the
extension of credit to one borrower. Generally, the maximum amount of total
outstanding loans that a Maryland chartered trust company may have to any one
borrower at any one time is 15% of Old Line Bank's unimpaired capital and
surplus.
11
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, 2004,
amounts in transaction accounts above $7,000,000 and up to $47,600,000 must have
reserves held against them in the ratio of three percent of the amount. Amounts
above $47,600,000 require reserves of $1,218,000 plus 10 percent of the amount
in excess of $47,600,000. 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 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
12
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
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 87.63% of our securities investment portfolio at December
31, 2004 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, 2004,
we maintained approximately 13.75% 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 THAT 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,
13
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 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. In 2004, we exercised the
option to purchase the facility for $1.00.
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 $4,633 monthly with 1.5% annual increases.
14
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.
In the fourth quarter of 2005 or the first quarter of 2006, Old Line Bank
plans to open a new branch in Crofton, Maryland in Anne Arundel County, located
at 1641 Route 3 North, Crofton, Maryland. On July 7, 2004, Old Line Bank
executed a lease agreement with Ridgley I, LLC, an unrelated entity, to lease
2,420 square feet of office space for a period of 10 years with three additional
renewals for terms of 5 years. The lease commences 120 days after the landlord
completes construction or the day Old Line Bank opens for business, whichever is
sooner. Payment terms on the lease are $6,353 monthly with 2.5% annual
increases. In addition to the monthly rent, we will pay any increase in taxes
during the term of the lease and utilities. We expect construction of the
building in which the branch will be located to begin in the third or fourth
quarter of 2005.
In the first quarter of 2006, we plan to move our main office facility
from Waldorf, Maryland to the intersection of Pointer Ridge Road and U.S. Route
301 in Bowie, Maryland in Prince George's County and to establish a branch in
this facility. Pointer Ridge Office Investment, LLC, an entity 50% owned by us
and in which we currently have a $550,000 investment, owns this property. Frank
Lucente, a director of Old Line Bancshares, Inc. and Old Line Bank controls 25%
of Pointer Ridge and controls the manager of Pointer Ridge. See
"Item-11-Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters." Pointer Ridge has acquired the property and plans
to construct a commercial office building containing approximately 40,000 square
feet. We plan to lease approximately 50% of this building for our main office
and a branch of Old Line Bank.
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, 2004, we had no material 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, 2004.
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
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,
15
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
---- ---
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
2004
First Quarter $12.00 10.83
Second Quarter 11.85 9.06
Third Quarter 11.50 9.45
Fourth Quarter 12.55 11.00
As of December 31, 2004, there were 1,776,394.5 shares of common stock
issued and outstanding held by approximately 303 stockholders of record. There
were 95,350 shares of common stock issuable on the exercise of outstanding stock
options, 84,950 of which were exercisable. There were 5,200 options that are
exercisable on December 31, 2005 and 5,200 options that are exercisable on
December 31, 2006.
DIVIDENDS
In February 2003, Old Line Bank paid a dividend of $0.09 per share,
adjusted to reflect its 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. In March, June, September and December of 2004, Old Line Bancshares,
Inc. paid a dividend of $0.03 per share.
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.
16
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, 2004 2003 2002
---------------------------------------------------- ------------- ------------- -------------
(Dollars in thousands, except per share data)
INCOME STATEMENT DATA:
Interest income $ 4,818 $ 3,994 $ 3,756
Interest expense 1,163 1,259 1,497
Net interest income 3,655 2,735 2,259
Provision for loan losses 220 162 144
Non-interest income 626 601 472
Non-interest expense 2,806 2,479 2,084
Income taxes 438 225 165
Net income $ 817 $ 470 $ 338
PER SHARE AND SHARES OUTSTANDING DATA: (1)
Basic net income $ .46 $ .34 $ .39
Fully diluted net income .45 .34 .39
Cash dividends declared .12 .09 .08
Book value at period end $ 7.60 $ 7.30 $ 6.61
Shares outstanding, period end 1,776,394.5 1,756,894.5 859,894.5
Average shares outstanding, basic 1,773,197.8 1,363,689.0 859,894.5
Average shares outstanding, diluted 1,803,262.8 1,395,300.0 874,069.5
BALANCE SHEET DATA:
Total assets $ 113,569 $ 89,536 $ 72,245
Total loans 81,505 59,518 43,059
Total investment securities 17,817 19,185 18,739
Total deposits 88,965 69,325 62,256
Stockholders' equity 13,494 12,828 5,687
PERFORMANCE RATIOS:
Return on average assets .82% .58% .53%
Return on average equity 6.27% 5.12% 6.40%
Net interest margin 3.99% 3.67% 3.78%
ASSET QUALITY RATIOS:
Allowance to period-end loans .91% .91% .90%
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 15.4% 19.4% 10.9%
Total risk-based capital 16.3% 20.2% 11.7%
Leverage capital ratio 12.7% 14.7% 7.9%
Total equity to total assets 12.0% 14.4% 7.7%
Dividend payout ratio for period 26.09% 17.07% 20.36%
(1) Restated for the effect of the one for two stock exchange in June 2002 and
the 200% stock dividend in October 2003.
17
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are pleased to report Old Line Bancshares, Inc. achieved record
earnings in 2004 while exceeding $100 million in total assets and maintaining
superior asset quality. During the year we accomplished our objectives of
improving net income and earnings per share by increasing interest revenue
through continued loan growth, by growing core and non-interest bearing deposits
and by reducing security, organizational and legal expenses. The following
outlines the specifics of our achievements for the year:
- We grew net income 73.66% or $346,379 from $470,262 in 2003 to $816,641 in
2004.
- We improved earnings per share to $0.46 basic and $0.45 diluted in 2004
from $0.34 basic and diluted in 2003.
- As a result of the improved earnings, we increased the return on average
equity from 5.12% to 6.27%.
- During the year, we grew net loans by $22.0 million or 36.97% to $81.5
million at December 31, 2004 from $59.5 million at December 31, 2003.
- We maintained asset quality with no loans past due more than 90 days at
December 31, 2004, a ratio of non performing assets to total assets at
December 31, 2004 of 0.00%, and a ratio of chargeoffs to average loans
outstanding during the period of 0.033% compared to 0.007% for the year
ended December 31, 2003.
- We sustained the loan loss allowance to period end loans at 0.91% at
December 31, 2004.
- In spite of a continued decline in interest rates during the first six
months of 2004, we improved the net interest margin to 3.99% in 2004
compared to 3.67% in 2003.
- We grew deposits $19.7 million or 28.43% to $89.0 million at December 31,
2004 from $69.3 million at December 31, 2003.
- Without any gain on disposal of assets in 2004 versus a gain of $88,359 in
2003, we grew noninterest revenue $25,058 or 4.17% to $625,799 at December
31, 2004 from $600,741 at December 31, 2003. This increase was primarily a
result of an increase in the dollar value of accepted loan commitments.
- We ended the year with a Tier I risk based capital ratio of 15.4%, a total
risk-based capital ratio of 16.3% and a leverage capital ratio of 12.7%,
which exceeds regulatory requirements of 4.0%, 8.0% and 4.0%,
respectively.
- We increased the dividend per share from $0.09 for 2003 to $0.12 for 2004.
- We executed the lease on our fifth branch location in Crofton, Maryland
that we anticipate will open in the fourth quarter of 2005 or first
quarter of 2006.
- We acquired a 50% interest in a real estate investment limited liability
company for $550,000. The limited liability company acquired the property
located at the intersection of Pointer Ridge Road and U.S. Route 301 in
Bowie, Prince George's County, Maryland and intends to build a new 40,000
square foot office building on the property. We plan to lease
approximately 50% of this building for our new main office and Old Line
Bank's sixth branch location during the first quarter of 2006.
- We implemented a new commercial account sweep service for our commercial
clients that allows them to earn interest daily on excess funds.
- We implemented enhanced Internet banking services for our customers.
- We completed installation of enhanced security systems in each of our
branch locations.
- We began a review of our internal policies and procedures to ensure
compliance with Section 404 of Sarbanes/ Oxley.
Our only significant disappointment during the year was a robbery.
Although we completed the installation of enhanced security systems during the
year, prior to the installation, we experienced a $25,000 robbery loss that
increased non operating expenses above our expectations.
In order to support continued growth and Old Line Bancshares' corporate
infrastructure, in late 2005 or early 2006, we plan to open the Bank's fifth and
sixth branch locations and build a new main office. We also expect to establish
a boat loan origination division. This division will originate and sell luxury
boat loans for a fee. As a result of the new branches and the boat loan
division, we anticipate salaries and benefits expenses and other operating
expenses will increase during 2005. We anticipate that, over time, income
generated from the branches and the boat loan division as well as continued loan
growth will more than offset any increase in expenses.
18
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.
2004 compared to 2003
Net interest income after provision for loan losses for the year ended
December 31, 2004 amounted to $3.4 million, which was $861,445 or 33.47% greater
than the 2003 level of $2.6 million.
Interest income increased from $4.0 million for the year ended December
31, 2003 to $4.8 million for the year ended December 31, 2004. The yield on
interest earning assets was 5.23% in 2004, which was eight basis points less
than the 2003 level of 5.31%.
Average loans, net of allowance, were $69.0 million in 2004, compared to
$51.2 million in 2003. The related interest income including fees from loans was
$4.1 million in 2004, or $796,726 greater than the 2003 level of $3.3 million.
The average yield on loans decreased to 5.85% in 2004 from 6.36% in 2003, as a
result of the reduction in the prime rate. On December 31, 2002, the prime rate
was 4.25%. By December 31, 2003, the prime rate had declined to 4.00% where it
remained until July 2004. During this six month period of 2004, interest income
and the average yield on the portfolio declined. During the period of July 2004
to December 2004, the prime rate increased to 5.00%. As a result, we began to
see improvement in the loan yield, but this improvement was not sufficient to
offset the earlier decline. Investment securities and other earning assets, such
as federal funds sold, contributed $739,180 to interest income for the year
ended December 31, 2004. This represents an increase of $27,181 over the 2003
level of $711,999. This increase was a result of higher average balances
maintained in investment securities. These balances derived from the funds
received in the equity offering and higher average deposit levels.
Interest expense for all interest bearing liabilities amounted to $1.2
million in 2004, which was $95,538 lower than the 2003 level of $1.3 million.
The cost of interest bearing liabilities was 1.80% in 2004, or 48 basis points
lower than the 2003 level of 2.28%. 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 $64.6 million in 2004, which was
$9.5 million greater than the 2003 level of $55.1 million. Average non-interest
bearing deposits grew $4.6 million to $21.2 million at December 31, 2004
compared to $16.6 million at December 31, 2003.
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 from the 2002
level of $931,699 as a higher level
19
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 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 with continued growth in deposits, we anticipate that we will
continue to grow earning assets during 2005. We believe that the anticipated
growth in earning assets, the change in the composition of earning assets as
more funds are deployed to loans and the relatively low cost of funds will
result in an increase in our interest earning income, although there is no
assurance that this will be the case.
20
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
-------------------------------------
2004 2003 2002
------------------------------------------------------------------------------------------------
Average Average Average
balance Interest Yield balance Interest Yield balance Interest Yield
------------ ----------- ----- ------------ ---------- ----- ------------ ----------- -----
ASSETS:
Federal funds sold $ 4,055,755 $ 51,368 1.27% $ 7,990,566 $ 82,300 1.03% $ 6,809,790 $ 109,880 1.61%
Interest-bearing deposits 551,093 16,746 3.04% 629,041 14,759 2.35% 347,945 8,297 2.38%
Investment securities (1) (2)
U.S. Treasury 3,654,031 119,041 3.26% 152,131 5,074 3.34% - -
U.S. Agency 8,752,327 308,354 3.52% 10,633,180 412,000 3.87% 11,806,666 609,988 5.17%
Mortgage-backed securities 2,988,771 118,088 3.95% 2,721,922 101,186 3.72% 2,969,958 160,498 5.40%
Tax exempt securities 3,401,218 163,754 4.81% 2,741,896 138,725 5.06% 694,697 31,966 4.60%
Other 1,015,507 35,097 3.46% 492,883 24,242 4.92% 378,988 20,832 5.50%
------------ ----------- ---- ------------ ---------- ---- ------------ ----------- ----
Total investment securities 19,811,854 744,334 3.76% 16,742,012 681,227 4.07% 15,850,309 823,284 5.19%
------------ ----------- ---- ------------ ---------- ---- ------------ ----------- ----
Loans: (2)
Commercial 9,224,604 648,870 7.03% 6,421,338 528,249 8.23% 5,842,925 533,785 9.14%
Mortgage 39,958,732 2,317,346 5.80% 27,023,348 1,667,368 6.17% 17,156,866 1,243,252 7.25%
Installment 20,517,755 1,112,861 5.42% 18,209,333 1,091,574 5.99% 14,278,193 1,047,597 7.34%
------------ ----------- ---- ------------ ---------- ---- ------------ ----------- ----
Total loans 69,701,091 4,079,077 5.85% 51,654,019 3,287,191 6.36% 37,277,984 2,824,634 7.58%
Allowance for loan losses 654,007 - 481,701 - 330,895 -
------------ ----------- ---- ------------ ---------- ---- ------------ ----------- ----
Total loans, net of allowance 69,047,084 4,079,077 5.91% 51,172,318 3,287,191 6.42% 36,947,089 2,824,634 7.65%
------------ ----------- ---- ------------ ---------- ---- ------------ ----------- ----
Total interest-earning assets 93,465,786 4,891,525 5.23% 76,533,937 4,065,477 5.31% 59,955,133 3,766,095 6.28%
------------ ----------- ---- ------------ ---------- ---- ------------ ----------- ----
Noninterest-bearing cash 2,471,507 2,028,452 1,737,089 -
Premises and equipment 2,278,670 2,129,029 1,758,886 -
Other assets 1,108,945 1,040,509 901,183 -
------------ ----------- ---- ------------ ---------- ---- ------------ ----------- ----
Total assets $ 99,324,908 $ 4,891,525 4.92% $ 81,731,927 $4,065,477 4.97% $ 64,352,291 $ 3,766,095 5.85%
============ =========== ==== ============ ========== ==== ============ =========== ====
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing deposits
Savings and Now deposits $ 11,252,236 $ 54,698 0.49% $ 12,560,842 $ 64,886 0.52% $ 10,320,302 $ 87,873 0.85%
Money market and NOW 16,912,834 78,162 0.46% 12,110,101 69,953 0.58% 8,211,172 69,791 0.85%
Other time deposits 30,438,116 800,697 2.63% 26,375,442 928,560 3.52% 25,176,433 1,144,434 4.55%
------------ ----------- ---- ------------ ---------- ---- ------------ ----------- ----
Total interest-bearing
deposits 58,603,186 933,557 1.59% 51,046,385 1,063,399 2.08% 43,707,907 1,302,098 2.98%
Borrowed funds 6,036,503 229,696 3.81% 4,053,425 195,392 4.82% 4,000,000 194,835 4.87%
------------ ----------- ---- ------------ ---------- ---- ------------ ----------- ----
Total interest-bearing
liabilities 64,639,689 1,163,253 1.80% 55,099,810 1,258,791 2.28% 47,707,907 1,496,933 3.14%
Non-interest-bearing deposits 21,222,852 16,643,727 10,839,966
------------ ----------- ---- ------------ ---------- ---- ------------ ----------- ----
85,862,541 1,163,253 1.35% 71,743,537 1,258,791 1.75% 58,547,873 1,496,933 2.56%
Other liabilities 431,255 795,882 525,934
Stockholders' equity 13,031,112 9,192,508 5,278,484
------------ ------------ ------------
Total liabilities and
stockholders' equity $ 99,324,908 $ 81,731,927 $ 64,352,291
============ ============ ============
NET INTEREST SPREAD 3.43% 3.03% 3.14%
NET INTEREST INCOME $ 3,728,272 3.99% $2,806,686 3.67% $ 2,269,162 3.78%
=========== ==== ========== ==== =========== ====
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.
21
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,
------------------------------------------ ------------------------------------------
2004 compared to 2003 2003 compared to 2002
------------------------------------------ ------------------------------------------
Variance due to: Variance due to:
Total Rate Volume Total Rate Volume
------------ ------------ ------------ ------------ ------------ ------------
INTEREST EARNING ASSETS:
Federal funds sold $ (30,932) $ 9,597 $ (40,529) $ (27,580) $ (46,590) $ 19,010
Interest bearing deposits 1,987 3,819 (1,832) 6,462 (228) 6,690
Investment Securities
U.S. Treasuries 113,967 (2,996) 116,963 5,074 - 5,074
U.S. Agency (103,646) (30,857) (72,789) (197,988) (137,319) (60,669)
Mortgage backed 16,902 6,975 9,927 (59,312) (45,918) (13,394)
State, county, municipals 25,029 (8,332) 33,361 106,759 12,588 94,171
Other 10,855 (14,858) 25,713 3,410 (2,854) 6,264
Loans:
Commercial 120,621 (110,087) 230,708 (5,536) (58,403) 52,867
Mortgage 649,978 (148,135) 798,113 424,116 (291,204) 715,320
Installment 21,287 (116,987) 138,274 43,977 (244,569) 288,546
----------- ----------- ----------- ----------- ----------- -----------
Total interest revenue 826,048 (411,861) 1,237,909 299,382 (814,497) 1,113,879
----------- ----------- ----------- ----------- ----------- -----------
INTEREST BEARING LIABILITIES
Savings and NOW deposits (10,188) (3,383) (6,805) (22,987) (42,064) 19,077
Money market 8,209 (19,647) 27,856 162 (32,977) 33,139
Other time deposits (127,863) (270,869) 143,006 (215,874) (270,377) 54,503
Other borrowed funds 34,304 (61,280) 95,584 557 (2,045) 2,602
----------- ----------- ----------- ----------- ----------- -----------
Total interest expense (95,538) (355,179) 259,641 (238,142) (347,463) 109,321
----------- ----------- ----------- ----------- ----------- -----------
Net interest income $ 921,586 $ (56,682) $ 978,268 $ 537,524 $ (467,034) $ 1,004,558
=========== =========== =========== =========== =========== ===========
1) Interest revenue is presented on a fully taxable equivalent (FTE) basis.
Management believes providing this information on a FTE basis provides
investors with a more accurate picture of our net interest spread and net
interest income and we believe it to be the preferred industry measurement
of these calculations. See "Reconciliation of Non-GAAP Measures."
PROVISION FOR LOAN LOSSES
Originating loans involves a degree of risk that credit losses will occur
in varying amounts according to, among other factors, the type of loans being
made, the credit-worthiness of the borrowers over the term of the loans, the
quality of the collateral for the loan, if any, as well as general economic
conditions. We charge the provision for loan losses to earnings to maintain the
total allowance for loan losses at a level considered by management to represent
its best estimate of the losses known and inherent in the portfolio that are
both probable and reasonable to estimate, based on, among other factors, prior
loss experience, volume and type of lending conducted, estimated value of any
underlying collateral, economic conditions (particularly as such conditions
relate to Old Line Bank's market area), regulatory guidance, peer statistics,
management's judgment, past due loans in the loan portfolio, loan charge off
experience and concentrations of risk (if any). We charge losses on loans
against the allowance when we believe that
22
collection of loan principal is unlikely. Recoveries on loans previously charged
off are added back to the allowance.
The provision for loan losses was $220,000 for the year ended December 31,
2004, as compared to $162,000 for the year ended December 31, 2003, an increase
of $58,000 or 35.80%. 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.
We review the adequacy of the allowance for loan losses 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 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, 2004 and 2003 and
23
0.90% of total loans at December 31, 2002. We have no exposure to foreign
countries or foreign borrowers. Management believes that the allowance for loan
losses is adequate for each period presented.
The following table represents an analysis of the allowance for loan
losses for the periods indicated:
ALLOWANCE FOR LOAN LOSSES
-------------------------
YEAR ENDED DECEMBER 31, 2004 2003 2002
----------------------------------------- --------- --------- ---------
Balance, beginning of period $ 547,690 $ 389,553 $ 268,806
Provision for loan losses 220,000 162,000 144,000
--------- --------- ---------
Chargeoffs:
Commercial (20,599) - -
Mortgage - - -
Consumer (18,408) (16,554) (35,748)
--------- --------- ---------
Total chargeoffs (39,007) (16,554) (35,748)
Recoveries:
Commercial - - -
Mortgage - - -
Consumer 16,179 12,691 12,495
--------- --------- ---------
Total recoveries 16,179 12,691 12,495
--------- --------- ---------
Net chargeoffs (22,828) (3,863) (23,253)
Balance, end of period $ 744,862 $ 547,690 $ 389,553
========= ========= =========
Allowance for loan losses to total loans 0.91% 0.91% 0.90%
Ratio of net-chargeoffs during period to
average loans outstanding during period .033% .007% .062%
24
The following table provides a breakdown of the allowance for loan losses:
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
------------------------------------------------------------------------------
2004 2003 2002
---------------------- ---------------------- ----------------------
% OF % OF % OF
LOANS LOANS LOANS
IN EACH IN EACH IN EACH
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
-------- -------- -------- -------- -------- --------
Installment & others $ 7,120 0.72% $ 9,840 1.29% $ 29,512 3.08%
Boat 148,411 25.35 141,826 31.04 114,282 35.43
Mortgage 401,585 60.27 278,329 53.89 172,277 47.27
Commercial 187,746 13.66 117,695 13.78 73,482 14.22
-------- -------- -------- -------- -------- --------
TOTAL $744,862 100.00% $547,690 100.00% $389,553 100.00%
======== ======== ======== ======== ======== ========
NON-INTEREST REVENUE
2004 compared to 2003
Non-interest revenue for the twelve months ended December 31, 2004 and
December 31, 2003 included primarily construction loan fees, fee income from
service charges on deposit accounts, mortgage origination fees from a third
party processor, credit card fees, ATM fees and gain on disposal of assets.
Non-interest revenue totaled $625,799 for the year ended December 31, 2004, or
$25,058 or 4.17% higher than the 2003 amount of $600,741. The increase was
primarily because of a $108,265 or 39.70% increase in other fees and commissions
during the period offset by an $88,359 decline in gain on disposal of assets.
Other fees and commissions consist of construction loan fees, broker/origination
fees, other loan fees and letter of credit fees. Other loan fees increased
$133,549 to $224,883 for the twelve months ended December 31, 2004 compared to
$91,334 for the twelve months ended December 31, 2003. This increase was
primarily due to the increase in the dollar value of commitments accepted by
customers during the period. Letter of credit fees increased $20,643 due to an
increase in the dollar value of letters of credit issued. Construction loan fees
increased $13,517 to $90,276 from $76,759 because we increased the number of
builders to whom we provide construction financing and these builders built more
homes during the period. These increases were offset by a $61,857 decline in
broker/origination fees. Broker fees declined because of a rise in interest
rates that caused a decrease in the refinancing of residential mortgages. We had
no gains on disposal of assets because we sold no assets during the period.
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.
25
In 2005, we anticipate we will continue to increase income from loan fees
as compared to prior years. During the year, we expect to establish a boat loan
origination division. This division will originate and sell luxury boat loans
for a fee. We believe we will begin to receive income from this division during
the third quarter. Because we anticipate the residential builders in our
customer base will continue to construct new homes at approximately the same
level as they did in 2004, we expect construction loan fees will remain stable.
Additionally, we believe the demand in the commercial real estate market will
remain stable. Therefore, other loan fees should remain constant.
NON-INTEREST EXPENSE
2004 compared to 2003
Non-interest expense was $2.8 million in 2004, which was $326,357 or
13.17% greater than the 2003 level of $2.5 million. Salaries and benefit costs
amounted to $1.7 million in 2004, as compared to $1.4 million in 2003. Salaries
and benefit expenses increased during the year because we hired a new credit
officer in March 2004. Additionally, prior to September 2004, the individual
responsible for overall branch administration was also managing the Clinton
branch. In September of 2004, we hired a new branch manager for Clinton. Salary
and benefit expenses also increased because of annual payroll increases and
bonuses.
Occupancy expenses increased $3,060 in 2004 due to scheduled annual rental
increases at the Old Line Centre branch.
Other operating expenses increased $77,690 or 12.57% from $618,214 for the
year ended December 31, 2003 to $695,904 for the year ended December 31, 2004.
This increase occurred because of an approximately $30,000 increase in expenses
associated with SEC filings, and Nasdaq fees incurred by the holding company
that we did not have during the first nine months of 2003. Additionally, we
incurred a $25,000 expense that represented the deductible on Old Line Bank's
robbery insurance policy because of a robbery in June. During the year, we also
increased director compensation by $39,860. These increases were offset by an
approximately $45,000 decrease in legal and organizational costs and a $25,000
reduction in security costs. During the year, we installed enhanced security
equipment in all of our branches that caused the reduction in security costs.
Data processing expenses increased by approximately $13,292 from $113,260 for
the year ended December 31, 2003 compared to $126,552 for the period ended
December 31, 2004. This increase occurred because of an increase in the number
of customers and new services we began providing in 2004.
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, 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
26
increases in the number of customers as well as enhanced services.
For 2005, we anticipate non-interest expense will increase. In February
2005, we hired an individual to establish the boat brokerage division. During
the third or fourth quarter of the year we expect to begin hiring staff for the
Crofton branch. We anticipate we will open this branch during the fourth quarter
of 2005 or the first quarter of 2006. During the first quarter of 2006, we plan
to begin moving the Waldorf main office to Bowie, Maryland and expect to incur
expenses related to this move. Also, during the year, we will continue our
efforts to comply with Sarbanes/Oxley Section 404 (relating to internal
controls). We have one individual focused on this effort. We expect to offset a
portion of these increases with increases in non-interest income that derive
from the boat brokerage business and continued increases in interest income
through loan and deposit growth.
INCOME TAXES
2004 Compared to 2003
Income tax expense was $438,203 (34.92% of pre-tax income) for 2004 as
compared to $224,616 (32.32% of pre-tax income) for 2003.
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.
NET INCOME
2004 Compared to 2003
Net income was $816,641 or $0.46 basic and $0.45 diluted earnings per
common share for the year ended December 31, 2004, an increase of $346,379 or
73.66%, compared to net income of $470,262 for the same period during 2003. The
increase in net income was the result of increases in net interest income of
$919,445 and non-interest revenue of $25,058, offset by increases in the
provision of loan losses of $58,000, income tax expense of $213,587, and
non-interest expense of $326,357.
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.
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, 2004 amounted to $17.8 million, a
decrease of $1.4
27
million, or 7.29%, from the December 31, 2003 amount of $19.2 million. Available
for sale investment securities decreased to $15.6 million at December 31, 2004
from $17.4 million at December 31, 2003. Held to maturity securities increased
to $2.2 million at December 31, 2004 from $1.8 million at December 31, 2003. The
carrying value of available for sale securities included net unrealized losses
of $141,229 at December 31, 2004 (reflected as unrealized losses of $90,386 in
stockholders' equity after deferred taxes) as compared to net unrealized losses
of $109,732 ($69,914 net of taxes) as of December 31, 2003.
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 FASB 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
depreciation 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 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, 2004 2003 2002
----------------------------------- ------- ------- -------
Available For Sale Securities
U.S. treasury $ 1,980 $ 1,503 $ -
U.S. government agency 7,778 9,332 8,075
State, county and municipal 3,322 3,098 1,472
Mortgage backed 2,532 3,448 3,841
------- ------- -------
Total Available for Sale Securities $15,612 $17,381 $13,388
======= ======= =======
Held To Maturity Securities
U.S. treasury 2,003 1,804 -
U.S. government agency - - 5,000
State, county and municipal 201 - 352
------- ------- -------
Total Held to Maturity Securities $ 2,204 $ 1,804 $ 5,352
======= ======= =======
Equity Securities $ 1,080 $ 818 $ 374
======= ======= =======
28
The following table shows the maturities for the securities portfolio at
December 31, 2004 and 2003.
AMORTIZED COST, CARRYING VALUE AND AVERAGE YIELD
DECEMBER 31, 2004
-----------------------------------------------------------------------------------------------------
Available for Sale Held to Maturity
---------------------------------------------- ----------------------------------------------
Amortized Market Average Amortized Market Average
Cost Value Yield Cost Value Yield
-------------- -------------- ------- -------------- -------------- -------
Maturing
3 Months or less $ - $ - 0.00% $ - $ - 0.00%
>3 Months through 1 Yr. 575,557 575,035 3.74% - - 0.00%
>1 Year through 5 Yrs. 11,789,877 11,668,088 3.22% 2,002,773 1,997,891 3.40%
>5 Years through 10 Yrs. 3,388,206 3,369,289 3.66% - - 0.00%
>10 Yrs. - - 0.00% 201,517 196,814 4.91%
-------------- -------------- -------------- --------------
$ 15,753,640 $ 15,612,412 $ 2,204,290 $ 2,194,705
============== ============== ============== ==============
Pledged Securities $ 12,824,536 $ 12,686,914
============== ==============
AMORTIZED COST, CARRYING VALUE AND AVERAGE YIELD
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 Year through 5 Yrs. 9,723,800 9,735,006 3.15% 1,504,337 1,511,719 3.23%
>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
============== ==============
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 $22.0 million or 36.97% to $81.5 million at December 31, 2004 from
$59.5 million at December 31, 2003. Commercial business loans increased by $2.9
million (34.94%), commercial real estate loans (generally owner-occupied)
increased by $7.4 million (27.51%), residential real estate loans (generally
home equity and fixed rate home improvement loans) increased by $4.9 million
(136.11%), real estate construction loans increased by $4.8 million (266.67%)
and installment loans increased by $2 million (10.31%) from their respective
balances at December 31, 2003.
The loan portfolio, net of allowance, unearned fees and origination costs
increased $16.4 million or 38.05% to $59.5 million at December 31, 2003 from
$43.1 million at December 31, 2002. Commercial business loans increased by $2.1
million (33.87%), commercial real estate loans (generally
29
owner-occupied) increased by $10.2 million (61.08%), 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 (16.17%) from their
respective balances at December 31, 2002.
Loans secured by real estate or luxury boats comprise the majority of the
loan portfolio. Old Line Bank's loan customers are generally located in the
greater Washington, D.C. metropolitan area.
As anticipated, the increase in our legal lending limit from $910,000 to
$2,049,000 that occurred as a result of the capital offering continued to allow
us to retain a higher percentage of loans that we previously participated to
other financial institutions. In 2002, we participated out approximately $7
million in loans that we originated because they would have exceeded our legal
lending limit. As a result of the capital offering, we were able to retain all
or a larger portion of these types of loans in the third and fourth quarters of
2003 and during all periods in 2004.
The following table summarizes the composition of the loan portfolio by
dollar amount and percentages:
LOAN PORTFOLIO
-----------------------------------------------------------------------------------------
DECEMBER 31, 2004 % 2003 % 2002 %
------------------------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Real Estate
Commercial $ 34,300 41.86% $ 26,859 44.87% $ 16,698 38.58%
Construction 6,551 8.00% 1,762 2.94% 879 2.03%
Residential 8,530 10.41% 3,641 6.08% 2,884 6.66%
Commercial 11,190 13.66% 8,251 13.78% 6,156 14.22%
Installment 21,356 26.07% 19,355 32.33% 16,666 38.51%
---------- ---------- ---------- ---------- ---------- ----------
$ 81,927 100.00% $ 59,868 100.00% $ 43,283 100.00%
---------- ========== ---------- ========== ---------- ==========
Allowance for loan losses 745 547 390
Net deferred loan
fees and (costs) (323) (197) (166)
---------- ---------- ----------
422 350 224
---------- ---------- ----------
$ 81,505 $ 59,518 $ 43,059
========== ========== ==========
30
The following table presents the maturities or repricing periods of selected
loans outstanding at December 31, 2004:
LOAN MATURITY DISTRIBUTION AT DECEMBER 31, 2004
-------------------------------------------------------
1 year or less 1-5 years After 5 years Total
-------------- --------- ------------- --------
(Dollars in thousands)
Real Estate
Commercial $14,179 $16,809 $ 3,312 $34,300
Construction 6,551 - - 6,551
Residential 6,573 1,470 487 8,530
Commercial 6,996 4,050 144 11,190
Installment 645 533 20,178 21,356
------- ------- ------- -------
Total Loans $34,944 $22,862 $24,121 $81,927
======= ======= ======= =======
Fixed Rates 7,406 13,180 22,118 42,704
Variable Rates 27,538 9,682 2,003 39,223
------- ------- ------- -------
Total Loans $34,944 $22,862 $24,121 $81,927
======= ======= ======= =======
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, 2004, 2003 and 2002. No loans were 90 days or more past due as of
December 31, 2004, 2003 or 2002.
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, 2004, 2003 and 2002, 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, 2004, December
31, 2003, or December 31, 2002.
31
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, 2004, the deposit portfolio had
grown to $89.0 million, a $19.7 million or 28.43% increase over the December 31,
2003 level of $69.3 million. We have seen growth in several key categories over
the period. Non-interest bearing deposits grew $5.5 million during the period to
$25.4 million from $19.9 million while interest-bearing deposits grew $14.1
million to $63.5 million from $49.4 million. Increased business development
efforts, the addition of key personnel and promotional campaigns expanded the
number of customers. As a result, our non-interest and interest bearing deposit
balances grew.
At December 31, 2003, deposits were $69.3 million, a $7 million increase
over the December 31, 2002 level of $62.3 million. Non-interest bearing deposits
grew $7.3 million during the period to $19.9 million from $12.6 million, and
interest-bearing deposits declined $219,062 to $49.4 million from $49.6 million.
As a general practice, we do not purchase brokered deposits. During the
periods reported, we had no brokered deposits. As market conditions warrant and
balance sheet needs dictate, we may participate in the wholesale certificates of
deposit market.
The following is a summary of the maturity distribution of certificates of
deposit as of December 31, 2004.
CERTIFICATE OF DEPOSIT MATURITY DISTRIBUTION
DECEMBER 31, 2004
--------------------------------------------------------------
Three Months or Three Months to Over
Less Twelve Months Twelve Months Total
--------------- --------------- ------------- -------
(Dollars in thousands)
Certificates of deposit
Less than $100,000 $ 1,085 $ 6,082 $11,977 $19,144
Greater than or equal to $100,000 295 3,175 13,799 17,269
------- ------- ------- -------
Total $ 1,380 $ 9,257 $25,776 $36,413
======= ======= ======= =======
BORROWINGS
Old Line Bank has available lines of credit, including overnight federal
funds and repurchase agreements from its correspondent banks totaling $9.5
million as of December 31, 2004. Old Line Bank has an additional secured line of
credit from the Federal Home Loan Bank of $22.7 million at December 31, 2004 of
which we have borrowed $7 million as outlined below.
Short-term borrowings consisted of short-term promissory notes issued to
Old Line Bank's customers and federal funds purchased. In 2004, Old Line Bank
developed an enhancement to the basic non-interest bearing demand deposit
account for its commercial clients. This service electronically sweeps excess
funds from the customer's account into an interest bearing Master Note with Old
Line Bank. These Master Notes reprice daily and have maturities of 270 days or
less. At December 31, 2004, Old Line Bank had $3.6 million outstanding in these
short term promissory notes with an interest rate of 0.77%. At December 31,
2004, Old Line Bank had $1 million outstanding in overnight federal funds at
1.64% with the Federal Home Loan Bank.
At December 31, 2004, long term borrowings were comprised of advances from
the Federal Home Loan Bank totaling $6 million. Old Line Bank borrowed $4.0
million of the $7.0 million in January 2001, currently pays interest only at
4.80%, and must repay the $4.0 million in January 2011. Interest is payable
January 3, April 3, July 3, and October 3 of each year. Effective January 3,
2002 and any payment date
32
thereafter, the FHLB has the option to convert the interest rate into a three
(3) month LIBOR based floating rate.
In March 2004, Old Line Bank borrowed an additional $2 million from the
Federal Home Loan Bank. Old Line Bank pays interest only, currently at 1.79%,
and must repay the $2.0 million in March 2009. Interest is payable March 17,
June 17, September 17 and December 17, of each year. Effective March 16, 2006
and any payment date thereafter, the FHLB has the option to convert the interest
rate into a three (3) month LIBOR based floating rate.
Old Line Bank may not prepay the Federal Home Loan Bank loans 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.
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, 2004. Because certain categories of securities and loans are
prepaid before their maturity date even without regard to
33
interest rate fluctuations, we have made certain assumptions to calculate the
expected maturity of securities and loans.
INTEREST SENSITIVITY ANALYSIS
-----------------------------------------------------------------
DECEMBER 31, 2004
-----------------------------------------------------------------
Maturing or Repricing
-----------------------------------------------------------------
Within 4-12 1-5 Over
3 Months Months Years 5 Years Total
-------- -------- -------- -------- --------
(Dollars in thousands)
Interest Earning Assets:
Investment securities $ - $ 575 $ 13,671 $ 3,571 $ 17,817
Loans 28,785 6,159 22,862 24,121 81,927
Interest bearing deposits 300 - - - 300
Federal funds sold 5,230 - - - 5,230
-------- -------- -------- -------- --------
Total interest earning assets 34,315 6,734 36,533 27,692 105,274
-------- -------- -------- -------- --------
Interest Bearing Liabilities:
Interest-bearing transaction deposits 11,038 5,437 - - 16,475
Savings accounts 3,551 3,551 3,551 10,653
Time deposits 1,380 9,256 25,777 - 36,413
-------- -------- -------- -------- --------
Total interest-bearing deposits 15,969 18,244 29,328 - 63,541
-------- -------- -------- -------- --------
FHLB Advances 1,000 - - - 1,000
Other borrowings 7,637 - 2,000 - 9,637
-------- -------- -------- -------- --------
Total interest-bearing liabilities 24,606 18,244 31,328 - 74,178
-------- -------- -------- -------- --------
Period Gap $ 9,709 $(11,510) $ 5,205 $ 27,692 $ 31,096
======== ======== ======== ======== ========
Cumulative Gap $ 9,709 $ (1,801) $ 3,404 $ 31,096
======== ======== ======== ========
Cumulative Gap/Total Assets 8.55% (1.59%) 3.00% 27.38%
34
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 $7.5 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, 2004, we had $4.1 million in cash and due from
banks, and $5.2 million in federal funds sold and other overnight investments.
As of December 31, 2003 and 2002, we had $2.5 million and $1.4 million in cash
and due from banks, and $4.0 million and $5.6 million, respectively, 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 $13.5 million at December 31, 2004,
$12.8 million at December 31, 2003 and $5.7 million at December 31, 2002. We are
considered "well capitalized" under the risk-based capital guidelines adopted by
the Federal Reserve.
35
The following table shows Old Line Bancshares, Inc.'s regulatory capital ratios
and the minimum capital ratios currently required by its banking regulator to be
"well capitalized." For a discussion of these capital requirements, see
"Supervision and Regulation - Capital Adequacy Guidelines."
RISK BASED CAPITAL ANALYSIS
DECEMBER 31,
-------------------------------
2004 2003 2002
------- ------- -------
(Dollars in thousands)
Tier 1 Capital:
Common stock $ 18 $ 18 $ 2,866
Additional paid-in capital 12,446 12,363 2,600
Retained earnings 1,121 517 127
Less: disallowed assets - - -
------- ------- -------
Total Tier 1 Capital $13,585 12,898 5,593
Tier 2 Capital:
Allowance for loan losses 745 547 390
------- ------- -------
Total Risk Based Capital $14,330 $13,445 $ 5,983
======= ======= =======
Risk weighted assets $88,131 $66,574 $50,971
======= ======= =======
REGULATORY
MINIMUM
----------
Capital Ratios:
Tier 1 risk based capital ratio 15.4% 19.4% 10.9% 4.0%
Total risk based capital ratio 16.3% 20.2% 11.7% 8.0%
Leverage ratio 12.7% 14.7% 7.9% 4.0%
36
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,
------------------------------------------
2004 2003 2002
---------- ---------- ----------
(Dollars in thousands)
Average total assets $ 99,325 $ 81,732 $ 64,352
========== ========== ==========
Average equity $ 13,031 $ 9,193 $ 5,278
========== ========== ==========
Net income $ 817 $ 470 $ 338
========== ========== ==========
Cash dividends declared $ 213 $ 80 $ 69
========== ========== ==========
Divided payout ratio for period 26.09% 17.07% 20.36%
========== ========== ==========
Return on average assets .82% .58% .53%
========== ========== ==========
Return on average equity 6.27% 5.12% 6.40%
========== ========== ==========
Average stockholders' equity to
average total assets 13.12% 11.25% 8.20%
========== ========== ==========
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.
37
Outstanding loan commitments and lines and letters of credit at December
31 of 2004, 2003 and 2002 are as follows:
DECEMBER 31, 2004 2003 2002
-------------------------------------------------------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Commitments to extend credit and available credit lines:
Commercial $ 2,896 $ 1,395 $ 2,385
Real estate-undisbursed development and construction 7,419 3,931 3,582
Real estate-undisbursed home equity lines of credit 3,426 2,686 3,891
------- ------- -------
$13,741 $ 8,012 $ 9,858
======= ======= =======
Standby letters of credit $ 1,307 $ 317 $ 275
======= ======= =======
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
$7.4 million, or 54.01% of the $13.7 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, 2004, 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 $25,424 $ - $ - $ -
Interest-bearing 34,213 18,428 10,900 -
Purchase obligations 543 1,550 417 -
Operating leases 79 303 305 577
------- ------- ------- -------
Total $60,259 $20,281 $11,622 $ 577
======= ======= ======= =======
38
Old Line Bancshares, Inc.'s operating leases obligation represents rental
payments for three branches and assumes we become obligated on the Crofton lease
in November 2005. 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, 2004.
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, 2004
Federal Net
Funds Investment Interest Total Net Interest Interest
Sold Securities Earning Assets Assets Income Spread
------- ---------- --------------- ----------- ------------ --------
GAAP interest income 50,936 $ 671,498 $ 4,818,257 $ 4,818,257 $ 3,655,004
Tax equivalent adjustment 432 72,836 73,268 73,268 73,268
------ ---------- ----------- ----------- -----------
Tax equivalent interest income 51,368 744,334 4,891,525 4,891,525 3,728,272
GAAP interest yield 1.26% 3.39% 5.16% 4.85% 3.91% 3.36%
Taxable equivalent adjustment 0.01% 0.37% 0.07% 0.07% 0.08% 0.07%
------ ---------- ----------- ----------- ----------- ----
Tax equivalent interest yield 1.27% 3.76% 5.23% 4.92% 3.99% 3.43%
TWELVE MONTHS ENDED DECEMBER 31, 2003
Federal Interest Net
Funds Investment Earning Total Net Interest Interest
Sold Securities 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 0.00% 3.64% 5.22% 4.89% 3.58% 2.94%
Taxable equivalent adjustment 0.00% 0.43% 0.09% 0.08% 0.09% 0.09%
---- ---------- ------------ ---------- ---------- ----
Tax equivalent interest yield 0.00% 4.07% 5.31% 4.97% 3.67% 3.03%
39
TWELVE MONTHS ENDED DECEMBER 31, 2002
Federal Interest Net
Funds Investment Earning Total Net Interest Interest
Sold Securities 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 0.00% 5.13% 6.27% 5.84% 3.76% 3.12%
Taxable equivalent adjustment 0.00% 0.06% 0.01% 0.01% 0.02% 0.02%
---- --------- ---------- ----------- ----------- ----
Tax equivalent interest yield 0.00% 5.19% 6.28% 5.85% 3.78% 3.14%
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 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.
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
40
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.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting pronouncements that the Financial Accounting Standards Board
recently approved follow. These Statements will not have any material impact on
the financial statements of Bancshares or the Bank.
FASB Statement No. 153, Exchanges of Nonmonetary Assets as an Amendment of
APB Opinion No. 29, eliminates the exception to fair value for exchanges of
similar productive assets that was provided in APB Opinion No. 29. This
statement is effective for years beginning after June 15, 2005.
FASB Statement No. 123 Accounting for Stock-Based Compensation (revised
2004) Share-Based Payment, establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This Statement eliminates the alternative to use Accounting Principles
Board Opinion 25's intrinsic value method of accounting that was provided in
Statement 123 as originally issued. Under Opinion 25, issuing stock options to
employees generally results in recognition of no compensation costs. This
Statement requires entities to recognize the cost of employee services received
in exchange for awards of equity instruments based on the grant-date fair value
of those awards. In addition, this Statement amends FASB Statement No. 95,
Statement of Cash Flows, to require that excess tax benefits be reported as
financing cash inflow rather than as a reduction of taxes paid. This statement
is effective for the Company for the first interim reporting period that begins
after December 15, 2005.
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
41
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:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2004, 2003 and 2002
Consolidated Statements of Income - For the years ended December 31, 2004,
2003 and 2002
Consolidated Statements of Changes in Stockholders' Equity - For the years
ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows - For the year ended December 31,
2004, 2003 and 2002
Notes to Consolidated Financial Statements
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004, 2003, and 2002, 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 the standards of the Public
Company Accounting Oversight Board in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Accordingly,
we express no such opinion. 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, 2004, 2003, and 2002, 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.
/s/ Rowles & Company, LLP
Baltimore, Maryland
January 21, 2005
43
OLD LINE BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 2003 2002
--------------------------------------------------------------------------- ------------ ------------ ------------
ASSETS
Cash and due from banks $ 4,090,776 $ 2,477,119 $ 1,409,172
Federal funds sold 5,229,867 4,002,828 5,622,983
------------ ------------ ------------
Total cash and cash equivalents 9,320,643 6,479,947 7,032,155
Time deposits in other banks 300,000 700,000 600,000
Investment securities available for sale 15,612,411 17,381,519 13,387,553
Investment securities held to maturity 2,204,290 1,803,812 5,351,588
Loans, less allowance for loan losses 81,504,890 59,517,690 43,058,786
Restricted equity securities at cost 1,079,950 818,450 373,750
Investment in real estate, LLC 550,000 - -
Bank premises and equipment 2,352,348 2,279,669 1,920,243
Accrued interest receivable 365,388 315,326 305,486
Deferred income taxes 88,723 60,925 -
Other assets 190,675 178,465 215,140
------------ ------------ ------------
$113,569,318 $ 89,535,803 $ 72,244,701
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 25,424,314 $ 19,902,350 $ 12,614,536
Interest-bearing 63,540,800 49,422,727 49,641,789
------------ ------------ ------------
Total deposits 88,965,114 69,325,077 62,256,325
Short-term borrowings 4,637,012 3,000,000 -
Long-term borrowings 6,000,000 4,000,000 4,000,000
Accrued interest payable 173,320 149,831 250,259
Income tax payable 184,975 130,675 -
Deferred income taxes - - 34,021
Other liabilities 114,585 102,566 17,503
------------ ------------ ------------
100,075,006 76,708,149 66,558,108
------------ ------------ ------------
Stockholders' equity
Common stock, par value $.01 per share in 2004 and 2003, $10 per share in
2002; authorized 5,000,000 shares in 2004 and 2003 and 1,000,000 in 2002;
issued and oustanding 1,776,394.5 in 2004, 1,756,894.5
in 2003, and 286,631.5 in 2002 17,764 17,569 2,866,315
Additional paid-in capital 12,446,229 12,362,902 2,600,000
Retained earnings 1,120,705 517,097 127,091
------------ ------------ ------------
13,584,698 12,897,568 5,593,406
Accumulated other comprehensive income (90,386) (69,914) 93,187
------------ ------------ ------------
13,494,312 12,827,654 5,686,593
------------ ------------ ------------
$113,569,318 $ 89,535,803 $ 72,244,701
============ ============ ============
The accompanying notes are an integral part of these financial statements.
44
OLD LINE BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004 2003 2002
------------------------------------------------------- ------------ ------------ ------------
INTEREST REVENUE
Loans, including fees $ 4,079,077 $ 3,282,351 $ 2,824,634
U.S. treasury securities 113,541 4,840 -
U.S. government agency securities 294,108 392,966 609,988
Mortgage backed securities 118,088 101,186 160,498
Tax exempt securities 111,236 88,397 22,204
Federal funds sold 50,936 82,300 109,880
Other 51,271 42,310 29,129
------------ ------------ ------------
Total interest revenue 4,818,257 3,994,350 3,756,333
------------ ------------ ------------
INTEREST EXPENSE
Deposits 933,557 1,063,399 1,302,098
Borrowed funds 229,696 195,392 194,835
------------ ------------ ------------
Total interest expense 1,163,253 1,258,791 1,496,933
------------ ------------ ------------
Net interest income 3,655,004 2,735,559 2,259,400
PROVISION FOR LOAN LOSSES 220,000 162,000 144,000
------------ ------------ ------------
Net interest income after provision for loan losses 3,435,004 2,573,559 2,115,400
------------ ------------ ------------
NONINTEREST REVENUE
Service charges on deposit accounts 244,831 239,679 217,749
Other fees and commissions 380,968 272,703 215,458
Gain on disposal of assets - 88,359 38,346
------------ ------------ ------------
Total noninterest revenue 625,799 600,741 471,553
------------ ------------ ------------
NONINTEREST EXPENSE
Salaries 1,417,434 1,233,855 1,021,878
Employee benefits 245,162 195,579 157,676
Occupancy 202,627 199,567 202,478
Equipment 118,280 118,947 99,386
Data processing 126,552 113,260 98,904
Other operating 695,904 618,214 503,878
------------ ------------ ------------
Total noninterest expense 2,805,959 2,479,422 2,084,200
------------ ------------ ------------
Income before income taxes 1,254,844 694,878 502,753
Income taxes 438,203 224,616 164,884
------------ ------------ ------------
NET INCOME $ 816,641 $ 470,262 $ 337,869
============ ============ ============
Basic earnings per common share $ 0.46 $ 0.34 $ 0.39
Diluted earnings per common share $ 0.45 $ 0.34 $ 0.39
The accompanying notes are an integral part of these financial statements.
45
OLD LINE BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Additional other
Common stock paid-in Retained Comprehensive Comprehensive
Shares Par value capital earnings income Income
------------ ----------- ------------ ------------ ------------- -------------
Balance, December 31, 2001 573,263.0 $ 2,866,315 $2,563,223.0 (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
shares for $.01 par value
shares - (5,850,459) 5,850,459 - -
Stock split effected in the form of
a 200% stock dividend 1,171,263.0 11,713 (11,713) - -
Cash dividend $.09 per share - - - (80,257) -
----------- ----------- ------------ ---------- -----------
Balance, December 31, 2003 1,756,894.5 $ 17,569 $ 12,362,902 $ 517,096 $ (69,914)
Net income - - - 816,641 - $ 816,641
Unrealized gain (loss) on
securities available for
sale, net of income taxes of $11,024 - - - - (20,472) (20,472)
-----------
Comprehensive income - - - - - $ 796,169
===========
Cash dividend $.12 per share - - - (213,032) -
Stock options exercised 19,500 195 83,327 - -
----------- ----------- ------------ ---------- -----------
BALANCE, DECEMBER 31, 2004 1,776,394.5 $ 17,764 $ 12,446,229 $1,120,705 $ (90,386)
=========== =========== ============ ========== ===========
The accompanying notes are an integral part of these financial statements.
46
OLD LINE BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004 2003 2002
-------------------------------------------------- ------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $ 4,651,342 $ 3,977,615 $ 3,762,405
Fees and commissions received 625,799 512,382 434,678
Interest paid (1,139,764) (1,359,219) (1,488,018)
Cash paid to suppliers and employees (2,668,340) (2,172,857) (2,038,914)
Income taxes paid (400,677) (101,064) (170,602)
------------ ------------ ------------
1,068,360 856,857 499,549
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities
Held to maturity (842,422) (2,504,375) (4,351,767)
Available for sale (1,253,113) (15,888,784) (14,508,839)
Proceeds from disposal of investment securities
Held to maturity at maturity or call 440,000 4,000,000 2,700,000
Held to maturity sold - 1,040,000 -
Available for sale at maturity or call 2,983,820 11,464,166 12,247,933
Available for sale sold - 1,249,275 1,036,875
Loans made, net of principal collected (22,081,500) (16,583,046) (9,385,288)
Purchase of equity securities (261,500) (444,700) (6,950)
Investment in real estate, LLC (550,000) - -
(Purchase) redemption of certificates of deposit 400,000 (100,000) (600,000)
Purchase of premises and equipment and software (221,166) (544,253) (302,498)
Proceeds from sale of premises and equipment 21,000 - 10,500
------------ ------------ ------------
(21,364,881) (18,311,717) (13,160,034)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in
Time deposits 11,162,317 (910,139) 2,365,583
Other deposits 8,477,720 7,978,892 9,053,865
Net change in borrowed funds 3,637,012 3,000,000 -
Proceeds from stock options exercised 73,200 - -
Proceeds from stock offering - 6,914,156 -
Dividends paid (213,032) (80,257) (68,791)
------------ ------------ ------------
23,137,217 16,902,652 11,350,657
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,840,696 (552,208) (1,309,828)
Cash and cash equivalents at beginning of year 6,479,947 7,032,155 8,341,983
------------ ------------ ------------
Cash and cash equivalents at end of year $ 9,320,643 $ 6,479,947 $ 7,032,155
------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
47
OLD LINE BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004 2003 2002
------------------------------------------------------ ------------ ------------ ------------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income $ 816,641 $ 470,262 $ 337,869
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 149,709 152,312 118,334
Provision for loan losses 220,000 162,000 144,000
Loss (gain) on disposal of securities - (88,359) (36,875)
(Gain) loss on sale of equipment 964 - (1,471)
Change in deferred loan fees net of costs (125,700) (37,858) (84,382)
Amortization of premium and discounts 8,847 30,963 14,724
Deferred income taxes (16,774) (7,123) 19,098
Increase (decrease) in accrued interest payable
and other liabilities 89,808 115,310 (2,964)
Decrease (increase) in accrued interest receivable
and other assets (75,135) 59,350 (8,784)
------------ ------------ ------------
$ 1,068,360 $ 856,857 $ 499,549
============ ============ ============
The accompanying notes are an integral part of these financial statements.
48
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.
49
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 2004 2003 2002
---------- ---- ---- ----
Net income
As reported $ 816,641 $ 470,262 $ 337,869
Stock-based employee compensation expense (59,200) (35,770) (8,556)
Income tax benefit of employee compensation expense $ 22,863 $ 13,814 $ 3,304
----------- ----------- -----------
Pro forma $ 780,304 $ 448,306 $ 332,617
Basic earnings per share
As reported $ 0.46 $ 0.34 $ 0.39
Pro forma 0.44 0.33 0.38
Diluted earnings per share
As reported $ 0.45 $ 0.34 $ 0.39
Pro forma 0.44 0.32 0.38
BANK PREMISES AND EQUIPMENT-Bank premises and equipment are recorded at
cost less accumulated depreciation. Depreciation is computed using the
straight-line method.
INVESTMENT IN REAL ESTATE LLC-On July 22, 2004, Bancshares executed an
Operating Agreement as a member to establish Pointer Ridge Office
Investment, LLC ("Pointer Ridge"). The purpose of Pointer Ridge is to
acquire, own, hold for profit, sell assign, transfer, operate, lease,
develop, mortgage, refinance, pledge and otherwise deal with real property
located at the intersection of Pointer Ridge Road and Route 301 in Bowie,
Md. Pointer Ridge has acquired the property and intends to construct a
commercial office building. Bancshares plans to lease approximately 50% of
this building for its main office and a branch of Old Line Bank.
Bancshares ownership percentage is 50% and four other members hold the
remaining 50% ownership. Bancshares records this investment on the equity
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 non-interest 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.
50
NOTES TO FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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, 2004 2003 2002
------------ ---- ---- ----
Weighted average number of shares 1,773,197.8 1,363,689.0 859,894.5
Dilutive average number of shares 30,065 31,611 14,175
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 may carry balances with other banks that exceed the federally
insured limit. The average balance in 2004, 2003 and 2002 did not exceed
the federally insured limit. The Bank also sells federal funds on an
unsecured basis to the same banks. The average balance sold was
$4,055,755, $7,990,556, and $6,809,790 in 2004, 2003, and 2002,
respectively.
51
NOTES TO FINANCIAL STATEMENTS (Continued)
CASH AND EQUIVALENTS (CONTINUED)
Banks are required to carry non-interest-bearing cash reserves at
specified percentages of deposit balances. The Bank's normal amount of
cash on hand and on deposit with other banks is sufficient to satisfy the
reserve requirements.
4. INVESTMENT SECURITIES
Investment securities are summarized as follows:
Amortized Unrealized Unrealized Fair
cost gains losses value
----------- ---------- ------------ -----------
DECEMBER 31, 2004
AVAILABLE FOR SALE
U.S. TREASURY $ 1,997,721 $ - $ (17,408) $ 1,980,313
U.S. GOVERNMENT AGENCY 7,885,261 191 (107,612) 7,777,840
STATE, COUNTY, AND MUNICIPAL 3,314,167 30,341 (22,006) 3,322,502
MORTGAGE-BACKED 2,556,491 749 (25,484) 2,531,756
----------- ---------- ------------ -----------
$15,753,640 $ 31,281 $ (172,510) $15,612,411
=========== ========== ============ ===========
HELD TO MATURITY
U.S. TREASURY $ 2,002,773 $ 7,567 $ (12,449) $ 1,997,891
STATE, COUNTY, AND MUNICIPAL 201,517 - (4,702) 196,815
----------- ---------- ------------ -----------
$ 2,204,290 $ 7,567 $ (17,151) $ 2,194,706
=========== ========== ============ ===========
December 31, 2003
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
=========== ========== ============ ===========
52
NOTES TO FINANCIAL STATEMENTS (Continued)
4. INVESTMENT SECURITIES (CONTINUED)
The table below summarizes investment securities with unrealized losses as
of December 31, 2004:
FAIR UNREALIZED
VALUE LOSSES
----------- ----------
DECEMBER 31, 2004
LOSSES LESS THAN 12 MONTHS
U.S. Treasury $ 3,471,328 $ 29,857
U.S. government agency 6,790,038 95,223
State, county, and municipal 942,771 14,175
Mortgage-backed 1,695,115 24,139
----------- ----------
TOTAL LESS THAN 12 MONTHS $12,899,252 $ 163,394
=========== ==========
LOSSES GREATER THAN 12 MONTHS
U.S. Treasury $ - $ -
U.S. government agency 487,611 12,389
State, county, and municipal 388,068 12,533
Mortgage-backed 418,528 1,345
----------- ----------
TOTAL GREATER THAN 12 MONTHS $ 1,294,207 $ 26,267
=========== ==========
TOTAL LOSSES
U.S. Treasury $ 3,471,328 $ 29,857
U.S. government agency 7,277,649 107,612
State, county, and municipal 1,330,839 26,708
Mortgage-backed 2,113,643 25,484
----------- ----------
TOTAL LOSSES $14,193,459 $ 189,661
=========== ==========
All unrealized losses on securities as of December 31, 2004 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. The Bank has the
intent and the ability to hold these securities until recovery or
maturity.
53
NOTES TO FINANCIAL STATEMENTS (Continued)
4. INVESTMENT SECURITIES (Continued)
There were no sales of securities in 2004. During 2003 and 2002 proceeds
from sales of investment securities were $2,289,275, and $1,036,875
resulting in gross gains of $88,359, and $36,875, 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, 2004, 2003,
and 2002, 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 Fair Amortized Fair
cost value cost value
----------- ----------- ---------- ----------
DECEMBER 31, 2004
MATURING
Within one year $ 575,557 $ 575,035 $ - $ -
Over one to five years 11,789,877 11,668,087 2,002,773 1,997,892
Over five years 3,388,206 3,369,289 - -
Over ten years - - 201,517 196,814
----------- ----------- ---------- ----------
$15,753,640 $15,612,411 $2,204,290 $2,194,706
=========== =========== ========== ==========
Pledged securities $12,824,536 $12,686,914
=========== ===========
December 31, 2003
Maturing
Within one year $ 1,091,411 $ 997,674 $ 299,475 $ 299,662
Over one to five years 9,723,800 9,735,006 1,504,337 1,511,719
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 $12,686,914 $1,500,000 $1,578,819
=========== =========== ========== ==========
Securities are pledged to secure a line of credit from the Federal Home
Loan Bank.
54
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, 2004 2003 2002
-------------------------------------------------------- ----------- ---------- ----------
Commitments to extend credit and available credit lines:
Commercial $ 2,895,972 $1,394,609 $2,385,000
Real estate-undisbursed development and construction 7,418,916 3,931,474 3,581,606
Real estate-undisbursed home equity lines of credit 3,426,235 2,686,224 3,891,297
----------- ---------- ----------
$13,741,123 $8,012,307 $9,857,903
=========== ========== ==========
Standby letters of credit $ 1,307,459 $ 316,705 $ 275,290
=========== ========== ==========
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.
55
NOTES TO FINANCIAL STATEMENTS (Continued)
6. LOANS
Major classifications of loans are as follows:
DECEMBER 31, 2004 2003 2002
---------------------------------- ------------ ------------ ------------
Real estate
Commercial $ 34,299,921 $ 26,858,597 $ 16,697,757
Construction 6,550,550 1,761,724 878,617
Residential 8,530,410 3,641,498 2,884,431
Commercial 11,190,012 8,250,958 6,156,267
Installment 21,355,734 19,355,178 16,665,758
------------ ------------ ------------
81,926,627 59,867,955 43,282,830
Allowance for loan losses (744,862) (547,690) (389,553)
Net deferred loan fees and (costs) 323,125 197,425 165,509
------------ ------------ ------------
$ 81,504,890 $ 59,517,690 $ 43,058,786
============ ============ ============
The maturity and rate repricing distribution of the loan portfolio
follows:
DECEMBER 31, 2004 2003 2002
------------------------------- ----------- ----------- -----------
Maturing within one year $34,943,883 $22,589,080 $10,347,276
Maturing over one to five years 22,861,858 14,373,242 13,287,123
Maturing over five years 24,120,886 22,905,633 19,648,431
----------- ----------- -----------
$81,926,627 $59,867,955 $43,282,830
=========== =========== ===========
No loans were 90 days or more past due or considered impaired at December
31, 2004, 2003 or December 31, 2002.
Transactions in the allowance for loan losses were as follows:
FOR THE YEAR ENDED DECEMBER 31, 2004 2003 2002
-------------------------------- -------- -------- --------
Beginning balance $547,690 $389,553 $268,806
Provisions charged to operations 220,000 162,000 144,000
Recoveries 16,179 12,691 12,495
-------- -------- --------
783,869 564,244 425,301
Loans charged off 39,007 16,554 35,748
-------- -------- --------
Ending balance $744,862 $547,690 $389,553
======== ======== ========
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.
56
NOTES TO FINANCIAL STATEMENTS (Continued)
7. RESTRICTED EQUITY SECURITIES
Restricted equity securities were as follows:
DECEMBER 31, 2004 2003 2002
----------------------------------- ---------- -------- --------
Federal Reserve Bank stock $ 356,450 $356,450 $161,750
Atlantic Central Bankers Bank stock 12,000 12,000 12,000
Federal Home Loan Bank stock 511,500 350,000 200,000
Maryland Financial Bank stock 200,000 100,000 -
---------- -------- --------
TOTAL $1,079,950 $818,450 $373,750
========== ======== ========
8. BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment and the related depreciation
follows:
Land $ 487,673 $ 487,673 $ 390,000
Building 50 years 1,264,831 1,201,361 1,135,350
Leasehold improvements 5-30 years 523,019 469,144 255,754
Furniture and equipment 5-7 years 767,515 738,372 629,953
---------- ---------- ----------
3,043,038 2,896,550 2,411,057
Accumulated depreciation 690,690 616,881 490,814
---------- ---------- ----------
Net bank premises and equipment $2,352,348 $2,279,669 $1,920,243
========== ========== ==========
Depreciation expense $ 123,673 $ 126,067 $ 98,346
========== ========== ==========
Computer software included in other assets, and related amortization, are
as follows:
Cost 5 years $201,436 $198,586 $139,826
Accumulated amortization 148,103 122,066 95,821
-------- -------- --------
Net computer software $ 53,333 $ 76,520 $ 44,005
======== ======== ========
Amortization expense $ 26,036 $ 26,245 $ 19,988
======== ======== ========
9. DEPOSITS
Major classifications of interest bearing deposits are as follows:
DECEMBER 31, 2004 2003 2002
------------------------------ ----------- ----------- -----------
Money market and NOW $16,475,269 $13,834,126 $15,052,542
Savings 10,652,997 10,338,384 8,428,891
Other time - $100,000 and over 17,269,348 7,669,333 7,324,067
Other time 19,143,186 17,580,884 18,836,289
----------- ----------- -----------
$63,540,800 $49,422,727 $49,641,789
=========== =========== ===========
57
NOTES TO FINANCIAL STATEMENTS (Continued)
9. DEPOSITS (Continued)
Time deposits mature as follows:
DECEMBER 31, 2004 2003 2002
------------------------ ----------- ----------- -----------
Within one year $10,636,468 $13,291,356 $ 9,946,325
Over one to two years 9,445,817 6,097,076 10,375,593
Over two to three years 5,430,631 3,160,300 4,683,713
Over three to four years 10,899,618 1,008,669 247,247
Over four to five years - 1,692,816 907,478
----------- ----------- -----------
$36,412,534 $25,250,217 $26,160,356
=========== =========== ===========
Interest on deposits for the years ended December 31, 2004, 2003, and 2002
consisted of the following:
DECEMBER 31, 2004 2003 2002
--------------------------------- ---------- ---------- ----------
Money market and NOW $ 81,213 $ 74,869 $ 77,414
Savings 51,648 59,969 80,250
Time deposits - $100,000 and over 358,154 290,451 295,294
Other time deposits 442,543 638,110 849,140
---------- ---------- ----------
$ 933,557 $1,063,399 $1,302,098
========== ========== ==========
10. SHORT-TERM BORROWINGS
The Bank has available lines of credit including overnight federal funds
and reverse repurchase agreements from its correspondent bank totaling
$9,500,000 as of December 31, 2004. The Bank has an additional secured
line of credit from the Federal Home Loan Bank of Atlanta (FHLB) of
$22,713,000 of which the Bank had borrowed $7,000,000 as of December 31,
2004 as outlined below.
Short-term borrowings consist of promissory notes sold to the Bank's
customers and federal funds purchased. The short-term promissory notes are
sold to the Bank's customers, reprice daily and have maturities of 270
days or less. Federal funds purchased are unsecured, overnight borrowings
from other financial institutions.
58
NOTES TO FINANCIAL STATEMENTS (Continued)
10. SHORT-TERM BORROWINGS (Continued)
Information relating to short-term borrowings is a follows:
2004 2003 2002
DECEMBER 31, AMOUNT RATE Amount Rate Amount Rate
------------------------------- ---------- ----- ---------- ----- --------- -----
Amount outstanding at year-end
Short-term promissory notes $3,637,012 0.77% $ - $ -
FHLB federal funds purchased 1,000,000 1.64% 3,000,000 1.24% -
---------- ---------- ---------
Total 4,637,012 3,000,000 -
========== ========== =========
Average for the Year
Short-term promissory notes 115,320 0.74% - -
FHLB federal funds purchased 85,117 1.74% 53,425 1.00% 8,219 2.06%
---------- ---------- ---------
Total $ 200,437 $ 53,425 $ 8,219
========== ========== =========
11. LONG-TERM BORROWINGS
At December 31, 2004, the Bank had two long-term advances from the Federal
Home Loan Bank (FHLB) totaling $6,000,000.
The 1.79% FHLB borrowings in the amount of $2,000,000 are due March 17,
2009. Interest is payable March 17, June 17, September 17 and December 17,
of each year. Effective March 16, 2006 and any payment date thereafter,
the FHLB has the option to convert the interest rate into a three (3)
month LIBOR based floating rate.
The 4.80% FHLB borrowings in the amount of $4,000,000 are due on January
3, 2011. Interest is payable January 3, April 3, July 3, and October 3 of
each year. Effective January 3, 2002 and any payment date thereafter, the
FHLB has the option to convert the interest rate into a three (3) month
LIBOR based floating rate.
2004 2003 2002
DECEMBER 31, AMOUNT RATE Amount Rate Amount Rate
------------------------------ ---------- ----- ----------- ----- ----------- -----
Amount outstanding at year-end
FHLB advance due 2009 $2,000,000 1.79% $ - $ -
FHLB advance due 2011 4,000,000 4.80% 4,000,000 4.80% 4,000,000 4.80%
---------- ----------- -----------
Total 6,000,000 4,000,000 4,000,000
========== =========== ===========
Average for the Year
FHLB advance due 2009 1,836,066 1.78% - -
FHLB advance due 2011 4,000,000 4.80% 4,000,000 4.80% 4,000,000 4.80%
---------- ----------- -----------
Total 5,836,066 $ 4,000,000 $ 4,000,000
========== =========== ===========
59
NOTES TO FINANCIAL STATEMENTS (Continued)
12. RELATED PARTY TRANSACTIONS
The Bank has entered into various transactions with firms in which owners
are also members of the Board of Directors. Fees charged for these
services are at similar rates charged by unrelated parties for similar
work. Amounts paid to these related parties totaled $6,886, $10,159, and
$18,175 during the years ended December 31, 2004, 2003, and 2002,
respectively. Bancshares has a $550,000 investment in Pointer Ridge. Frank
Lucente, a director of Bancshares and the Bank, controls twenty five
percent of Pointer Ridge.
Loans made to officers and directors or their affiliated companies totaled
$2,888,793, $1,959,356, and $1,484,469, at December 31, 2004, 2003, and
2002, respectively. The directors and officers and their affiliated
companies maintained deposits with the Bank of $7,992,743, $6,149,089, and
$9,348,805 at December 31, 2004, 2003, and 2002, 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 or their affiliated companies:
DECEMBER 31, 2004 2003
---------------------------- ------------- -------------
Balance at beginning of year $ 1,959,356 $ 1,484,469
Additions 2,661,910 3,486,164
Repayments (1,732,473) (3,011,277)
------------ ------------
Balance at end of year $ 2,888,793 $ 1,959,356
============ ============
13. INCOME TAXES
The components of income tax are as follows:
FOR YEAR ENDED DECEMBER 31, 2004 2003 2002
--------------------------- ---------- ---------- ---------
Current
Federal $ 386,878 $ 203,708 $ 145,786
State 68,099 28,031 -
--------- --------- ---------
454,977 231,739 145,786
Deferred (16,774) (7,123) 19,098
--------- --------- ---------
$ 438,203 $ 224,616 $ 164,884
========= ========= =========
The components of the deferred income taxes are as follows:
Provision for loan losses $ (75,849) $(75,018) $(41,054)
Organizational costs 5,897 (28,013) -
Deferred loan origination fees and cost, net 38,251 34,951 31,311
Depreciation 14,927 60,957 (753)
Operating loss carryover - - 29,594
--------- -------- --------
$ (16,774) $ (7,123) $ 19,098
========= ======== ========
60
NOTES TO FINANCIAL STATEMENTS (Continued)
13. INCOME TAXES (CONTINUED)
The components of the net deferred tax assets are as follows:
DECEMBER 31, 2004 2003 2002
------------------------------------------------------ --------- --------- ----------
Deferred tax assets
Allowance for loan losses $ 253,337 $ 177,488 $ 102,470
Organization costs 22,116 28,013 -
Net unrealized loss on securities available for sale 50,842 39,818 -
Net operating loss carryforward - - -
--------- --------- ---------
326,295 245,319 102,470
--------- --------- ---------
Deferred tax liabilities
Deferred loan origination costs 137,022 98,771 63,820
Depreciation 100,550 85,623 24,666
Net unrealized gain on securities available for sale - - 48,005
--------- --------- ---------
237,572 184,394 136,491
--------- --------- ---------
Net deferred tax asset (liability) $ 88,723 $ 60,925 $ (34,021)
========= ========= =========
The differences between the federal income tax rate of 34 percent
and the effective tax rate for the Bank are reconciled as follows:
2004 2003 2002
----- ----- -----
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from
State income taxes, net of federal income tax benefit 3.1 1.9 -
Tax exempt income (2.6) (3.9) (1.3)
Nondeductible expenses 0.3 0.3 0.1
Other 0.1 - -
---- ---- ----
Effective tax rate 34.9% 32.3% 32.8%
==== ==== ====
14. 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 2004, 2003, and 2002, were $42,623,
$37,716, and $14,255, respectively.
61
NOTES TO FINANCIAL STATEMENTS (Continued)
15. 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, 2004, 2003, and 2002, the capital ratios and minimum capital
requirements are as follows:
Minimum capital To be well
(in thousands) Actual adequacy capitalized
DECEMBER 31, 2004 Amount Ratio Amount Ratio Amount Ratio
------------------------------------------- ------- ----- ------- ----- ------- -----
Total capital (to risk-weighted assets)
Consolidated $14,330 16.3% $ 7,050 8.0% $ 8,813 10.0%
Old Line Bank $13,662 15.5% $ 7,050 8.0% $ 8,813 10.0%
Tier 1 capital (to risk-weighted assets)
Consolidated $13,585 15.4% $ 3,525 4.0% $ 5,288 6.0%
Old Line Bank $12,917 14.7% $ 3,525 4.0% $ 5,288 6.0%
Tier 1 capital (to average assets)
Consolidated $13,585 12.7% $ 4,272 4.0% $ 5,340 5.0%
Old Line Bank $12,917 12.1% $ 4,257 4.0% $ 4,407 5.0%
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
December 31, 2003
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%
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.
62
NOTES TO FINANCIAL STATEMENTS (Continued)
15. 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.
16. COMMITMENTS AND CONTINGENCIES
The Bank leases three branch locations under operating lease agreements
expiring through 2015. Each of the leases provides extension options. The
approximate future minimum lease commitments under the operating leases as
of December 31, 2004, are as follows:
Year Amount
--------- -----------
2005 $ 78,551
2006 145,736
2007 157,406
2008 162,371
2009 142,471
Remaining 577,434
-----------
$ 1,263,969
===========
Rent expense was $74,463, $81,056, and $83,651 for the years ended
December 31, 2004, 2003, and 2002, 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.
63
NOTES TO FINANCIAL STATEMENTS (Continued)
17. 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, 2004 December 31, 2003 December 31, 2002
CARRYING FAIR Carrying Fair Carrying Fair
AMOUNT VALUE amount value amount value
---------- ---------- ---------- ---------- ---------- ----------
Financial assets
Time deposits 300,000 301,469 700,000 713,092 600,000 624,920
Investment securities 17,816,701 17,807,117 19,185,331 19,192,900 18,739,141 18,853,001
Loans 81,504,890 81,800,291 59,517,690 60,257,105 43,058,786 44,440,324
Financial liabilities
Interest bearing deposits 63,540,800 63,618,816 49,422,727 50,097,561 49,641,789 50,727,499
Long term borrowings 6,000,000 6,024,540 4,000,000 4,150,607 4,000,000 4,172,581
64
NOTES TO FINANCIAL STATEMENTS (Continued)
18. OTHER OPERATING EXPENSES
Other operating expenses that are over 1% of gross revenues are as
follows:
YEAR ENDED DECEMBER 31, 2004 2003 2002
------------------------------- -------- -------- --------
Director fees $ 93,359 $ 53,499 $ 38,200
Branch security costs 34,042 58,726 28,078
Audit & exam fees 60,000 74,884 40,200
Organizational & legal expenses 41,673 86,726 25,162
Other 466,830 344,379 372,238
-------- -------- --------
Total $695,904 $618,214 $503,878
======== ======== ========
19. 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, 2004 2003
--------------------------------------------------------- ------------ ------------
ASSETS
Cash and due from banks $ 47,715 $ 113,908
Investment securities held to maturity 299,475
Investment in Pointer Ridge, LLC 550,000 -
Investment in Old Line Bank 12,826,689 12,384,821
Deferred income taxes 22,116 28,013
Other assets 47,912 1,437
------------ ------------
$ 13,494,432 $ 12,827,654
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 120 $ -
Stockholders' equity
Common stock, par value $.01 per share; authorized
5,000,000 shares; issued and outstanding 1,776,394.5
in 2004, and 1,756,894.5 in 2003. $ 17,764 $ 17,569
Paid-in-capital 12,446,229 12,362,902
Retained earnings 1,120,705 517,097
------------ ------------
13,584,698 12,897,568
Accumulated other comprehensive income (90,386) (69,914)
13,494,312 12,827,654
------------ ------------
$ 13,494,432 $ 12,827,654
============ ============
65
NOTES TO FINANCIAL STATEMENTS (Continued)
19. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31, 2004 2003
----------------------------------- ---------- ----------
INTEREST AND DIVIDEND REVENUE
Distribution from bank $ 413,032 $ -
U.S. Treasury securities 602 109
Certificates of deposit 4,910 -
--------- ---------
TOTAL INTEREST AND DIVIDEND REVENUE 418,544 109
OPERATING EXPENSES
Organizational expense - 86,726
Other operating 94,499 -
--------- ---------
Total operating expenses 94,499 86,726
INCOME BEFORE INCOME TAXES 324,045 (86,617)
Income tax benefit (30,256) (29,450)
--------- ---------
354,301 (57,167)
Undistributed net income of bank 462,340 527,429
--------- ---------
Net income $ 816,641 $ 470,262
========= =========
66
NOTES TO FINANCIAL STATEMENTS (Continued)
19. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
OLD LINE BANCSHARES, INC.
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004 2003
------------------------------------------------------------------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and dividends received $ 417,892 $ -
Cash paid for operating expenses (94,379) (86,726)
--------- ---------
323,513 (86,726)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities held to maturity (139,874) (499,366)
Proceeds from maturity of investment securities held to maturity 440,000 200,000
Purchase (redemption) of certificates of deposit - -
Investment in real estate, LLC (550,000) -
--------- ---------
(249,874) (299,366)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock options exercised 73,200 -
Dividends paid (213,032) -
Cash from Bank at reorganization - 500,000
--------- ---------
(139,832) 113,908
--------- ---------
NET INCREASE (DECREASE) IN CASH (66,193) 113,908
--------- ---------
Cash and cash equivalents at beginning of year 113,908 -
--------- ---------
Cash and cash equivalents at end of year $ 47,715 $ 113,908
========= =========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
Net income $ 816,641 $ 470,262
Adjustment to reconcile net income to net cash used in operating
activities
Undistributed net income of subsidiary (462,340) (527,429)
Accretion of discount on debt securities (652) (109)
(Increase) Decrease in deferred income taxes 5,897 (28,013)
Increase in other liabilities 120
Increase in other assets (36,153) (1,437)
--------- ---------
$ 323,513 $ (86,726)
========= =========
67
NOTES TO FINANCIAL STATEMENTS (Continued)
20. STOCKHOLDER'S EQUITY
STOCK OPTIONS
A summary of the status of the outstanding options follows:
2004 2003 2002
--------------------------- -------------------------- --------------------------
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 89,250 $ 5.92 73,500 $ 4.57 62,250 $ 4.51
Options granted 25,600 11.79 15,750 11.50 11,250 5.93
Options exercised (19,500) 4 - - - -
Options expired - - - - - -
--------- ------------ ------ -------------- ------ --------------
Outstanding, end of year 95,350 $ 7.94 89,250 $ 5.92 73,500 $ 4.57
========= ============ ====== ============== ====== ==============
Outstanding options Options exercisable
-------------------------------------- -------------------------
Number Weighted Weighted Number Weighted
outstanding at average average outstanding at average
Exercise December 31, remaining exercise December 31, exercise
price 2004 term price 2004 price
-------------- --------- -------- -------------- --------
$ 4.00-5.00 18,750 5.36 years $ 4.12 18,750 $ 4.12
$ 5.01-$6.00 35,250 5.47 years 5.58 35,250 5.58
$11.50-$12.00 41,350 9.50 years 11.68 35,850 11.79
------ ---------- -------- ------ --------
95,350 7.36 years $ 7.94 89,850 $ 7.70
====== ========== ======== ====== ========
The weighted average fair value of options granted during 2004, 2003, and
2002, has been estimated using the Black-Scholes option-pricing model with
the following assumptions:
2004 2003 2002
------ ------ ------
Dividend yield 1.02% 0.81% 1.37%
Risk-free interest rate 4.22% 3.27% 3.00%
Expected volatility 25.10% 25.10% 21.37%
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.
68
NOTES TO FINANCIAL STATEMENTS (Continued)
21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations
THREE MONTHS ENDED
2004 DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
-------------------------- ------------ ------------- --------- ---------
(Dollars in thousands except per share data)
Interest income $ 1,356 $ 1,253 $ 1,123 $ 1,086
Interest expense 312 288 283 280
Net interest income 1,044 965 840 806
Provision for loan losses 45 85 45 45
Net income 248 239 150 180
Earnings per share-basic 0.14 0.13 0.08 0.10
Earnings per share-diluted 0.14 0.13 0.08 0.10
2003
-------------------------- ----------- ------------ -------- --------
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
69
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,
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, 2004, that have materially affected, or are reasonably likely to materially
affect, Old Line Bancshares, Inc.'s internal control over financial reporting.
ITEM 8B. OTHER INFORMATION
None
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," "Board Meetings and Committees," Executive Compensation" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement
for the 2005 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 2005 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 2005 Annual Meeting
of Stockholders of Old Line Bancshares, Inc.
70
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 2005 Annual Meeting of Stockholders
of Old Line Bancshares, Inc.
ITEM 13. EXHIBITS
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) Executive Employment Agreement of James W. Cornelsen
10.2(G) First Amendment to Executive Employment Agreement of James W.
Cornelsen
10.3(A) Executive Employment Agreement of Joseph E. Burnett
10.4(G) First Amendment to Executive Employment Agreement of Joseph W.
Burnett
10.5(A) Employment Agreement of Christine M. Rush
10.6(G) First Amendment to Executive Employment Agreement of Christine M.
Rush
10.7(B) 2001 Stock Option Plan, as amended
10.8(B) Form of Incentive Stock Option Agreement for 2001 Stock Option Plan
10.9(B) Form of Non-Qualified Stock Option Agreement for 2001 Stock Option
Plan
10.10(C) 1990 Stock Option Plan, as amended
10.11(C) Form of Incentive Stock Option Grant Letter for 1990 Stock Option
Plan
10.12(C) Form of Director Non-Qualified Stock Option Agreement for 1990
Stock Option Plan
10.13(E) 2004 Equity Incentive Plan
10.14(G) Form of Incentive Stock Option Agreement for 2004 Equity Incentive
Plan
10.15(G) Old Line Bancshares, Inc. and Old Line Bank Director Compensation
Policy
10.16(D) Lease Agreement dated April 29, 1999 between Live Oak Limited
Partnership and Old Line National Bank
10.17(D) Commercial Lease Agreement dated February 14, 2002 between Adams
and Company Commercial Brokers, Inc. and Old Line National Bank
10.18(F) Commercial Lease Agreement dated July 7, 2004 by and between
Ridgely I, LLC and Old Line Bank
10.19(F) Operating Agreement for Pointer Ridge Office Investment, LLC among
J. Webb Group, Inc., Michael M. Webb, Lucente Enterprises, Inc.,
Chesapeake Custom Homes, L.L.C. and Old Line Bancshares, Inc., all
as Members and Chesapeake Pointer Ridge Manager, LLC
14(D) 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
incorporated by reference from, Old Line Bancshares, Inc.'s Registration
Statement on Form 10-SB, as amended, under the Securities Exchange Act of 1934,
as amended (File Number 000-50345).
(B) Previously filed by Old Line Bancshares, Inc. as a part of, and
incorporated by reference from, Old Line Bancshares, Inc.'s Registration
Statement on Form S-8, under the Securities Act of 1933, as amended
71
(Registration Number 333-111587).
(C) Previously filed by Old Line Bancshares, Inc. as a part of, and
incorporated by reference from, Old Line Bancshares, Inc.'s Registration
Statement on Form S-8, under the Securities Act of 1933, as amended
(Registration Number 333-113097).
(D) Previously filed by Old Line Bancshares, Inc. as a part of, and
incorporated by reference from, Old Line Bancshares, Inc.'s Annual Report on
Form 10-KSB/A filed on April 8, 2004.
(E) Previously filed by Old Line Bancshares, Inc. as a part of, and
incorporated by reference from, Old Line Bancshares, Inc.'s Registration
Statement on Form S-8, under the Securities Act of 1933, as amended
(Registration Number 333-116845).
(F) Previously filed by Old Line Bancshares, Inc. as a part of, and
incorporated by reference from, Old Line Bancshares, Inc.'s Quarterly Report on
Form 10-QSB filed on November 8, 2004.
(G) Previously filed by Old Line Bancshares, Inc. as a part of, and
incorporated by reference from, Old Line Bancshares, Inc.'s Current Report on
Form 8-K filed on January 5, 2005.
Note: Exhibits 10.1 through 10.15, relate to management contracts or
compensatory plans or arrangements.
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, 2004 and
December 31, 2003 and fees billed for other services rendered by Rowles &
Company, LLP during those periods.
YEAR ENDED
DECEMBER 31
2004 2003
Audit Fees(1) $39,556 $36,495
Audit Related Fees (2) - 28,672
Tax Fees (3) 6,292 7,177
All Other Fees(4) 3,102 5,698
Total $48,950 $78,042
======= =======
(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 $2,306 incurred during 2004 for training costs, 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
completed these services
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prior to May 6, 2004.
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.
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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: March 24, 2005 By: /s/ James W. Cornelsen
------------------------------
James W. Cornelsen, President
(Principal Executive Officer)
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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
James W. Cornelsen (Principal Executive Officer) March 24, 2005
/s/ Christine M. Rush Chief Financial Officer
--------------------------- (Principal Accounting and
Christine M. Rush Financial Officer) March 24, 2005
/s/ Charles A. Bongar, Jr. Director March 24, 2005
--------------------------
Charles A. Bongar, Jr.
/s/ Craig E. Clark Director and March 24, 2005
--------------------------- Chairman of the Board
Craig E. Clark
/s/ Daniel W. Deming Director March 24, 2005
---------------------------
Daniel W. Deming
/s/ James F. Dent Director March 24, 2005
---------------------------
James F. Dent
/s/ Nancy L. Gasparovic Director March 24, 2005
---------------------------
Nancy L. Gasparovic
/s/ Randy A. Lakes Director March 24, 2005
---------------------------
Randy A. Lakes
/s/ Frank Lucente, Jr. Director March 24, 2005
---------------------------
Frank Lucente, Jr.
/s/ Gail D. Manuel Director March 24, 2005
---------------------------
Gail D. Manuel
/s/ John D. Mitchell Director March 24, 2005
---------------------------
John D. Mitchell
/s/ Gregory S. Proctor, Sr. Director March 24, 2005
---------------------------
Gregory S. Proctor, Sr.
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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) Executive Employment Agreement of James W. Cornelsen
10.2(G) First Amendment to Executive Employment Agreement of James W.
Cornelsen
10.3(A) Executive Employment Agreement of Joseph E. Burnett
10.4(G) First Amendment to Executive Employment Agreement of Joseph W.
Burnett
10.5(A) Employment Agreement of Christine M. Rush
10.6(G) First Amendment to Executive Employment Agreement of Christine M.
Rush
10.7(B) 2001 Stock Option Plan, as amended
10.8(B) Form of Incentive Stock Option Agreement for 2001 Stock Option Plan
10.9(B) Form of Non-Qualified Stock Option Agreement for 2001 Stock Option
Plan
10.10(C) 1990 Stock Option Plan, as amended
10.11(C) Form of Incentive Stock Option Grant Letter for 1990 Stock Option
Plan
10.12(C) Form of Director Non-Qualified Stock Option Agreement for 1990
Stock Option Plan
10.13(E) 2004 Equity Incentive Plan
10.14(G) Form of Incentive Stock Option Agreement for 2004 Equity Incentive
Plan
10.15(G) Old Line Bancshares, Inc. and Old Line Bank Director Compensation
Policy
10.16(D) Lease Agreement dated April 29, 1999 between Live Oak Limited
Partnership and Old Line National Bank
10.17(D) Commercial Lease Agreement dated February 14, 2002 between Adams
and Company Commercial Brokers, Inc. and Old Line National Bank
10.18(F) Commercial Lease Agreement dated July 7, 2004 by and between
Ridgely I, LLC and Old Line Bank
10.19(F) Operating Agreement for Pointer Ridge Office Investment, LLC among
J. Webb Group, Inc., Michael M. Webb, Lucente Enterprises, Inc.,
Chesapeake Custom Homes, L.L.C. and Old Line Bancshares, Inc., all
as Members and Chesapeake Pointer Ridge Manager, LLC
14(D) 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
incorporated by reference from, Old Line Bancshares, Inc.'s Registration
Statement on Form 10-SB, as amended, under the Securities Exchange Act of 1934,
as amended (File Number 000-50345).
(B) Previously filed by Old Line Bancshares, Inc. as a part of, and
incorporated by reference from, Old Line Bancshares, Inc.'s Registration
Statement on Form S-8, under the Securities Act of 1933, as amended
(Registration Number 333-111587).
(C) Previously filed by Old Line Bancshares, Inc. as a part of, and
incorporated by reference from, Old Line Bancshares, Inc.'s Registration
Statement on Form S-8, under the Securities Act of 1933, as amended
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(Registration Number 333-113097).
(D) Previously filed by Old Line Bancshares, Inc. as a part of, and
incorporated by reference from, Old Line Bancshares, Inc.'s Annual Report on
Form 10-KSB/A filed on April 8, 2004.
(E) Previously filed by Old Line Bancshares, Inc. as a part of, and
incorporated by reference from, Old Line Bancshares, Inc.'s Registration
Statement on Form S-8, under the Securities Act of 1933, as amended
(Registration Number 333-116845).
(F) Previously filed by Old Line Bancshares, Inc. as a part of, and
incorporated by reference from, Old Line Bancshares, Inc.'s Quarterly Report on
Form 10-QSB filed on November 8, 2004.
(G) Previously filed by Old Line Bancshares, Inc. as a part of, and
incorporated by reference from, Old Line Bancshares, Inc.'s Current Report on
Form 8-K filed on January 5, 2005.
Note: Exhibits 10.1 through 10.15, relate to management contracts or
compensatory plans or arrangements.
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