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OLBK > SEC Filings for OLBK > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for OLD LINE BANCSHARES INC

Form 10-Q for OLD LINE BANCSHARES INC


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Some of the matters discussed below include forward-looking statements. Forward-looking statements often use words such as "believe," "expect," "plan," "may," "will," "should," "project," "contemplate," "anticipate," "forecast," "intend" or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. Our actual results and the actual outcome of our expectations and strategies could be different from those anticipated or estimated for the reasons discussed below and under the heading "Information Regarding Forward Looking Statements."

Overview

Old Line Bancshares was incorporated under the laws of the State of Maryland on April 11, 2003 to serve as the holding company of Old Line Bank.

Our primary business is to own all of the capital stock of Old Line Bank. We also have an approximately $699,500 investment in a real estate investment limited liability company named Pointer Ridge Office Investment, LLC (Pointer Ridge). We own 62.5% of Pointer Ridge. Frank Lucente, one of our directors and a director of Old Line Bank, controls 12.5% of Pointer Ridge and controls the manager of Pointer Ridge. The purpose of Pointer Ridge is to acquire, own, hold for profit, sell, assign, transfer, operate, lease, develop, mortgage, refinance, pledge and otherwise deal with real property located at the intersection of Pointer Ridge Road and Route 301 in Bowie, Maryland. Pointer Ridge owns a commercial office building containing approximately 40,000 square feet and leases this space to tenants. We lease approximately 65% of this building for our main office and operate a branch of Old Line Bank from this address.

On April 1, 2011, we acquired Maryland Bankcorp, Inc. (Maryland Bankcorp), the parent company of Maryland Bank & Trust Company, N.A (MB&T). This acquisition created the sixth largest independent commercial bank based in Maryland, with assets of more than $750 million and with 19 full service branches serving five counties.

Summary of Recent Performance and Other Activities

In a continually challenging economic environment, we are pleased to report continued profitability for the third quarter of 2012. Net income available to common stockholders was $2.0 million or $0.30 per basic and $0.29 per diluted common share for the three month period ended September 30, 2012. This was $320,802 or 18.79% higher than net income available to common stockholders of $1.7 million or $0.25 per basic and diluted common share for the same period in 2011. Net income available to common stockholders was $5.8 million or $0.85 per basic and $0.84 per diluted common share for the nine month period ending September 30, 2012. This was $2.4 million or 70.33% higher than net income available to common stockholders of $3.4 million or $0.56 per basic and diluted common share for the nine months ended September 30, 2011.

The following highlights certain financial data and events that have occurred during the first nine months and third quarter of 2012:

On September 10, 2012, we announced that we had executed a merger agreement that provided for the acquisition of WSB Holdings, Inc. ("WSB").

As a result of our business development efforts, expanded market area and increased name recognition:

Average total loans grew approximately $69.0 million or 13.59% for the three months ended September 30, 2012 compared to the three months ended September 30, 2011.

Average non-interest bearing deposits grew $23.8 million or 14.67% for the three months ended September 30, 2012 relative to the same period in 2011.

Average total loans grew approximately $125.1 million or 28.64% for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. Our acquisition of Maryland Bankcorp also contributed to our growth in the nine month period.

Average non-interest bearing deposits grew $53.5 million or 43.16% for the nine months ended September 30, 2012 relative to the same period in 2011.


Our asset quality remained strong:
At September 30, 2012, we had six legacy loans (loans originated by Old Line Bank) on non-accrual status in the amount of $3.2 million.

At September 30, 2012, we had 27 acquired loans (loans acquired from MB&T pursuant to the merger) on non-accrual status totaling $5.1 million compared to 26 acquired non-accrual loans totaling $4.6 million at December 31, 2011.

At third quarter end 2012, we had accruing legacy loans past due between 30 and 89 days in the amount of $2.3 million and $2,064 accruing legacy loans 90 or more days past due.

At September 30, 2012, we had accruing acquired loans totaling $24,335 past due between 30 and 89 days and $81,486 accruing acquired loans 90 or more days past due.

We ended the third quarter of 2012 with a book value of $10.83 per common share and a tangible book value of $10.17 per common share.

We maintained liquidity and by all regulatory measures remained "well capitalized".

We decreased the provision for loan losses by $425,000 during the three month period and increased it by $125,000 for the nine month period ended September 30, 2012 compared to September 30, 2011.

As a result of the provision discussed above, and net charge offs for the nine month period of $372,523, the allowance for loan losses increased to $4.5 million at September 30, 2012 compared to $3.7 million at December 31, 2011.

We recognized a loss, net of taxes, on our investment in Pointer Ridge of approximately $34,000 and $96,000, respectively, for the three and nine months ended September 30, 2012.

As noted above, on September 10, 2012, we announced that we had executed a merger agreement that provided for the acquisition of WSB Holdings, Inc. (WSB). We plan to complete the merger by the second quarter of 2013. This combination will create a $1.2 billion banking institution and will allow us to expand our financial services with the addition of a successful and growing mortgage origination team. We also anticipate that the acquisition and integration of WSB will enhance the liquidity of our stock as well as our overall financial condition and operating performance.

In June 2012, we established Old Line Financial Services as a division of Old Line Bank and hired an individual with over 25 years of experience to manage this division. Old Line Financial Services allows us to expand the services we provide our customers to include retirement planning and products. Additionally, this division offers investment services to include investment management, estate and succession planning and allows our customers to directly purchase individual stocks, bonds and mutual funds. Through this division customers may also purchase life insurance, long term care insurance and key man/woman insurance.

On April 1, 2011, all MB&T branches were rebranded as Old Line Bank branches and all data processing and accounting systems were consolidated. As discussed below, during the second quarter of 2011, we also substantially completed the assessment and recordation on our financial statements of MB&T's assets and liabilities at fair value as required by current accounting guidance. With the exception of the closing of one MB&T branch, which MB&T had previously designated for closure, we have also retained, and expect to continue to retain, all of MB&T's branches, and the branch personnel with severance of employees occurring only at MB&T's operations, accounting and executive offices.

In accordance with accounting for business combinations, we recorded the acquired assets and liabilities at their estimated fair value on April 1, 2011, the acquisition date. The determination of the fair value of the loans caused a significant write down in the value of certain loans, which we assigned to an accretable or non-accretable balance. We will recognize the accretable balance as interest income over the remaining term of the loan. We will recognize the non-accretable balance as the borrower repays the loan. The accretion of the loan marks, along with other fair value adjustments, favorably impacted our net interest income by $876,046 and $2.5 million for the three and nine months ended September 30, 2012, respectively. We based the determination of fair value on cash flow expectations and/or collateral values. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change. Change in our cash flow expectations could impact net interest income after provision for loan losses. We will recognize any decline in expected cash flows as impairment and record a provision for loan losses during the period. We will recognize any improvement in expected cash flows as an adjustment to interest income.

In conjunction with the merger, we also recorded the deposits acquired at their fair value and recorded a core deposit intangible of $5.0 million. The amortization of this intangible asset was $177,582 for the three month period and $549,839 for the nine month period ended September 30, 2012.


The following summarizes the highlights of our financial performance for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011 (figures in the table may not match those discussed in the balance of this section due to rounding).

Three Months ended September 30,

(Dollars in thousands)

                                                   2012            2011         $ Change       % Change

Net income available to common stockholders   $   2,028       $   1,707       $      321          18.80 %
Interest revenue                                  9,801           9,737               64           0.66
Interest expense                                  1,264           1,393             (129 )        (9.26 )
Net interest income after provision
for loan losses                                   8,162           7,545              617           8.18
Non-interest revenue                                840           1,016             (176 )       (17.32 )
Non-interest expense                              6,082           6,153              (71 )        (1.15 )
Average total loans                             576,428         507,472           68,956          13.59
Average interest earning assets                 752,858         674,069           78,789          11.69
Average total interest bearing deposits         553,524         486,889           66,635          13.69
Average non-interest bearing deposits           186,319         162,479           23,840          14.67
Net interest margin (1)                            4.72   %        5.01   %
Return on average equity                          11.83   %       11.02   %
Basic earnings per common share               $    0.30       $    0.25       $     0.05          20.00
Diluted earnings per common share                  0.29            0.25             0.04          16.00

(1) See "Reconciliation of Non-GAAP Measures"


The following summarizes the highlights of our financial performance for the nine month period ended September 30, 2012 compared to the nine month period ended September 30, 2011 (figures in the table may not match those discussed in the balance of this section due to rounding).

Nine Months ended September 30,

(Dollars in thousands)

                                                   2012            2011        $ Change       % Change

Net income available to common stockholders   $   5,814       $   3,413       $   2,401          70.34 %
Interest revenue                                 28,667          23,259           5,408          23.25
Interest expense                                  3,904           3,856              48           1.24
Net interest income after provision
for loan losses                                  23,638          18,403           5,235          28.44
Non-interest revenue                              2,875           1,858           1,017          54.72
Non-interest expense                             18,017          15,246           2,771          18.18
Average total loans                             561,681         436,629         125,052          28.64
Average interest earning assets                 732,230         566,912         165,318          29.16
Average total interest bearing deposits         533,303         414,114         119,189          28.78
Average non-interest bearing deposits           177,349         123,886          53,463          43.16
Net interest margin (1)                            4.69   %        4.66   %
Return on average equity                          11.67   %        8.25   %
Basic earnings per common share               $    0.85       $    0.56       $    0.29          52.08 %
Diluted earnings per common share                  0.84            0.56            0.28          50.00

(1) See "Reconciliation of Non-GAAP Measures"

Growth Strategy

We have based our strategic plan on the premise of enhancing stockholder value and growth through branching and operating profits. Our short term goals include collecting payments on non-accrual and past due loans, profitably disposing of other real estate owned, enhancing and maintaining credit quality, maintaining an attractive branch network, expanding fee income, generating extensions of core banking services, and using technology to maximize stockholder value. During the past two years, we have expanded in Prince George's County and Anne Arundel County, Maryland and the acquisition of Maryland Bankcorp has expanded our operations in Charles County and into St. Mary's and Calvert Counties, Maryland. We anticipate that the acquisition of WSB will further enhance our presence in Charles, Prince George's and Anne Arundel counties.

Other Opportunities

We use the Internet and technology to augment our growth plans. Currently, we offer our customers image technology, Internet banking with on line account access and bill payer service. We provide selected commercial customers the ability to remotely capture their deposits and electronically transmit them to us. We will continue to evaluate cost effective ways that technology can enhance our management capabilities, products and services.

We may take advantage of strategic opportunities presented to us via mergers occurring in our marketplace. For example, we may purchase branches that other banks close or lease branch space from other banks or hire additional loan officers. We also continually evaluate and consider opportunities with financial services companies or institutions with which we may become a strategic partner, merge or acquire such as we have done with WSB and MB&T.

Although the current economic climate continues to present significant challenges for our industry, we have worked diligently towards our goal of becoming the premier community bank in the Washington, D.C. market. While we are uncertain whether the economy will remain at its current anemic growth or if the high unemployment rate, soaring national debt and high gas prices will continue to dampen the economic climate, we continue to remain cautiously optimistic that we
have identified any problem assets and our remaining borrowers will continue to stay current on their loans and that we can continue to grow our balance sheet and earnings. Now that we have substantially completed our branch expansion, enhanced our data processing capabilities and expanded our commercial lending team, we believe that we are well positioned to capitalize on the opportunities that may become available in a healthy economy as we did with the Maryland Bankcorp and pending WSB acquisitions.


We anticipate that as a result of the Maryland Bankcorp acquisition, salaries and benefits expenses and other operating expenses will be higher the remainder of 2012 than they were in 2011. As previously reported, we have identified several areas within the former MB&T non-interest expense structure that we expected would provide expense reductions from those incurred since the acquisition date of April 1, 2011. We realized these expense reductions during the fourth quarter of 2011 and the first quarter of 2012 and will continue to benefit from them for the remainder of 2012. If the WSB acquisition is completed as anticipated, then we expect that salaries and benefits expenses and other operating expenses will be higher in 2013 than they were in 2012. We believe with our 19 branches, our lending staff, our corporate infrastructure and our solid balance sheet and strong capital position, we can continue to focus our efforts on improving earnings per share and enhancing stockholder value. Until completion of the merger with WSB, we anticipate that merger related expenses may cause earnings to be slightly lower than would otherwise be expected. However, we anticipate that the WSB merger will be accretive to earnings within three quarters of closing.

Results of Operations

Net Interest Income

Net interest income is the difference between income on interest earning assets and the cost of funds supporting those assets. Earning assets are comprised primarily of loans, investments, interest bearing deposits and federal funds sold. Cost of funds consists of interest bearing deposits and other borrowings. Non-interest bearing deposits and capital are also funding sources. Changes in the volume and mix of earning assets and funding sources along with changes in associated interest rates determine changes in net interest income.

Three months ended September 30, 2012 compared to three months ended September 30, 2011

Net interest income after provision for loan losses for the three months ended September 30, 2012 increased $617,202 or 8.18% to $8.2 million from $7.5 million for the same period in 2011. As discussed below and outlined in detail in the Rate/Volume Analysis, these changes were the result of growth in average interest earning assets and the change in the composition of average interest earning assets that occurred with the movement of funds from lower yielding interest bearing deposits into higher yielding loans and investment securities. A decline in interest paid on interest bearing liabilities also contributed to the improvement in net interest income. The accretion of the fair value adjustments positively impacted net interest income after provision for loan losses as did the $425,000 decrease in the provision for loan losses. The faster than expected repayment of impaired loans that we acquired from MB&T was the most significant factor that caused these changes and the improvement in net interest margin as discussed below.

Although a competitive rate environment and a low prime rate cause low market yields that continue to negatively impact net interest income, the relatively stable rate environment has allowed us to adjust the mix and volume of interest earning assets and liabilities on the balance sheet. This contributed to the improvement in the net interest margin.

We offset the effect on net income caused by the low rate environment primarily by growing total average interest earning assets by $78.8 million or 11.69% to $752.8 million for the three months ended September 30, 2012 from $674.1 million for the three months ended September 30, 2011. The growth in net interest income that derived from the increase in total average interest earning assets was partially offset by growth in average interest bearing liabilities. Average interest bearing deposits which increased to $553.5 million for the three months ended September 30, 2012 from $486.9 million for the three months ended September 30, 2011 was the primary cause of the growth in interest bearing liabilities. The growth in average interest earning assets and interest bearing deposits was primarily a result of increased name recognition in our market place and our business development efforts, particularly our increased business development efforts in our new market area resulting from our acquisition of Maryland Bankcorp.

Non-interest bearing deposits allow us to fund growth in interest earning assets at minimal cost. As a result of growth generated from our branch network, our average non-interest bearing deposits increased $23.8 million to $186.3 million. This was also a significant contributor to the improvement in the net interest margin.

Our net interest margin was 4.72% for the three months ended September 30, 2012 as compared to 5.01% for the three months ended September 30, 2011. The yield on average interest earning assets decreased forty four basis points during the period from 5.83% for the quarter ended September 30, 2011 to 5.39% for the quarter ended September 30, 2012. Twenty one basis points of this decrease was primarily because during the three month period we had a lower dollar value of impaired loans that we acquired from MB&T repaid this quarter relative to the same quarter last year which caused a lower accretion of fair value adjustments as outlined below. This coupled with re-pricing in the loan portfolio caused the average loan yield to decline.


During three months ended September 30, 2012 and 2011, we continued to successfully collect payments on acquired loans that we had recorded at fair value according to ASC 310-20 and ASC 310-30, albeit at a lower dollar value during the 2012 period than we accomplished during the same period last year. These payments were a direct result of our efforts to negotiate payments, sell notes or foreclose on and sell collateral after the acquisition date. The accretion of the fair value adjustments positively impacted the yield on loans and increased the net interest margin as follows:

                                                            Three Months Ended September 30,
                                               2012                               2011


                                            Fair Value       % Impact on       Fair Value       % Impact on
                                            Accretion        Net Interest       Accretion       Net Interest
                                             Dollars            Margin           Dollars           Margin
Commercial loans                           $     64,142               0.03 %   $    60,855               0.04 %
Mortgage loans                                  776,089               0.41       1,042,789               0.61
Consumer loans                                    1,968               0.01           1,226               0.00
Interest bearing deposits                        33,847               0.01         108,469               0.06
Total Fair Value Accretion                 $    876,046               0.46 %   $ 1,213,339               0.71 %


The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the three months ended September 30, 2012 and 2011, showing the average distribution of assets, liabilities, stockholders' equity and related income, expense and corresponding weighted average yields and rates. The average balances used in this table and other statistical data were calculated using average daily balances.

                                                     Average Balances, Interest and Yields
Three Months Ended
September 30,                                 2012                                            2011
                             Average                                          Average
                             balance          Interest         Yield          balance         Interest         Yield
Assets:
Federal funds sold(1)     $   4,357,802            1,696          0.15 %   $   4,334,556     $       994          0.09 %
Interest bearing
deposits                      5,251,808            3,313          0.25        14,238,260          11,237          0.31
Investment
securities(1)(2)
  U.S. treasury               1,248,954            2,638          0.84         1,247,141           2,552          0.81
  U.S. government
agency                       27,035,518           86,660          1.28        22,611,220         117,850          2.07
  Mortgage backed
securities                   86,500,675          540,022          2.48       100,121,572         782,903          3.10
  Municipal securities       52,440,302          649,970          4.93        22,537,921         330,861          5.82
  Other                       3,860,839           56,066          5.78         3,818,831          34,517          3.59
Total investment
securities                  171,086,288        1,335,356          3.11       150,336,685       1,268,683          3.35
Loans: (1) (3)
  Commercial                 96,685,151        1,257,295          5.17        98,799,462       1,376,251          5.53
  Mortgage                  467,135,047        7,422,503          6.32       393,694,344       7,030,619          7.08
  Consumer                   12,608,252          176,362          5.56        14,978,369         224,455          5.95
   Total loans              576,428,450        8,856,160          6.11       507,472,175       8,631,325          6.75
  Allowance for loan
losses                        4,266,214                -                       2,313,027               -
Total loans, net of
allowance                   572,162,236        8,856,160          6.16       505,159,148       8,631,325          6.78
Total interest earning
assets(1)                   752,858,134       10,196,525          5.39       674,068,649       9,912,239          5.83
  Non-interest bearing
cash                         50,174,932                                       29,110,472
  Premises and
equipment                    23,921,637                                       22,634,871
  Other assets               37,989,887                                       40,019,636
Total assets              $ 864,944,590                                    $ 765,833,628
Liabilities and
Stockholders' Equity:
Interest bearing
deposits
  Savings                 $  62,840,067           52,395          0.33     $  60,972,112          50,076          0.33
  Money market and NOW      178,067,375          147,621          0.33       117,322,326         161,479          0.55
  Other time deposits       312,616,815          857,059          1.09       308,594,165         964,218          1.24
Total interest bearing
deposits                    553,524,257        1,057,075          0.76       486,888,603       1,175,773          0.96
  Borrowed funds             49,608,300          206,721          1.66        48,302,618         216,756          1.78
Total interest bearing
liabilities                 603,132,557        1,263,796          0.83       535,191,221       1,392,529          1.03
Non-interest bearing
deposits                    186,319,471                                      162,479,123
                            789,452,028                                      697,670,344
Other liabilities             6,898,432                                        6,192,632
Non-controlling
interest                        406,102                                          484,851
Stockholders' equity         68,188,028                                       61,485,801
Total liabilities and
. . .
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