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OLBK > SEC Filings for OLBK > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for OLD LINE BANCSHARES INC

Form 10-Q for OLD LINE BANCSHARES INC


14-Aug-2013

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 $612,000 investment in a real estate investment limited liability company named Pointer Ridge Office Investment, LLC (Pointer Ridge). We own 62.5% of Pointer Ridge. Frank Lucente, one of our directors and a director of Old Line Bank, controls 12.5% of Pointer Ridge and controls the manager of Pointer Ridge. The purpose of Pointer Ridge is to acquire, own, hold for profit, sell, assign, transfer, operate, lease, develop, mortgage, refinance, pledge and otherwise deal with real property located at the intersection of Pointer Ridge Road and Route 301 in Bowie, Maryland. Pointer Ridge owns a commercial office building containing approximately 40,000 square feet and leases this space to tenants. We lease approximately 73% 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).

On May 10, 2013, we acquired WSB Holdings, Inc. (WSB Holdings), the parent company of The Washington Savings Bank, F.S.B. (WSB). This acquisition created the fifth largest independent commercial bank based in Maryland, with assets of more than $1.1 billion and with 23 full service branches serving five counties. Since the acquisition, teams from both institutions have worked diligently to join the two organizations.

Summary of Recent Performance and Other Activities

Our net income available to common stockholders decreased $2.1 million for a net loss of $84,285 for the three months ended June 30, 2013, compared to net earnings of $2.0 million for the three months ended June 30, 2012. Loss was $0.01 per basic and diluted common share for the three months ended June 30, 2013 compared to earnings of $0.30 and $0.29, respectively, per basic and diluted common share for the same period in 2012. This decrease is primarily the result of $2.9 million of merger related expenses incurred during the second quarter of 2013. These merger related expenses were primarily related to legal fees, investment banking fees, severance and charges associated with the termination of WSB's core data processing contract in connection with our acquisition of WSB Holdings. Earnings were $1.2 million, or $0.16 and $0.15 per basic and diluted share, for the six months ended June 30, 2013, compared with $3.8 million, or $0.55 per basic and diluted share for the same six month period last year. The decrease is primarily the result of an increase in non-interest expenses which includes the $2.9 million merger and integration expenses.


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The following highlights contain additional financial data and events that have occurred during the three and six months ended June 30, 2013:

The merger with WSB Holdings became effective May 10, 2013, causing total assets to grow to $1.1 billion at June 30, 2013 compared to $861.9 million at December 31, 2012.

Total loans grew $192.0 million or 32.27% during the six months ended June 30, 2013, to $787.2 million at June 30, 2013 compared to $595.1 million at December 31, 2012, primarily as a result of the acquisition of WSB Holdings.

Non-interest bearing deposits grew $24.7 million, or 13.07%, and interest bearing deposits grew $235.4 million, or 43.07%, during the six months ended June 30, 2013 compared to their respective balances at December 31, 2012, primarily as a result of the acquisition of WSB Holdings.

          Our asset quality remained strong:



          At June 30, 2013, we had four legacy loans (loans originated by Old
Line Bank) on non-accrual status in the amount of $1.9 million.

          At June 30, 2013, we had 105 acquired loans (loans acquired from MB&T
and WSB pursuant to the mergers) on non-accrual status totaling $14.8 million.

          At June 30, 2013, we had accruing legacy loans past due between 30

and 89 days in the amount of $2.6 million and $0 accruing legacy loans 90 or more days past due.

At June 30, 2013, we had accruing acquired loans totaling $3.6 million past due between 30 and 89 days and one accruing acquired loan of $8,056 that is 90 or more days past due.

We ended the second quarter of 2013 with a book value of $10.93 per common share and a tangible book value of $9.65 per common share.

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

We decreased the provision for loan losses by $350,000 during the six month period as compared to the six months ended June 30, 2012.

We recognized a loss, net of taxes, on our investment in Pointer Ridge of approximately $11,500 and $24,600, respectively, for the three and six month periods ended June 30, 2013.

On May 11, 2013, all five WSB branches were rebranded as Old Line Bank branches. The data processing and accounting systems are scheduled to be consolidated during the fourth quarter of 2013. As discussed below, during the second quarter of 2013, we also substantially completed the assessment and recordation on our financial statements of WSB Holdings' assets and liabilities at fair value as required by current accounting guidance. We have retained, and expect to continue to retain, all of WSB's branches, and the branch personnel with severance of employees occurring at WSB's operations, accounting and executive offices. We are pleased to have the remaining WSB personnel as part of the Old Line Bank team and anticipate that they will be a significant contributor to our success.

Pursuant to the merger agreement, the stockholders of WSB Holdings received approximately 2.9 million shares of Old Line Bancshares common stock and aggregate cash consideration of $16.7 million. The total merger consideration was $54.7 million based on recent trading prices of Old Line Bancshares' common stock at the time of the merger. Included in Note 3 to the consolidated financial statements is additional discussion about the WSB Holdings acquisition.

On March 29, 2013, we closed our branch located at 12080 Old Line Centre, Waldorf, Maryland. In conjunction with this closure, we disposed of all of the fixed assets that we did not transfer to another location and accelerated the remaining lease payments due under the lease agreement for this location. We transferred the deposits of this branch to one of our other two Waldorf locations. The closure of this facility eliminates approximately $250,000 in annual non-interest expense.

During the first quarter of 2013, we opened a loan production office located at 12501 Prosperity Drive, Suite 215, Silver Spring, in Montgomery County, Maryland. We have hired a Senior Vice President with over 30 years of banking experience to lead this office. This office will allow us to expand our services to the Montgomery County market. We


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anticipate that the individuals in this office will generate sufficient interest and non-interest income during 2013 and beyond to more than offset the cost associated with this office.

During the first six months of 2013, we sold eight properties that we obtained through foreclosure. With the sale of these properties, we recorded a $201,224 loss on sales of other real estate owned. We expect that the sale of these properties will reduce future legal and maintenance costs.

In accordance with accounting for business combinations, during the second quarter of 2013, we recorded the acquired assets and liabilities of WSB at their estimated fair value on May 10, 2013, 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 discount. We will recognize the accretable discount as interest income over the remaining term of the loan. The non-accretable discount will be adjusted based on subsequent increases or decreases to the expected cash flows and will result in either an increase to accretion income or provisions for loan losses, respectively. The accretion of the loan marks, along with other fair value adjustments, favorably impacted our net interest income by $26,222 for the six months ended June 30, 2013 compared to the six months ended June 30, 2012.

Our combined total accretion of the loan marks, along with other fair value adjustments, for both MB&T and WSB favorably impacted out net interest income by $300,116 and $540,592 for the three and six months ended June 30, 2013.

The following summarizes the highlights of our financial performance for the three and six month period ended June 30, 2013 compared to same periods in 2012 (figures in the table may not match those discussed in the balance of this section due to rounding).

                                                 Three months ended June 30,
                                                   (Dollars in thousands)
                                          2013          2012      $ Change    % Change

Net income available to common
stockholders                           $       (84 )  $   2,019   $  (2,103 )  (104.16 )%
Interest revenue                            10,308        9,764         544       5.57
Interest expense                             1,104        1,300        (196 )   (15.08 )
Net interest income after provision
for loan losses                              9,003        8,088         915      11.31
Non-interest revenue                         1,153          965         188      19.48
Non-interest expense                        10,535        6,068       4,467      73.62
Average total loans                        721,223      558,859     162,364      29.05
Average interest earning assets            904,597      729,382     175,215      24.02
Average total interest bearing
deposits                                   686,544      524,539     162,005      30.89
Average non-interest bearing
deposits                                   205,050      181,789      23,261      12.80
Net interest margin (1)                       4.28 %       4.84 %
Return on average equity                     (0.35 )%     12.27 %
Basic earnings per common share        $     (0.01 )  $    0.30   $   (0.31 )  (103.33 )
Diluted earnings per common share            (0.01 )       0.29       (0.30 )  (103.45 )


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                                            Six months ended June 30,
                                              (Dollars in thousands)
                                 2013            2012         $ Change      % Change

Net income available to
common stockholders          $      1,202    $      3,785    $    (2,583 )     (68.24 )%
Interest revenue                   19,125          18,866            259         1.37
Interest expense                    2,074           2,640           (566 )     (21.44 )
Net interest income after
provision for loan losses          16,651          15,476          1,175         7.59
Non-interest revenue                2,381           1,875            506        26.99
Non-interest expense               17,616          11,776          5,840        49.59
Average total loans               663,782         554,227        109,555        19.77
Average interest earning
assets                            838,758         721,796        116,962        16.20
Average total interest
bearing deposits                  619,967         523,081         96,886        18.52
Average non-interest
bearing deposits                  196,305         173,196         23,109        13.34
Net interest margin (1)              4.32 %          4.67 %
Return on average equity             2.89 %         11.59 %
Basic earnings per common
share                        $       0.16    $       0.55    $     (0.39 )     (70.91 )%
Diluted earnings per
common share                         0.15            0.55          (0.40 )     (72.73 )



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

Strategic Plan

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, through the acquisition of Maryland Bankcorp, in Charles County and into St. Mary's and Calvert Counties, Maryland. The acquisition of WSB Holdings will continue to further enhance our presence in Charles, Prince George's and Anne Arundel counties.

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 Maryland Bankcorp and WSB Holdings.

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, including through the new branches we acquired in the WSB acquisition and the attendant increased penetration into the Charles, Prince George's and Anne Arundel County markets. While we are uncertain about the pace of economic growth or the impact of the current political environment, and we believe that high unemployment and growing national debt will continue to dampen the economic climate, we remain cautiously optimistic that we have identified any problem assets, that our remaining borrowers will stay current on their loans and that we can continue to grow our balance sheet and earnings. We believe that we are well positioned to capitalize on the opportunities that may become available in the current economy as well as a healthier economy.

If the Federal Reserve maintains the federal funds rate at current levels and the economy remains stable, we believe that we can continue to grow total loans and deposits during the remainder of 2013. We also believe that we will be able to


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maintain our current level of net interest margins during the remainder of 2013. As a result of this growth and expected continued strength in the net interest margin, we expect that net interest income will continue to increase during the remainder of 2013, although there can be no guarantee that this will be the case.

We also expect that salaries and benefits expenses and other operating expenses will be higher in 2013 than they were in 2012 due to the acquisition of WSB Holdings. We believe with our existing 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. Due to the merger with WSB Holdings, until final conversion we anticipate that merger related expenses may cause earnings to be lower than would otherwise be expected. However, merger related costs in connection with the WSB Holdings merger should be substantially lower going forward than those incurred to date and we anticipate that the merger will be accretive to earnings by the first quarter of 2014.

Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. As discussed in Old Line Bancshares' Form 10-K for the fiscal year ended December 31, 2012, we consider our critical accounting policies to be the allowance for loan losses, other-than-temporary impairment of investment securities, real estate owned, goodwill and other intangible assets, deferred income taxes, business combinations and accounting for acquired loans, and estimation of fair value.

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 June 30, 2013 compared to three months ended June 30, 2012

Net interest income before provision for loan losses for the three months ended June 30, 2013 increased $740 thousand or 8.75% to $9.2 million from $8.5 million for the same period in 2012. As discussed below and outlined in detail in the Rate/Volume Analysis, this increase was the result of an increase in average interest earning assets, partially offset by a decrease in yield on such assets, and a decline in interest paid on interest bearing liabilities. The accretion of the fair value and credit quality negatively impacted net interest income. This decrease is primarily due to a lower dollar value of impaired loans that we acquired from MB&T that was repaid during the three month period ending June 30, 2013 relative to the same three months last year, which caused a lower accretion of fair value adjustments. Although we continued to receive faster than expected repayment of the impaired loans that we acquired from MB&T, the rate of repayment was significantly slower than it was during the second quarter of 2012.

A competitive rate environment and a low prime rate resulted in decreases in both the rate paid on interest bearing liabilities and the yield on interest earning assets during the three months ended June 30, 2013, however, the low market yields on interest bearing assets that resulted in the decrease in interest income had a much greater impact on, and continue to negatively impact, net interest income. We continue to adjust the mix and volume of interest earning assets and liabilities on the balance sheet to maintain a relatively stable net interest margin.

Total interest revenue increased $543,907, or 5.57%, to $10.3 million during the three months ended June 30, 2013 compared to $9.8 million during the three months ended June 30, 2012. As noted above, we offset the effect on interest income and net interest income caused by the low rate environment by growing total average interest earning assets by $175.2 million or 24.03% to $904.6 million for the three months ended June 30, 2013 from $729.4 million for the three months ended June 30, 2012, as well as by changes in the mix of our interest-earning assets. The increase is partially due to the income on the loans and investments acquired in the WSB Holdings transaction.

Total interest expense decreased $195,884, or 15.08%, to $1.1 million during the three months ended June 30, 2013 from $1.3 million for the same period in 2012, as a result of the decrease in the average interest rate paid on interest bearing liabilities partially offset by an increase in the average volume of interest bearing liabilities, primarily interest bearing deposits. The average rate paid on interest bearing liabilities decreased to 0.56% during the three months ended June 30, 2013 compared to 0.83% during the three months ended June 30, 2012, while average interest bearing deposits increased $162.0 million or 30.89% to $686.5 million for the three months ended June 30, 2013 from $524.5 million for the three months ended June 30, 2012.


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The growth in average interest earning assets and interest bearing deposits was primarily the result of the acquisition of WSB Holdings, but we also experienced organic growth in both these areas as a result of increased name recognition in our market place, including as a result of the acquisition, and our business development efforts.

Non-interest bearing deposits allow us to fund growth in interest earning assets at minimal cost. As a result of the acquisition of WSB and the growth generated from our branch network and commercial loan officers, our average non-interest bearing deposits increased $23.3 million to $205.1 million from $181.8 million during the three months ended June 30, 2013, compared to the three months ended June 30, 2012.

Our net interest margin was 4.28% for the three months ended June 30, 2013 compared to 4.84% for the three months ended June 30, 2012. The yield on average interest earning assets decreased 79 basis points during the period from 5.56% for the quarter ended June 30, 2012 to 4.77% for the quarter ended June 30, 2013. Forty nine basis points of this decrease was primarily because we had a lower dollar value of impaired loans that we acquired from MB&T that were repaid during the 2013 period relative to the same quarter last year which caused a lower accretion of fair value adjustments. This, coupled with re-pricing in the loan portfolio and slightly lower yields on new loans, caused the average loan yield to decline.

During the three months ended June 30, 2013 and 2012, 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 2013 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. This decrease is primarily due to a lower dollar value of impaired loans that we acquired from MB&T that was repaid during the three month period ending June 30, 2013 relative to the same three months last year, which caused a lower accretion of fair value adjustment.

Total fair value accretion decreased for the three months ending June 30, 2013 as compared to June 30, 2012 primarily due to one real estate loan that was paid off during last year representing approximately $683,000 in accretion. The accretion of the fair value adjustments positively impacted the yield on loans and increased the net interest margin as follows:

                                           Three months ended June 30,
                                        2013                          2012
                              Fair Value    % Impact on    Fair Value    % Impact on
                              Accretion     Net Interest    Accretion    Net Interest
                               Dollars         Margin        Dollars        Margin
Commercial loans             $     38,933           0.02 % $    42,718           0.02 %
Mortgage loans(1)                 173,261           0.07     1,007,812           0.56
Consumer loans                      2,876           0.00         1,899           0.00
Interest bearing deposits          85,046           0.05        57,081           0.03
Total Fair Value Accretion   $    300,116           0.14 % $ 1,109,510           0.61 %



(1) In 2013, we reclassified mortgage loans totaling $873,918 to commercial loans, the impact of this reclassification was immaterial to prior period net interest income or financial condition. Therefore, we did not adjust prior period information.

The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the three months ended June 30, 2013 and 2012, 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.


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                                                    Average Balances, Interest and Yields
                                                 2013                                      2012
                                   Average                                    Average
Three months ended June 30,        balance         Interest      Yield        balance       Interest     Yield
Assets:
Federal funds sold(1)          $     6,778,841          1,784      0.11 %  $   4,568,009   $     1,892     0.17
Interest bearing deposits              199,541             61      0.12        4,150,881         2,593     0.25
Investment securities(1)(2)
U.S. treasury                        1,248,692            452      0.15        1,248,504         2,518     0.81
U.S. government agency              44,930,315        143,760      1.28       24,448,432        96,418     1.59
Mortgage backed securities          67,906,312        329,618      1.95       90,311,537       592,725     2.64
Municipal securities                62,664,327        722,819      4.63       45,842,852       615,460     5.40
Other                                3,810,214         66,256      6.97        3,918,725        44,590     4.58
Total investment securities        180,559,860      1,262,905      2.81      165,770,050     1,351,711     3.28
Loans: (1) (3)
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