Old Line Bancshares, Inc. (OLBK)

FORM 10-Q | Quarterly Report
OLD LINE BANCSHARES INC (Form: 10-Q, Received: 05/09/2018 15:23:08)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2018

 

OR

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 000-50345

 

Old Line Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

     
Maryland   20-0154352
(State or other jurisdiction   (I.R.S. Employer
of incorporation or organization)   Identification No.)

 

 

     
1525 Pointer Ridge Place    
Bowie, Maryland   20716
(Address of principal executive offices)   (Zip Code)

 

 

Registrant’s telephone number, including area code: (301) 430-2500

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

   
Large accelerated filer  o Accelerated filer  x
Non-accelerated filer  o (Do not check if a smaller reporting company) Smaller reporting company  o
Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o No x

 

As of April 30, 2018, the registrant had 16,974,783 shares of common stock outstanding.

 

 

OLD LINE BANCSHARES, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

 

     
    Page
    Number
     
PART I. FINANCIAL INFORMATION 3
     
Item 1. Financial Statements  
     
  Consolidated Balance Sheets as of March 31, 2018 (Unaudited) and December 31, 2017 3
     
  Consolidated Statements of Income (Unaudited) for the Three Months Ended March 31, 2018 and 2017 4
     
  Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2018 and 2017 5
     
  Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2018 6
     
  Consolidated Statements of Cash Flows  (Unaudited) for the Three Months Ended March 31, 2018 and 2017 7
     
  Notes to Consolidated Financial Statements (Unaudited) 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 56
     
Item 4. Controls and Procedures 57
     
PART II.    
     
Item 1. Legal Proceedings 57
     
Item 1A. Risk Factors 57
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 58
     
Item 3. Defaults Upon Senior Securities 58
     
Item 4. Mine Safety Disclosures 58
     
Item 5. Other Information 58
     
Item 6. Exhibits 63
     
Signatures   65

 

  2  

Part 1. Financial Information

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Balance Sheets

 

    March 31,
2018
  December 31,
2017
    (Unaudited)    
Assets
Cash and due from banks   $ 85,617,226     $ 33,562,652  
Interest bearing accounts     2,687,988       1,354,870  
Federal funds sold     200,366       256,589  
Total cash and cash equivalents     88,505,580       35,174,111  
Investment securities available for sale-at fair value     210,353,788       218,352,558  
Loans held for sale, fair value of $4,073,887 and $4,557,722     3,934,086       4,404,294  
Loans held for investment (net of allowance for loan losses of $6,257,519 and $5,920,586, respectively)     1,756,576,833       1,696,361,431  
Equity securities at cost     7,782,847       8,977,747  
Premises and equipment     40,991,968       41,173,810  
Accrued interest receivable     5,310,151       5,476,230  
Deferred income taxes     8,547,392       7,317,096  
Bank owned life insurance     41,849,569       41,612,496  
Annuity Plan     5,981,809       5,981,809  
Other real estate owned     1,799,598       2,003,998  
Goodwill     25,083,675       25,083,675  
Core deposit intangible     5,985,657       6,297,970  
Other assets     8,008,664       7,396,227  
Total assets   $ 2,210,711,617     $ 2,105,613,452  
                 
Liabilities and Stockholders’ Equity                
Deposits                
Non-interest bearing   $ 572,119,981     $ 451,803,052  
Interest bearing     1,213,584,463       1,201,100,317  
Total deposits     1,785,704,444       1,652,903,369  
Short term borrowings     161,477,872       192,611,971  
Long term borrowings     38,172,653       38,106,930  
Accrued interest payable     1,105,830       1,471,954  
Supplemental executive retirement plan     5,975,159       5,893,255  
Income taxes payable     4,182,749       2,157,375  
Other liabilities     3,700,120       4,741,412  
Total liabilities     2,000,318,827       1,897,886,266  
Stockholders’ equity                
Common stock, par value $0.01 per share; 25,000,000 shares authorized; 12,566,696 and 12,508,332 shares issued and outstanding in 2018 and 2017, respectively     125,667       125,083  
Additional paid-in capital     149,691,736       148,882,865  
Retained earnings     66,573,919       61,054,487  
Accumulated other comprehensive loss     (5,998,532 )     (2,335,249 )
Total stockholders’ equity     210,392,790       207,727,186  
Total liabilities and stockholders’ equity   $ 2,210,711,617     $ 2,105,613,452  

 

The accompanying notes are an integral part of these consolidated financial statements

 

  3  

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Income

(Unaudited)

 

    Three Months Ended
March 31,
    2018   2017
Interest Income                
Loans, including fees   $ 19,700,762     $ 15,365,654  
U.S. treasury securities     10,029       5,067  
U.S. government agency securities     81,542       48,504  
Corporate bonds     200,469       117,837  
Mortgage backed securities     575,018       554,429  
Municipal securities     500,620       435,554  
Federal funds sold     665       612  
Other     255,234       107,677  
Total interest income     21,324,339       16,635,334  
Interest expense                
Deposits     2,306,733       1,541,058  
Borrowed funds     1,334,831       932,887  
Total interest expense     3,641,564       2,473,945  
Net interest income     17,682,775       14,161,389  
Provision for loan losses     394,896       440,491  
Net interest income after provision for loan losses     17,287,879       13,720,898  
Non-interest income                
Service charges on deposit accounts     576,584       412,159  
Gain on sales or calls of investment securities           15,677  
Earnings on bank owned life insurance     292,936       281,356  
Gain on disposal of assets     14,366       112,594  
Rental Income     198,444       140,593  
Income on marketable loans     418,472       630,930  
Other fees and commissions     294,219       261,425  
Total non-interest income     1,795,021       1,854,734  
Non-interest expense                
Salaries and benefits     5,485,450       4,867,531  
Occupancy and equipment     1,980,401       1,653,413  
Data processing     609,639       356,648  
FDIC insurance and State of Maryland assessments     188,071       261,600  
Core deposit premium amortization     312,313       197,901  
Loss (gain) on sales of other real estate owned     12,516       (17,689 )
OREO expense     184,994       27,577  
Directors Fees     170,550       177,200  
Network services     79,205       139,607  
Telephone     204,424       194,142  
Other operating     1,764,396       1,674,200  
Total non-interest expense     10,991,959       9,532,130  
                 
Income before income taxes     8,090,941       6,043,502  
Income tax expense     2,025,759       2,069,720  
Net income available to common stockholders     6,065,182       3,973,782  
                 
Basic earnings per common share   $ 0.48     $ 0.36  
Diluted earnings per common share   $ 0.48     $ 0.36  
Dividend per common share   $ 0.08     $ 0.08  

 

The accompanying notes are an integral part of these consolidated financial statements

 

  4  

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

Three Months Ended March 31,   2018   2017
Net income   $ 6,065,182     $ 3,973,782  
                 
Other comprehensive income:                
Unrealized gain/(loss) on securities available for sale, net of taxes of ($1,216,115), and $715,030, respectively     (3,203,310 )     1,097,727  
Reclassification adjustment for realized gain on securities available for sale included in net income, net of taxes of $0 and $6,184, respectively           (9,493 )
Other comprehensive income (loss)     (3,203,310 )     1,088,234  
Comprehensive income   $ 2,861,872     $ 5,062,016  

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 

 

 

 

 

 

 

 

 

 

 

  5  

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

 

                    Accumulated    
            Additional       other   Total
    Common stock   paid-in   Retained   comprehensive   Stockholders’
    Shares   Par value   capital   earnings   loss   Equity
                         
Balance December 31, 2017     12,508,332     $ 125,083     $ 148,882,865     $ 61,054,487     $ (2,335,249 )   $ 207,727,186  
Net income attributable to Old Line Bancshares, Inc.                       6,065,182             6,065,182  
Other comprehensive loss, net of income tax of $1,216,115                             (3,203,310 )     (3,203,310 )
Reclassification of stranded tax effect resulting from the Tax Cuts and Jobs Act                             459,973       (459,973 )      
Stock based compensation awards                 288,559                   288,559  
Stock options exercised     38,921       389       520,507                   520,896  
Restricted stock issued     19,443       195       (195 )                  
Common stock cash dividends $0.08 per share                       (1,005,723 )           (1,005,723 )
Balance March 31, 2018     12,566,696     $ 125,667     $ 149,691,736     $ 66,573,919     $ (5,998,532 )   $ 210,392,790  

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 

  6  

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

    Three Months Ended March 31,
    2018   2017
Cash flows from operating activities                
Net income   $ 6,065,182     $ 3,973,782  
Adjustments to reconcile net income to net cash provided by operating activities                
Depreciation and amortization     725,225       588,966  
Provision for loan losses     394,896       440,491  
Change in deferred loan fees net of costs     (360,813 )     84,001  
Gain on sales or calls of securities           (15,677 )
Amortization of premiums and discounts     205,833       265,593  
Origination of loans held for sale     (19,299,766 )     (20,356,369 )
Proceeds from sale of loans held for sale     19,769,974       25,270,536  
Income on marketable loans     (418,472 )     (630,930 )
(Gain)/loss on sales of other real estate owned     12,516       (17,689 )
Gain on sale of fixed assets     (14,366 )     (112,594 )
Amortization of intangible assets     312,313       197,901  
Deferred income taxes     (14,181 )     (28,358 )
Stock based compensation awards     288,559       115,113  
Increase (decrease) in                
Accrued interest payable     (366,124 )     (487,144 )
Income tax payable     2,025,374       2,042,421  
Supplemental executive retirement plan     81,904       69,864  
Other liabilities     (1,041,292 )     (333,095 )
Decrease (increase) in                
Accrued interest receivable     166,079       233,959  
Bank owned life insurance     (237,073 )     (233,925 )
Other assets     (612,437 )     1,052,881  
Net cash provided by operating activities   $ 7,683,331     $ 12,119,727  
Cash flows from investing activities                
Purchase of investment securities available for sale     (2,875,007 )     (7,027,916 )
Proceeds from disposal of investment securities                
Available for sale at maturity, call or paydowns     6,248,518       8,339,200  
Loans made, net of principal collected     (59,831,012 )     (55,381,656 )
Proceeds from sale of other real estate owned     191,884       (555,052 )
Change in equity securities     1,194,900       (1,031,900 )
Purchase of premises and equipment     (529,017 )     (1,786,466 )
Proceeds from the sale of premises and equipment           112,594  
Net cash used in investing activities     (55,599,734 )     (57,331,196 )
Cash flows from financing activities                
Net increase (decrease) in                
Time deposits     21,502,593       8,074,049  
Other deposits     111,298,482       34,924,175  
Short term borrowings     (31,134,099 )     7,961,724  
Long term borrowings     65,723       65,723  
Proceeds from stock options exercised     520,896       148,382  
Cash dividends paid-common stock     (1,005,723 )     (875,758 )
Net cash provided by financing activities     101,247,872       50,298,295  
                 
Net increase (decrease) in cash and cash equivalents     53,331,469       5,086,826  
                 
Cash and cash equivalents at beginning of period     35,174,111       23,463,171  
Cash and cash equivalents at end of period   $ 88,505,580     $ 28,549,997  
                 
Supplemental Disclosure of Cash Flow Information:                
Cash paid during the period for:                
Interest   $ 4,007,688     $ 2,961,089  
Income taxes   $     $  
Supplemental Disclosure of Non-Cash Flow Operating Activities:                
Loans transferred to other real estate owned   $     $ 422,848  

 

The accompanying notes are an integral part of these consolidated financial statements

 

  7  

OLD LINE BANCSHARES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Description of Business - Old Line Bancshares, Inc. (“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. The primary business of Old Line Bancshares is to own all of the capital stock of Old Line Bank. We provide a full range of banking services to customers located in Anne Arundel, Baltimore, Calvert, Carroll, Charles, Frederick, Montgomery, Prince George’s, and St. Mary’s Counties in Maryland and surrounding areas.

 

As previously announced, on September 27, 2017, Old Line Bancshares entered into an Agreement and Plan of Merger with Bay Bancorp, Inc. (“BYBK”), the parent company of Bay Bank, FSB (“Bay Bank”), pursuant to which BYBK merged with and into Old Line Bancshares (the “Merger”) on April 13, 2018. Please see Note 11 to our consolidated financial statements, “Subsequent Event,” for more information.

 

Basis of Presentation and Consolidation - The accompanying condensed consolidated financial statements include the activity of Old Line Bancshares and its wholly owned subsidiary, Old Line Bank, and its wholly-owned subsidiary Pointer Ridge Office Investments, LLC (“Pointer Ridge”), a real estate investment company. We have eliminated all significant intercompany transactions and balances.

 

The foregoing consolidated financial statements for the periods ended March 31, 2018 and 2017 are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), however, in the opinion of management we have included all adjustments necessary for a fair presentation of the results of the interim period. We derived the balances as of December 31, 2017 from audited financial statements. These statements should be read in conjunction with Old Line Bancshares’ financial statements and accompanying notes included in Old Line Bancshares’ Form 10-K for the year ended December 31, 2017. We have made no significant changes to Old Line Bancshares’ accounting policies as disclosed in the Form 10-K, except as described in the Recent Accounting Pronoucements section below.

 

Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions may affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses.

 

Revenue from Contracts with Customers - Old Line Bancshares records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, we must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) we satisfy a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

Our primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. We have evaluated the nature of Old Line Bancshares’ contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. Old Line Bancshares generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

 

  8  

Reclassifications - We have made certain reclassifications to the 2017 financial presentation to conform to the 2018 presentation. These reclassifications did not change net income or stockholders’ equity.

 

Recent Accounting Pronouncements – In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 – Revenue from Contracts with Customers , which will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principal of this ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The ASU allows for either full retrospective or modified retrospective adoption. The ASU does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under U.S. GAAP. Our revenue is comprised of net interest income on financial assets and liabilities, which is explicitly excluded from the scope of the new guidance, and non-interest income. The contracts that are within scope of the guidance are primarily related to service charges on deposit accounts, cardholder and merchant income, wealth advisory services income, other service charges and fees, sales of other real estate owned, insurance commissions and miscellaneous fees. Old Line Bancshares adopted the ASU on January 1, 2018, utilizing the modified retrospective approach. Based on our overall assessment of revenue streams and review of related contracts affected by the ASU, it did not have a material impact on our consolidated financial position or consolidated results of operations as a result of the adoption of this ASU.

 

In January 2016, FASB issued ASU No. 2016-01 , Financial Instruments – Recognition and Measurement of Financial Assets and Liabilities, which is intended to improve the recognition and measurement of financial instruments by: requiring equity investments (other than equity method or consolidation) to be measured at fair value with changes in fair value recognized in net income; requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities; eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This ASU is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We adopted this ASU effective January 1, 2018. With the adoption of this ASU, equity securities can no longer be classified as available for sale, and as such marketable equity securities are disclosed as a separate line item on the balance sheet with changes in the fair value of equity securities reflected in net income. During the first quarter of 2018, we began using an exit price notion when measuring the fair value of our loan portfolio, excluding loans held for sale, for disclosure purposes. The adoption of this ASU did not have a significant impact on our consolidated financial statements.

 

In February 2016, FASB issued ASU 2016-02 , Leases (Topic 842 ). FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of this ASU is permitted for all entities. This ASU will be effective for us in our first quarter of 2019. Old Line Bancshares is currently assessing the impact that the adoption of this standard will have on its financial condition and results of operations and will closely monitor any new developments or additional guidance to determine the potential impact the new standard will have on our consolidated financial statements.

 

  9  

In June 2016, FASB issued ASU 2016-13 , Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which sets forth a “current expected credit loss” (“CECL”) model requiring Old Line Bancshares to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. For public business entities that are U.S. Securities and Exchange Commission filers, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Old Line Bancshares has constituted a committee that has the responsibility to gather loan information and consider acceptable methodologies to comply with this ASU. The committee meets periodically to discuss the latest developments and committee members keep themselves updated on such developments via webcasts, publications, and conferences. We have also evaluated and selected a third party vendor solution to assist us in the application of ASU 2016-13. The adoption of ASU 2016-13 is likely to result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses on debt securities. Old Line Bancshares’ evaluation indicates that the provisions of ASU No. 2016-13 will impact its consolidated financial statements, in particular the level of the reserve for loan losses. We are, however, continuing to evaluate the extent of the potential impact.

 

In August 2016, FASB issued ASU 2016-15 , Statement of Cash Flows (Topic 230 ): Classification of Certain Cash Receipts and Cash Payments , to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  The amendments provide guidance on the following nine specific cash flow issues:  1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned; 6) life insurance policies; 7) distributions received from equity method investees; 8) beneficial interests in securitization transactions; and 9) separately identifiable cash flows and application of the predominance principle.  The ASU is effective for all annual and interim periods beginning January 1, 2018 and is required to be applied retrospectively to all periods presented. We adopted this guidance January 1, 2018, which did not result in a change in the classification in the statement of cash flows and did not have a material impact on our consolidated financial statements or on our financial position or results of operations.

 

In January 2017, FASB issued ASU 2017-01, Business Combinations (Topic 805) : Clarifying the definition of a business, which clarifies the definition of a business and assists entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under this guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset (or group of similar assets), the assets acquired would not represent a business. In addition, in order to be considered a business, an acquisition would have to include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The guidance also narrows the definition of outputs by more closely aligning it with how outputs are described in FASB guidance for revenue recognition. We adopted this guidance effective January 1, 2018. The adoption of this ASU did not have a material impact on our consolidated financial statements.

 

In January 2017, FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, under the ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Old Line Bancshares does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

 

  10  

In March 2017, FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities . This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We do not expect the adoption of this guidance to have a material impact on Old Line Bancshares’ consolidated financial statements.

 

In August 2017, FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities . This ASU’s objectives are to: (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities; and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. ASU No. 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. Old Line Bancshares currently does not designate any derivative financial instruments as formal hedging relationships, and therefore, does not utilize hedge accounting. However, Old Line Bancshares is currently evaluating this ASU to determine whether its provisions will enhance its ability to employ risk management strategies, while improving the transparency and understanding of those strategies for financial statement users.

 

In February 2018, FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). This ASU allows an entity to elect a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act that changed our income tax rate from 35% to 21%. The amount of that reclassification should include the effect of changes of tax rate on the deferred tax amount, any related valuation allowance and other income tax effects on the items in AOCI. The ASU requires an entity to state if an election to reclassify the tax effect to retained earnings is made along with the description of other income tax effects that are reclassified from AOCI. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. Old Line Bancshares adopted ASU 2018-02 in the first quarter of 2018. The change in accounting principal was accounted for as a cumulative effect adjustment to the balance sheet resulting in a reclass of $459,973 thousand from AOCI to retained earnings during the first quarter of 2018.

 

2. ACQUISITION OF DCB BANCSHARES, INC.

 

On July 28, 2017, Old Line Bancshares acquired DCB Bancshares, Inc. (“DCB”), the parent company of Damascus Community Bank (“Damascus”). Upon the consummation of the merger, each share of common stock of DCB outstanding immediately before the merger was converted into the right to receive 0.9269 shares of Old Line Bancshares’ common stock, provided that cash was paid in lieu of any fractional shares of Old Line Bancshares common stock. As a result, Old Line Bancshares issued 1,495,090 shares of its common stock in exchange for the shares of DCB common stock in the merger. The aggregate merger consideration was approximately $40.9 million based on the closing sales price of Old Line Bancshares’ common stock on July 28, 2017.

 

In connection with the merger, Damascus merged with and into Old Line Bank, with Old Line Bank the surviving bank.

 

  11  

At July 28, 2017, DCB had consolidated assets of approximately $311 million. This merger added six banking locations located in Montgomery, Frederick and Carroll Counties in Maryland.

 

The acquired assets and assumed liabilities of DCB were measured at estimated fair value. Management made significant estimates and exercised significant judgment in accounting for the acquisition of DCB. Management judgmentally assigned risk ratings to loans based on appraisals and estimated collateral values, expected cash flows, prepayment speeds and estimated loss factors to measure fair value for loans. Management used quoted or current market prices to determine the fair value of DCB’s investment securities.

 

The following table provides the purchase price as of the acquisition date and the identifiable assets acquired and liabilities assumed at their estimated fair values.

 

Purchase Price Consideration    
Cash consideration   $ 4,534  
Purchase price assigned to shares exchanged for stock     40,845,876  
Total purchase price for DCB acquisition     40,850,410  

 

 

Fair Value of Assets Acquired    
Cash and due from banks   $ 35,571,479  
Investment securities available for sale     42,349,201  
Loans, net     216,172,008  
Premises and equipment     5,214,193  
Accrued interest receivable     585,195  
Deferred income taxes     599,336  
Bank owned life insurance     3,085,783  
Core deposit intangible     3,746,430  
Other assets     3,650,800  
Total assets acquired   $ 310,974,425  
Fair Value of Liabilities assumed        
Deposits   $ 277,867,449  
Short term borrowings     4,753,521  
Other liabilities     2,800,363  
Total liabilities assumed   $ 285,421,333  
Fair Value of net assets acquired     25,553,092  
Total Purchase Price     40,850,410  
         
Goodwill recorded for DCB   $ 15,297,318  

 

  12  

3. INVESTMENT SECURITIES

 

Presented below is a summary of the amortized cost and estimated fair value of securities.

 

    Amortized
cost
  Gross
unrealized
gains
  Gross
unrealized
losses
  Estimated
fair value
March 31, 2018                                
Available for sale                                
U.S. treasury   $ 2,999,500     $     $ (6,062 )   $ 2,993,438  
U.S. government agency     19,164,818             (529,629 )     18,635,189  
Corporate bonds     14,619,949       99,785       (5,625 )     14,714,109  
Municipal securities     79,351,920       30,292       (2,963,996 )     76,418,216  
Mortgage backed securities:                                
FHLMC certificates     19,303,154       1,405       (950,058 )     18,354,501  
FNMA certificates     62,459,780             (3,018,401 )     59,441,379  
GNMA certificates     20,730,502             (933,546 )     19,796,956  
Total available for sale securities   $ 218,629,623     $ 131,482     $ (8,407,317 )   $ 210,353,788  
                                 
December 31, 2017                                
Available for sale                                
U.S. treasury   $ 3,007,728     $     $ (2,337 )   $ 3,005,391  
U.S. government agency     18,001,200             (267,434 )     17,733,766  
Corporate bonds     14,621,378       144,574       (107,893 )     14,658,059  
Municipal securities     80,791,431       126,566       (1,362,709 )     79,555,288  
Mortgage backed securities                                
FHLMC certificates     19,907,299       2,516       (455,580 )     19,454,235  
FNMA certificates     64,476,038             (1,530,121 )     62,945,917  
GNMA certificates     21,403,894             (403,992 )     20,999,902  
Total available for sale securities   $ 222,208,968     $ 273,656     $ (4,130,066 )   $ 218,352,558  

 

At March 31, 2018 and December 31, 2017, securities with unrealized losses segregated by length of impairment were as follows:

 

    March 31, 2018
    Less than 12 months   12 Months or More   Total
    Fair
value
  Unrealized
losses
  Fair
value
  Unrealized
losses
  Fair
value
  Unrealized
losses
U.S. treasury   $ 1,492,266     $ 5,348     $ 1,501,172     $ 714     $ 2,993,438     $ 6,062  
U.S. government agency     13,266,132       241,263       5,369,055       288,366       18,635,187       529,629  
Corporate bonds     4,494,375       5,625                   4,494,375       5,625  
Municipal securities     37,388,243       964,608       30,504,642       1,999,388       67,892,885       2,963,996  
Mortgage backed securities                                                
FHLMC certificates                 18,237,727       950,058       18,237,727       950,058  
FNMA certificates     2,405,187       80,910       57,036,192       2,937,491       59,441,379       3,018,401  
GNMA certificates     8,529,852       358,923       11,267,104       574,623       19,796,957       933,546  
Total   $ 67,576,055     $ 1,656,677     $ 123,915,892     $ 6,750,640     $ 191,491,948     $ 8,407,317  

 

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    December 31, 2017
    Less than 12 months   12 Months or More   Total
    Fair
value
  Unrealized
losses
  Fair
value
  Unrealized
losses
  Fair
value
  Unrealized
losses
U.S. treasury   $ 1,506,328     $ 1,422     $ 1,499,063     $ 915     $ 3,005,391     $ 2,337  
U.S. government agency     12,266,502       93,043       5,467,264       174,391       17,733,766       267,434  
Corporate bonds     9,407,810       107,893                   9,407,810       107,893  
Municipal securities     25,548,751       189,668       31,343,394       1,173,041       56,892,145       1,362,709  
Mortgage backed securities                                                
FHLMC certificates                 19,314,957       455,580       19,314,957       455,580  
FNMA certificates     2,516,080       19,937       60,429,837       1,510,184       62,945,917       1,530,121  
GNMA certificates     8,822,021       114,278       12,177,882       289,714       20,999,904       403,992  
Total   $ 60,067,492     $ 526,241     $ 130,232,397     $ 3,603,825     $ 190,299,890     $ 4,130,066  

 

At March 31, 2018 and December 31, 2017, we had 116 and 56 investment securities, respectively, in an unrealized loss position for 12 months or more and 76 and 56 securities, respectively, in an unrealized loss position for less than 12 months.  We consider all unrealized losses on securities as of March 31, 2018 to be temporary losses because we will redeem each security at face value at or prior to maturity. We have the ability and intent to hold these securities until recovery or maturity. As of March 31, 2018, we do not have the intent to sell any of the securities classified as available for sale and believe that it is more likely than not that we will not have to sell any such securities before a recovery of cost. In most cases, market interest rate fluctuations cause a temporary impairment in value. We expect the fair value to recover as the investments approach their maturity date or re-pricing date or if market yields for these investments decline. We do not believe that credit quality caused the impairment in any of these securities. Because we believe these impairments are temporary, we have not realized any loss in our consolidated statement of income.

 

During the three months ended March 31, 2018, we received $6.2 million in proceeds from maturities or calls and principal pay-downs on investment securities. All the net proceeds of these transactions were used to purchase new investment securities. We received $8.3 million in proceeds from maturities or calls and principal pay-downs on investment securities and realized gains of $16 thousand from the remaining discount on one called security for the three months ended March 31, 2017. The net proceeds of these transactions and the proceeds of principal paydowns in the first quarter of 2017 were used to purchase new investment securities.

 

Contractual maturities and pledged securities at March 31, 2018 are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. We classify mortgage-backed securities (“MBS”) based on maturity date. However, we receive payments on a monthly basis.

 

    Available for Sale
March 31, 2018   Amortized
cost
  Fair
value
         
Maturing                
Within one year   $ 3,307,089     $ 3,296,591  
Over one to five years     2,095,597       2,091,156  
Over five to ten years     53,449,035       52,128,458  
Over ten years     159,777,902       152,837,583  
Total   $ 218,629,623     $ 210,353,788  
Pledged securities   $ 64,300,151     $ 61,506,128  

 

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4. LOANS

 

Major classifications of loans held for investment are as follows:

 

    March 31, 2018   December 31, 2017
    Legacy (1)   Acquired   Total   Legacy (1)   Acquired   Total
                         
Commercial Real Estate                                                
Owner Occupied   $ 260,238,291     $ 80,868,601     $ 341,106,892     $ 268,128,087     $ 87,658,855     $ 355,786,942  
Investment     536,823,023       50,040,491       586,863,514       485,536,921       52,926,739       538,463,660  
Hospitality     164,411,156       6,711,774       171,122,930       164,193,228       7,395,186       171,588,414  
Land and A&D     78,199,476       9,162,901       87,362,377       67,310,660       9,230,771       76,541,431  
Residential Real Estate                                                
First Lien-Investment     79,549,169       20,987,672       100,536,841       79,762,682       21,220,518       100,983,200  
First Lien-Owner Occupied     75,114,741       60,957,548       136,072,289       67,237,699       62,524,794       129,762,493  
Residential Land and A&D     36,633,466       6,542,940       43,176,406       35,879,853       6,536,160       42,416,013  
HELOC and Jr. Liens     20,896,736       14,954,499       35,851,235       21,520,339       16,019,418       37,539,757  
Commercial and Industrial     168,101,599       31,609,023       199,710,622       154,244,645       33,100,688       187,345,333  
Consumer     14,407,498       44,249,501       58,656,999       10,758,589       49,082,751       59,841,340  
Total loans     1,434,375,155       326,084,950       1,760,460,105       1,354,572,703       345,695,880       1,700,268,583  
Allowance for loan losses     (6,075,467 )     (182,052 )     (6,257,519 )     (5,738,534 )     (182,052 )     (5,920,586 )
Deferred loan costs, net     2,374,247             2,374,247       2,013,434             2,013,434  
Net loans   $ 1,430,673,935     $ 325,902,898     $ 1,756,576,833     $ 1,350,847,603     $ 345,513,828     $ 1,696,361,431  

 

____________________________

(1) As a result of the acquisitions of Maryland Bankcorp, Inc. (“Maryland Bankcorp”), the parent company of Maryland Bank & Trust Company, N.A. (“MB&T”), in April 2011, WSB Holdings Inc., the parent company of The Washington Savings Bank (“WSB”), in May 2013, Regal Bancorp, Inc. (“Regal”), the parent company of Regal Bank & Trust (“Regal Bank”), in December 2015 and DCB, the parent company of Damascus, in July 2017, we have segmented the portfolio into two components, “Legacy” loans originated by Old Line Bank and “Acquired” loans acquired from MB&T, WSB, Regal Bank and Damascus.

 

Credit Policies and Administration

 

We have adopted a comprehensive lending policy, which includes stringent underwriting standards for all types of loans. We have designed our underwriting standards to promote a complete banking relationship rather than a transactional relationship. In an effort to manage risk, prior to funding, the loan committee consisting of the Executive Officers and seven members of the board of directors must approve by a majority vote all credit decisions in excess of a lending officer’s lending authority.

 

Management believes that it employs experienced lending officers, secures appropriate collateral and carefully monitors the financial condition of its borrowers and loan concentrations.

 

In addition to the internal business processes employed in the credit administration area, Old Line Bank retains an outside independent firm to review the loan portfolio. This firm performs a detailed annual review and an interim update. We use the results of the firm’s report to validate our internal ratings and we review the commentary on specific loans and on our loan administration activities in order to improve our operations.

 

Commercial Real Estate Loans

 

We finance commercial real estate for our clients, for owner occupied and investment properties, hospitality and land acquisition and development. Commercial real estate loans totaled $1.2 billion and $1.1 billion at March 31, 2018 and December 31, 2017, respectively. This lending has involved loans secured by owner-occupied commercial buildings for office, storage and warehouse space, as well as non-owner occupied commercial buildings. Our underwriting criteria for commercial real estate loans include maximum loan-to-value ratios, debt coverage ratios, secondary sources of repayments, guarantor requirements, net worth requirements and quality of cash flows. Loans secured by commercial real estate may be large in size and may involve a greater degree of risk than one-to-four family residential mortgage loans. Payments on such loans are often dependent on successful operation or management of the properties. We will generally finance owner occupied commercial real estate that does not exceed loan to value of 80% and investor real estate at a maximum loan to value of 75%.

 

  15  

Commercial real estate lending entails significant risks. Risks inherent in managing our 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 monitor the financial condition and operating performance of the borrower through a review of annual tax returns and updated financial statements. In addition, we meet with the borrower and/or perform site visits as required.

 

At March 31 2018, we had approximately $171.1 million of commercial real estate loans outstanding to the hospitality industry. An individual review of these loans indicates that they generally have a low loan to value, more than acceptable existing or projected cash flow, are to experienced operators and are generally dispersed throughout the region.

 

Residential Real Estate Loans

 

We offer a variety of consumer oriented residential real estate loans including home equity lines of credit, home improvement loans and first or second mortgages on owner occupied and investment properties. Our residential loan portfolio amounted to $315.6 million and $310.7 million at March 31, 2018 and December 31, 2017, respectively. Although most of these loans are in our market area, the diversity of the individual loans in the portfolio reduces our potential risk. Usually, we secure our residential real estate loans with a security interest in the borrower’s primary or secondary residence with a loan to value not exceeding 85%. Our initial underwriting includes an analysis of the borrower’s debt/income ratio which generally may not exceed 43%, collateral value, length of employment and prior credit history. A credit score of 640 is required. We do not originate any subprime residential real estate loans.

 

This segment of our portfolio also consists of funds advanced for construction of custom single family residences homes (where the home buyer is the borrower) and financing to builders for the construction of pre-sold homes and multi-family housing. These loans generally have short durations, meaning maturities typically of twelve months or less. Old Line Bank limits its construction lending risk through adherence to established underwriting procedures. These loans generally have short durations, meaning maturities typically of twelve months or less. Residential houses, multi-family dwellings and commercial buildings under construction and the underlying land for which the loan was obtained secure the construction loans. The vast majority of these loans are concentrated in our market area.

 

Construction lending also entails significant risk. These risks generally involve larger loan balances concentrated with single borrowers with funds advanced upon the security of the land or the project under construction. An appraisal of the property estimates the value of the project “as is and as if” completed. An appraisal of the property estimates the value of the project prior to completion of construction. Thus, initial funds are advanced based on the current value of the property with the remaining construction funds advanced under a budget sufficient to successfully complete the project within the “as completed” loan to value. To further mitigate the risks, we generally limit loan amounts to 80% or less of appraised values and obtain first lien positions on the property.

 

We generally only offer real estate construction financing only to experienced builders, commercial entities or individuals who have demonstrated the ability to obtain a permanent loan “take-out” (conversion to a permanent mortgage upon completion of the project). We also perform a complete analysis of the borrower and the project under construction. This analysis includes a review of the cost to construct, the borrower’s ability to obtain a permanent “take-out” the cash flow available to support the debt payments and construction costs in excess of loan proceeds, and the value of the collateral. During construction, we advance funds on these loans on a percentage of completion basis. We inspect each project as needed prior to advancing funds during the term of the construction loan. We may provide permanent financing on the same projects for which we have provided the construction financing.

 

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 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.

 

  16  

Under our loan approval policy, all residential real estate loans approved must comply with federal regulations. Generally, we will make residential mortgage loans in amounts up to the limits established by Fannie Mae and Freddie Mac for secondary market resale purposes. Currently this amount for single-family residential loans currently varies from $453,100 up to a maximum of $679,650 for certain high-cost designated areas. We also make residential mortgage loans up to limits established by the Federal Housing Administration, which currently is $679,650. The Washington, D.C. and Baltimore areas are both considered high-cost designated areas. We will, however, make loans in excess of these amounts if we believe that we can sell the loans in the secondary market or that the loans should be held in our portfolio. For loans we originate for sale in the secondary market, we typically require a credit score or 620 or higher, with some exceptions provided we receive an approval recommendation from FannieMae, FreddieMac or the Federal Housing Administration’s automated underwriting approval system.  Loans sold in the secondary market are sold to investors on a servicing released basis and recorded as loans as held for sale.  The premium is recorded in income on marketable loans in non-interest income, net of commissions paid to the loan officers.

 

Commercial and Industrial Lending

 

Our commercial and industrial lending consists of lines of credit, revolving credit facilities, accounts receivable financing, term loans, equipment loans, Small Business Administration loans, standby 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, 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 high average balances, increased difficulty monitoring and a high risk of default. 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 generally includes a review of the borrower’s annual tax returns and updated financial statements.

 

Consumer Installment Lending

 

We offer various types of secured and unsecured consumer loans. We make consumer loans for personal, family or household purposes as a convenience to our customer base. Consumer loans, however, are not a focus of our lending activities. 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. As a general guideline, a consumer’s total debt service should not exceed 40% of his or her gross income.

 

Our consumer loan portfolio, includes indirect loans, which consists primarily of auto and RV loans. These loans are financed through dealers and the dealers receive a percentage of the finance charge, which varies depending on the terms of each loan. We use the same underwriting standards in originating these indirect loans as we do for consumer loans generally.

 

Consumer loans may present greater credit risk than residential mortgage loans because many consumer loans are unsecured or rapidly depreciating assets secure these loans. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance because of the greater likelihood of damage, loss or depreciation. Consumer loan collections depend on the borrower’s continuing financial stability. If a borrower suffers personal financial difficulties, the consumer may not repay the loan. Also, various federal and state laws, including bankruptcy and insolvency laws, may limit the amount we can recover on such loans.

 

  17  

Concentrations of Credit

 

Most of our lending activity occurs within the state of Maryland within the suburban Washington, D.C.and Baltimore market areas in Anne Arundel, Baltimore, Calvert, Carroll, Charles, Frederick, Montgomery, Prince George’s and St. Mary’s Counties. The majority of our loan portfolio consists of commercial real estate loans and residential real estate loans.

 

Non-Accrual and Past Due Loans

 

We consider loans past due if the borrower has not paid the required principal and interest payments when due under the original or modified terms of the promissory note and place a loan on non-accrual status when the payment of principal or interest has become 90 days past due. When we classify a loan as non-accrual, we no longer accrue interest on such loan and we reverse any interest previously accrued but not collected. We will generally restore a non-accrual loan to accrual status when the borrower brings delinquent principal and interest payments current and we expect to collect future monthly principal and interest payments. We recognize interest on non-accrual legacy loans only when received. We originally recorded purchased, credit-impaired loans at fair value upon acquisition, and an accretable yield is established and recognized as interest income on purchased loans to the extent subsequent cash flows support the estimated accretable yield. Purchased, credit-impaired loans that perform consistently with the accretable yield expectations are not reported as non-accrual or nonperforming. However, purchased, credit-impaired loans that do not continue to perform according to accretable yield expectations are considered impaired, and presented as non-accrual and nonperforming. Currently, management expects to fully collect the carrying value of acquired, credit-impaired loans.

 

 

 

 

 

 

 

 

 

 

 

 

  18  

The table below presents an age analysis of the loans held for investment portfolio at March 31, 2018 and December 31, 2017.

 

Age Analysis of Past Due Loans

 

    March 31, 2018   December 31, 2017
    Legacy   Acquired   Total   Legacy   Acquired   Total
Current   $ 1,429,320,233     $ 319,524,653     $ 1,748,844,886     $ 1,352,406,852     $ 338,913,557     $ 1,691,320,409  
Accruing past due loans:                                                
30-89 days past due                                                
Commercial Real Estate:                                                
Owner Occupied           585,036       585,036                    
Investment     71,397       829,819       901,216       1,089,022       843,706       1,932,728  
Hospitality     1,174,349       293,497       1,467,846                    
Land and A&D     2,610,890       158,899       2,769,789       254,925       158,899       413,824  
Residential Real Estate:                                                
First Lien-Investment     268,430       502,557       770,987       270,822       506,600       777,422  
First Lien-Owner Occupied           1,624,416       1,624,416       229       2,457,299       2,457,528  
HELOC and Jr. Liens                             130,556       130,556  
Commercial and Industrial     403,453       50,432       453,885       51,088       261,081       312,169  
Consumer     58,469       887,465       945,934       26,134       1,017,195       1,043,329  
Total 30-89 days past due     4,586,988       4,932,121       9,519,109       1,692,220       5,375,336       7,067,556  
90 or more days past due                                                
Residential Real Estate:                                                
First Lien-Owner Occupied           221,828       221,828             37,560       37,560  
Consumer           108,031       108,031             78,407       78,407  
Total 90 or more days past due           329,859       329,859             115,967       115,967  
Total accruing past due loans     4,586,988       5,261,980       9,848,968       1,692,220       5,491,303       7,183,523  
                                                 
Commercial Real Estate:                                                
Owner Occupied           230,082       230,082             228,555       228,555  
Land and A&D           196,171       196,171             190,193       190,193  
Residential Real Estate:                                                
First Lien-Investment     192,501             192,501       192,501             192,501  
First Lien-Owner Occupied     275,433       872,064       1,147,497       281,130       872,272       1,153,402  
Commercial and Industrial                                    
Non-accruing loans:     467,934       1,298,317       1,766,251       473,631       1,291,020       1,764,651  
Total Loans   $ 1,434,375,155     $ 326,084,950     $ 1,760,460,105     $ 1,354,572,703     $ 345,695,880     $ 1,700,268,583  

 

We consider all nonperforming loans and troubled debt restructurings (“TDRs”) to be impaired. We do not recognize interest income on nonperforming loans during the time period that the loans are nonperforming. We only recognize interest income on nonperforming loans when we receive payment in full for all amounts due of all contractually required principle and interest, and the loan is current with its contractual terms. The tables below present our impaired loans at and for the periods ended March 31, 2018 and December 31, 2017.

 

  19  

    Impaired Loans at March 31, 2018        
                Three months March 31, 2018
    Unpaid
Principal
Balance
  Recorded
Investment
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
Legacy                    
With no related allowance recorded:                                        
Commercial Real Estate:                                        
Owner Occupied   $ 1,782,165     $ 1,782,165     $     $ 1,782,165     $ 18,595  
Investment     1,143,826       1,143,826             1,143,826       15,341  
Residential Real Estate:                                        
First Lien-Owner Occupied     224,092       224,092             230,786       2,188  
Commercial and Industrial     377,936       377,936             377,936       3,365  
With an allowance recorded:                                        
Commercial Real Estate:                                        
Investment     587,663       587,663       69,903       587,663       7,388  
Residential Real Estate:                                        
First Lien-Investment     192,501       192,501       39,420       192,501        
First Lien-Owner Occupied     51,341       51,341       37,076       55,830       1,134  
Commercial and Industrial     95,431       95,431       95,431       95,231       1,611  
Total legacy impaired     4,454,955       4,454,955       241,830       4,465,938       49,622  
Acquired(1)                                        
With no related allowance recorded:                                        
Commercial Real Estate:                                        
Owner Occupied     254,445       254,445             254,445        
Land and A&D     328,851       45,000             328,851        
Residential Real Estate:                                        
First Lien-Owner Occupied     1,377,804       1,265,545             1,374,804       4,870  
With an allowance recorded:                                        
Commercial Real Estate:                                        
Land and A&D     154,297       154,297       80,072       161,153        
Residential Real Estate:                                        
First Lien-Owner Occupied     250,194       250,194       77,464       273,618          
Commercial and Industrial     71,049       71,049       24,516       70,869       1,194  
Total acquired impaired     2,436,640       2,040,530       182,052       2,463,740       6,064  
Total impaired   $ 6,891,595     $ 6,495,485     $ 423,882     $ 6,929,678     $ 55,686  

_________________________

(1) Generally accepted accounting principles require that we record acquired loans at fair value at acquisition, which includes a discount for loans with credit impairment. These purchased credit impaired loans are not performing according to their contractual terms and meet the definition of an impaired loan. Although we do not accrue interest income at the contractual rate on these loans, we do recognize an accretable yield as interest income to the extent such yield is supported by cash flow analysis of the underlying loans.

 

  20  

Impaired Loans
December 31, 2017
    Unpaid           Average   Interest
    Principal   Recorded   Related   Recorded   Income
    Balance   Investment   Allowance   Investment   Recognized
Legacy                    
With no related allowance recorded:                                        
Commercial Real Estate:                                        
Owner Occupied   $ 1,797,030     $ 1,797,030     $     $ 1,913,873     $ 70,623  
Investment     1,155,595       1,155,595             1,183,738       51,806  
Residential Real Estate:                                        
First Lien-Owner Occupied     226,554       226,554             233,618       10,536  
Commercial and Industrial     387,208       387,208             379,983       30,245  
With an allowance recorded:                                        
Commercial Real Estate:                                        
Investment     592,432       592,432       69,903       601,959       30,576  
Residential Real Estate:                                        
First Lien-Owner Occupied     54,576       54,576       37,075       217,673        
First Lien-Investment     192,501       192,501       39,420       192,501        
Commercial and Industrial     96,212       96,212       96,212       97,923       4,960  
Total legacy impaired     4,502,108       4,502,108       242,610       4,821,268       198,746  
Acquired(1)                                        
With no related allowance recorded:                                        
Commercial Real Estate:                                        
Owner Occupied     253,865       253,865             252,988       2,155  
Land and A&D     334,271       45,000             334,271        
Residential Real Estate:                                        
First Lien-Owner Occupied     1,382,055       1,269,796             1,390,037       31,601  
First Lien-Investment     131,294       74,066             132,812       4,378  
With an allowance recorded:                                        
Commercial Real Estate:                                        
Land and A&D     148,196       148,196       80,072       155,621       2,498  
Residential Real Estate:                                        
First Lien-Owner Occupied     250,194       250,194       77,464       273,596       23,424  
Commercial and Industrial     72,125       72,125       24,517       74,279       3,775  
Total acquired impaired     2,572,000       2,113,242       182,053       2,613,604       67,831  
Total impaired   $ 7,074,108     $ 6,615,350     $ 424,663     $ 7,434,872     $ 266,577  

______________________

(1) Generally accepted accounting principles require that we record acquired loans at fair value at acquisition, which includes a discount for loans with credit impairment. These purchased credit impaired loans are not performing according to their contractual terms and meet the definition of an impaired loan. Although we do not accrue interest income at the contractual rate on these loans, we do recognize an accretable yield as interest income to the extent such yield is supported by cash flow analysis of the underlying loans.

 

We consider a loan a TDR when we conclude that both of the following conditions exist: the restructuring constitutes a concession and the debtor is experiencing financial difficulties. Restructured loans at March 31, 2018 consisted of seven loans for $2.6 million compared to seven loans at December 31, 2017 for $2.7 million.

 

  21  

The following table includes the recorded investment in and number of modifications of TDRs for the three months ended March 31, 2018 and 2017. We report the recorded investment in loans prior to a modification and also the recorded investment in the loans after the loans were restructured. Reductions in the recorded investment are primarily due to the partial charge-off of the principal balance prior to the modification. We had no loans that were modified as a TDR that defaulted within three months of the modification date during the three month periods ended March 31, 2018 and 2017.

 

    Loans Modified as a TDR for the three months ended
    March 31, 2018   March 31, 2017
        Pre-   Post       Pre-   Post
        Modification   Modification       Modification   Modification
        Outstanding   Outstanding       Outstanding   Outstanding
TroubledDebtRestructurings—   # of   Recorded   Recorded   # of   Recorded   Recorded
(Dollarsinthousands)   Contracts   Investment   Investment   Contracts   Investment   Investment
Legacy                        
Commercial Real Estate                       1       1,596,740       1,596,740  
Commercial and Industrial                       1       414,324       414,324  
Total legacy TDR's         $     $       2     $ 2,011,064     $ 2,011,064  

 

Acquired impaired loans

The following table documents changes in the accretable (premium) discount on acquired impaired loans during the three months ended March 31, 2018 and 2017, along with the outstanding balances and related carrying amounts for the beginning and end of those respective periods.

 

    March 31, 2018   March 31, 2017
Balance at beginning of period   $ 115,066     $ (22,980 )
Accretion of fair value discounts     (27,770 )     (41,601 )
Reclassification from non-accretable discount     23,195       42,146  
Balance at end of period   $ 110,491     $ (22,435 )

 

    Contractually    
    Required Payments    
    Receivable   Carrying Amount
At March 31, 2018   $ 8,421,446     $ 6,799,657  
At December 31, 2017     8,277,731       6,617,774  
At March 31, 2017     8,857,375       7,078,918  
At December 31, 2016     9,597,703       7,558,415  

 

Credit Quality Indicators

 

We review the adequacy of the allowance for loan losses at least quarterly. We base the evaluation of the adequacy of the allowance for loan losses upon loan categories. We categorize loans as residential real estate loans, commercial real estate loans, commercial loans and consumer loans. We further divide commercial real estate loans by owner occupied, investment, hospitality and land acquisition and development. We also divide residential real estate by owner occupied, investment, land acquisition and development and junior liens. All categories are divided by risk rating and loss factors and weighed 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 collateral separately and assign loss amounts based upon the evaluation.

 

  22  

We determine loss ratios for all loans based upon a review of the three year loss ratio for the category and qualitative factors.

 

We charge off loans that management has identified as losses. We consider suggestions from our external loan review firm and bank examiners when determining which loans to charge off. We automatically charge off consumer loan accounts based on regulatory requirements. We partially charge off real estate loans that are collateral dependent based on the value of the collateral.

 

If a loan that was previously rated a pass performing loan, from our acquisitions, deteriorates subsequent to the acquisition, the subject loan will be assessed for risk and, if necessary, evaluated for impairment. If the risk assessment rating is adversely changed and the loan is determined to not be impaired, the loan will be placed in a migration category and the credit mark established for the loan will be compared to the general reserve allocation that would be applied using the current allowance for loan losses formula for General Reserves. If the credit mark exceeds the allowance for loan losses formula for General Reserves, there will be no change to the allowance for loan losses. If the credit mark is less than the current allowance for loan losses formula for General Reserves, the allowance for loan losses will be increased by the amount of the shortfall by a provision recorded in the income statement. If the loan is deemed impaired, the loan will be subject to evaluation for loss exposure and a specific reserve. If the estimate of loss exposure exceeds the credit mark, the allowance for loan losses will be increased by the amount of the excess loss exposure through a provision. If the credit mark exceeds the estimate of loss exposure there will be no change to the allowance for loan losses. If a loan from the acquired loan portfolio is carrying a specific credit mark and a current evaluation determines that there has been an increase in loss exposure, the allowance for loan losses will be increased by the amount of the current loss exposure in excess of the credit mark.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  23  

The following tables outline the class of loans by risk rating at March 31, 2018 and December 31, 2017:

 

At March 31, 2018   Legacy   Acquired   Total
Risk Rating                        
Pass(1 - 5)                        
Commercial Real Estate:                        
Owner Occupied   $ 254,527,556     $ 76,329,072     $ 330,856,628  
Investment     534,711,778       48,194,797       582,906,575  
Hospitality     164,411,156       6,418,277       170,829,433  
Land and A&D     76,107,752       9,009,609       85,117,361  
Residential Real Estate:                        
First Lien-Investment     78,607,349       19,413,443       98,020,792  
First Lien-Owner Occupied     74,773,041       56,353,386       131,126,427  
Land and A&D     34,485,110       5,737,907       40,223,017  
HELOC and Jr. Liens     20,896,735       14,954,499       35,851,234  
Commercial and Industrial     164,571,909       31,479,248       196,051,157  
Consumer     14,407,498       44,188,529       58,596,027  
Total pass     1,417,499,884       312,078,767       1,729,578,651  
Special Mention(6)                        
Commercial Real Estate:                        
Owner Occupied     431,911       2,776,523       3,208,434  
Investment     379,756       1,026,752       1,406,508  
Hospitality           293,497       293,497  
Land and A&D     2,091,724       108,292       2,200,016  
Residential Real Estate:                        
First Lien-Investment     298,030       1,349,598       1,647,628  
First Lien-Owner Occupied     66,267       1,828,225       1,894,492  
Land and A&D     2,148,357       653,862       2,802,219  
Commercial and Industrial     1,518,258       56,988       1,575,246  
Consumer           60,972       60,972  
Total special mention     6,934,303       8,154,709       15,089,012  
Substandard(7)                        
Commercial Real Estate:                        
Owner Occupied     5,278,824       1,763,006       7,041,830  
Investment     1,731,489       818,942       2,550,431  
Hospitality                  
Land and A&D           45,000       45,000  
Residential Real Estate:                        
First Lien-Investment     643,790       224,631       868,421  
First Lien-Owner Occupied     275,433       2,775,937       3,051,370  
Land and A&D           151,171       151,171  
Commercial and Industrial     2,011,432       72,787       2,084,219  
Consumer                  
Total substandard     9,940,968       5,851,474       15,792,442  
Doubtful(8)                  
Loss(9)                  
Total   $ 1,434,375,155     $ 326,084,950     $ 1,760,460,105  

 

  24  

At December 31, 2017   Legacy   Acquired   Total
Risk Rating                        
Pass(1 - 5)                        
Commercial Real Estate:                        
Owner Occupied   $ 262,377,665     $ 83,069,390     $ 345,447,055  
Investment     483,404,883       51,064,247       534,469,130  
Hospitality     164,193,228       7,395,186       171,588,414  
Land and A&D     65,184,837       9,065,405       74,250,242  
Residential Real Estate:                        
First Lien-Investment     78,814,931       19,846,749       98,661,680  
First Lien-Owner Occupied     66,888,943       57,895,058       124,784,001  
Land and A&D     33,712,187       5,727,719       39,439,906  
HELOC and Jr. Liens     21,520,339       16,019,418       37,539,757  
Commercial and Industrial     150,881,948       32,738,715       183,620,663  
Consumer     10,758,589       49,017,427       59,776,016  
Total pass     1,337,737,550       331,839,314       1,669,576,864  
Special Mention(6)                        
Commercial Real Estate:                        
Owner Occupied     435,751       2,816,057       3,251,808  
Investment     384,011       1,037,254       1,421,265  
Hospitality                  
Land and A&D     2,125,823       120,366       2,246,189  
Residential Real Estate:                        
First Lien-Investment     300,824       1,034,942       1,335,766  
First Lien-Owner Occupied     67,626       1,848,385       1,916,011  
Land and A&D     2,167,666       663,248       2,830,914  
Commercial and Industrial     1,519,394       59,902       1,579,296  
Consumer           65,324       65,324  
Total special mention     7,001,095       7,645,478       14,646,573  
Substandard(7)                        
Commercial Real Estate:                        
Owner Occupied     5,314,671       1,773,408       7,088,079  
Investment     1,748,027       825,238       2,573,265  
Hospitality                  
Land and A&D           45,000       45,000  
Residential Real Estate:                        
First Lien-Investment     646,927       338,827       985,754  
First Lien-Owner Occupied     281,130       2,781,351       3,062,481  
Land and A&D           145,193       145,193  
Commercial and Industrial     1,843,303       302,071       2,145,374  
Consumer                  
Total substandard     9,834,058       6,211,088       16,045,146  
Doubtful(8)                  
Loss(9)                  
Total   $ 1,354,572,703     $ 345,695,880     $ 1,700,268,583  

 

  25  

The following table details activity in the allowance for loan losses by portfolio segment for the three month periods ended March 31, 2018 and 2017. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

March 31, 2018   Commercial
and Industrial
  Commercial
Real Estate
  Residential
Real Estate
  Consumer   Total
Beginning balance   $ 1,262,030     $ 3,783,735     $ 844,355     $ 30,466     $ 5,920,586  
Provision for loan losses     (50,372 )     527,631       (148,161 )     65,798       394,896  
Recoveries     300       139       32       3,645       4,116  
Total     1,211,958       4,311,505       696,226       99,909       6,319,598  
Loans charged off                       (62,079 )     (62,079 )
Ending Balance   $ 1,211,958     $ 4,311,505     $ 696,226     $ 37,830     $ 6,257,519  
Amount allocated to:                                        
Legacy Loans:                                        
Individually evaluated for impairment   $ 95,431     $ 69,903     $ 76,496     $     $ 241,830  
Other loans not individually evaluated     1,092,011       4,161,530       542,266       37,830       5,833,637  
Acquired Loans:                                        
Individually evaluated for impairment     24,516       80,072       77,464             182,052  
Ending balance   $ 1,211,958     $ 4,311,505     $ 696,226     $ 37,830     $ 6,257,519  

 

 

March 31, 2017   Commercial
and Industrial
  Commercial
Real Estate
  Residential
Real Estate
  Consumer   Total
Beginning balance   $ 1,372,235     $ 3,990,152     $ 823,520     $ 9,562     $ 6,195,469  
Provision for loan losses     430,390       132,613       (137,611 )     15,099       440,491  
Recoveries     1,050       417       900       3,324       5,691  
Total     1,803,675       4,123,182       686,809       27,985       6,641,651  
Loans charged off     (570,523 )     (439,922 )     (2,268 )     (19,149 )     (1,031,862 )
Ending Balance   $ 1,233,152     $ 3,683,260     $ 684,541     $ 8,836     $ 5,609,789  
Amount allocated to:                                        
Legacy Loans:                                        
Individually evaluated for impairment   $ 300,960     $ 30,177     $ 20,262     $     $ 351,399  
Other loans not individually evaluated     906,658       3,653,083       583,711       8,836       5,152,288  
Acquired Loans:                                        
Individually evaluated for impairment     25,534             80,568             106,102  
Ending balance   $ 1,233,152     $ 3,683,260     $ 684,541     $ 8,836     $ 5,609,789  

 

 

  26  

Our recorded investment in loans at March 31, 2018 and 2017 related to each balance in the allowance for probable loan losses by portfolio segment and disaggregated on the basis of our impairment methodology was as follows:

 

March 31, 2018   Commercial
and Industrial
  Commercial
Real Estate
  Residential
Real Estate
  Consumer   Total
Legacy loans:                                        
Individually evaluated for impairment with specific reserve   $ 95,431     $ 587,663     $ 243,842     $     $ 926,936  
Individually evaluated for impairment without specific reserve     377,936       2,925,991       224,092             3,528,019  
Other loans not individually evaluated     167,628,232       1,036,158,293       211,726,177       14,407,498       1,429,920,200  
Acquired loans:                                        
Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition)     71,049       154,297       250,194             475,540  
Individually evaluated for impairment without specific reserve (ASC 310-20 at acquisition)           299,445       1,265,545             1,564,990  
Individually evaluated for impairment without specific reserve (ASC 310-30 at acquisition)           3,434,002       3,351,654       14,000       6,799,656  
Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition)     31,537,974       142,896,022       98,575,266       44,235,502       317,244,764  
Ending balance   $ 199,710,622     $ 1,186,455,713     $ 315,636,770     $ 58,657,000     $ 1,760,460,105  

 

March 31, 2017   Commercial
and Industrial
  Commercial
Real Estate
  Residential
Real Estate
  Consumer   Total
Legacy loans:                                        
Individually evaluated for impairment with specific reserve   $ 300,960     $ 607,327     $ 192,501     $     $ 1,100,788  
Individually evaluated for impairment without specific reserve     414,324       3,033,353       263,495             3,711,172  
Other loans not individually evaluated     142,496,583       888,876,611       200,565,837       4,915,505       1,236,854,536  
Acquired loans:                                        
Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition)     75,221       150,430                   225,651  
Individually evaluated for impairment without specific reserve (ASC 310-20 at acquisition)                 1,048,310             1,048,310  
Individually evaluated for impairment without specific reserve (ASC 310-30 at acquisition)           3,934,823       3,144,095             7,078,918  
Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition)     5,251,269       97,414,215       68,369,950       121,018       171,156,452  
Ending balance   $ 148,538,357     $ 994,016,759     $ 273,584,188     $ 5,036,523     $ 1,421,175,827  

 

5. OTHER REAL ESTATE OWNED

 

At March 31, 2018 and December 31, 2017, the fair value of other real estate owned was $1.8 million and $2.0 million, respectively. As a result of the acquisitions of Maryland Bankcorp , WSB Holdings and Regal , we have segmented the other real estate owned (“OREO”) into two components, real estate obtained as a result of loans originated by Old Line Bank (legacy) and other real estate acquired from MB&T, WSB and Regal Bank or obtained as a result of loans originated by MB&T, WSB and Regal Bank (acquired); we did not acquire any OREO properties in the Damascus acquisition. We are currently aggressively either marketing these properties for sale or improving them in preparation for sale.

 

  27  

The following outlines the transactions in OREO during the period.

 

Three months ended March 31, 2018   Legacy   Acquired   Total
Beginning balance   $ 425,000     $ 1,578,998     $ 2,003,998  
Real estate acquired through foreclosure of loans                  
Addiitonal valuation adjustment of real estate owned                  
Sales/deposits on sales           (191,884 )     (191,884 )
Net realized gain/(loss)           (12,516 )     (12,516 )
Total end of period   $ 425,000     $ 1,374,598     $ 1,799,598  

 

Residential Foreclosures and Repossessed Assets  — Once all potential alternatives for reinstatement are exhausted, past due loans collateralized by residential real estate are referred for foreclosure proceedings in accordance with local requirements of the applicable jurisdiction. Once possession of the property collateralizing the loan is obtained, the repossessed property will be recorded within other assets either as other real estate owned or, where management has both the intent and ability to recover its losses through a government guarantee, as a foreclosure claim receivable. At March 31, 2018, residential foreclosures classified as other real estate owned totaled $966 thousand. We had two loans for an aggregate of $529 thousand secured by residential real estate in process of foreclosure at March 31, 2018 compared to one loan for $277 thousand at December 31, 2017.

 

6. EARNINGS PER COMMON SHARE

 

We determine basic earnings per common share by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding giving retroactive effect to stock dividends.

 

We calculate diluted earnings per common share by including the average dilutive common stock equivalents outstanding during the period. Dilutive common equivalent shares consist of stock options, calculated using the treasury stock method.

 

    Three Months Ended
March 31,
    2018   2017
Weighted average number of shares     12,544,266       10,926,181  
Dilutive average number of shares     12,743,282       11,139,802  

 

7. STOCK-BASED COMPENSATION

 

For the three months ended March 31, 2018 and 2017, we recorded stock-based compensation expense of $288,559 and $115,113, respectively.  At March 31, 2018, there was total unrecognized compensation cost of $1.5 million related to non-vested stock options and $4.1 million related to restricted stock awards that we expect to realize over the next 2.2 years. As of March 31, 2018, there were 232,005 shares remaining available for future issuance under the 2010 equity incentive plan. The officers exercised 36,951 options during the three month period ended March 31, 2018 compared to 8,500 options during the three month period ended March 31, 2017.

 

For purposes of determining estimated fair value of stock options and restricted stock awards, we have computed the estimated fair values of all stock-based compensation using the Black-Scholes option pricing model and, for stock options and restricted stock awards granted prior to March 31, 2018, have applied the assumptions set forth in Old Line Bancshares’ Annual Report on Form 10-K for the year ended December 31, 2017.  During the three months ended March 31, 2018, there were 40,000 stock options granted compared to no stock options issued during the three months ended March 31, 2017.  The weighted average grant date fair value of the 2018 stock options is $8.63 and was computed using the Black-Scholes option pricing model under similar assumptions.

 

  28  

During the three months ended March 31, 2018 and 2017, we granted 19,443 and 24,415 restricted common stock awards, respectively. The weighted average grant date fair value of these restricted stock awards is $32.00 at March 31, 2018. There were no restricted shares forfeited during the three month periods ended March 31, 2018 and 2017.

 

8. FAIR VALUE MEASUREMENT

 

The fair value of an asset or liability is the price that participants would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability, or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

 

The fair value hierarchy established by accounting standards defines three input levels for fair value measurement. The applicable standard describes three levels of inputs that may be used to measure fair value: Level 1 is based on quoted market prices in active markets for identical assets. Level 2 is based on significant observable inputs other than Level 1 prices. Level 3 is based on significant unobservable inputs that reflect a company’s own assumptions about the assumption that market participants would use in pricing an asset or liability. We evaluate fair value measurement inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer between levels. For the three months ended March 31, 2018 and year ended December 31, 2017, there were no transfers between levels.

 

At March 31, 2018, we hold, as part of our investment portfolio, available for sale securities reported at fair value consisting of municipal securities, U.S. government sponsored entities, corporate bonds, mortgage-backed securities. The fair value of the majority of these securities is determined using widely accepted valuation techniques including matrix pricing and broker-quote based applications. Inputs include benchmark yields, reported trades, issuer spreads, prepayments speeds and other relevant items. These are inputs used by a third-party pricing service used by us.

 

To validate the appropriateness of the valuations provided by the third party, we regularly update the understanding of the inputs used and compare valuations to an additional third party source. We classify all our investment securities available for sale in Level 2 of the fair value hierarchy, with the exception of treasury securities that fall into Level 1 and our corporate bonds, which fall into Level 3.

 

  29  

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

    At March 31, 2018 (In thousands)
    Carrying Value   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
  Total Changes
in Fair Values
Included in
Period Earnings
Available-for-sale:                    
Treasury securities   $ 2,994     $ 2,994     $     $     $  
U.S. government agency     18,635             18,635              
Corporate bonds     14,714                   14,714        
Municipal securities     76,418             76,418              
FHLMC MBS     18,355             18,355              
FNMA MBS     59,441             59,441              
GNMA MBS     19,797             19,797              
Total recurring assets at fair value   $ 210,354     $ 2,994     $ 192,646     $ 14,714     $  

 

 

    At December 31, 2017 (In thousands)
    Carrying Value   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
  Total Changes
in Fair Values
Included in
Period Earnings
Available-for-sale:                    
Treasury securities   $ 3,005     $ 3,005     $     $     $  
U.S. government agency     17,734             17,734              
Corporate bonds     14,658                   14,658        
Municipal securities     79,555             79,555              
FHLMC MBS     19,455             19,455              
FNMA MBS     62,946             62,946              
GNMA MBS     21,000             21,000              
Total recurring assets at fair value   $ 218,353     $ 3,005     $ 200,690     $ 14,658     $  

 

 

Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes our methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value. Furthermore, we have not comprehensively revalued the fair value amounts since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the above presented amounts.

 

The fair value of the majority of the securities in significant unobservable inputs (Level 3) is determined using widely accepted valuation techniques including matrix pricing and broker-quote based applications. Inputs include benchmark yields, reported trades, issuer spreads, prepayments speeds and other relevant items. These are inputs used by a third-party pricing service used by us.

 

The following table provides a reconciliation of changes in fair value included in assets measured in the Consolidated Balance Sheet using inputs classified as level 3 in the fair value for the period indicated:

 

  30  

     
(in thousands)   Level 3
Investment available-for-sale        
Balance as of January 1, 2018   $ 14,658  
Realized and unrealized gains (losses)        
Included in earnings      
Included in other comprehensive income     56  
Purchases, issuances, sales and settlements      
Transfers into or out of level 3      
Balance at March 31, 2018   $ 14,714  

 

The fair value calculated may not be indicative of net realized value or reflective of future fair values.

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

We may be required, from time to time, to measure certain assets at fair value on a non-recurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis at March 31, 2018 and December 31, 2017 are included in the tables below.

 

We also measure certain non-financial assets such as other real estate owned, TDRs, and repossessed or foreclosed property at fair value on a non-recurring basis. Generally, we estimate the fair value of these items using Level 2 inputs based on observable market data or Level 3 inputs based on discounting criteria.

 

    At March 31, 2018 (In thousands)
    Carrying Value   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
Impaired Loans                                
Legacy:   $ 4,213                 $ 4,213  
Acquired:     1,858                   1,858  
Total Impaired Loans     6,071                   6,071  
                                 
Other real estate owned:                                
Legacy:   $ 425                 $ 425  
Acquired:     1,375                   1,375  
Total other real estate owned:     1,800                   1,800  
Total   $ 7,871     $     $     $ 7,871  

 

 

 

 

 

 

  31  

    At December 31, 2017 (In thousands)
    Carrying Value   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
Impaired Loans                                
Legacy:   $ 4,260                 $ 4,260  
Acquired:     1,931                   1,931  
Total Impaired Loans     6,191                   6,191  
                                 
Other real estate owned:                                
Legacy:   $ 425                 $ 425  
Acquired:     1,579                   1,579  
Total other real estate owned:     2,004                   2,004  
Total   $ 8,195     $     $     $ 8,195  

 

As of March 31, 2018 and December 31, 2017, we estimated the fair value of impaired assets using Level 3 inputs to be $7.9 million and $8.2 million, respectively. We determined these Level 3 inputs based on appraisal evaluations, offers to purchase and/or appraisals that we obtained from an outside third party during the preceding twelve months less costs to sell. Discounts have predominantly been in the range of 0% to 50%. As a result of the acquisitions of Maryland Bankcorp, WSB Holdings and Regal, we have segmented the OREO into two components, real estate obtained as a result of loans originated by Old Line Bank (legacy) and other real estate acquired from MB&T, WSB and Regal Bank or obtained as a result of loans originated by MB&T, WSB and Regal Bank (acquired).

 

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of Old Line Bancshares’ financial instruments not recorded at fair value on a recurring or non-recurring basis as of March 31, 2018 and December 31, 2017.  For short term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization.  For non-marketable equity securities the carrying amount is a reasonable estimate of fair value as these securities can only be redeemed or sold at their par value and only to the respective issuing government-supported institution or to another member institution.  For net loans recievable, an exit price notion was used consistant with ASC Topic 820, Fair Value Measurement. Prior to adoption, loans were calculated using an entry price notion. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

 

 

 

 

 

 

 

 

 

  32  

    March 31,2018 (in thousands)
    Carrying
Amount
(000’s)
  Total
Estimated
Fair
Value
  Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Other
Unobservable
Inputs
(Level 3)
Assets:                                        
Cash and cash equivalents   $ 88,506     $ 88,506     $ 88,506     $     $  
Loans receivable, net     1,756,577       1,722,797                   1,722,797  
Loans held for sale     3,934       4,074             4,074        
Investment securities available for sale     210,354       210,354       2,993       192,647       14,714  
Equity Securities at cost     7,783       7,783             7,783        
Bank Owned Life Insurance     41,850       41,850             41,850        
Accrued interest receivable     5,310       5,310             1,152       4,158  
Liabilities:                                        
Deposits:                                        
Non-interest-bearing     572,120       572,120             572,120        
Interest bearing     1,213,584       1,219,276             1,219,276        
Short term borrowings     161,478       161,478             161,478        
Long term borrowings     38,173       38,173             38,173        
Accrued Interest payable     1,106       1,106             1,106        

 

    December 31,2017 (in thousands)
    Carrying
Amount
(000’s)
  Total
Estimated
Fair
Value
  Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Other
Unobservable
Inputs
(Level 3)
Assets:                                        
Cash and cash equivalents   $ 35,174     $ 35,174     $ 35,174     $     $  
Loans receivable, net     1,696,361       1,692,018                   1,692,018  
Loans held for sale     4,404       4,558             4,558        
Investment securities available for sale     218,353       218,353       3,005       200,690       14,658  
Equity Securities at cost     8,978       8,978             8,978        
Bank Owned Life Insurance     41,612       41,612             41,612        
Accrued interest receivable     5,476       5,476             1,215       4,261  
Liabilities:                                        
Deposits:                                        
Non-interest-bearing     451,803       451,803             451,803        
Interest bearing     1,201,100       1,205,936             1,205,936        
Short term borrowings     192,612       192,612             192,612        
Long term borrowings     38,107       38,107             38,107        
Accrued Interest payable     1,472       1,472             1,472        

 

9. SHORT TERM BORROWINGS

 

Short term borrowings consist of promissory notes or overnight repurchase agreements sold to Old Line Bank’s customers, federal funds purchased and advances from the Federal Home Loan Bank of Atlanta (“FHLB”). At March 31, 2018, we had $125.0 million outstanding in short term FHLB borrowings, compared to $155.0 million at December 31, 2017. At March 31, 2018 and December 31, 2017, we had no unsecured promissory notes and $36.5 million and $37.6 million, respectively, in secured promissory notes.

 

  33  

Securities Sold Under Agreements to Repurchase

 

To support the $36.5 million in repurchase agreements at March 31, 2018, we have provided collateral in the form of investment securities. At March 31, 2018 we have pledged $61.5 million in U.S. government agency securities and mortgage-backed securities to customers who require collateral for overnight repurchase agreements and deposits. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. As a result, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. We monitor collateral levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities in the event the collateral fair value falls below stipulated levels. We closely monitor the collateral levels to ensure adequate levels are maintained. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents. We have the right to sell or re-pledge the investment securities. For government entity repurchase agreements, the collateral is held by Old Line Bank in a segregated custodial account under a tri-party agreement. The repurchase agreements totaling $36.5 million mature daily and will remain fully collateralized until the account has been closed or terminated.

 

10. LONG TERM BORROWINGS

 

Long term borrowings consist of $35 million in aggregate principal amount of Old Line Bancshares 5.625% Fixed-to-Floating Rate Subordinated Notes due 2026 (the “Notes”). The Notes were issued pursuant to an indenture and a supplemental indenture, each dated as of August 15, 2016, between Old Line Bancshares and U.S. Bank National Association as Trustee. The Notes are unsecured subordinated obligations of Old Line Bancshares and rank equally with all other unsecured subordinated indebtedness currently outstanding or issued in the future. The Notes are subordinated in right of payment of all senior indebtedness. The fair value of the Notes is $34.1 million.

 

Also included in long term borrowings are trust preferred subordinated debentures totaling $4.1 million (net of $2.6 million fair value adjustment) at March 31, 2018 acquired in the Regal acquisition. The trust preferred subordinated debentures consists of two trusts – Trust 1 in the amount of $4.0 million (fair value adjustment of $1.4 million) maturing on March 17, 2034 and Trust 2 in the amount of $2.5 million (fair value adjustment $1.2 million) maturing on December 14, 2035.

 

11. SUBSEQUENT EVENT

 

On April 13, 2018, Old Line Bancshares BYBK, the parent company of Bay Bank. Upon the consummation of the Merger, all outstanding shares of BYBK common stock were exchanged for shares of common stock of Old Line Bancshares. As a result of the merger, each share of common stock of BYBK was converted into the right to receive 0.4088 shares of Old Line Bancshares’ common stock, provided that cash was paid in lieu of any fractional shares of Old Line Bancshares common stock. As a result, Old Line Bancshares issued approximately 4,408,087 shares of its common stock in exchange for the shares of common stock of BYBK in the merger. The aggregate merger consideration was approximately $143.6 million, consisting of approximately 4,408,087 shares of Old Line Bancshares common stock, valued at approximately $142.6 million based on the closing sales price of Old Line Bancshares’ common stock on April 13, 2018, and approximately $968,805 in cash in exchange for unexercised options to purchase BYBK common stock that were outstanding immediately before the Merger.

 

In connection with the merger, the parties have caused Bay Bank to merge with and into Old Line Bank, with Old Line Bank the surviving bank.

 

At December 31, 2017, BYBK had consolidated assets of approximately $659 million. This merger adds 11 banking locations located in market areas of Baltimore City and Baltimore, Howard and Harford Counties in Maryland.

 

The initial accounting for the business combination is incomplete as of the date of this report due to the timing of the closing date for the acquisition. The required information is not yet available for Old Line Bancshares to perform the necessary financial reporting and fair values of the related acquisition.

 

  34  

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.”

 

In this report, references to the “Company,” “we,” “us,” and “ours” refer to Old Line Bancshares, Inc. and its subsidiaries, collectively, and references to the “Bank” refer to Old Line Bank.

 

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.

 

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”), on December 4, 2015, we acquired Regal Bancorp, Inc. (“Regal”), the parent company of Regal Bank & Trust (“Regal Bank”), and on July 28, 2017, we acquired DCB Bancshares, Inc. (“DCB”), the parent company of Damascus Community Bank (“Damascus”). On April 13, 2018, we acquired Bay Bancorp, Inc. (“BYBK”), the parent company of Bay Bank, FSB. This acquisition brought our assets to approximately $2.8 billion and we now operate 39 full service branches serving 11 counties and Baltimore City.

 

Summary of Recent Performance and Other Activities

 

Net income available to common stockholders increased $2.1 million, or 52.63%, to $6.1 million for the three months ended March 31, 2018, compared to $4.0 million for the three month period ended March 31, 2017. Earnings were $0.48 per basic and diluted common share for the three months ended March 31, 2018, compared to $0.36 per basic and diluted common share for the three months ended March 31, 2017. The increase in net income for the first quarter of 2018 as compared to the same 2017 period is primarily the result of a $3.5 million increase in net interest income, partially offset by an increase of $1.5 million in non-interest expenses.

 

Net loans held for investment increased $60.2 million, or 3.55% during the three month period ended March 31, 2018 from the December 31, 2017 balance as a result of organic growth. Average gross loans increased $338.4 million, or 24.47%, during the three month period ended March 31, 2018, to $1.7 billion from $1.4 billion for the three months ended March 31, 2017. $192.1 million of the increase in average loans is due to the July 2017 acquisition of DCB and the remaining $146.3 million increase is due to organic loan growth.

 

Nonperforming assets remained consistent at our 10 year historical low of 0.18% of total assets at March 31, 2018 and December 31, 2017.

 

Total yield on interest earning assets increased to 4.52% for the three months ended March 31, 2018, compared to 4.37% for the same period of 2017.

 

Return on average assets (“ROAA”) and return on average equity (“ROAE”) were 1.16% and 11.36%, respectively, for the three months ended March 31, 2018, compared to ROAA and ROAE of 0.93% and 9.63%, respectively, for the three months ended March 31, 2017.

 

  35  

Net income available to common stockholders increased 52.63% to $6.1 million, or $0.48 per basic and diluted share, for the three month period ended March 31, 2018, from $4.0 million, or $0.36 per basic and diluted share, for the first quarter of 2017.

 

Total assets increased $105.1 million, or 4.99%, since December 31, 2017.

 

Total deposits grew by $132.8 million, or 8.03%, since December 31, 2017.

 

We ended the first quarter of 2018 with a book value of $16.74 per common share and a tangible book value of $14.27 per common share compared to $16.61 and $14.10, respectively, at December 31, 2017.

 

We maintained appropriate levels of liquidity and by all regulatory measures remained “well capitalized.”

 

The following summarizes the highlights of our financial performance for the three month period ended March 31, 2018 compared to same period in 2017 (figures in the table may not match those discussed in the balance of this section due to rounding).

 

    Three months ended March 31,
    (Dollars in thousands)
    2018   2017   $ Change   % Change
                 
Net income available to common stockholders   $ 6,065     $ 3,974     $ 2,091       52.62 %
Interest income     21,324       16,635       4,689       28.19  
Interest expense     3,642       2,474       1,168       47.21  
Net interest income before provision for loan losses     17,683       14,161       3,522       24.87  
Provision for loan losses     395       440       (45 )     (10.23 )
Non-interest income     1,795       1,855       (60 )     (3.23 )
Non-interest expense     10,992       9,532       1,460       15.32  
Average total loans     1,720,721       1,382,344       338,377       24.48  
Average interest earning assets     1,946,208       1,593,510       352,698       22.13  
Average total interest bearing deposits     1,200,932       988,719       212,213       21.46  
Average non-interest bearing deposits     457,851       336,646       121,205       36.00  
Net interest margin     3.76 %     3.74 %             0.53  
Return on average equity     11.36 %     9.63 %             17.96  
Basic earnings per common share   $ 0.48     $ 0.36     $ 0.12       33.33  
Diluted earnings per common share     0.48       0.36       0.12       33.33  

 

Recent Acquisitions

 

DCB Bancshares, Inc . On July 28, 2017, Old Line Bancshares acquired DCB, the parent company of Damascus. The aggregate merger consideration was approximately $40.9 million based on the closing sales price of Old Line Bancshares’ common stock on July 28, 2017.

 

In connection with the merger, Damascus merged with and into Old Line Bank, with Old Line Bank the surviving bank.

 

At July 28, 2017, DCB had consolidated assets of approximately $311 million. This merger added six banking locations located in Montgomery, Frederick and Carroll Counties in Maryland.

 

The acquired assets and assumed liabilities of DCB were measured at estimated fair value. Management made significant estimates and exercised significant judgment in accounting for the acquisition of DCB. Management judgmentally assigned risk ratings to loans based on appraisals and estimated collateral values, expected cash flows, prepayment speeds and estimated loss factors to measure fair value for loans. Management used quoted or current market prices to determine the fair value of Damascus’ investment securities.

 

Bay Bancorp, Inc. Also, as discussed, above, on April 13, 2018, we acquired BYBK, the parent company of Bay Bank.

 

  36  

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 continuing our strong pattern of organic loan and deposit growth, enhancing and maintaining credit quality, collecting payments on non-accrual and past due loans, profitably disposing of certain acquired loans and other real estate owned, maintaining an attractive branch network, expanding fee income, generating extensions of core banking services, and using technology to maximize stockholder value. During the past few years, we have expanded by acquisition into Baltimore, Carroll, Howard, Harford and Frederick Counties and Baltimore City, Maryland, organically and through acquisitions in Montgomery and Anne Arundel Counties, Maryland, by acquisition in Carroll and Baltimore Counties, Maryland, and organically in Prince George’s County, Maryland.

 

We use the Internet and technology to augment our growth plans. Currently, we offer our customers image technology, Internet banking with online account access and bill pay service and mobile banking. 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 continue to 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, WSB Holdings, Regal, DCB and BYBK. We believe the BYBK acquisition will generate increased earnings and increased returns for our stockholders, including the former stockholders of BYBK.

 

Although the current interest rate climate continues to present challenges for our industry, we have worked diligently towards our goal of becoming the premier community bank in Maryland. While we are uncertain about the continued pace of economic growth or the impact of the current political environment and the growing national debt, 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.

 

Although the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) has been slowly increasing the federal funds rate since December 2015, interest rates are still at historically low levels, and if the economy remains stable, we believe that we can continue to grow total loans during 2018 even with the additional expected incremental increases in the federal funds rate, which will increase market interest rates, and that we can continue to grow total deposits during 2018 even with interest rates that are, and are expected to remain during 2018, low by historical levels. As a result of this expected growth, we expect that net interest income will continue to increase during 2018, although there can be no guarantee that this will be the case.

 

We also expect that salaries and benefits expenses and occupancy and equipment expenses will continue to be higher in 2018 and going forward generally than they were in 2017 as a result of including the expenses related to the former Damascus employees and the staff associated with our new branch in Riverdale, Maryland, which opened in June 2017, and the occupancy costs associated with the new Damascus and Riverdale branches, for the full year, as well as the addition of Bay Bank employees and branches as of April 13, 2018; such expenses may increase even further if we selectively take the opportunity to add more business development talent. We will continue to look for opportunities to reduce expenses as we did with the closing of three branches in 2016 and the planned July 2018 closure of two legacy Old Line Bank branches that will be consolidated with former Bay Bank locations within close proximity. 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.

 

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, 2017, we consider our critical accounting policies to be the allowance for loan losses, other-than-temporary impairment of investment securities, goodwill and other intangible assets, income taxes, business combinations and accounting for acquired loans. There have been no material changes in our critical accounting policies during the three months ended March 31, 2018.

 

  37  

Results of Operations for the Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017.

 

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 paid on 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.

 

Net interest income before the provision for loan losses for the three months ended March 31, 2018 increased $3.5 million, or 24.87%, to $17.7 million from $14.2 million for the same period in 2017. As outlined in detail in the Rate/Volume Variance Analysis, this increase was the result of an increase in total interest income, resulting from an increase in the average balance of and, to a much lesser extent, the average yield on, our loans, partially offset by an increase in interest expense resulting primarily from an increase in the average rate on our interest-bearing liabilities, all as discussed further below. We continue to adjust the mix and volume of interest earning assets and liabilities on the balance sheet to maintain a relatively strong net interest margin.

 

Total interest income increased $4.7 million, or 28.19%, to $21.3 million during the three months ended March 31, 2018 compared to $16.6 million during the three months ended March 31, 2017, primarily as a result of a $4.3 million increase in interest and fees on loans, which consisted of $2.7 million in interest recognized on acquired DCB loans and an increase of $1.6 million recognized on organic loans. The increase in interest and fees on loans is primarily the result of a $338.4 million increase in the average balance of our loans, primarily mortgage loans, for the three months ended March 31, 2018 compared to the same period last year.. The average yield on the loan portfolio increased to 4.69% for the three months ended March 31, 2018 from 4.58% during the three months ended March 31, 2017 due to higher yields on new commercial and consumer loans. The fair value accretion/amortization on acquired loans affects interest income, primarily due to payoffs on such acquired loans. Payoffs during the three months ended March 31, 2018 contributed a five basis point increase in interest income, compared to seven basis points for the three months ended March 31, 2017.

 

In addition, interest income on our securities portfolio increased $206 thousand or 17.7% for the three months ended March 31, 2018 compared to the same period last year as a result of an increase in the average balance of and, to a lesser extent, the average yield on, our investment securities. The average balance of our investment portfolio increased $13.6 million, or 6.28%, for the three months ended March 31, 2018 compared to for the three months ended March 31, 2017, primarily due to increases in the average balance of our municipal and U.S. government agency securities and our corporate bonds, partially offset by a decrease in our MBS. The average yield on the investment portfolio increased to 3.15% for the three months ended March 31, 2018 from 2.86% during the three months ended March 31, 2017, primarily due to higher yields on our corporate bonds, MBS and other investment securities, partially offset by a decrease in the average yield on our municipal securities.

 

Total interest expense increased $1.2 million, or 47.20%, to $3.6 million during the three months ended March 31, 2018 from $2.5 million for the same period in 2017, as a result of increases in the average rate paid on and, to a lesser extent, the average balance of, our interest bearing liabilities. The average interest rate paid on all interest bearing liabilities increased to 1.03% during the three months ended March 31, 2018 from 0.82% during the three months ended March 31, 2017, due to higher rates paid on our borrowings, primarily our FHLB borrowings, and, to a lesser extent, an increase in the rate paid on our money market and NOW accounts and our time deposits. The increase in the average rate paid on FHLB borrowings, money market and NOW accounts is the result of us paying slightly higher rates as a result of recent Federal Reserve Board rate increases. The fair value accretion recorded on acquired deposits also affects interest expense. The benefit from accretion on such deposits slightly increased to two basis points for the three months ended March 31, 2018, compared to one basis point for the three months ended March 31, 2017.

 

  38  

The average balance of our interest bearing liabilities increased $215.8 million, or 17.68%, to $1.4 billion for the three months ended March 31, 2018 from $1.2 billion for the three months ended March 31, 2017, as a result of increases of $212.2 million, or 21.46%, in our average interest bearing deposits and $3.6 million, or 1.57%, in our average borrowings quarter over quarter. The increase in our average interest bearing deposits is due to the deposits acquired in the DCB merger and, to a lesser extent, organic deposit growth The increase in our average borrowings is primarily due to the use of short term FHLB advances to fund new loan originations.

 

Non-interest bearing deposits allow us to fund growth in interest earning assets at minimal cost. Average non-interest bearing deposits increased $121.2 million to $457.9 million for the three months ended March 31, 2018, compared to $336.6 million for the three months ended March 31, 2017, primarily as a result of the deposits we acquired in the DCB merger.

 

Our net interest margin increased to 3.76% for the three months ended March 31, 2018 from 3.74% for the three months ended March 31, 2017. The yield on average interest earning assets increased 15 basis points for the period from 4.37% for the quarter ended March 31, 2017 to 4.52% for the quarter ended March 31, 2018 due primarily due to an improvement in asset yields in addition to an increase in non-interest bearing deposits as a source of funding. The net interest margin during the 2018 period was affected primarily by the increase in interest expense. The increase was partially offset by a reduction in the tax equivalent yield as a result of the tax rate change that was enacted in December 2017 in accordance with the Tax Cut and Jobs Act. The change in the tax rate contributed to a reduction of six basis points for the three months ended March 31, 2018 as compared to the three month period ended March 31, 2017.

 

During the three months ended March 31, 2018 and 2017, we continued to successfully collect payments on acquired loans that we had recorded at fair value at the acquisition date, which resulted in a positive impact in interest income. Total accretion remained relatively stable, slightly decreasing by $31 thousand for the three months ended March 31, 2018, compared to the same period last year. The payments received were a direct result of our efforts to negotiate payments, sell notes or foreclose on and sell collateral after the acquisition date.

 

The accretion positively impacted the yield on loans and increased the net interest margin during these periods as follows:

 

    Three months ended March 31,
    2018   2017
        % Impact on       % Impact on
    Accretion   Net Interest   Accretion   Net Interest
    Dollars   Margin   Dollars   Margin
Commercial loans   $ 47,705       0.01 %   $ 9,727       %
Mortgage loans     78,188       0.02       285,482       0.07  
Consumer loans     97,544       0.02       5,277        
Interest bearing deposits     80,886       0.02       35,036       0.01  
Total accretion (amortization)   $ 304,323       0.07 %   $ 335,522       0.08 %

 

 

 

 

 

 

 

 

  39  

Average Balances, Yields and Accretion of Fair Value Adjustments Impact . The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the three months ended March 31, 2018 and 2017, showing the average distribution of assets, liabilities, stockholders’ equity and related income, expense and corresponding weighted average yields and rates. Non-accrual loans are included in total loan balances lowering the effective yield for the portfolio in the aggregate. The average balances used in this table and other statistical data were calculated using average daily balances.

 

    Average Balances, Interest and Yields
    2018   2017
    Average       Yield/   Average       Yield/
Three months ended March 31,   balance   Interest   Rate   balance   Interest   Rate
Assets:                        
Federal funds sold (1)   $ 193,669     $ 701       1.47 %   $ 250,829     $ 623       1.01 %
Interest bearing deposits (1)     1,809,700       4             1,147,711       5        
Investment securities (1)(2)                                                
U.S. Treasury     3,003,977       10,945       1.48       3,033,779       5,370       0.72  
U.S. government agency     13,144,333       86,325       2.66       8,341,787       51,300       2.49  
Corporate bonds     14,620,840       200,469       5.56       8,888,889       117,837       5.38  
Mortgage backed securities     109,516,824       575,018       2.13       116,903,217       554,429       1.92  
Municipal securities     80,023,423       644,411       3.27       69,970,377       683,084       3.96  
Other equity securities     9,147,367       266,651       11.82       8,762,570       112,263       5.20  
Total investment securities     229,456,764       1,783,819       3.15       215,900,619       1,524,283       2.86  
Loans(1)                                                
Commercial     211,783,107       2,263,192       4.33       167,545,585       1,634,120       3.96  
Mortgage real estate     1,450,874,975       16,648,703       4.65       1,209,541,468       13,928,482       4.67  
Consumer     58,063,394       978,903       6.84       5,256,771       64,054       4.94  
Total loans     1,720,721,476       19,890,798       4.69       1,382,343,824       15,626,656       4.58  
Allowance for loan losses     5,973,556                     6,132,653                
Total loans, net of allowance     1,714,747,920       19,890,798       4.70       1,376,211,171       15,626,656       4.61  
Total interest earning assets(1)     1,946,208,053       21,675,322       4.52       1,593,510,330       17,151,567       4.37  
Non-interest bearing cash     36,844,268                       28,795,542                  
Goodwill and intangibles     31,272,865                                          
Premises and equipment     41,088,624                       35,256,270                  
Other assets     69,837,318                       78,339,425                  
Total assets(1)     2,125,251,128                       1,735,901,567                  
Liabilities and Stockholders’ Equity:                                                
Interest bearing deposits                                                
Savings     133,091,341       34,791       0.11       101,690,536       30,350       0.12  
Money market and NOW     527,497,875       649,317       0.50       428,869,458       343,552       0.32  
Time deposits     540,342,764       1,622,625       1.22       458,159,400       1,167,156       1.03  
Total interest bearing deposits     1,200,931,980       2,306,733       0.78       988,719,394       1,541,058       0.63  
Borrowed funds     235,924,800       1,334,831       2.29       232,287,588       932,887       1.63  
Total interest bearing liabilities     1,436,856,780       3,641,564       1.03       1,221,006,982       2,473,945       0.82  
Non-interest bearing deposits     457,850,993                       336,645,712                  
      1,894,707,773                       1,557,652,694                  
Other liabilities     13,931,983                       10,884,384                  
Stockholders’ equity     216,611,372                       167,364,489                  
Total liabilities and stockholders’ equity   $ 2,125,251,128                     $ 1,735,901,567                  
Net interest spread(1)                       3.49                       3.55  
Net interest margin(1)             $ 18,033,758       3.76 %           $ 14,677,622       3.74 %

____________________

(1) Interest income is presented on a fully taxable equivalent (“FTE”) basis. The FTE basis adjusts for the tax favored status of these types of assets. Management believes providing this information on a FTE basis provides investors with a more accurate picture of our net interest spread and net interest income and we believe it to be the preferred industry measurement of these calculations. See “Reconciliation of Non-GAAP Measures.”
(2) Available for sale investment securities are presented at amortized cost.

 

  40  

The following table describes the impact on our interest income and expense resulting from changes in average balances and average rates for the three months ended March 31, 2018 and 2017. We have allocated the change in interest income, interest expense and net interest income due to both volume and rate proportionately to the rate and volume variances.

 

Rate/Volume Variance Analysis

 

    Three months ended March 31,
2018 compared to 2017
Variance due to:
    Total   Rate   Volume
             
Interest earning assets:                        
Federal funds sold(1)   $ 78     $ 322     $ (244 )
Interest bearing deposits     (1 )     (5 )     4  
Investment Securities(1)                        
U.S. treasury     5,575       5,668       (93 )
U.S. government agency     35,025       11,335       23,690  
Corporate bond     82,632       14,658       67,974  
Mortgage backed securities     20,589       79,137       (58,548 )
Municipal securities     (38,673 )     (195,426 )     156,753  
Other     154,388       153,088       1,300  
Loans:(1)                        
Commercial     629,072       374,332       254,740  
Mortgage     2,720,221       (189,628 )     2,909,849  
Consumer     914,849       122,680       792,169  
Total interest income (1)     4,523,755       376,161       4,147,594  
                         
Interest bearing liabilities                          
Savings     4,441       (8,865 )     13,306  
Money market and NOW     305,765       276,543       29,222  
Time deposits     455,469       365,139       90,330  
Borrowed funds     401,944       398,183       3,761  
Total interest expense     1,167,619       1,031,000       136,619  
                         
Net interest income(1)   $ 3,356,136     $ (654,839 )   $ 4,010,975  

__________________________

(1) Interest income is presented on a FTE basis. The FTE basis adjusts for the tax favored status of these types of assets. Management believes providing this information on a FTE basis provides investors with a more accurate picture of our net interest spread and net interest income and we believe it to be the preferred industry measurement of these calculations. See “Reconciliation of Non-GAAP Measures.”

 

Provision for Loan Losses. The provision for loan losses for the three months ended March 31, 2018 was $395 thousand, a decrease of $46 thousand, or 10.35%, compared to $440 thousand for the three months ended March 31, 2017. This decrease was due to our continued strong credit quality trends and a slight decrease in our reserves on specific loans.

 

Management identified additional probable losses in the loan portfolio and recorded $62 thousand in charge-offs during the three month period ended March 31, 2018, compared to charge-offs of $1.0 million for the three months ended March 31, 2017. We recognized recoveries of $4 thousand during the three months ended March 31, 2018 compared to recoveries of $7 thousand during the same period in 2017.

 

The allowance for loan losses to gross loans held for investment was 0.36% and 0.35%, and the allowance for loan losses to non-accrual loans was 354.28% and 335.51%, at March 31, 2018 and December 31, 2017, respectively. The increase in the allowance for loan losses as a percentage of gross loans held for investment was primarily the result of growth in the loan portfolio. The increase in the allowance for loan losses to non-accrual loans is primarily the result of the increase in our allowance while non-accrual loans remained flat.

 

  41  

Non-interest Income . Non-interest income totaled $1.8 million for the three months ended March 31, 2018, a decrease of $60 thousand, or 3.22%, from the corresponding period of 2017 amount of $1.9 million.

 

The following table outlines the amounts of and changes in non-interest income for the three month periods.

 

    Three months ended March 31,        
    2018   2017   $ Change   % Change
Service charges on deposit accounts   $ 265,912     $ 86,505     $ 179,407       207.39 %
Wire transfer fees     26,965       28,301       (1,336 )     (4.72 )
ATM Income     283,707       297,353       (13,646 )     (4.59 )
Gain on sales or calls of investment securities           15,677       (15,677 )     (100.00 )
Earnings on bank owned life insurance     292,936       281,356       11,580       4.12  
Loss (gain) on disposal of assets     14,366       112,594       (98,228 )     (87.24 )
Rental income     198,444       140,593       57,851       41.15  
Income on marketable loans     418,472       630,930       (212,458 )     (33.67 )
Other fees and commissions     294,219       261,425       32,794       12.54  
Total non-interest income   $ 1,795,021     $ 1,854,734     $ (59,713 )     (3.22 )%

 

Non-interest income decreased during the 2018 period primarily as a result of decreases in income on marketable loans and gain on disposal of assets, partially offset by increases in service charges on deposits accounts and rental income.

 

Income on marketable loans consists of gain on the sale of residential mortgage loans originated for sale and any fees we receive in connection with such sales. Income on marketable loans decreased $212 thousand during the three months ended March 31, 2018, compared to the same period last year primarily due to a decrease in gains recorded on the sale of residential mortgage loans as a result of a decrease in the volume of mortgage loans originated and sold in the secondary market; a decrease in the premiums received on such loans also contributed to the decline. The residential mortgage division originated loans aggregating $19.3 million for sale in the secondary market during the first quarter of 2018 compared to $20.4 million for the same period last year.

 

The decrease in gain on disposal of assets is due to the sale during the first quarter of 2017 of our previously owned branch, the Accokeek branch, that we closed in the third quarter of 2016.

 

The increase in service charges on deposits accounts is the result of increased income on bank debit cards due to the increased deposit base primarily as a result of the DCB merger.

 

The increase in rental income is a result of formerly vacant space that is now occupied at our building located on Mitchellville Road in Bowie, MD.

 

Non-interest Expense. Non-interest expense increased $1.5 million, or 15.31%, for the three months ended March 31, 2018 compared to the three months ended March 31, 2017.

 

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The following table outlines the amounts of and changes in non-interest expenses for the periods.

 

    Three months ended March 31,        
    2016   2017   $ Change   % Change
Salaries and benefits   $ 5,485,450     $ 4,867,531     $ 617,919       12.69 %
Occupancy and equipment     1,980,401       1,653,413       326,988       19.78  
Data processing     609,639       356,648       252,991       70.94  
FDIC insurance and State of Maryland assessments     188,071       261,600       (73,529 )     (28.11 )
Core deposit premium amortization     312,313       197,901       114,412       57.81  
Loss (gain) on sale of other real estate owned     12,516       (17,689 )     30,205       (170.76 )
OREO expense     184,994       27,577       157,417       570.83  
Director fees     170,550       177,200       (6,650 )     (3.75 )
Network services     79,205       139,607       (60,402 )     (43.27 )
Telephone     204,424       194,142       10,282       5.30  
Other operating     1,764,396       1,674,200       90,196       5.39  
Total non-interest expenses   $ 10,991,959     $ 9,532,130     $ 1,459,829       15.31 %

 

Non-interest expenses increased quarter over quarter primarily as a result of increases in salaries and benefits, data processing, occupancy and equipment expense and OREO expense for the three months ended March 31, 2018 compared to the same period of 2017.

 

The increases in salaries and benefits and occupancy and equipment expenses are primarily due to the additional staff and new branches, respectively, that we acquired in the DCB merger.

 

Data processing increased for the 2018 period due to additional customer transactions due to growth as well as new and enhanced products in connection with our core processer.

 

OREO expenses increased primarily due to a $137 thousand real estate tax payment that we made on one property during the 2018 period.

 

Income Taxes. We had an income tax expense of $2.0 million (25.04% of pre-tax income) for the three months ended March 31, 2018 compared to an income tax expense of $2.1 million (34.25% of pre-tax income) for the same period in 2017. The effective tax rate decreased for the 2018 period primarily as a result of the decrease in the federal corporate tax income rate from 35% to 21% enacted as part of the Tax Cuts and Jobs Act.

 

Analysis of Financial Condition

 

Investment Securities. Our portfolio consists primarily of investment grade securities including U.S. Treasury securities, U.S. government agency securities, U.S. government sponsored entity securities, corporate bonds, securities issued by states, counties and municipalities, MBS, certain equity securities (recorded at cost), Federal Home Loan Bank stock, Maryland Financial Bank stock, and Atlantic Community Bankers Bank stock.

 

We have prudently managed our investment portfolio to maintain liquidity and safety. The portfolio provides a source of liquidity, collateral for borrowings as well as a means of diversifying our earning asset portfolio. While we usually intend to hold the investment securities until maturity, currently we classify all of our investment securities as available for sale. This classification provides us the opportunity to divest of securities that may no longer meet our liquidity objectives. We account for investment securities at fair value and report the unrealized appreciation and depreciation as a separate component of stockholders’ equity, net of income tax effects. Although we may sell securities to reposition the portfolio, generally, we invest in securities for the yield they produce and not to profit from trading the securities. We continually evaluate our investment portfolio to ensure it is adequately diversified, provides sufficient cash flow and does not subject us to undue interest rate risk. There are no trading securities in our portfolio.

 

The investment securities at March 31, 2018 amounted to $210.4 million, a decrease of $8.0 million, or 3.66%, from the December 31, 2017 amount of $218.4 million. As outlined above, at March 31, 2018, all securities are classified as available for sale.

 

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The fair value of available for sale securities included net unrealized losses of $8.3 million at March 31, 2018 (reflected as $6.0 million net of taxes) compared to net unrealized losses of $3.9 million (reflected as $2.3 million net of taxes) at December 31, 2017. The decline in the value of the investment securities is due to the increase in market interest rates, which resulted in a decrease in bond values. We have evaluated securities with unrealized losses for an extended period of time and determined that all such losses are temporary because, at this point in time, we expect to hold them until maturity. We have no intent or plan to sell these securities, it is not likely that we will have to sell these securities and we have not identified any portion of the loss that is a result of credit deterioration in the issuer of the security. As the maturity date moves closer and/or interest rates decline, any unrealized losses in the portfolio will decline or dissipate.

 

Loan Portfolio. Net of allowance, unearned fees and origination costs, loans held for investment increased $60.2 million, or 3.55%, during the three months ended March 31, 2018, bringing the balance to $1.8 billion at March 31, 2018 compared to $1.7 billion at December 31, 2017. The loan growth during 2018 was primarily due to new commercial real estate originations resulting from our enhanced presence in our market area. Commercial real estate loans increased by $44.1 million, residential real estate loans increased by $4.9 million, commercial and industrial loans increased by $12.4 million and consumer loans decreased by $1.2 million from their respective balances at December 31, 2017.

 

Most of our lending activity occurs within the state of Maryland in the suburban Washington, D.C. and Baltimore market areas in Anne Arundel, Baltimore, Calvert, Carroll, Charles, Montgomery, Frederick, Prince George’s and St. Mary’s Counties. The majority of our loan portfolio consists of commercial real estate loans and residential real estate loans.

 

 

 

 

 

 

 

 

 

 

 

 

  44  

The following table summarizes the composition of the loan portfolio held for investment by dollar amount at the dates indicated:

 

    March 31, 2018   December 31, 2017
    Legacy (1)   Acquired   Total   Legacy (1)   Acquired   Total
                         
Commercial Real Estate                                                
Owner Occupied   $ 260,238,291     $ 80,868,601     $ 341,106,892     $ 268,128,087     $ 87,658,855     $ 355,786,942  
Investment     536,823,023       50,040,491       586,863,514       485,536,921       52,926,739       538,463,660  
Hospitality     164,411,156       6,711,774       171,122,930       164,193,228       7,395,186       171,588,414  
Land and A&D     78,199,476       9,162,901       87,362,377       67,310,660       9,230,771       76,541,431  
Residential Real Estate                                                
First Lien-Investment     79,549,169       20,987,672       100,536,841       79,762,682       21,220,518       100,983,200  
First Lien-Owner Occupied     75,114,741       60,957,548       136,072,289       67,237,699       62,524,794       129,762,493  
Residential Land and A&D     36,633,466       6,542,940       43,176,406       35,879,853       6,536,160       42,416,013  
HELOC and Jr. Liens     20,896,736       14,954,499       35,851,235       21,520,339       16,019,418       37,539,757  
Commercial and Industrial     168,101,599       31,609,023       199,710,622       154,244,645       33,100,688       187,345,333  
Consumer     14,407,498       44,249,501       58,656,999       10,758,589       49,082,751       59,841,340  
Total loans     1,434,375,155       326,084,950       1,760,460,105       1,354,572,703       345,695,880       1,700,268,583  
Allowance for loan losses     (6,075,467 )     (182,052 )     (6,257,519 )     (5,738,534 )     (182,052 )     (5,920,586 )
Deferred loan costs, net     2,374,247             2,374,247       2,013,434             2,013,434  
Net loans   $ 1,430,673,935     $ 325,902,898     $ 1,756,576,833     $ 1,350,847,603     $ 345,513,828     $ 1,696,361,431  

______________________

(1) As a result of the acquisitions of Maryland Bankcorp, WSB Holdings, Regal Bancorp and DCB, we have segmented the portfolio into two components, “Legacy” loans originated by Old Line Bank and “Acquired” loans acquired from MB&T, WSB, Regal Bank and Damascus.

 

Bank Owned Life Insurance (“BOLI”) . At March 31, 2018, we have invested $41.9 million in life insurance policies on our executive officers, other officers of Old Line Bank, retired officers of MB&T and former officers of WSB, Regal Bank and Damascus. Gross earnings on BOLI were $293 thousand during the three months ended March 31, 2018, which earnings were partially offset by $56 thousand in expenses associated with the policies, for total net earnings of $237 thousand in 2018. We anticipate that the earnings on these policies will continue to help offset our employee benefit expenses as well as our obligations under our salary continuation agreements and supplemental life insurance agreements that we have entered into with our executive officers as well as that MB&T and WSB had entered into with their executive officers. There are no post-retirement death benefits associated with the BOLI policies owned by Old Line Bank prior to the acquisition of MB&T. We have accrued a $203 thousand liability associated with the post-retirement death benefits of the BOLI policies acquired from MB&T and there are no such benefits related to the BOLI policies acquired from WSB, Regal Bank or Damascus.

 

Annuity Plan . Our new annuity plan is an interest earning investment that we purchased to fund a new supplemental retirement plan and amendments to existing retirement plans that will provide lifetime payments to two of our executive officers. See Part II, Item 5 of this report for a description of this new benefit. We invested $6.0 million during the fourth quarter of 2017 and the annuity plan was effective January 1, 2018.

 

Deposits . Deposits increased $132.8 million during the three months ended March 31, 2018 to $1.8 billion, compared to $1.7 billion at December 31, 2017. The increase is comprised of a $120.3 million increase in our non-interest bearing deposits and a $12.5 million increase in our interest bearing deposits. Deposits at March 31, 2018 included approximately $99.8 million that one commercial customer deposited on March 29, 2018, following the customer’s sale of properties. The customer has since withdrawn approximately $97.5 million of the $99.8 million deposited on March 29. Excluding this deposit, deposits increased $33.0 million or 2.0% during the three month period ended March 31, 2018.

 

  45  

The following table outlines the changes in interest bearing deposits:

 

    March 31,   December 31,        
    2018   2017   $ Change   % Change
    (Dollars in thousands)
Certificates of deposit   $ 551,529     $ 530,027     $ 21,502       4.06 %
Interest bearing checking     526,501       538,102       (11,601 )     (2.16 )
Savings     135,554       132,971       2,583       1.94  
Total   $ 1,213,584     $ 1,201,100     $ 12,484       1.04 %

 

We acquire brokered certificates of deposit and money market accounts through the Promontory Interfinancial Network (“Promontory”). Through this deposit matching network and its certificate of deposit account registry service (CDARS) and money market account service, we have the ability to offer our customers access to Federal Deposit Insurance Corporation (the “FDIC”) insured deposit products in aggregate amounts exceeding current insurance limits. When we place funds through Promontory on behalf of a customer, we receive matching deposits through the network’s reciprocal deposit program. We can also place deposits through this network without receiving matching deposits. At March 31, 2018, we had $47.5 million in CDARS and $146.4 million in money market accounts through Promontory’s reciprocal deposit program compared to $49.2 million and $144.9 million, respectively, at December 31, 2017.

 

We do not currently have any brokered certificates of deposits other than CDARS. Old Line Bank did not obtain any brokered certificates of deposit during the three months ended March 31, 2018. We may, however, use brokered deposits in the future as an element of our funding strategy if and when required to maintain an acceptable loan to deposit ratio.

 

Borrowings. Short term borrowings consist of short term borrowings with the FHLB and short term promissory notes issued to Old Line Bank’s commercial customers as an enhancement to the basic non-interest bearing demand deposit account. This service electronically sweeps excess funds from the customer’s account into a short term promissory note with Old Line Bank. These obligations are payable on demand and are secured by investments. At March 31, 2018, we had $125.0 million outstanding in short term FHLB borrowings, compared to $155.0 million at December 31, 2017. At March 31, 2018 and December 31, 2017, we had no unsecured promissory notes and $36.5 million and $37.6 million, respectively, in secured promissory notes.

 

Long term borrowings at March 31, 2018 consist primarily of the Notes in the amount of $35.0 million (fair value of $34.1 million) due in 2026. The initial interest rate on the Notes is 5.625% per annum from August 15, 2016 to August 14, 2021, payable semi-annually on each February 15 and August 15. Beginning August 15, 2021, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month LIBOR rate plus 450.2 basis points, payable quarterly on each February 15, May 15, August 15 and November 15 through maturity or early redemption. Also included in long term borrowings are trust preferred subordinated debentures totaling $4.1 million (net of $2.6 million fair value adjustment) we acquired in the Regal acquisition. The trust preferred subordinated debentures consists of two trusts – Trust 1 in the amount of $4.0 million (fair value adjustment of $1.4 million) with an interest rate of floating 90-day LIBOR plus 2.85%, maturing in 2034 and Trust 2 in the amount of $2.5 million (fair value adjustment $1.2 million) with an interest rate of floating 90-day LIBOR plus 1.60%, maturing in 2035.

 

Liquidity and Capital Resources . 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 regulatory guidelines. As further discussed below, we have credit lines, unsecured and secured, available from several correspondent banks totaling $43.5 million. Additionally, we may borrow funds from the FHLB and the Federal Reserve Bank of Richmond. We can use these credit facilities in conjunction with the normal deposit strategies, which include pricing changes to increase deposits as necessary. We can also sell available for sale investment securities or pledge investment securities as collateral 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 flow from the investment and loan portfolios.

 

  46  

Our immediate sources of liquidity are cash and due from banks, federal funds sold and deposits in other banks. On March 31, 2018, we had $85.6 million in cash and due from banks, $2.7 million in interest bearing accounts, and $200 thousand in federal funds sold. As of December 31, 2017, we had $33.6 million in cash and due from banks, $1.4 million in interest bearing accounts, and $257 thousand in federal funds sold.

 

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.

 

We did not have any unusual liquidity requirements during the three months ended March 31, 2018. Although we plan for various liquidity scenarios, if turmoil in the financial markets occurs and our depositors lose confidence in us, we could experience liquidity issues.

 

Old Line Bancshares has available a $5.0 million unsecured line of credit at March 31, 2018. In addition, Old Line Bank has $38.5 million in available lines of credit at March 31, 2018, consisting of overnight federal funds of $33.5 million and repurchase agreements of $5.0 million from its correspondent banks. Old Line Bank has an additional secured line of credit from the FHLB of $506.5 million at March 31, 2018. As a condition of obtaining the line of credit from the FHLB, the FHLB requires that Old Line Bank purchase shares of capital stock in the FHLB. Prior to allowing Old Line Bank to borrow under the line of credit, the FHLB also requires that Old Line Bank provide collateral to support borrowings. Therefore, we have provided collateral to support up to $369.6 million in lendable collateral value for FHLB borrowings. We may increase availability by providing additional collateral. Additionally, we have overnight repurchase agreements sold to Old Line Bank’s customers and have provided collateral in the form of investment securities to support the $36.5 million in repurchase agreements.

 

In July 2013, the Federal Reserve Board and the FDIC adopted rules implementing Basel III. Under the rules, which became effective January 1, 2015, minimum requirements increased for both the quantity and quality of capital held by Old Line Bancshares and Old Line Bank. Among other things, the rules established a new minimum common equity Tier 1 capital for risk-weighted assets ratio of 4.5%, a minimum Tier 1 risk-based capital ratio of 6.0%, a minimum total risk-based capital ratio requirement of 8.0% and a minimum Tier 1 leverage ratio of 4.0%. These capital requirements also included changes in the risk-weights of certain assets to better reflect credit risk and other risk exposures. Additionally, subject to a transition schedule, the rule limits a banking organization’s ability to make capital distributions, engage in share repurchases and pay certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. Implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will increase ratably each subsequent January 1, until it reaches 2.5% on January 1, 2019. Old Line Bank has elected to permanently opt out of the inclusion of accumulated other comprehensive income in our capital calculations, as permitted by the regulations. This opt-out will reduce the impact of market volatility on our regulatory capital levels.

 

As of March 31, 2018, Old Line Bancshares’ capital levels remained characterized as “well-capitalized” under the rules.

 

Current regulations require subsidiaries of a financial institution to be separately capitalized and require investments in and extensions of credit to any subsidiary engaged in activities not permissible for a bank to be deducted in the computation of the institution’s regulatory capital. Regulatory capital and regulatory assets below also reflect increases of $8.3 million and $6.0 million, respectively, which represents unrealized losses (after-tax for capital additions and pre-tax for asset additions, respectively) on mortgage-backed securities and investment securities classified as available for sale. In addition, the risk-based capital reflects an increase of $6.3 million for the general loan loss reserve during the three months ended March 31, 2018.

 

As of March 31, 2018, Old Line Bank met all capital adequacy requirements to be considered well capitalized. There were no conditions or events since the end of the first quarter of 2018 that management believes have changed Old Line Bank’s classification as well capitalized.

 

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The following table shows Old Line Bank’s regulatory capital ratios and the minimum capital ratios currently required by its banking regulator to be “well capitalized” at March 31, 2018.

 

        Minimum capital   To be well
    Actual   adequacy   capitalized
March 31, 2018   Amount   Ratio   Amount   Ratio   Amount   Ratio
    (Dollars in 000’s)
Common equity tier 1 (to risk-weighted assets)   $ 211,838       10.95 %   $ 87,030       4.5 %   $ 125,709       6.5 %
Total capital (to risk weighted assets)   $ 218,180       11.28 %   $ 154,719       8 %   $ 193,399       10 %
Tier 1 capital (to risk weighted assets)   $ 211,838       10.95 %   $ 116,039       6 %   $ 154,719       8 %
Tier 1 leverage (to average assets)   $ 211,838       10.14 %   $ 83,597       4 %   $ 104,496       5 %

 

Our management believes that, under current regulations, and eliminating the assets of Old Line Bancshares, Old Line Bank remains well capitalized and will continue to meet its minimum capital requirements in the foreseeable future. However, events beyond our control, such as a shift in interest rates or an economic downturn in areas where we extend credit, could adversely affect future earnings and, consequently, our ability to meet minimum capital requirements in the future.

 

Asset Quality

 

Overview . Management performs reviews of all delinquent loans and foreclosed assets and directs relationship officers to work with customers to resolve potential credit issues in a timely manner. Management reports to the Loan Committee for their approval and recommendation to the board of directors on a monthly basis. The reports presented include information on delinquent loans and foreclosed real estate. We have formal action plans on criticized assets and provide status reports on OREO on a quarterly basis. These action plans include our actions and plans to cure the delinquent status of the loans and to dispose of the foreclosed properties. The Loan Committee consists of three executive officers and four non-employee members of the board of directors.

 

We classify any property acquired as a result of foreclosure on a mortgage loan as “other 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 property at the lower of cost or net realizable value. We charge any required write down of the loan to its net realizable value against the allowance for loan losses at the time of foreclosure. We charge to expense any subsequent adjustments to net realizable value. Upon foreclosure, Old Line Bank generally requires an appraisal of the property and, thereafter, appraisals of the property generally on an annual basis and external inspections on at least a quarterly basis.

 

As required by ASC Topic 310- Receivables and ASC Topic 450- Contingencies , we measure all impaired loans, which consist of all modified loans (TDRs) and other loans for which collection of all contractual principal and interest is not probable, based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, we recognize impairment through a valuation allowance and corresponding provision for loan losses. Old Line Bank considers consumer loans as homogenous loans and thus does not apply the impairment test to these loans. We write off impaired loans when collection of the loan is doubtful.

 

Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of a borrower has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. These loans do not meet the criteria for, and are therefore not included in, nonperforming assets. Management, however, classifies potential problem loans as either special mention, watch, or substandard. These loans were considered in determining the adequacy of the allowance for loan losses and are closely and regularly monitored to protect our interests. Potential problem loans, which are not included in nonperforming assets, amounted to $29.1 million at March 31, 2018 compared to $28.9 million at December 31, 2017. At March 31, 2018, we had $16.4 million and $12.7 million, respectively, of potential problem loans attributable to our legacy and acquired loan portfolios, compared to $16.4 million and $12.5 million, respectively, at December 31, 2017.

 

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Acquired Loans . Loans acquired in mergers are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan losses. Generally accepted accounting principles require that we record acquired loans at fair value, which includes a discount for loans with credit impairment. These loans are not performing according to their contractual terms and meet our definition of a nonperforming loan. The discounts that arise from recording these loans at fair value were due to credit quality. Although we do not accrue interest income at the contractual rate on these loans, we may accrete these discounts to interest income as a result of pre-payments that exceed our expectations or payment in full of amounts due. Purchased, credit-impaired loans that perform consistent with the accretable yield expectations are not reported as non-accrual or nonperforming.

 

We recorded at fair value all acquired loans from MB&T, WSB, Regal Bank and Damascus. The fair value of the acquired loans includes expected loan losses, and as a result there was no allowance for loan losses recorded for acquired loans at the time of acquisition. Accordingly, the existence of the acquired loans reduces the ratios of the allowance for loan losses to total gross loans and the allowance for loan losses to non-accrual loans, and this measure is not directly comparable to prior periods. Similarly, net loan charge-offs are normally lower for acquired loans since we recorded these loans net of expected loan losses. Therefore, the ratio of net charge-offs during the period to average loans outstanding is reduced as a result of the existence of acquired loans, and the measures are not directly comparable to prior periods. Other institutions may not have acquired loans, and therefore there may be no direct comparability of these ratios between and among other institutions when compared in total.

 

The accounting guidance also requires that if we experience a decrease in the expected cash flows of a loan subsequent to the acquisition date, we establish an allowance for loan losses for those acquired loans with decreased cash flows. At March 31, 2018, there was $182 thousand of allowance reserved for potential loan losses on acquired loans compared to $182 thousand at December 31, 2017.

 

Nonperforming Assets . As of March 31, 2018, our nonperforming assets totaled $3.9 million and consisted of $1.8 million of nonaccrual loans, $330 thousand of loans past due 90 days and still accruing and other real estate owned of $1.8 million.

 

 

 

 

 

 

 

 

 

 

  49  

The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.

 

    Nonperforming Assets
    March 31, 2018   December 31, 2017
    Legacy   Acquired   Total   Legacy   Acquired   Total
Accruing loans 90 or more days past due                                                
Commercial Real Estate                                                
Owner Occupied   $     $     $     $     $     $  
Residential Real Estate:                                                
First Lien-Owner Occupied           221,828       221,828             37,560       37,560  
Consumer           108,031       108,031             78,406       78,406  
Total accruing loans 90 or more days past due           329,859       329,859             115,966       115,966  
Non-accrued loans:                                                
Commercial Real Estate                                                
Owner Occupied           230,082       230,082             228,555       228,555  
Hospitality                                    
Land and A&D           196,171       196,171             190,193       190,193  
Residential Real Estate:                                                
First Lien-Investment     192,501             192,501       192,501             192,501  
First Lien-Owner Occupied     275,433       872,064       1,147,497       281,130       872,272       1,153,402  
Commercial                                    
Consumer                                    
Total non-accrued past due loans:     467,934       1,298,317       1,766,251       473,631       1,291,020       1,764,651  
Other real estate owned (“OREO”)     425,000       1,374,598       1,799,598       425,000       1,578,998       2,003,998  
Total non performing assets   $ 892,934     $ 3,002,774     $ 3,895,708     $ 898,631     $ 2,985,984     $ 3,884,615  
Accruing Troubled Debt Restructurings                                                
Commercial Real Estate:                                                
Owner Occupied   $ 1,548,176     $     $ 1,548,176     $ 1,560,726     $     $ 1,560,726  
Residential Real Estate:                                                
First Lien-Owner Occupied           640,493       640,493             644,744       644,744  
First Lien-Investment                                    
Land and A&D                                    
Commercial     377,936       71,049       448,985       459,333             459,333  
Total Accruing Troubled Debt Restructurings   $ 1,926,112     $ 711,542     $ 2,637,654     $ 2,020,059     $ 644,744     $ 2,664,803  

 

The table below reflects our ratios of our nonperforming assets at March 31, 2018 and December 31, 2017.

 

    March 31,   December 31,
    2018   2017
Ratios, Excluding Acquired Assets                
Total nonperforming assets as a percentage of total loans held for investment and OREO     0.06 %     0.07 %
Total nonperforming assets as a percentage of total assets     0.05 %     0.05 %
Total nonperforming assets as a percentage of total loans held for investment     0.06 %     0.07 %
                 
Ratios, Including Acquired Assets                
Total nonperforming assets as a percentage of total loans held for investment and OREO     0.22 %     0.23 %
Total nonperforming assets as a percentage of total assets     0.18 %     0.18 %
Total nonperforming assets as a percentage of total loans held for investment     0.22 %     0.23 %

 

 

  50  

The table below presents a breakdown of the recorded book balance of non-accruing loans at March 31, 2018 and December 31, 2017.

 

    March 31, 2018   December 31, 2017
        Unpaid       Interest       Unpaid        
    # of   Principal   Recorded   Not   # of   Principal   Recorded   Interest Not
    Contracts   Balance   Investment   Accrued   Contracts   Balance   Investment   Accrued
Legacy                                
Residential Real Estate                                                                
First Lien-Investment     1     $ 192,501     $ 192,501     $ 25,030       1     $ 192,501     $ 192,501