Old Line Bancshares, Inc. (OLBK)

FORM 10-Q | Quarterly Report
OLD LINE BANCSHARES INC (Form: 10-Q, Received: 11/02/2018 15:05:14)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2018

 

OR

 

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 ☒     No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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 ☐ Accelerated filer ☒
Non-accelerated filer ☐ Smaller reporting company ☐
  Emerging growth company ☐

 

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. ☐

 

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

 

Yes ☐     No ☒

 

As of October 25, 2018, the registrant had 16,989,883 shares of common stock outstanding.

 

 

 

 

 

OLD LINE BANCSHARES, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

 

      Page
      Number
PART I. FINANCIAL INFORMATION    
         
  Item 1. Financial Statements   3
         
    Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017   3
         
    Consolidated Statements of Income (Unaudited) for the Three and Nine Months Ended September 30, 2018 and 2017   4
         
    Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2018 and 2017   5
         
    Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2018   6
         
    Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2018 and 2017   7
         
    Notes to Consolidated Financial Statements (Unaudited)   9
         
  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations   36
         
  Item 3. Quantitative and Qualitative Disclosures about Market Risk   66
         
  Item 4. Controls and Procedures   67
         
PART II.        
         
  Item 1. Legal Proceedings   68
         
  Item 1A. Risk Factors   68
         
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   68
         
  Item 3. Defaults Upon Senior Securities   68
         
  Item 4. Mine Safety Disclosures   68
         
  Item 5. Other Information   68
         
  Item 6. Exhibits   69
         
  Signatures   70

 

 

2

 

Part 1. Financial Information

 

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Balance Sheets

 

 

    September 30,   December 31,
    2018   2017
    (Unaudited)    
Assets
Cash and due from banks   $ 45,774,719     $ 33,562,652  
Interest bearing accounts     3,522,685       1,354,870  
Federal funds sold     1,008,801       256,589  
Total cash and cash equivalents     50,306,205       35,174,111  
Investment securities available for sale-at fair value     216,358,059       218,352,558  
Loans held for sale, fair value of $9,056,027 and $4,557,722     8,829,777       4,404,294  
Loans held for investment (net of allowance for loan losses of $6,980,050 and $5,920,586, respectively)     2,384,579,814       1,696,361,431  
Equity securities at cost     13,063,250       8,977,747  
Premises and equipment     43,060,727       41,173,810  
Accrued interest receivable     8,072,826       5,476,230  
Deferred income taxes     11,385,296       7,317,096  
Bank owned life insurance     67,490,846       41,612,496  
Annuity Plan     6,298,627       5,981,809  
Other real estate owned     1,469,166       2,003,998  
Goodwill     94,403,635       25,083,675  
Core deposit intangible     16,024,950       6,297,970  
Other assets     9,675,019       7,396,227  
Total assets   $ 2,931,018,197     $ 2,105,613,452  
                 
Liabilities and Stockholders’ Equity
Deposits                
Non-interest bearing   $ 581,339,177     $ 451,803,052  
Interest bearing     1,660,902,293       1,201,100,317  
Total deposits     2,242,241,470       1,652,903,369  
Short term borrowings     272,534,890       192,611,971  
Long term borrowings     38,304,981       38,106,930  
Accrued interest payable     1,643,666       1,471,954  
Supplemental executive retirement plan     6,123,518       5,893,255  
Income taxes payable           2,157,375  
Other liabilities     9,989,481       4,741,412  
Total liabilities     2,570,838,006       1,897,886,266  
Stockholders’ equity                
Common stock, par value $0.01 per share; 25,000,000 shares authorized; 16,988,883 and 12,508,332 shares issued and outstanding in 2018 and 2017, respectively     169,889       125,083  
Additional paid-in capital     293,139,653       148,882,865  
Retained earnings     74,167,389       61,054,487  
Accumulated other comprehensive loss     (7,296,740 )     (2,335,249 )
Total stockholders’ equity     360,180,191       207,727,186  
Total liabilities and stockholders’ equity   $ 2,931,018,197     $ 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   Nine Months Ended
    September 30,   September 30,
    2018   2017   2018   2017
Interest Income                                
Loans, including fees   $ 29,056,814     $ 18,022,324     $ 75,206,303     $ 49,153,228  
U.S. treasury securities     16,325       6,859       42,953       18,772  
U.S. government agency securities     89,953       78,713       262,905       194,549  
Corporate bonds     221,995       189,274       643,580       428,153  
Mortgage backed securities     563,384       548,779       1,690,299       1,657,619  
Municipal securities     498,200       455,227       1,498,163       1,301,582  
Federal funds sold     3,553       3,797       7,079       5,381  
Other     303,100       186,829       895,099       421,623  
Total interest income     30,753,324       19,491,802       80,246,381       53,180,907  
Interest expense                                
Deposits     4,098,787       1,926,590       9,551,755       5,174,640  
Borrowed funds     1,768,532       1,092,736       4,817,613       3,119,757  
Total interest expense     5,867,319       3,019,326       14,369,368       8,294,397  
Net interest income     24,886,005       16,472,476       65,877,013       44,886,510  
Provision for loan losses     307,870       135,701       1,235,023       855,108  
Net interest income after provision for loan losses     24,578,135       16,336,775       64,641,990       44,031,402  
Non-interest income                                
Account service charges     728,550       542,909       2,028,013       1,389,340  
Point of sale sponsorship program     711,577             1,385,079        
Gain on sales or calls of investment securities                       35,258  
Earnings on bank owned life insurance     520,785       297,656       1,274,777       861,112  
Gain (loss) on disposal of assets     (1,100 )     7,469       13,266       120,063  
Loss on write down of stock     (91,498 )           (152,496 )      
Gain on sale of loans                       94,714  
Rental income     204,714       188,505       602,208       498,961  
Income on marketable loans     411,850       482,641       1,342,201       1,840,218  
Other fees and commissions     320,457       632,191       1,295,359       1,162,058  
Total non-interest income     2,805,335       2,151,371       7,788,407       6,001,724  
Non-interest expense                                
Salaries and benefits     7,491,736       5,365,890       20,178,521       15,284,057  
Occupancy and equipment     2,349,691       1,828,593       6,572,733       5,137,273  
Data processing     659,926       443,453       1,971,747       1,161,647  
FDIC insurance and State of Maryland assessments     278,109       281,587       786,506       799,700  
Merger and integration     2,282,705       3,985,514       9,404,507       3,985,514  
Core deposit premium amortization     663,685       272,354       1,516,734       651,613  
Loss (gain) on sales of other real estate owned     26,266       4,100       80,738       (13,589 )
OREO expense     (99,957 )     200,959       113,032       256,170  
Directors fees     172,550       148,800       539,750       485,700  
Network services     127,226       133,301       302,038       437,140  
Telephone     269,070       218,316       725,976       598,618  
Other operating     2,441,331       1,757,586       6,539,421       5,318,191  
Total non-interest expense     16,662,338       14,640,453       48,731,703       34,102,034  
                                 
Income before income taxes     10,721,132       3,847,693       23,698,694       15,931,092  
Income tax expense     2,456,303       1,684,505       6,642,850       5,824,713  
Net income available to common stockholders     8,264,829       2,163,188       17,055,844       10,106,379  
                                 
Basic earnings per common share   $ 0.49     $ 0.18     $ 1.12     $ 0.90  
Diluted earnings per common share   $ 0.48     $ 0.18     $ 1.10     $ 0.88  
Dividend per common share   $ 0.10     $ 0.08     $ 0.28     $ 0.24  

 

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 September 30,   2018   2017
Net income   $ 8,264,829     $ 2,163,188  
                 
Other comprehensive income:                
Unrealized (loss) gain on securities available for sale, net of taxes of ($392,117), and $60,922, respectively     (1,032,857 )     93,526  
Reclassification adjustment for realized gain on securities available for sale included in net income, net of taxes of $0 and $0, respectively            
Other comprehensive income (loss)     (1,032,857 )     93,526  
Comprehensive income   $ 7,231,972     $ 2,256,714  

 

         
Nine Months Ended September 30,   2018   2017
Net income   $ 17,055,844     $ 10,106,379  
                 
Other comprehensive income:                
Unrealized (loss) gain on securities available for sale, net of taxes of ($1,708,971) and $2,386,772, respectively     (4,501,518 )     3,664,114  
Reclassification adjustment for realized gain on securities available for sale included in net income, gross of taxes of $0 and $13,908, respectively           (21,350 )
Other comprehensive income (loss)     (4,501,518 )     3,642,764  
Comprehensive income     12,554,326       13,749,143  

 

 

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.                       17,055,844             17,055,844  
Other comprehensive loss, net of income tax of $1,708,971                             (4,501,518 )     (4,501,518 )
Reclassification of stranded tax effect resulting from the Tax Cuts and Jobs Act                       459,973       (459,973 )      
Acquisition of Bay Bancorp, Inc.     4,408,087       44,081       142,601,614                   142,645,695  
Stock based compensation awards                 872,284                   872,284  
Stock options exercised     53,021       530       783,085                   783,615  
Restricted stock issued     19,443       195       (195 )                  
Common stock cash dividends $0.28 per share                       (4,402,915 )           (4,402,915 )
Balance September 30, 2018     16,988,883     $ 169,889     $ 293,139,653     $ 74,167,389     $ (7,296,740 )   $ 360,180,191  

 

 

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

 

6

 

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

    Nine Months Ended September 30,
    2018   2017
Cash flows from operating activities                
Net income   $ 17,055,844     $ 10,106,379  
Adjustments to reconcile net income to net cash provided by operating activities                
Depreciation and amortization     2,334,125       1,915,955  
Provision for loan losses     1,235,023       855,108  
Change in deferred loan fees net of costs     (791,450 )     (203,092 )
Gain on sales or calls of securities           (35,258 )
Amortization of premiums and discounts     636,357       729,996  
Origination of loans held for sale     (77,092,451 )     (71,093,124 )
Proceeds from sale of loans held for sale     72,666,968       76,782,499  
Loss on write down of stock     152,496        
Income on marketable loans     (1,342,201 )     (1,840,218 )
(Gain) loss on sales of other real estate owned     80,738       (13,589 )
Gain on the sale of loans           (94,714 )
Gain on sale of fixed assets     (13,266 )     (120,062 )
Amortization of intangible assets     1,516,734       651,613  
Deferred income taxes     278,439       30,193  
Stock based compensation awards     872,284       449,935  
Increase (decrease) in                
Accrued interest payable     171,712       (448,720 )
Income tax payable     (2,157,375 )     845,554  
Supplemental executive retirement plan     230,263       209,592  
Other liabilities     (436,815 )     (1,558,077 )
Decrease (increase) in                
Accrued interest receivable     (882,542 )     (83,399 )
Bank owned life insurance     (1,059,152 )     (717,522 )
Annuity plan     (316,818 )      
Income tax receivable     1,134,944        
Other assets     (86,942 )     1,899,050  
Net cash provided by operating activities   $ 14,186,915     $ 18,268,099  
Cash flows from investing activities                
Cash and cash equivalents of acquired bank, net of cash consideration     21,617,611       35,566,945  
Purchase of investment securities available for sale     (20,483,491 )     (39,289,497 )
Proceeds from disposal of investment securities                
Available for sale at maturity, call or paydowns     15,876,726       18,998,110  
Available for sale sold     51,650,175       53,802,337  
Loans made, net of principal collected     (141,256,263 )     (88,297,883 )
Purchase of bank owned life insurance     (8,500,000 )      
Proceeds from sale of other real estate owned     1,495,173       1,178,439  
Change in equity securities     (1,745,803 )     1,025,601  
Purchase of premises and equipment     (1,093,079 )     (3,075,960 )
Proceeds from the sale of premises and equipment     13,266       120,062  
Net cash used in investing activities     (82,425,685 )     (19,971,846 )
Cash flows from financing activities                
Net increase (decrease) in                
Time deposits     245,116,710       83,108,361  
Other deposits     (197,147,516 )     (32,221,712 )
Short term borrowings     38,822,919       (36,008,301 )
Long term borrowings     198,051       198,051  
Proceeds from stock options exercised     783,615       378,679  
Cash dividends paid-common stock     (4,402,915 )     (2,750,298 )
Net cash provided by financing activities     83,370,864       12,704,780  
                 
Net increase in cash and cash equivalents     15,132,094       11,001,033  
                 
Cash and cash equivalents at beginning of period     35,174,111       23,463,171  
Cash and cash equivalents at end of period   $ 50,306,205     $ 34,464,204  

 

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

 

7

 

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Cash Flows (continued)

(Unaudited)

 

 

    Nine Months Ended September 30,
    2018   2017
Supplemental Disclosure of Cash Flow Information:                
Cash paid during the period for:                
Interest   $ 14,197,656     $ 8,695,869  
Income taxes   $ 7,600,000     $ 5,018,000  
Supplemental Disclosure of Non-Cash Flow Operating Activities:                
Loans transferred to other real estate owned   $ 1,041,079     $ 422,848  

 

      2018       2017  
Fair value of assets and liabilities from acquisition:                
Fair value of assets acquired   $ 720,529,155     $ 310,974,425  
Other intangible assets acquired     11,243,714       15,297,318  
Fair value of liabilities assumed     (588,153,791 )     (285,421,333 )
Total merger consideration   $ 143,619,078     $ 40,850,410  

 

 

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

 

 

8

 

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, Baltimore City, Calvert, Carroll, Charles, Frederick, Harford, Howard, Montgomery, Prince George’s, and St. Mary’s Counties in Maryland and surrounding areas.

 

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 September 30, 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 Pronouncements 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.

 

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.

 

As a result of the BYBK acquisition, the Bank became a member of the POS network sponsorship program, which allows our customers to access several processing and settlement networks; when our customers use one of these networks, the Bank receives a transaction fee from the network.

 

9

 

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, point of sale sponsorship program, 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. The adoption of this ASU did not have a material impact on our consolidated financial position or consolidated results of operations.

 

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. We are currently evaluating third party software options to assist in implementation of policy and procedures in order to be compliant with ASU 2016-02 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.

 

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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. We expect to run our current model compared to the CECL model by the end of the second quarter in 2019. 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 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. We expect to implement ASU 2017-04 beginning with our upcoming goodwill testing during the fourth quarter of 2018. Old Line Bancshares does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

 

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In March 2017, FASB issued ASU 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 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 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 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 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 22 0). 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 from AOCI to retained earnings during the first quarter of 2018.

 

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements.   These amendments provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases).  The amendments also provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance (Topic 606) and certain criteria are met: If the non-lease component or components associated with the lease component are the predominant component of the combined component, an entity is required to account for the combined component in accordance with Topic 606. Otherwise, the entity must account for the combined component as an operating lease in accordance with Topic 842 The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for the Company). Old Line Bancshares expects to elect the transition options. ASU 2018-11 is not expected to have a material impact on the company’s consolidated financial statements.

 

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2. ACQUISITION OF BAY BANCORP, INC.

 

On April 13, 2018, Old Line Bancshares acquired Bay Bancorp, Inc. (“BYBK”), the parent company of Bay Bank, FSB (“Bay Bank”). Upon the consummation of the merger, each share of common stock of BYBK outstanding immediately before the merger 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 4,408,087 shares of its common stock in exchange for the shares of BYBK common stock in the merger. The aggregate merger consideration was approximately $143.6 million based on the closing sales price of Old Line Bancshares’ common stock on April 13, 2018.

 

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

 

At April 13, 2018, BYBK had consolidated assets of approximately $663 million. This merger added eleven banking locations located in BYBK’s primary market areas of Baltimore City and Anne Arundel, Baltimore, Howard and Harford Counties in Maryland.

 

The BYBK transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. Management made significant estimates and exercised significant judgment in accounting for the acquisition of BYBK. 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 BYBK’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   $ 973,383  
Purchase price assigned to shares exchanged for stock     142,645,695  
Total purchase price for BYBK acquisition     143,619,078  

 

 

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Fair Value of Assets Acquired    
Cash and due from banks   $ 22,590,994  
Investment securities     51,895,757  
Restricted equity securities, at cost     2,339,700  
Loans, net     546,215,988  
Premises and equipment     3,127,963  
Accrued interest receivable     1,714,054  
Accrued taxes receivable     1,912,807  
Deferred income taxes     2,637,668  
Bank owned life insurance     16,319,198  
Other real estate owned     1,041,079  
Core deposit intangible     11,243,714  
Other assets     1,413,987  
Total assets acquired   $ 662,452,909  
Fair Value of Liabilities assumed        
Deposits   $ 541,368,907  
Short term borrowings     41,100,000  
Other liabilities     5,684,884  
Total liabilities assumed   $ 588,153,791  
Fair Value of net assets acquired     74,299,118  
Total Purchase Price     143,619,078  
         
Goodwill recorded for BYBK   $ 69,319,960  

 

 

Comparative and Pro Forma Financial Information for the BYBK Acquisition

 

The adjusted results of Old Line Bancshares for the periods ended September 30, 2018 and 2017, as presented below, include the results of the acquired assets and assumed liabilities from the BYBK acquisition since the acquisition date of April 13, 2018; adjusted net income figures shown below exclude merger and integration expenses incurred during the periods presented. Merger-related expenses of $2.3 million and $9.4 million, respectively, are recorded in the consolidated statement of income for the three and nine months ended September 30, 2018, and include costs related to the conversion of systems, termination of contracts, branch closures and severance.

 

The following table discloses the impact of the merger with BYBK (excluding the impact of the merger-related expenses) for the three and nine months ended September 30, 2018. The table also presents certain pro forma information as if BYBK had been acquired on January 1, 2018. These results combine the historical results of BYBK into our consolidated statements of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition related activity, they are not necessarily indicative of what would have occurred had the acquisition actually taken place on January 1, 2018.

 

Old Line Bancshares incurred merger-related expenses of $2.3 million and $9.4 million, respectively, during the three and nine months ended September 30, 2018, which are excluded from the pro forma information below. In addition, no adjustments have been made to the pro formas to eliminate the $300 thousand BYBK provision for loans losses for each of the three and nine months ended September 30, 2018. No adjustments were made to reduce the impact of any other real estate owned (“OREO”) write downs, investment securities sold or repayment of borrowings recognized by BYBK in the three and nine months ended September 30, 2018. Old Line Bancshares expects to continue to record in the fourth quarter of 2018 expenses related to conversion, contract cancellation and personnel in connection with the BYBK merger. Old Line Bancshares also expects to achieve operating costs savings as a result of the BYBK acquisition that are not reflected in the pro forma amounts below.

 

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    Pro Forma   Pro Forma   Pro Forma   Pro Forma
    Three months ended
September 30, 2018
  Three months ended
September 30, 2017
  Nine months ended
September 30, 2018
  Nine months ended
September 30, 2017
Total revenues (net interest income plus noninterest income)   $ 27,691,340     $ 28,218,087     $ 82,628,420     $ 75,991,779  
Net proforma income available to common stockholders   $ 9,739,452     $ 7,245,186     $ 26,636,060     $ 17,323,544  

 

 

3. INVESTMENT SECURITIES

 

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

 

        Gross   Gross    
    Amortized   unrealized   unrealized   Estimated
    cost   gains   losses   fair value
September 30, 2018                                
Available for sale                                
U.S. treasury   $ 3,006,397     $     $ (14,834 )   $ 2,991,563  
U.S. government agency     18,791,500             (780,168 )     18,011,332  
Corporate bonds     18,117,144       24,548       (31,480 )     18,110,212  
Municipal securities     79,459,426       6,219       (3,771,161 )     75,694,484  
Mortgage backed securities:                                
FHLMC certificates     19,663,844       1,115       (1,083,073 )     18,581,886  
FNMA certificates     58,902,507             (3,311,751 )     55,590,756  
GNMA certificates     28,484,140       116       (1,106,430 )     27,377,826  
Total available for sale securities   $ 226,424,958     $ 31,998     $ (10,098,897 )   $ 216,358,059  
                                 
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  

 


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At September 30, 2018 and December 31, 2017, securities with unrealized losses segregated by length of impairment were as follows:

 

    September 30, 2018
    Less than 12 months   12 Months or More   Total
    Fair   Unrealized   Fair   Unrealized   Fair   Unrealized
    value   losses   value   losses   value   losses
U.S. treasury   $ 2,991,563     $ 14,834     $     $     $ 2,991,563     $ 14,834  
U.S. government agency     4,207,260       175,329       13,804,072       604,839       18,011,332       780,168  
Corporate bonds     8,985,665       31,480                   8,985,665       31,480  
Municipal securities     32,490,897       1,168,344       37,832,127       2,602,817       70,323,024       3,771,161  
Mortgage backed securities                                                
FHLMC certificates     1,724,767       24,379       16,777,049       1,058,694       18,501,816       1,083,073  
FNMA certificates     3,562,727       104,100       52,028,029       3,207,651       55,590,756       3,311,751  
GNMA certificates     6,644,013       123,405       17,418,219       983,025       24,062,233       1,106,430  
Total   $ 60,606,892     $ 1,641,871     $ 137,859,496     $ 8,457,026     $ 198,466,389     $ 10,098,897  

 

    December 31, 2017
    Less than 12 months   12 Months or More   Total
    Fair   Unrealized   Fair   Unrealized   Fair   Unrealized
    value   losses   value   losses   value   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 September 30, 2018 and December 31, 2017, we had 135 and 56 investment securities, respectively, in an unrealized loss position for 12 months or more and 73 and 56 securities, respectively, in an unrealized loss position for less than 12 months.  We consider all unrealized losses on securities as of September 30, 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 September 30, 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 September 30, 2018, we received $4.3 million in proceeds from maturities and principal pay-downs on investment securities. The net proceeds of these transactions were used to reduce our Federal Home Loan Bank of Atlanta (“FHLB”) borrowings and fund loan growth. During the three months ended September 30, 2017, we received $45.8 million in proceeds from sales, maturities or calls of, and principal pay-downs on, investment securities and realized no gains or losses. The net proceeds of these transactions were used to pay down our FHLB borrowings and purchase new investment securities. In July 2017 we acquired a $42.3 million investment portfolio as a result of our acquisition of DCB Bancshares, Inc. (“DCB”), the parent company of Damascus Community Bank (“Damascus”). The securities sold during the three months ended September 30, 2017 included $41.8 million of securities that we acquired in the DCB merger, which we sold immediately after the closing of the merger, resulting in no gain or loss on such sales.

 

During the nine months ended September 30, 2018, we received $67.5 million in proceeds from sales, maturities or calls of, and principal pay-downs on, investment securities. The securities sold include $51.7 million of securities that we acquired in the BYBK merger and sold immediately after the closing of the merger, resulting in no gain or loss on such sales. During the nine months ended September 30, 2017, we received $72.5 million in proceeds from sales, maturities or calls of, and principal pay-downs on, investment securities, and realized gains of $164 thousand and losses of $129 thousand for total realized net gain of $35 thousand. We used the net proceeds of these transactions to re-balance our investment portfolio, which resulted in an overall slightly higher yield on our security investments. The securities sold included $41.8 million of securities that we acquired in the DCB merger and sold immediately after the closing of the merger, resulting in no gain or loss on such sales.

 

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Contractual maturities and pledged securities at September 30, 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 contractual maturity date. However, we receive payments on a monthly basis.

 

    Available for Sale
    Amortized   Fair
September 30, 2018   cost   value
         
Maturing                
Within one year   $ 4,283,142     $ 4,271,753  
Over one to five years     4,282,063       4,254,785  
Over five to ten years     59,101,418       57,063,268  
Over ten years     158,758,335       150,768,253  
Total   $ 226,424,958     $ 216,358,059  
Pledged securities   $ 65,861,752     $ 62,395,938  

 

4. LOANS

 

Major classifications of loans held for investment are as follows:

 

    September 30, 2018   December 31, 2017
    Legacy (1)   Acquired   Total   Legacy (1)   Acquired   Total
                         
Commercial Real Estate                                                
Owner Occupied   $ 275,339,040     $ 152,433,104     $ 427,772,144     $ 268,128,087     $ 87,658,855     $ 355,786,942  
Investment     601,113,264       197,662,549       798,775,813       485,536,921       52,926,739       538,463,660  
Hospitality     148,312,837       13,265,447       161,578,284       164,193,228       7,395,186       171,588,414  
Land and A&D     91,987,559       24,883,469       116,871,028       67,310,660       9,230,771       76,541,431  
Residential Real Estate                                                
First Lien-Investment     90,285,266       50,629,554       140,914,820       79,762,682       21,220,518       100,983,200  
First Lien-Owner Occupied     98,966,442       142,135,278       241,101,720       67,237,699       62,524,794       129,762,493  
Residential Land and A&D     49,708,005       18,494,088       68,202,093       35,879,853       6,536,160       42,416,013  
HELOC and Jr. Liens     20,581,673       43,445,979       64,027,652       21,520,339       16,019,418       37,539,757  
Commercial and Industrial     215,729,656       97,412,805       313,142,461       154,244,645       33,100,688       187,345,333  
Consumer     17,671,242       38,697,723       56,368,965       10,758,589       49,082,751       59,841,340  
Total loans     1,609,694,984       779,059,996       2,388,754,980       1,354,572,703       345,695,880       1,700,268,583  
Allowance for loan losses     (6,698,812 )     (281,238 )     (6,980,050 )     (5,738,534 )     (182,052 )     (5,920,586 )
Deferred loan costs, net     2,804,884             2,804,884       2,013,434             2,013,434  
Net loans   $ 1,605,801,056     $ 778,778,758     $ 2,384,579,814     $ 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, DCB in July 2017, and BYBK, the parent company of Bay Bank, in April 2018, 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, Damascus and Bay Bank.

 

17

 

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. Our lending staff follows pricing guidelines established periodically by our management team. In an effort to manage risk, prior to funding, the loan committee, consisting of four non-employee members of the board of directors and four executive officers, must approve by majority vote all credit decisions in excess of a lending officer’s lending authority. Management believes that we employ experienced lending officers, secure appropriate collateral and carefully monitor the financial condition of our borrowers and the concentrations of loans in the portfolio.

 

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 $1.5 billion and $1.1 billion at September 30, 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%.

 

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 September 30, 2018, we had approximately $161.6 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 $514.2 million and $310.7 million at September 30, 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 at least 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.

 

18

 

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.

 

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 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 of 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.

 

19

 

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.

 

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, Baltimore City, Calvert, Carroll, Charles, Frederick, Harford, Howard, 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.

 

20

 

The table below presents an age analysis of the loans held for investment portfolio at September 30, 2018 and December 31, 2017.

 

Age Analysis of Past Due Loans

 

    September 30, 2018   December 31, 2017
    Legacy   Acquired   Total   Legacy   Acquired   Total
Current   $ 1,600,670,724     $ 766,584,894     $ 2,367,255,618     $ 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     2,689,179             2,689,179                    
Investment     438,456       1,819,810       2,258,266       1,089,022       843,706       1,932,728  
Hospitality           4,915       4,915                    
Land and A&D     1,015,998             1,015,998       254,925       158,899       413,824  
Residential Real Estate:                                                
First Lien-Investment     180,764       718,673       899,437       270,822       506,600       777,422  
First Lien-Owner Occupied     93,817       2,705,941       2,799,758       229       2,457,299       2,457,528  
Land and A&D     1,032,599       170,000       1,202,599                    
HELOC and Jr. Liens     325,914       1,026,737       1,352,651             130,556       130,556  
Commercial and Industrial     290,290       295,841       586,131       51,088       261,081       312,169  
Consumer     284,843       1,378,380       1,663,223       26,134       1,017,195       1,043,329  
Total 30-89 days past due     6,351,860       8,120,297       14,472,157       1,692,220       5,375,336       7,067,556  
90 or more days past due                                                
Commercial Real Estate:                                                
Owner Occupied     1,042,909       179,718       1,222,627                    
Investment     291,278             291,278                    
Residential Real Estate:                                                
First Lien-Owner Occupied           143,625       143,625             37,560       37,560  
Land and A&D     417,110             417,110                          
HELOC and Jr. Liens           308,796       308,796                    
Commercial     29,134             29,134                    
Consumer     4,476       101,079       105,555             78,407       78,407  
Total 90 or more days past due     1,784,907       733,218       2,518,125             115,967       115,967  
Total accruing past due loans     8,136,767       8,853,515       16,990,282       1,692,220       5,491,303       7,183,523  
                                                 
Commercial Real Estate:                                                
Owner Occupied           412,785       412,785             228,555       228,555  
Investment           179,091       179,091                    
Land and A&D           151,780       151,780             190,193       190,193  
Residential Real Estate:                                                
First Lien-Investment     192,501       219,681       412,182       192,501             192,501  
First Lien-Owner Occupied     266,811       1,734,910       2,001,721       281,130       872,272       1,153,402  
HELOC and Jr. Liens           126,240       126,240                    
Land and A&D     277,704       594,505       872,209                    
Commercial and Industrial     150,477       150,924       301,401                    
Consumer           51,671       51,671                    
Non-accruing loans:     887,493       3,621,587       4,509,080       473,631       1,291,020       1,764,651  
Total Loans   $ 1,609,694,984     $ 779,059,996     $ 2,388,754,980     $ 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 September 30, 2018 and December 31, 2017.

 

21

 

    Impaired Loans                
                Three months September 30, 2018   Nine months September 30, 2018
    Unpaid           Average   Interest   Average   Interest
    Principal   Recorded   Related   Recorded   Income   Recorded   Income
    Balance   Investment   Allowance   Investment   Recognized   Investment   Recognized
Legacy                            
With no related allowance recorded:                                                        
Commercial Real Estate:                                                        
Owner Occupied   $ 1,752,561     $ 1,752,561     $     $ 1,758,968     $ 13,509       1,773,719     $ 55,910  
Investment     1,701,018       1,701,018             1,708,471       18,586       1,723,700       69,746  
Residential Real Estate:                                                        
First Lien-Investment                                          
First Lien-Owner Occupied     216,720       216,720             229,349       743       230,150       7,192  
Land and A&D     277,704       277,704             277,704             277,704        
Commercial and Industrial     509,772       509,772             515,840       2,201       526,281       13,287  
With an allowance recorded:                                                        
Commercial Real Estate:                                                        
Investment                                          
Residential Real Estate:                                                        
First Lien-Investment     192,501       192,501       39,420       192,501             192,501        
First Lien-Owner Occupied     50,091       50,091       37,075       55,510       290       56,322       1,424  
Commercial and Industrial     93,892       93,892       93,892       94,163       812       94,932       3,622  
Total legacy impaired     4,794,259       4,794,259       170,387       4,832,506       36,141       4,875,309       151,181  
Acquired(1)                                                        
With no related allowance recorded:                                                        
Commercial Real Estate:                                                        
Owner Occupied     516,170       465,723             590,642             591,057       3,281  
Investment     221,197       200,954             627,792       10,855       628,745       25,790  
Land and A&D     243,329       106,780             349,809             349,809        
Residential Real Estate:                                                        
First Lien-Owner Occupied     2,028,054       1,915,795             2,030,925       4,321       2,035,333       26,246  
First Lien-Investment     224,868       224,868             238,294             238,294       4,664  
Land and A&D     654,644       451,627             767,290             767,315       1,518  
HELOC and Jr. Liens     128,063       128,063             128,063             128,063       964  
Commercial     1,031,496       167,560             1,303,135       15,576       1,303,808       23,427  
Consumer     52,730       52,730             85,421             92,987       1,438  
With an allowance recorded:                                                        
Commercial Real Estate:                                                        
Land and A&D     328,851       45,000       45,000       328,851             329,705        
Residential Real Estate:                                                        
First Lien-Owner Occupied     253,437       253,437       88,723       276,861             275,590        
Land and A&D     154,297       154,297       96,391       161,153             159,370        
Commercial and Industrial     68,888       68,888       24,517       69,324       589       70,367       2,683  
Consumer     27,009       27,009       26,607       27,456       291       27,720       533  
Total acquired impaired     5,933,033       4,262,731       281,238       6,985,016       31,632       6,998,163       90,544  
Total impaired   $ 10,727,292     $ 9,056,990     $ 451,625     $ 11,817,522     $ 67,773       11,873,472     $ 241,725  

_______________________

(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.

 


22

 

Impaired Loans
Twelve months ended 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 September 30, 2018 consisted of seven loans for an aggregate of $2.4 million compared to seven loans for an aggregate of $2.7 million at December 31, 2017.

 

We had no loan modifications reported as TDRs during the three months ended September 30, 2018 or 2017. The following table includes the recorded investment in and number of modifications reported as TDRs during the nine months ended September 30, 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. TDR’s consisted on one consumer loan of which we extended the original maturity date from 75 months to 117 months. We had no loans that were modified as a TDR that defaulted during the three or nine month periods ended September 30, 2018 or 2017.

 

23

 

    Loans Modified as a TDR for the nine months ended
    September 30, 2018   September 30, 2017
        Pre-   Post       Pre-   Post
        Modification   Modification       Modification   Modification
        Outstanding   Outstanding       Outstanding   Outstanding
Troubled Debt Restructurings—   # of   Recorded   Recorded   # of   Recorded   Recorded
(Dollars in thousands)   Contracts   Investment   Investment   Contracts   Investment   Investment
Legacy                        
Commercial Real Estate                       1       1,596,740       1,572,976  
Commercial and Industrial                       1       414,324       399,351  
Consumer     1       28,009       27,009                    
Total legacy TDR's     1     $ 28,009     $ 27,009       2     $ 2,011,064     $ 1,972,327  

 

Acquired impaired loans

 

The following table documents changes in the accretable (premium) discount on acquired impaired loans during the nine months ended September 30, 2018 and 2017, along with the outstanding balances and related carrying amounts for the beginning and end of those respective periods.

 

    September 30, 2018   September 30, 2017
Balance at beginning of period   $ 115,066     $ (22,980 )
Additions due to BYBK acquisition     50,984        
Additions due to DCB acquisition           99,981  
Accretion of fair value discounts     (873,308 )     (83,099 )
Reclassification (to)/from non-accretable discount     847,153       (15,428 )
Balance at end of period   $ 139,895     $ (21,526 )

 

    Contractually    
    Required Payments    
    Receivable   Carrying Amount
At September 30, 2018   $ 17,975,448     $ 14,109,972  
At December 31, 2017     8,277,731       6,617,774  
At September 30, 2017     8,301,260       6,611,444  
At December 31, 2016     9,597,703       7,558,415  

 

For our acquisition of Bay Bank on April 13, 2018, we recorded all loans acquired at the estimated fair value on their purchase date with no carryover of the related allowance for loan losses. On the acquisition date, we segregated the loan portfolio into two loan pools, performing and non-performing.

 

We had an independent third party determine the net discounted value of cash flows on 1,991 performing loans totaling $520.5 million. The valuation took into consideration the loans’ underlying characteristics including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-value ratios, loss exposures, and remaining balances. These performing loans were segregated into pools based on loan and payment type and, in some cases, risk grade. The effect of this fair valuation process was a net discount of $8.3 million at acquisition.

 

We also individually evaluated 132 impaired loans totaling $13.5 million to determine their fair value as of the April 13, 2018 measurement date. In determining the fair value for each individually evaluated impaired loan, we considered a number of factors including the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral and net present value of cash flows we expect to receive, among others.

 

We established a credit related non-accretable difference of $3.2 million relating to these purchased credit impaired loans, reflected in the recorded fair value.

 

24

 

We re-classified $21.7 million (net of fair value marks) of our acquired loans to available for sale. These loans consisted primarily of purchase credit impaired loans that we were working to market with brokers. Settlement occurred on these loans during the third quarter of 2018, resulting in no gain or loss on the sale.

 

The following table outlines the contractually required payments receivable, cash flows we expect to receive, non-accretable credit adjustment and the accretable yield for all of Bay Bank’s impaired loans as of the acquisition date, April 13, 2018.

 

    Purchased
    Credit
    Impaired
    (in millions)
Contractually required principal at acquisition   $ 14,766  
Contractual cash flows not expected to be collected (non-accretable difference)     (3,201 )
Expected cash flows at acquisition-Total     11,565  

 

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.

 

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.

 

25

 

The following tables outline the class of loans by risk rating at September 30, 2018 and December 31, 2017:

 

At September 30, 2018   Legacy   Acquired   Total
Risk Rating                        
Pass(1 - 5)                        
Commercial Real Estate:                        
Owner Occupied   $ 269,706,878     $ 147,139,598     $ 416,846,476  
Investment     598,321,509       195,074,793       793,396,302  
Hospitality     148,312,837       13,260,532       161,573,369  
Land and A&D     89,964,201       24,431,791       114,395,992  
Residential Real Estate:                        
First Lien-Investment     89,462,345       47,521,236       136,983,581  
First Lien-Owner Occupied     98,636,095       137,076,969       235,713,064  
Land and A&D     47,318,505       17,796,181       65,114,686  
HELOC and Jr. Liens     20,581,673       43,265,816       63,847,489  
Commercial and Industrial     213,311,801       94,484,613       307,796,414  
Consumer     17,671,242       38,541,584       56,212,826  
Total pass     1,593,287,086       758,593,113       2,351,880,199  
Special Mention(6)                        
Commercial Real Estate:                        
Owner Occupied     424,315       3,074,210       3,498,525  
Investment     1,090,737       1,304,518       2,395,255  
Hospitality           4,915       4,915  
Land and A&D     2,023,358       299,898       2,323,256  
Residential Real Estate:                        
First Lien-Investment     292,445       1,738,070       2,030,515  
First Lien-Owner Occupied     63,536       1,576,527       1,640,063  
Land and A&D     2,111,796       103,402       2,215,198  
HELOC and Jr. Liens                  
Commercial and Industrial     588,904       97,737       686,641  
Consumer           70,382       70,382  
Total special mention     6,595,091       8,269,659       14,864,750  
Substandard(7)                        
Commercial Real Estate:                        
Owner Occupied     5,207,847       2,219,296       7,427,143  
Investment     1,701,018       1,283,238       2,984,256  
Hospitality                  
Land and A&D           151,780       151,780  
Residential Real Estate:                        
First Lien-Investment     530,476       1,370,248       1,900,724  
First Lien-Owner Occupied     266,811       3,481,782       3,748,593  
Land and A&D     277,704       594,505       872,209  
HELOC and Jr. Liens           180,163       180,163  
Commercial and Industrial     1,828,951       2,830,455       4,659,406  
Consumer           85,757       85,757  
Total substandard     9,812,807       12,197,224       22,010,031  
Doubtful(8)                  
Loss(9)                  
Total   $ 1,609,694,984     $ 779,059,996     $ 2,388,754,980  

 

 

26

 

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  

 

 

27

 

The following table details activity in the allowance for loan losses by portfolio segment for the three and nine month periods ended September 30, 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.

 

    Commercial   Commercial   Residential        
Three Months Ended September 30, 2018   and Industrial   Real Estate   Real Estate   Consumer   Total
Beginning balance   $ 1,680,448     $ 4,196,752     $ 749,630     $ 77,747     $ 6,704,577  
Provision for loan losses     (141,751 )     303,547       34,609       111,465       307,870  
Recoveries     65,819       417       3,119       5,127       74,482  
Total     1,604,516       4,500,716       787,358       194,339       7,086,929  
Loans charged off                       (106,879 )     (106,879 )
Ending Balance   $ 1,604,516     $ 4,500,716     $ 787,358     $ 87,460     $ 6,980,050  

 

    Commercial   Commercial   Residential        
Nine Months Ended September 30, 2018   and Industrial   Real Estate   Real Estate   Consumer   Total
Beginning balance   $ 1,262,030     $ 3,783,735     $ 844,355     $ 30,466     $ 5,920,586  
Provision for loan losses     273,017       716,147       (70,403 )     316,262       1,235,023  
Recoveries     69,469       834       15,230       11,980       97,513  
Total     1,604,516       4,500,716       789,182       358,708       7,253,122  
Loans charged off                 (1,824 )     (271,248 )     (273,072 )
Ending Balance   $ 1,604,516     $ 4,500,716     $ 787,358     $ 87,460     $ 6,980,050  
Amount allocated to:                                        
Legacy Loans:                                        
Individually evaluated for impairment   $ 93,892     $     $ 76,495     $     $ 170,387  
Other loans not individually evaluated     1,441,108       4,500,716       525,749       60,852       6,528,425  
Acquired Loans:                                        
Individually evaluated for impairment     69,516             185,114       26,608       281,238  
Ending balance   $ 1,604,516     $ 4,500,716     $ 787,358     $ 87,460     $ 6,980,050  

 

        Commercial   Residential        
Three Months Ended September 30, 2017   Commercial   Real Estate   Real Estate   Consumer   Total
Beginning balance   $ 1,318,247     $ 3,789,423     $ 793,795     $ 10,377     $ 5,911,842  
Provision for loan losses     81,378       113,694       (97,691 )     38,320       135,701  
Recoveries     786       417             6,280       7,483  
Total     1,400,411       3,903,534       696,104       54,977       6,055,026  
Loans charged off     (202,528 )                 (36,311 )     (238,839 )
Ending Balance   $ 1,197,883     $ 3,903,534     $ 696,104     $ 18,666     $ 5,816,187  

 

        Commercial   Residential        
Nine Months Ended September 30, 2017   Commercial   Real Estate   Real Estate   Consumer   Total
Beginning balance   $ 1,372,235     $ 3,990,152     $ 823,520     $ 9,562     $ 6,195,469  
Provision for loan losses     596,350       352,054       (126,048 )     32,752       855,108  
Recoveries     2,350       1,250       900       31,811       36,311  
Total     1,970,935       4,343,456       698,372       74,125       7,086,888  
Loans charged off     (773,052 )     (439,922 )     (2,268 )     (55,459 )     (1,270,701 )
Ending Balance   $ 1,197,883     $ 3,903,534     $ 696,104     $ 18,666     $ 5,816,187  
Amount allocated to:                                        
Legacy Loans:                                        
Individually evaluated for impairment   $ 96,712     $ 69,903     $ 35,647     $     $ 202,262  
Other loans not individually evaluated     1,076,654       3,753,559       582,994       18,666       5,431,873  
Acquired Loans:                                        
Individually evaluated for impairment     24,517       80,072       77,463             182,052  
Ending balance   $ 1,197,883     $ 3,903,534     $ 696,104     $ 18,666     $ 5,816,187  

 

 

28

 

Our recorded investment in loans at September 30, 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:

 

    Commercial   Commercial   Residential        
September 30, 2018   and Industrial   Real Estate   Real Estate   Consumer   Total
Legacy loans:                                        
Individually evaluated for impairment with specific reserve   $ 93,892     $     $ 242,592     $     $ 336,484  
Individually evaluated for impairment without specific reserve     509,772       3,453,579       494,423             4,457,774  
Other loans not individually evaluated     215,125,991       1,113,299,121       258,804,372       17,671,242       1,604,900,726  
Acquired loans:                                        
Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition)     68,888       45,000       407,735       27,009       548,632  
Individually evaluated for impairment without specific reserve (ASC 310-20 at acquisition)     167,560       773,457       2,720,353       52,730       3,714,100  
Individually evaluated for impairment without specific reserve (ASC 310-30 at acquisition)     559,248       7,872,328       5,664,394       14,000       14,109,970  
Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition)     96,617,110       379,553,784       245,912,416       38,603,984       760,687,294  
Ending balance   $ 313,142,461     $ 1,504,997,269     $ 514,246,285     $ 56,368,965     $ 2,388,754,980  

 

 

        Commercial   Residential        
September 30, 2017   Commercial   Real Estate   Real Estate   Consumer   Total
Legacy loans:                                        
Individually evaluated for impairment with specific reserve   $ 96,712     $ 597,053     $ 411,383     $     $ 1,105,148  
Individually evaluated for impairment without specific reserve     399,351       2,981,975       274,701             3,656,027  
Other loans not individually evaluated     143,238,162       941,537,848       207,916,920       7,076,344       1,299,769,274  
Acquired loans:                                        
Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition)     73,167       149,226       250,194             472,587  
Individually evaluated for impairment without specific reserve (ASC 310-20 at acquisition)           298,279       1,192,153             1,490,432  
Individually evaluated for impairment without specific reserve (ASC 310-30 at acquisition)           3,492,464       3,156,119       14,000       6,662,583  
Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition)     39,101,483       157,924,243       106,619,402       53,712,972       357,358,100  
Ending balance   $ 182,908,875     $ 1,106,981,088     $ 319,820,872     $ 60,803,316     $ 1,670,514,151  

 

 

5. OTHER REAL ESTATE OWNED

 

At September 30, 2018 and December 31, 2017, the fair value of other real estate owned was $1.5 million and $2.0 million, respectively. As a result of the acquisitions of Maryland Bankcorp, WSB Holdings, Regal and BYBK, 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, Regal Bank and Bay Bank or obtained as a result of loans originated by MB&T, WSB, Regal Bank and Bay Bank (acquired); we did not acquire any OREO properties in the DCB acquisition. We are currently aggressively either marketing these properties for sale or improving them in preparation for sale.

 

29

 

The following outlines the transactions in OREO during the period.

 

Nine months ended September 30, 2018   Legacy   Acquired   Total
Beginning balance   $ 425,000     $ 1,578,998     $ 2,003,998  
Acquisition of Bay Bancorp, Inc.           1,041,079       1,041,079  
Sales/deposits on sales     (425,000 )     (1,070,173 )     (1,495,173 )
Net realized gain/(loss)           (80,738 )     (80,738 )
Total end of period   $     $ 1,469,166     $ 1,469,166  

 

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 OREO or, where management has both the intent and ability to recover its losses through a government guarantee, as a foreclosure claim receivable. At September 30, 2018, residential foreclosures classified as OREO totaled $686 thousand. We had three loans for an aggregate of $597 thousand secured by residential real estate in process of foreclosure at September 30, 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   Nine Months Ended
    September 30,   September 30,
    2018   2017   2018   2017
Weighted average number of shares     16,988,883       11,969,536       15,277,219       11,286,215  
Dilutive average number of shares     17,187,837       12,172,868       15,485,452       11,496,659  

 

7. STOCK-BASED COMPENSATION

 

For the three months ended September 30, 2018 and 2017, we recorded stock-based compensation expense of $302,974 and $187,904, respectively.  For the nine months ended September 30, 2018 and 2017, we recorded stock-based compensation expense of $872,284 and $449,935, respectively. At September 30, 2018, there was $1.6 million of total unrecognized compensation cost related to non-vested stock options that we expect to realize over the next 2.0 years. As of September 30, 2018, there were 212,005 shares remaining available for future issuance under the 2010 equity incentive plan. The officers exercised 53,021 options during the nine month period ended September 30, 2018 compared to 14,300 options exercised during the nine month period ended September 30, 2017.

 

For purposes of determining estimated fair value of stock options, we have computed the estimated fair value of all stock-based compensation using the Black-Scholes option pricing model and, for stock options granted prior to December 31 2017, we have applied the assumptions set forth in Old Line Bancshares’ Annual Report on Form 10-K for the year ended December 31, 2017.  Restricted stock awards are valued at the current stock price on the date of the award. During the nine months ended September 30, 2018, there were 50,000 stock options granted compared to no stock options granted during the nine months ended September 30, 2017.  The weighted average grant date fair value of the 2018 stock options is $8.90 and was computed using the Black-Scholes option pricing model under similar assumptions.

 

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During the nine months ended September 30, 2018 and 2017, we granted 19,443 and 40,713 restricted common stock awards, respectively. The weighted average grant date fair value of these restricted stock awards was $32.00 at September 30, 2018.  At September 30, 2018, there was $3.6 million of total unrecognized compensation cost related to restricted stock awards that we expect to realize over the next 2.5 years. There were no restricted shares forfeited during the nine month periods ended September 30, 2018 or 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. There were no transfers between levels during the three and nine months ended September 30, 2018 or the year ended December 31, 2017.

 

At September 30, 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, and 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.

 

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

    At September 30, 2018 (In thousands)
        Quoted Prices in   Other   Significant   Total Changes
        Active Markets for   Observable   Unobservable   in Fair Values
        Identical Assets   Inputs   Inputs   Included in
    Carrying Value   (Level 1)   (Level 2)   (Level 3)   Period Earnings
Available-for-sale:                    
Treasury securities   $ 2,992     $ 2,992     $     $     $  
U.S. government agency     18,011             18,011              
Corporate bonds     18,110                   18,110        
Municipal securities     75,694             75,694              
FHLMC MBS     18,582             18,582              
FNMA MBS     55,591             55,591              
GNMA MBS     27,378             27,378              
Total recurring assets at fair value   $ 216,358     $ 2,992     $ 195,256     $ 18,110     $  

 

 

    At December 31, 2017 (In thousands)
        Quoted Prices in   Other   Significant   Total Changes
        Active Markets for   Observable   Unobservable   in Fair Values
        Identical Assets   Inputs   Inputs   Included in
    Carrying Value   (Level 1)   (Level 2)   (Level 3)   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:

 

(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     (48 )
Purchases, issuances, sales and settlements     3,500  
Transfers into or out of level 3      
Balance at September 30, 2018   $ 18,110  

 

 

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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 September 30, 2018 and December 31, 2017 are included in the tables below.

 

We also measure certain non-financial assets such as OREO, 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 September 30, 2018 (In thousands)
        Quoted Prices in   Other   Significant
        Active Markets for   Observable   Unobservable
        Identical Assets   Inputs