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EX-32 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - OLD LINE BANCSHARES INCex32.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - OLD LINE BANCSHARES INCex31_2.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - OLD LINE BANCSHARES INCex31_1.htm
 

 
 
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 June 30, 2017
 
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☒ No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐ (Do not check if a smaller reporting company)
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 August 1, 2017, the registrant had  12,451,220 shares of common stock outstanding.
 

 
 

OLD LINE BANCSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
 
 
 
Page
 
 
Number
 
 
 
PART I.
FINANCIAL INFORMATION
  3
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Consolidated Balance Sheets as of June 30, 2017 (Unaudited) and December 31, 2016
  3
 
 
 
 
Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June 30, 2017 and 2016
  4
 
 
 
 
Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2017 and 2016
  5
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Six Months Ended June 30, 2017
  6
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2017 and 2016
  7
 
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
8
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
34
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
62
 
 
 
Item 4.
Controls and Procedures
63
 
 
 
PART II.
 
 
 
 
 
Item 1.
Legal Proceedings
63
 
 
 
Item 1A.
Risk Factors
63
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
64
 
 
 
Item 3.
Defaults Upon Senior Securities
64
 
 
 
Item 4.
Mine Safety Disclosures
64
 
 
 
Item 5.
Other Information
64
 
     
 
Item 6.
Exhibits 65  
 64
 
     
 
Signatures
 
 65
 
 
 
 
 
Part 1. Financial Information
 
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Balance Sheets
 
 
 
 June 30,
 
 
December 31,
 
 
 
2017
 
 
2016
 
 
 
(Unaudited)
 
 
 
 
 
Assets
 
Cash and due from banks
 $25,025,269 
 $22,062,912 
Interest bearing accounts
  1,136,343 
  1,151,917 
Federal funds sold
  302,970 
  248,342 
Total cash and cash equivalents
  26,464,582 
  23,463,171 
Investment securities available for sale-at fair value
  198,372,453 
  199,505,204 
Loans held for sale, fair value of $6,857,924 and $8,707,516
  6,615,208 
  8,418,435 
Loans held for investment (net of allowance for loan losses of $5,911,842 and $6,195,469, respectively)
  1,446,573,249 
  1,361,175,206 
Equity securities at cost
  9,972,744 
  8,303,347 
Premises and equipment
  36,999,988 
  36,744,704 
Accrued interest receivable
  4,144,803 
  4,278,229 
Deferred income taxes
  7,323,124 
  9,578,350 
Bank owned life insurance
  38,025,982 
  37,557,566 
Other real estate owned
  2,895,893 
  2,746,000 
Goodwill
  9,786,357 
  9,786,357 
Core deposit intangible
  3,141,162 
  3,520,421 
Other assets
  4,001,391 
  3,942,640 
Total assets
 $1,794,316,936 
 $1,709,019,630 
 
    
    
 
Liabilities and Stockholders’ Equity
 
Deposits
    
    
Non-interest bearing
 $366,468,569 
 $331,331,263 
Interest bearing
  1,012,960,448 
  994,549,269 
Total deposits
  1,379,429,017 
  1,325,880,532 
Short term borrowings
  203,781,308 
  183,433,892 
Long term borrowings
  37,974,308 
  37,842,567 
Accrued interest payable
  1,340,591 
  1,269,356 
Supplemental executive retirement plan
  5,753,527 
  5,613,799 
Income taxes payable
  1,357,159 
  18,706 
Other liabilities
  3,633,602 
  4,293,993 
Total liabilities
  1,633,269,512 
  1,558,352,845 
Stockholders’ equity
    
    
Common stock, par value $0.01 per share; 25,000,000 shares authorized; 10,956,130 and 10,910,915 shares issued and outstanding in 2017 and 2016, respectively
  109,561 
  109,109 
Additional paid-in capital
  107,333,216 
  106,692,958 
Retained earnings
  55,032,717 
  48,842,026 
Accumulated other comprehensive loss
  (1,428,070)
  (4,977,308)
Total Old Line Bancshares, Inc. stockholders’ equity
  161,047,424 
  150,666,785 
Total liabilities and stockholders’ equity
 $1,794,316,936 
 $1,709,019,630 
 
    
    
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
 
 
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Income
(Unaudited)
 
 
 
Three Months Ended
 
 
Six Months Ended
 
 
 
 June 30,
 
 
 June 30,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
Interest Income
 
 
 
 
 
 
 
 
 
 
 
 
Loans, including fees
 $15,765,250 
 $13,562,643 
 $31,130,904 
 $26,619,823 
U.S. treasury securities
  6,847 
  4,997 
  11,914 
  8,774 
U.S. government agency securities
  67,333 
  85,686 
  115,837 
  211,418 
Corporate bonds
  121,042 
   
  238,878 
   
Mortgage backed securities
  554,411 
  494,145 
  1,108,840 
  1,007,450 
Municipal securities
  410,801 
  371,596 
  846,355 
  731,032 
Federal funds sold
  971 
  376 
  1,583 
  1,501 
Other
  127,116 
  94,297 
  234,794 
  192,068 
Total interest income
  17,053,771 
  14,613,740 
  33,689,105 
  28,772,066 
Interest expense
    
    
    
    
Deposits
  1,706,993 
  1,309,379 
  3,248,050 
  2,579,811 
Borrowed funds
  1,094,133 
  328,613 
  2,027,021 
  604,272 
Total interest expense
  2,801,126 
  1,637,992 
  5,275,071 
  3,184,083 
Net interest income
  14,252,645 
  12,975,748 
  28,414,034 
  25,587,983 
Provision for loan losses
  278,916 
  300,000 
  719,407 
  1,078,611 
Net interest income after provision for loan losses
  13,973,729 
  12,675,748 
  27,694,627 
  24,509,372 
Non-interest income
    
    
    
    
Service charges on deposit accounts
  434,272 
  433,498 
  846,431 
  844,835 
Gain on sales or calls of investment securities
  19,581 
  823,214 
  35,258 
  900,212 
Earnings on bank owned life insurance
  282,100 
  282,358 
  563,456 
  564,544 
Gain on disposal of assets
   
  22,784 
  112,594 
  22,784 
Gain on sale of loans
  94,714 
   
  94,714 
   
Rental Income
  169,862 
  208,556 
  310,455 
  417,135 
Income on marketable loans
  726,647 
  587,030 
  1,357,577 
  964,168 
Other fees and commissions
  268,443 
  206,244 
  529,868 
  833,659 
Total non-interest income
  1,995,619 
  2,563,684 
  3,850,353 
  4,547,337 
Non-interest expense
    
    
    
    
Salaries and benefits
  5,050,635 
  5,079,143 
  9,918,166 
  10,455,695 
Severence expense
   
  393,495 
   
  393,495 
Occupancy and equipment
  1,655,270 
  1,647,490 
  3,308,683 
  3,372,043 
Data processing
  361,546 
  383,689 
  718,194 
  781,481 
FDIC insurance and State of Maryland assessments
  256,513 
  285,630 
  518,113 
  520,914 
Merger and integration
   
  301,538 
   
  661,019 
Core deposit premium amortization
  181,357 
  200,998 
  379,258 
  427,239 
Gain on sales of other real estate owned
   
  (48,099)
  (17,689)
  (52,307)
OREO expense
  27,634 
  63,192 
  55,211 
  218,158 
Directors Fees
  159,700 
  162,900 
  336,900 
  331,700 
Network services
  164,232 
  146,334 
  303,839 
  283,230 
Telephone
  186,159 
  201,141 
  380,301 
  419,775 
Other operating
  1,886,405 
  1,735,287 
  3,560,605 
  3,364,815 
Total non-interest expense
  9,929,451 
  10,552,738 
  19,461,581 
  21,177,257 
 
    
    
    
    
Income before income taxes
  6,039,897 
  4,686,694 
  12,083,399 
  7,879,452 
Income tax expense
  2,070,488 
  1,554,000 
  4,140,208 
  2,597,366 
Net income
  3,969,409 
  3,132,694 
  7,943,191 
  5,282,086 
Less: Net loss attributable to the non-controlling interest
   
  1,728 
   
  62 
Net income available to common stockholders
 $3,969,409 
 $3,130,966 
 $7,943,191 
 $5,282,024 
 
    
    
    
    
Basic earnings per common share
 $0.36 
 $0.29 
 $0.73 
 $0.49 
Diluted earnings per common share
 $0.36 
 $0.28 
 $0.71 
 $0.48 
Dividend per common share
 $0.08 
 $0.06 
 $0.16 
 $0.12 
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
 
 
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three Months Ended June 30,
 
2017
 
 
2016
 
Net income
 $3,969,409 
 $3,132,694 
 
    
    
Other comprehensive income:
    
    
Unrealized gain on securities available for sale, net of taxes of $1,610,802, and $514,611, respectively
  2,472,861 
  790,018 
Reclassification adjustment for realized gain on securities available for sale included in net income, net of taxes of $7,724 and $324,717, respectively
  (11,857)
  (498,497)
Other comprehensive income
  2,461,004 
  291,521 
Comprehensive income
  6,430,413 
  3,424,215 
Comprehensive loss attributable to the non-controlling interest
   
  1,728 
Comprehensive income available to common stockholders
 $6,430,413 
 $3,422,487 
 
 
Six Months Ended June 30,
 
2017
 
 
2016
 
Net income
 $7,943,191 
 $5,282,086 
 
    
    
Other comprehensive income:
    
    
Unrealized gain on securities available for sale, net of taxes of $2,325,851 and $987,721, respectively
  3,570,588 
  1,516,325 
Reclassification adjustment for realized gain on securities available for sale included in net income, net of taxes of $13,908 and $355,089, respectively
  (21,350)
  (545,123)
Other comprehensive income
  3,549,238 
  971,202 
Comprehensive income
  11,492,429 
  6,253,288 
Comprehensive income attributable to the non-controlling interest
   
  62 
Comprehensive income available to common stockholders
 $11,492,429 
 $6,253,226 
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
 
 
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, 2016
  10,910,915 
 $109,109 
 $106,692,958 
 $48,842,026 
 $(4,977,308)
 $150,666,785 
Net income attributable to Old Line Bancshares, Inc.
   
   
   
  7,943,191 
   
  7,943,191 
Other comprehensive income, net of income tax of $2,311,943
   
   
   
   
  3,549,238 
  3,549,238 
Stock based compensation awards
   
   
  262,031 
   
   
  262,031 
Stock options exercised
  20,800 
  208 
  378,471 
   
   
  378,679 
Restricted stock issued
  24,415 
  244 
  (244)
   
   
   
Common stock cash dividends $0.16 per share
   
   
   
  (1,752,500)
   
  (1,752,500)
Balance June 30, 2017
  10,956,130 
 $109,561 
 $107,333,216 
 $55,032,717 
 $(1,428,070)
 $161,047,424 
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
 
 
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
Six Months Ended June 30,
 
 
 
2017
 
 
2016
 
Cash flows from operating activities
 
 
 
 
 
 
Net income
 $7,943,191 
 $5,282,086 
Adjustments to reconcile net income to net cash provided by operating activities
    
    
Depreciation and amortization
  1,221,445 
  1,320,718 
Provision for loan losses
  719,407 
  1,078,611 
Change in deferred loan fees net of costs
  (75,162)
  47,952 
Gain on sales or calls of securities
  (35,258)
  (900,212)
Amortization of premiums and discounts
  510,194 
  445,587 
Origination of loans held for sale
  (51,745,329)
  (38,982,301)
Proceeds from sale of loans held for sale
  53,548,556 
  40,982,984 
Income on marketable loans
  (1,357,577)
  (964,168)
Gain on sales of other real estate owned
  (17,689)
  (52,307)
Gain on sale of loans
  (94,714)
   
Gain on sale of fixed assets
  (112,594)
  (22,784)
Amortization of intangible assets
  379,259 
  427,239 
Deferred income taxes
  (56,718)
  521,555 
Stock based compensation awards
  262,031 
  262,080 
Increase (decrease) in
    
    
Accrued interest payable
  71,235 
  31,720 
Income tax payable
  1,338,453 
  1,802,946 
Supplemental executive retirement plan
  139,728 
  143,333 
Other liabilities
  (660,391)
  (424,794)
Decrease (increase) in
    
    
Accrued interest receivable
  133,426 
  110,259 
Bank owned life insurance
  (468,416)
  (475,533)
Other assets
  985,294 
  84,057 
          Net cash provided by operating activities
 $12,628,371 
 $10,719,028 
Cash flows from investing activities
    
    
Purchase of investment securities available for sale
  (21,167,506)
  (88,943,976)
Proceeds from disposal of investment securities
    
    
Available for sale at maturity, call or paydowns
  14,686,479 
  7,934,077 
Available for sale sold
  13,000,024 
  87,476,437 
Loans made, net of principal collected
  (85,012,845)
  (95,145,250)
Proceeds from sale of other real estate owned
  290,644 
  80,808 
Change in equity securities
  (1,669,397)
  (2,362,300)
Purchase of premises and equipment
  (2,520,774)
  (1,689,968)
Proceeds from the sale of premises and equipment
  112,594 
   
          Net cash used in investing activities
  (82,280,781)
  (92,650,172)
Cash flows from financing activities
    
    
Net increase (decrease) in
    
    
Time deposits
  15,239,072 
  5,654,458 
Other deposits
  38,309,413 
  21,356,195 
Short term borrowings
  20,347,416 
  46,194,479 
Long term borrowings
  131,741 
  (34,300)
Proceeds from stock options exercised
  378,679 
   
Cash dividends paid-common stock
  (1,752,500)
  (1,297,384)
          Net cash provided by financing activities
  72,653,821 
  71,873,448 
 
    
    
Net increase (decrease) in cash and cash equivalents
  3,001,411 
  (10,057,696)
 
    
    
Cash and cash equivalents at beginning of period
  23,463,171 
  43,700,692 
Cash and cash equivalents at end of period
 $26,464,582 
 $33,642,996 
 
    
    
Supplemental Disclosure of Cash Flow Information:
    
    
   Cash paid during the period for:
    
    
     Interest
 $4,716,692 
 $2,743,048 
     Income taxes
 $2,728,000 
 $885,000 
Supplemental Disclosure of Non-Cash Flow Operating Activities:
    
    
Loans transferred to other real estate owned
 $422,848 
 $261,700 
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
 
 
OLD LINE BANCSHARES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Organization and Description of Business - Old Line Bancshares, Inc. (“Old Line Bancshares”) was incorporated under the laws of the State of Maryland on April 11, 2003 to serve as the holding company of Old Line Bank. The primary business of Old Line Bancshares is to own all of the capital stock of Old Line Bank. We provide a full range of banking services to customers located in Anne Arundel, Baltimore, Calvert, Carroll, Charles, 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 their 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 June 30, 2017 and 2016 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, 2016 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, 2016. We have made no significant changes to Old Line Bancshares’ accounting policies as disclosed in the Form 10-K.
 
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.
 
Reclassifications - We have made certain reclassifications to the 2016 financial presentation to conform to the 2017 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. Revenue streams from services provided by financial institutions that could be impacted by this ASU include credit card arrangements, trust and custody services, and administration services for customer deposit accounts. This update will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. This ASU will be effective for us in our first quarter of 2018. Early adoption is not permitted. Old Line Bancshares is currently performing an overall assessment of the revenue streams potentially affected by this ASU to determine the potential impact to its consolidated financial statements. Old Line Bancshares continues to monitor implementation issues relevant to the banking industry with respect to this ASU that are still pending resolution. Old Line Bancshares does not expect the ASU to have a material impact on its consolidated financial statements.
 
 
 
 
In January 2016, the 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. This ASU permits early adoption of the instrument-specific credit risk provision. This ASU will be effective for us in our first quarter of 2018. This ASU is not expected to have a significant impact on our consolidated financial statements. We will monitor any new developments and additional guidance for this ASU.
 
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The 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 2018. 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 on have on our consolidated financial statements.
 
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 was effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of ASU 2016-09 on January 1, 2017 did not impact Old Line Bancshares’ consolidated financial statements.
 
In June 2016, the 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 implemented a committee and has the responsibility to gather loan information and consider acceptable methodologies to comply with this ASU. The implementation team meets periodically to discuss the latest developments and updates via webcasts, publications, and conferences. Old Line Bancshares’ evaluation indicates that the provisions of ASU No. 2016-13 are expected to 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, the 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 amendments are effective for public companies for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years.  Early adoption is permitted, including adoption in an interim period. Old Line Bancshares is currently evaluating the impact of adopting these amendments on its consolidated financial statements, but the adoption is not expected to have a significant impact as of the filing of this report.
 
 
 
 
In January 2017, the 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 amended guidance also narrows the definition of outputs by more closely aligning it with how outputs are described in FASB guidance for revenue recognition. This guidance is effective for interim and annual periods for Old Line Bancshares on January 1, 2018, with early adoption permitted. Old Line Bancshares does not expect the adoption of this ASU to have a material impact on its Consolidated Financial Statements.
 
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, under the ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Old Line Bancshares does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
 
 
 
 
2.            
POINTER RIDGE OFFICE INVESTMENT, LLC
 
We currently own 100% of Pointer Ridge and we have consolidated its results of operations from the date of acquisition. In August 2016, Old Line Bank purchased the aggregate 37.5% minority interest in Pointer Ridge not held by Old Line Bancshares and on September 2, 2016, we paid off the entire $5.8 million principal amount of a promissory note previously issued by Pointer Ridge. Pointer Ridge owns our headquarters building located at 1525 Pointer Ridge Place, Bowie, Maryland, containing approximately 40,000 square feet. We lease 98% of this building for our main office and operate a branch of Old Line Bank from this address. Prior to this purchase, we owned 62.5% of Pointer Ridge.
 
The following table summarizes the condensed Balance Sheets and Statements of Income information for Pointer Ridge.
 
 
 
June 30,
 
 
December 31,
 
Balance Sheets
 
2017
 
 
2016
 
 
 
 
 
 
 
 
Current assets
 $86,941 
 $257,438 
Non-current assets
  6,104,146 
  6,164,486 
Liabilities
  18,640 
  13,974 
Equity
  6,172,447 
  6,407,950 
 
 
 
 
 
Three Months Ended
 
 
Six Months Ended
 
 
 
June 30,
 
 
June 30,
 
Statements of Income
 
2017
 
 
2016
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 $3,175 
 $251,300 
 $6,351 
 $502,374 
Expenses
  105,637 
  246,691 
  241,854 
  502,210 
Net income (loss)
 $(102,462)
 $4,609 
 $(235,503)
 $164 
 
 
 
 
 
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
 
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury
 $3,019,443 
 $ 
 $(6,084)
 $3,013,359 
U.S. government agency
  18,438,208 
  67,505 
  (160,941)
  18,344,772 
Corporate bonds
  9,100,000 
  142,887 
   
  9,242,887 
Municipal securities
  67,047,540 
  289,060 
  (862,311)
  66,474,289 
Mortgage backed securities:
    
    
    
    
FHLMC certificates
  21,321,085 
  5,481 
  (369,834)
  20,956,732 
FNMA certificates
  68,152,342 
  11,144 
  (1,246,977)
  66,916,509 
GNMA certificates
  13,652,136 
   
  (228,231)
  13,423,905 
 
 $200,730,754 
 $516,077 
 $(2,874,378)
 $198,372,453 
 
    
    
    
    
 December 31, 2016
    
    
    
    
Available for sale
    
    
    
    
U.S. treasury
 $2,999,483 
 $27 
 $(3,728)
 $2,995,782 
U.S. government agency
  7,653,595 
   
  (387,280)
  7,266,315 
Corporate bonds
  8,100,000 
  90,477 
  (18,840)
  8,171,637 
Municipal securities
  71,103,969 
  170,512 
  (3,587,676)
  67,686,805 
Mortgage backed securities
    
    
    
    
FHLMC certificates
  22,706,185 
  11,712 
  (917,543)
  21,800,354 
FNMA certificates
  73,425,200 
   
  (2,976,384)
  70,448,816 
GNMA certificates
  21,736,255 
  3,506 
  (604,266)
  21,135,495 
 
 $207,724,687 
 $276,234 
 $(8,495,717)
 $199,505,204 
 
 
At June 30, 2017 and December 31, 2016, securities with unrealized losses segregated by length of impairment were as follows:
 
 
 
 June 30, 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
 $3,013,359 
 $6,084 
 $ 
 $ 
 $3,013,359 
 $6,084 
U.S. government agency
  13,382,939 
  160,941 
   
   
  13,382,939 
  160,941 
Municipal securities
  32,234,681 
  785,478 
  2,500,197 
  76,833 
  34,734,878 
  862,311 
Mortgage backed securities
    
    
    
    
    
    
      FHLMC certificates
  19,120,575 
  326,452 
  1,645,932 
  43,382 
  20,766,507 
  369,834 
      FNMA certificates
  50,323,982 
  879,626 
  15,126,935 
  367,351 
  65,450,917 
  1,246,977 
      GNMA certificates
  10,425,797 
  171,715 
  2,998,109 
  56,516 
  13,423,906 
  228,231 
Total
 $128,501,333 
 $2,330,296 
 $22,271,173 
 $544,082 
 $150,772,506 
 $2,874,378 
 
 
 
 
 
 
 
 
 December 31, 2016
 
 
 
Less than 12 months
 
 
12 Months or More
 
 
Total
 
 
 
Fair
 
 
Unrealized
 
 
Fair
 
 
Unrealized
 
 
Fair
 
 
Unrealized
 
 
 
value
 
 
losses
 
 
value
 
 
losses
 
 
value
 
 
losses
 
U.S. treasury
 $1,496,016 
 $3,728 
 $ 
 $ 
 $1,496,016 
 $3,728 
U.S. government agency
  7,266,315 
  387,280 
   
   
  7,266,315 
  387,280 
Corporate bonds
  1,981,160 
  18,840 
   
   
  1,981,160 
  18,840 
Municipal securities
  50,722,187 
  3,587,676 
   
   
  50,722,187 
  3,587,676 
Mortgage backed securities
    
    
    
    
    
    
      FHLMC certificates
  21,413,620 
  917,543 
   
   
  21,413,620 
  917,543 
      FNMA certificates
  70,448,817 
  2,976,384 
   
   
  70,448,817 
  2,976,384 
      GNMA certificates
  16,403,268 
  475,022 
  4,227,210 
  129,244 
  20,630,479 
  604,266 
Total
 $169,731,383 
 $8,366,473 
 $4,227,210 
 $129,244 
 $173,958,594 
 $8,495,717 
 
 
At June 30, 2017 and December 31, 2016, we had 18 and seven investment securities, respectively, in an unrealized loss position greater than the 12 month time frame and 107 and 166 securities, respectively, in an unrealized loss position less than the 12 month time frame.  We consider all unrealized losses on securities as of June 30, 2017 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 June 30, 2017, 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 June 30, 2017, we received $19.3 million in proceeds from sales, maturities or calls and principal pay-downs on investment securities and realized gains of $148 thousand and realized losses of $129 thousand for a net gain of $20 thousand. The net proceeds of these transactions were used to purchase new investment securities. During the three month period ending June 30, 2016, we received proceeds of $74.5 million from sales, maturities or calls and principal pay-downs on investment securities. Such transactions consisted of 25 mortgage backed securities (“MBS”) pools, 20 municipal bonds and 17 callable agency securities, resulting in realized gains of $823 thousand. The net proceeds of these transactions and the proceeds of principal paydowns in the first quarter of 2016 were used to purchase new investment securities and remainder for new loan originations. During the six months ended June 30, 2017, we received $27.7 million in proceeds from sales, maturities or calls and principal pay-downs on investment securities and realized gains of $164 thousand and realized losses of $129 thousand for total realized net gain of $35 thousand. The net proceeds of these transactions were used to re-balance the investment portfolio, which resulted in an overall slightly higher yield on our security investments. For the six month period ending June 30, 2016, we received $95.4 million in proceeds from sales, maturities or calls and principal pay-downs on investment securities and realized gain of $967 thousand and realized losses of $67 thousand for total realized net gain of $900 thousand. The proceeds of these transactions were used for re-investment in the investment portfolio to increase the yield on such investments.
 
 
 
 
Contractual maturities and pledged securities at June 30, 2017 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 MBS based on maturity date. However, we receive payments on a monthly basis.
 
 
 
Available for Sale
 
 
 
Amortized
 
 
Fair
 
June 30, 2017
 
cost
 
 
value
 
 
 
 
 
 
 
 
Maturing
 
 
 
 
 
 
Within one year
 $3,019,443 
 $3,013,359 
Over one to five years
  2,265,522 
  2,271,340 
Over five to ten years
  41,915,898 
  42,012,426 
Over ten years
  153,529,891 
  151,075,328 
 
 $200,730,754 
 $198,372,453 
Pledged securities
 $39,637,225 
 $39,043,138 
 
 
4.
LOANS
 
Major classifications of loans held for investment are as follows:
 
 
 
June 30, 2017
 
 
December 31, 2016
 
 
 
Legacy (1)
 
 
Acquired
 
 
Total
 
 
Legacy (1)
 
 
Acquired
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner Occupied
 $266,686,058 
 $45,923,998 
 $312,610,056 
 $238,220,475 
 $53,850,612 
 $292,071,087 
Investment
  453,597,514 
  32,857,002 
  486,454,516 
  414,012,709 
  37,687,804 
  451,700,513 
Hospitality
  157,457,044 
  6,814,105 
  164,271,149 
  141,611,858 
  11,193,427 
  152,805,285 
Land and A&D
  44,742,020 
  5,452,470 
  50,194,490 
  51,323,297 
  6,015,813 
  57,339,110 
Residential Real Estate
    
    
    
    
    
    
First Lien-Investment
  81,285,353 
  20,860,372 
  102,145,725 
  72,150,512 
  23,623,660 
  95,774,172 
First Lien-Owner Occupied
  61,719,823 
  40,800,994 
  102,520,817 
  54,732,604 
  42,443,767 
  97,176,371 
Residential Land and A&D
  43,290,769 
  5,012,688 
  48,303,457 
  39,667,222 
  5,558,232 
  45,225,454 
HELOC and Jr. Liens
  22,692,006 
  2,352,459 
  25,044,465 
  24,385,215 
  2,633,718 
  27,018,933 
Commercial and Industrial
  149,943,871 
  4,823,533 
  154,767,404 
  136,259,560 
  5,733,904 
  141,993,464 
Consumer
  4,405,042 
  88,696 
  4,493,738 
  4,868,909 
  139,966 
  5,008,875 
 
  1,285,819,500 
  164,986,317 
  1,450,805,817 
  1,177,232,361 
  188,880,903 
  1,366,113,264 
Allowance for loan losses
  (5,807,254)
  (104,588)
  (5,911,842)
  (6,084,478)
  (110,991)
  (6,195,469)
Deferred loan costs, net
  1,679,274 
   
  1,679,274 
  1,257,411 
   
  1,257,411 
 
 $1,281,691,520 
 $164,881,729 
 $1,446,573,249 
 $1,172,405,294 
 $188,769,912 
 $1,361,175,206 
 
 
(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, and Regal Bancorp, Inc. (“Regal”), the parent company of Regal Bank & Trust (“Regal Bank), in December 2015, we have segmented the portfolio into two components, “Legacy” loans originated by Old Line Bank and “Acquired” loans acquired from MB&T, WSB and Regal Bank.
 
Credit Policies and Administration
 
We have adopted a comprehensive lending policy, which includes stringent underwriting standards for all types of loans. We have designed our underwriting standards to promote a complete banking relationship rather than a transactional relationship. In an effort to manage risk, prior to funding, the loan committee consisting of the Executive Officers and seven members of the Board of Directors must approve by a majority vote all credit decisions in excess of a lending officer’s lending authority.
 
 
 
 
Management believes that it employs experienced lending officers, secures appropriate collateral and carefully monitors the financial condition of its borrowers and loan concentrations.
 
In addition to the internal business processes employed in the credit administration area, Old Line Bank retains an outside independent firm to review the loan portfolio. This firm performs a detailed annual review and an interim update. We use the results of the firm’s report to validate our internal ratings and we review the commentary on specific loans and on our loan administration activities in order to improve our operations.
 
Commercial Real Estate Loans
 
We finance commercial real estate for our clients, for owner occupied and investment properties, hospitality and land acquisition and development. Commercial real estate loans totaled $1.0 billion and $953.9 million at June 30, 2017 and December 31, 2016, 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 June 30, 2017, we had approximately $164.3 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 $278.0 million and $265.2 million at June 30, 2017 and December 31, 2016, 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 660 is required. We do not originate any subprime residential real estate loans.
 
This segment of our portfolio also consists of funds advanced for construction of custom single family residences homes (where the home buyer is the borrower) and financing to builders for the construction of pre-sold homes and multi-family housing. These loans generally have short durations, meaning maturities typically of twelve months or less. Old Line Bank limits its construction lending risk through adherence to established underwriting procedures. These loans generally have short durations, meaning maturities typically of twelve months or less. Residential houses, multi-family dwellings and commercial buildings under construction and the underlying land for which the loan was obtained secure the construction loans. The vast majority of these loans are concentrated in our market area.
 
Construction lending also entails significant risk. These risks generally involve larger loan balances concentrated with single borrowers with funds advanced upon the security of the land or the project under construction. An appraisal of the property estimates the value of the project “as is and as if” completed. An appraisal of the property estimates the value of the project prior to completion of construction. Thus, initial funds are advanced based on the current value of the property with the remaining construction funds advanced under a budget sufficient to successfully complete the project within the “as completed” loan to value. To further mitigate the risks, we generally limit loan amounts to 80% or less of appraised values and obtain first lien positions on the property.
 
 
 
 
We generally only offer real estate construction financing only to experienced builders, commercial entities or individuals who have demonstrated the ability to obtain a permanent loan “take-out” (conversion to a permanent mortgage upon completion of the project). We also perform a complete analysis of the borrower and the project under construction. This analysis includes a review of the cost to construct, the borrower’s ability to obtain a permanent “take-out” the cash flow available to support the debt payments and construction costs in excess of loan proceeds, and the value of the collateral. During construction, we advance funds on these loans on a percentage of completion basis. We inspect each project as needed prior to advancing funds during the term of the construction loan. We may provide permanent financing on the same projects for which we have provided the construction financing.
 
We also offer fixed rate home improvement loans. Our home equity and home improvement loan portfolio gives us a diverse client base. Although most of these loans are in our market area, the diversity of the individual loans in the portfolio reduces our potential risk. Usually, we secure our home equity loans and lines of credit with a security interest in the borrower’s primary or secondary residence.
 
Under our loan approval policy, all residential real estate loans approved must comply with federal regulations. Generally, we will make residential mortgage loans in amounts up to the limits established by Fannie Mae and Freddie Mac for secondary market resale purposes. Currently this amount for single-family residential loans currently varies from $424,100 up to a maximum of $636,150 for certain high-cost designated areas. We also make residential mortgage loans up to limits established by the Federal Housing Administration, which currently is $636,150. 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 sold in the secondary market, we typically require a credit score or 640, with some exceptions provided we receive an approval recommendation from FannieMae, FreddieMac or FHA’s automated underwriting approval system.  For Veteran Administration loans, we require a minimum score of 620.  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 (“SBA”) loans, standby letters of credit and unsecured loans. We originate commercial loans for any business purpose including the financing of leasehold improvements and equipment, the carrying of accounts receivable, general working capital, and acquisition activities. We have a diverse client base and we do not have a concentration of these types of loans in any specific industry segment. We generally secure commercial business loans with accounts receivable, equipment, deeds of trust and other collateral such as marketable securities, cash value of life insurance and time deposits at Old Line Bank.
 
Commercial business loans have a higher degree of risk than residential mortgage loans because the availability of funds for repayment generally depends on the success of the business. They may also involve high average balances, increased difficulty monitoring and a high risk of default. To help manage this risk, we typically limit these loans to proven businesses and we generally obtain appropriate collateral and personal guarantees from the borrower’s principal owners and monitor the financial condition of the business. For loans in excess of $250,000, monitoring generally includes a review of the borrower’s annual tax returns and updated financial statements.
 
Consumer Installment Lending
 
We offer various types of secured and unsecured consumer loans. We make consumer loans for personal, family or household purposes as a convenience to our customer base. Consumer loans, however, are not a focus of our lending activities. The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of his or her ability to meet existing obligations and payments on the proposed loan. As a general guideline, a consumer’s total debt service should not exceed 40% of his or her gross income.
 
 
 
 
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. market area in Anne Arundel, Calvert, Charles, 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. We also have a presence in Baltimore County and Carroll County, Maryland due to the Regal acquisition.
 
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.
 
 
 
 
The table below presents an age analysis of the loans held for investment portfolio at June 30, 2017 and December 31, 2016.
 
Age Analysis of Past Due Loans
 
 
 
June 30, 2017
 
 
December 31, 2016
 
 
 
Legacy
 
 
Acquired
 
 
Total
 
 
Legacy
 
 
Acquired
 
 
Total
 
Current
 $1,279,091,477 
 $160,607,927 
 $1,439,699,404 
 $1,167,380,870 
 $185,631,054 
 $1,353,011,924 
Accruing past due loans:
    
    
    
    
    
    
30-89 days past due
    
    
    
    
    
    
Commercial Real Estate:
    
    
    
    
    
    
Owner Occupied
  4,864,845 
  717,930 
  5,582,775 
  2,799,802 
   
  2,799,802 
Investment
   
  769,539 
  769,539 
   
  794,037 
  794,037 
Residential Real Estate:
    
    
    
    
    
    
First Lien-Investment
  461,119 
  515,168 
  976,287 
  517,498 
  397,944 
  915,442 
First Lien-Owner Occupied
  233,891 
  1,134,676 
  1,368,567 
   
  879,718 
  879,718 
HELOC and Jr. Liens
  136,820 
   
  136,820 
  99,946 
   
  99,946 
Commercial and Industrial
  353,665 
   
  353,665 
  325,161 
   
  325,161 
Consumer
   
  550 
  550 
   
   
   
Total 30-89 days past due
  6,050,340 
  3,137,863 
  9,188,203 
  3,742,407 
  2,071,699 
  5,814,106 
90 or more days past due
    
    
    
    
    
    
Commercial Real Estate:
    
    
    
    
    
    
Owner Occupied
   
   
   
   
  634,290 
  634,290 
Residential Real Estate:
    
    
    
    
    
    
First Lien-Owner Occupied
   
  3,360 
  3,360 
   
  250,000 
  250,000 
Commercial
  19,159 
   
  19,159 
   
   
   
Consumer
   
   
   
  19,242 
   
  19,242 
Total 90 or more days past due
  19,159 
  3,360 
  22,519 
  19,242 
  884,290 
  903,532 
Total accruing past due loans
  6,069,499 
  3,141,223 
  9,210,722 
  3,761,649 
  2,955,989 
  6,717,638 
 
    
    
    
    
    
    
Commercial Real Estate:
    
    
    
    
    
    
Owner Occupied
   
  225,432 
  225,432 
  2,370,589 
   
  2,370,589 
Hospitality
   
   
   
  1,346,736 
   
  1,346,736 
Land and A&D
   
  192,382 
  192,382 
  77,395 
  194,567 
  271,962 
Residential Real Estate:
    
    
    
    
    
    
First Lien-Investment
  233,759 
   
  233,759 
  312,061 
  99,293 
  411,354 
First Lien-Owner Occupied
  222,237 
  819,353 
  1,041,590 
  222,237 
   
  222,237 
Commercial and Industrial
  202,528 
   
  202,528 
  1,760,824 
   
  1,760,824 
Non-accruing loans:
  658,524 
  1,237,167 
  1,895,691 
  6,089,842 
  293,860 
  6,383,702 
Total Loans
 $1,285,819,500 
 $164,986,317 
 $1,450,805,817 
 $1,177,232,361 
 $188,880,903 
 $1,366,113,264 
 
 
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 June 30, 2017 and December 31, 2016.
 
 
 
 
 
 
 
Impaired at June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months June 30, 2017
 
 
Six Months June 30, 2017
 
 
 
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
 $1,825,757 
 $1,825,757 
 $ 
 $1,825,757 
 $19,303 
 $1,967,633 
 $32431 
Investment
  1,183,812 
  1,183,812 
   
  1,183,812 
  9,070 
  1,196,978 
  26,001 
Residential Real Estate:
    
    
    
    
    
    
    
First Lien-Investment
  41,258 
  41,258 
   
  41,258 
   
  41,258 
   
First Lien-Owner Occupied
  222,237 
  222,237 
   
  222,237 
   
  222,237 
   
Commercial
  405,368 
  405,368 
   
  405,368 
  3,700 
  345,972 
  23,130 
With an allowance recorded:
    
    
    
    
    
    
    
Commercial Real Estate:
    
    
    
    
    
    
    
Owner Occupied
   
   
   
   
   
    
    
Investment
  601,535 
  601,535 
  28,803 
  601,535 
  7,739 
  605,929 
  15,364 
Residential Real Estate:
    
    
    
    
    
    
    
First Lien-Investment
  192,501 
  192,501 
  20,263 
  192,501 
   
  192,501 
   
Commercial
  300,234 
  300,234 
  300,234 
  300,234 
  1,255 
  300,806 
  2,493 
Total legacy impaired
  4,772,702 
  4,772,702 
  349,300 
  4,772,702 
  41,067 
  4,873,314 
  99,419 
Acquired(1)
    
    
    
    
    
    
    
With no related allowance recorded:
    
    
    
    
    
    
    
Commercial Real Estate:
    
    
    
    
    
    
    
Owner Occupied
  252,687 
  252,687 
   
  252,687 
   
  252,743 
  2,155 
Residential Real Estate:
    
    
    
    
    
    
    
First Lien-Owner Occupied
  1,581,891 
  1,469,632 
   
  1,581,653 
  8,526 
  1,587,209 
  21,844 
First Lien-Investment
  132,715 
  71,348 
   
  132,715 
  1,106 
  133,367 
  2,194 
Land and A&D
  334,271 
  45,000 
   
  334,271 
   
  334,271 
   
With an allowance recorded:
    
    
    
    
    
    
    
Commercial Real Estate:
    
    
    
    
    
    
    
Land and A&D
  150,430 
  150,430 
  80,072 
  155,611 
   
  155,780 
  823 
Commercial
  74,197 
  74,197 
  24,516 
  73,898 
  948 
  75,077 
  1900 
Total acquired impaired
  2,526,191 
  2,063,294 
  104,588 
  2,530,835 
  10,580 
  2,538,447 
  28,916 
Total impaired
 $7,298,893 
 $6,835,996 
 $453,888 
 $7,303,537 
 $51,647 
 $7,411,761 
 $128,335 
 
 
(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.  
 
 
 
 
 
Impaired Loans
 
 
December 31, 2016
 
 
 
Unpaid
 
 
 
 
 
 
 
 
Average
 
 
Interest
 
 
 
Principal
 
 
Recorded
 
 
Related
 
 
Recorded
 
 
Income
 
 
 
Balance
 
 
Investment
 
 
Allowance
 
 
Investment
 
 
Recognized
 
Legacy
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner Occupied
 $566,973 
 $566,973 
 $ 
 $1,223,360 
 $12,759 
Investment
  1,212,771 
  1,212,771 
   
  1,208,240 
  54,531 
Residential Real Estate:
    
    
    
    
    
First Lien-Owner Occupied
  222,237 
  222,237 
   
  243,699 
  5,440 
Commercial
  843,809 
  843,809 
   
  3,338,295 
  3,761 
With an allowance recorded:
    
    
    
    
    
Commercial Real Estate:
    
    
    
    
    
Owner Occupied
  2,048,989 
  2,048,989 
  443,489 
  6,605,858 
  50,348 
Investment
  610,485 
  610,485 
  33,335 
  610,373 
  46,550 
Hospitality
  1,346,736 
  1,346,736 
  134,674 
  4,199,162 
  20,959 
Land and A&D
  77,395 
  77,395 
  15,860 
  82,587 
  4,729 
Residential Real Estate:
    
    
    
    
    
First Lien-Owner Occupied
  312,061 
  312,061 
  45,505 
  547,024 
  9,348 
Commercial
  1,016,479 
  1,016,479 
  609,152 
  1,976,689 
  4,476 
Total legacy impaired
  8,257,935 
  8,257,935 
  1,282,015 
  20,035,287 
  212,901 
Acquired(1)
    
    
    
    
    
With no related allowance recorded:
    
    
    
    
    
Commercial Real Estate:
    
    
    
    
    
Land and A&D
  255,716 
  91,669 
   
  255,661 
  13,686 
Residential Real Estate:
    
    
    
    
    
First Lien-Owner Occupied
  662,835 
  662,835 
   
  1,408,689 
  19,899 
First Lien-Investment
  292,349 
  171,348 
   
  233,133 
  4,383 
Land and A&D
  334,271 
  45,000 
   
  334,271 
   
With an allowance recorded:
    
    
    
    
    
Commercial Real Estate:
    
    
    
    
    
Land and A&D
  151,634 
  151,634 
  83,784 
  161,622 
  5,264 
Commercial
  76,243 
  76,243 
  27,207 
  83,049 
  3,992 
Total acquired impaired
  1,773,048 
  1,198,729 
  110,991 
  2,476,425 
  47,224 
Total impaired
 $10,030,983 
 $9,456,664 
 $1,393,006 
 $22,511,712 
 $260,125 
 
 
(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 June 30, 2017 consisted of eight loans for $2.8 million compared to seven loans at December 31, 2016 for $897 thousand.
 
 
 
 
 
The following table includes the recorded investment in and number of modifications of TDRs for the three and six months ended June 30, 2017 and 2016. We report the recorded investment in loans prior to a modification and also the recorded investment in the loans after the loans were restructured. Reductions in the recorded investment are primarily due to the partial charge-off of the principal balance prior to the modification. We had no loans that were modified as a TDR that defaulted within the three and six month periods ending June 30, 2017 or 2016.
 
 
 
Loans Modified as a TDR for the three months ended
 
 
 
June 30, 2017
 
 
June 30, 2016
 
 
 
 
 
 
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
   
   
   
   
   
   
Residential Real Estate Non-Owner Occupied
   
   
   
   
   
   
Commercial
   
   
   
   
   
   
   Total legacy TDR's
   
   
   
   
   
   
Acquired
    
    
    
    
    
    
     Commercial Real Estate
   
   
   
   
   
   
Residential Real Estate Non-Owner Occupied
   
   
   
   
   
   
Commercial
   
   
   
   
   
   
    Total acquired TDR's
   
   
   
   
   
   
Total Troubled Debt Restructurings
   
 $ 
 $ 
   
 $ 
 $ 
 
 
 
 
Loans Modified as a TDR for the six months ended
 
 
 
June 30, 2017
 
 
June 30, 2016
 
 
 
 
 
 
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 
  1,584,913 
   
   
   
Commercial
  1 
  414,324 
  405,328 
   
   
   
   Total legacy TDR's
  2 
  2,011,064 
  1,990,241 
   
   
   
Acquired
    
    
    
    
    
    
     Commercial Real Estate
   
   
   
  1 
  256,669 
  91,929 
Residential Real Estate Non-Owner Occupied
   
   
   
  1 
  136,173 
  66,453 
    Total acquired TDR's
   
   
   
  2 
  392,842 
  158,382 
Total Troubled Debt Restructurings
  2 
 $2,011,064 
 $1,990,241 
  2 
 $392,842 
 $158,382 
 
Acquired impaired loans
 
The following table documents changes in the accretable (premium) discount on acquired impaired loans during the six months ended June 30, 2017 and 2016, along with the outstanding balances and related carrying amounts for the beginning and end of those respective periods.
 
 
 
June 30, 2017
 
 
June 30, 2016
 
Balance at beginning of period
 $(22,980)
 $276,892 
Accretion of fair value discounts
  (51,722)
  (44,967)
Payoff of acquired loans
   
  (390,990)
Reclassification from non-accretable discount
  52,807 
  352,714 
Balance at end of period
 $(21,895)
 $193,649 
 
 
 
 
 
 
 
Contractually
 
 
 
 
 
 
Required Payments
 
 
 
 
 
 
Receivable
 
 
Carrying Amount
 
 At June 30, 2017
 $8,311,088 
 $6,643,878 
 At December 31, 2016
  9,597,703 
  7,558,415 
 At June 30, 2016
  12,798,858 
  10,099,810 
 At December 31, 2015
  14,875,352 
  10,675,943 
 
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.
 
 
 
 
The following tables outline the class of loans by risk rating at June 30, 2017 and December 31, 2016:
 
 
June 30, 2017
 
Legacy
 
 
Acquired
 
 
Total
 
Risk Rating
 
 
 
 
 
 
 
 
 
Pass(1 - 5)
 
 
 
 
 
 
 
 
 
Commercial Real Estate:
 
 
 
 
 
 
 
 
 
Owner Occupied
 $259,552,188 
 $40,967,683 
 $300,519,871 
Investment
  450,729,071 
  31,408,378 
  482,137,449 
Hospitality
  157,457,044 
  5,409,549 
  162,866,593 
Land and A&D
  42,304,057 
  5,269,440 
  47,573,497 
Residential Real Estate:
    
    
    
First Lien-Investment
  80,284,280 
  19,451,885 
  99,736,165 
First Lien-Owner Occupied
  61,193,426 
  36,843,774 
  98,037,200 
Land and A&D
  40,849,195 
  4,076,796 
  44,925,991 
HELOC and Jr. Liens
  22,692,006 
  2,352,459 
  25,044,465 
Commercial
  146,413,343 
  4,692,996 
  151,106,339 
Consumer
  4,405,042 
  88,696 
  4,493,738 
 
  1,265,879,652 
  150,561,656 
  1,416,441,308 
Special Mention(6)
    
    
    
Commercial Real Estate:
    
    
    
Owner Occupied
  4,503,876 
  3,538,877 
  8,042,753 
Investment
  1,083,096 
  1,057,944 
  2,141,040 
Hospitality
   
  1,404,556 
  1,404,556 
Land and A&D
  2,437,963 
  138,031 
  2,575,994 
Residential Real Estate:
    
    
    
First Lien-Investment
  491,815 
  1,051,720 
  1,543,535 
First Lien-Owner Occupied
  304,160 
  1,852,090 
  2,156,250 
Land and A&D
  2,441,574 
  678,778 
  3,120,352 
Commercial
  1,420,075 
  56,868 
  1,476,943 
 
  12,682,559 
  9,778,864 
  22,461,423 
Substandard(7)
    
    
    
Commercial Real Estate:
    
    
    
Owner Occupied
  2,629,993 
  1,417,438 
  4,047,431 
Investment
  1,785,347 
  390,679 
  2,176,026 
Land and A&D
   
  45,000 
  45,000 
Residential Real Estate:
    
    
    
First Lien-Investment
  509,258 
  356,767 
  866,025 
First Lien-Owner Occupied
  222,237 
  2,105,131 
  2,327,368 
Land and A&D
   
  257,114 
  257,114 
Commercial
  2,110,454 
  73,668 
  2,184,122 
 
  7,257,289 
  4,645,797 
  11,903,086 
Doubtful(8)
   
   
   
Loss(9)
   
   
   
Total
 $1,285,819,500 
 $164,986,317 
 $1,450,805,817 
 
 
 
 
 
At December 31, 2016
 
Legacy
 
 
Acquired
 
 
Total
 
Risk Rating
 
 
 
 
 
 
 
 
 
Pass(1 - 5)
 
 
 
 
 
 
 
 
 
Commercial Real Estate:
 
 
 
 
 
 
 
 
 
Owner Occupied
 $231,985,682 
 $48,069,046 
 $280,054,728 
Investment
  408,875,014 
  35,130,038 
  444,005,052 
Hospitality
  140,265,123 
  9,781,737 
  150,046,860 
Land and A&D
  48,817,229 
  5,815,572 
  54,632,801 
Residential Real Estate:
    
    
    
First Lien-Investment
  70,980,640 
  21,898,603 
  92,879,243 
First Lien-Owner Occupied
  54,201,816 
  39,011,487 
  93,213,303 
Land and A&D
  36,910,902 
  4,299,830 
  41,210,732 
HELOC and Jr. Liens
  24,385,215 
  2,633,718 
  27,018,933 
Commercial
  132,518,224 
  5,460,820 
  137,979,044 
Consumer
  4,868,909 
  139,966 
  5,008,875 
 
  1,153,808,754 
  172,240,817 
  1,326,049,571 
Special Mention(6)
    
    
    
Commercial Real Estate:
    
    
    
Owner Occupied
  2,799,801 
  4,572,278 
  7,372,079 
Investment
  400,228 
  1,776,837 
  2,177,065 
Hospitality
   
  1,411,689 
  1,411,689 
Land and A&D
  2,506,068 
  155,241 
  2,661,309 
Residential Real Estate:
    
    
    
First Lien-Investment
  577,767 
  1,248,453 
  1,826,220 
First Lien-Owner Occupied
  308,552 
  1,882,182 
  2,190,734 
Land and A&D
  2,678,925 
  791,399 
  3,470,324 
Commercial
  456,093 
  197,383 
  653,476 
 
  9,727,434 
  12,035,462 
  21,762,896 
Substandard(7)
    
    
    
Commercial Real Estate:
    
    
    
Owner Occupied
  3,434,990 
  1,209,289 
  4,644,279 
Investment
  4,737,465 
  780,929 
  5,518,394 
Hospitality
  1,346,736 
   
  1,346,736 
Land and A&D
   
  45,000 
  45,000 
Residential Real Estate:
    
    
    
First Lien-Investment
  592,106 
  476,603 
  1,068,709 
First Lien-Owner Occupied
  222,237 
  1,550,098 
  1,772,335 
Land and A&D
  77,395 
  467,004 
  544,399 
Commercial
  3,285,244 
  75,701 
  3,360,945 
Consumer
   
   
   
 
  13,696,173 
  4,604,624 
  18,300,797 
Doubtful(8)
   
   
   
Loss(9)
   
   
   
Total
 $1,177,232,361 
 $188,880,903 
 $1,366,113,264 
 
 
 
 
 
The following table details activity in the allowance for loan losses by portfolio segment for the three and six month periods ended June 30, 2017 and 2016. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
 
 
 
 
 
 
Commercial
 
 
Residential
 
 
 
 
 
 
 
Three Months Ended June 30, 2017
 
Commercial
 
 
Real Estate
 
 
Real Estate
 
 
Consumer
 
 
Total
 
Beginning balance
 $1,233,152 
 $3,683,260 
 $684,541 
 $8,836 
 $5,609,789 
Provision for loan losses
  84,583 
  105,746 
  109,254 
  (20,667)
  278,916 
Recoveries
  512 
  417 
   
  22,208 
  23,137 
 
  1,318,247 
  3,789,423 
  793,795 
  10,377 
  5,911,842 
Loans charged off
   
   
   
   
   
Ending Balance
 $1,318,247 
 $3,789,423 
 $793,795 
 $10,377 
 $5,911,842 
 
 
 
 
 
 
 
Commercial
 
 
Residential
 
 
 
 
 
 
 
Six Months Ended June 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
  514,972 
  238,360 
  (28,357)
  (5,568)
  719,407 
Recoveries
  1,563 
  833 
  900 
  25,532 
  28,828 
 
  1,888,770 
  4,229,345 
  796,063 
  29,526 
  6,943,704 
Loans charged off
  (570,523)
  (439,922)
  (2,268)
  (19,149)
  (1,031,862)
Ending Balance
 $1,318,247 
 $3,789,423 
 $793,795 
 $10,377 
 $5,911,842 
Amount allocated to:
    
    
    
    
    
Legacy Loans:
    
    
    
    
    
Individually evaluated for impairment
 $300,234 
 $28,803 
 $20,262 
 $ 
 $349,299 
Other loans not individually evaluated
  993,496 
  3,760,620 
  693,461 
  10,377 
  5,457,954 
Acquired Loans:
    
    
    
    
    
Individually evaluated for impairment
  24,517 
   
  80,072 
   
  104,589 
Ending balance
 $1,318,247 
 $3,789,423 
 $793,795 
 $10,377 
 $5,911,842 
 
 
 
 
 
 
 
Commercial
 
 
Residential
 
 
 
 
 
 
 
Three Months Ended June 30, 2016
 
Commercial
 
 
Real Estate
 
 
Real Estate
 
 
Consumer
 
 
Total
 
Beginning balance
 $989,005 
 $3,801,163 
 $904,204 
 $11,485 
 $5,705,857 
Provision for loan losses
  146,461 
  138,069 
  14,615 
  855 
  300,000 
Recoveries
  7,386 
   
  11,308 
  3,212 
  21,906 
 
  1,142,852 
  3,939,232 
  930,127 
  15,552 
  6,027,763 
Loans charged off
   
   
  (3,055)
  (5,785)
  (8,840)
Ending Balance
 $1,142,852 
 $3,939,232 
 $927,072 
 $9,767 
 $6,018,923 
 
    
    
    
    
    
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
Residential
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
Commercial
 
 
Real Estate
 
 
Real Estate
 
 
Consumer
 
 
Total
 
Beginning balance
 $1,168,529 
 $3,046,714 
 $682,962 
 $11,613 
 $4,909,818 
Provision for loan losses
  (35,490)
  892,518 
  227,996 
  (6,413)
  1,078,611 
Recoveries
  14,285 
   
  19,169 
  10,853 
  44,307 
 
  1,147,324 
  3,939,232 
  930,127 
  16,053 
  6,032,736 
Loans charged off
  (4,472)
   
  (3,055)
  (6,286)
  (13,813)
Ending Balance
 $1,142,852 
 $3,939,232 
 $927,072 
 $9,767 
 $6,018,923 
Amount allocated to:
    
    
    
    
    
Legacy Loans:
    
    
    
    
    
Individually evaluated for impairment
 $550,046 
 $676,747 
 $ 
 $ 
 $1,226,793 
Other loans not individually evaluated
  592,806 
  3,262,485 
  611,006 
  9,767 
  4,476,064 
Acquired Loans:
    
    
    
    
    
Individually evaluated for impairment
   
   
  316,066 
   
  316,066 
Ending balance
 $1,142,852 
 $3,939,232 
 $927,072 
 $9,767 
 $6,018,923 
 
 
Our recorded investment in loans at June 30, 2017 and 2016 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
 
 
Residential
 
 
 
 
 
 
 
June 30, 2017
 
Commercial
 
 
Real Estate
 
 
Real Estate
 
 
Consumer
 
 
Total
 
Legacy loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment with specific reserve
 $300,234 
 $601,535 
 $192,501 
 $ 
 $1,094,270 
Individually evaluated for impairment without specific reserve
  405,368 
  3,009,569 
  263,495 
   
  3,678,432 
Other loans not individually evaluated
  149,238,270 
  918,871,531 
  208,531,955 
  4,405,042 
  1,281,046,798 
Acquired loans:
    
    
    
    
    
Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition)
  74,197 
  150,430 
   
   
  224,627 
Individually evaluated for impairment without specific reserve (ASC 310-20 at acquisition)
   
  252,687 
  1,585,980 
   
  1,838,667 
Individually evaluated for impairment without specific reserve (ASC 310-30 at acquisition)
   
  3,515,652 
  3,128,226 
   
  6,643,878 
Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition)
  4,749,336 
  87,128,806 
  64,312,307 
  88,696 
  156,279,145 
Ending balance
 $154,767,405 
 $1,013,530,210 
 $278,014,464 
 $4,493,738 
 $1,450,805,817 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
Residential
 
 
 
 
 
 
 
June 30, 2016
 
Commercial
 
 
Real Estate
 
 
Real Estate
 
 
Consumer
 
 
Total
 
Legacy loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment with specific reserve
 $1,009,512 
 $3,495,551 
 $ 
 $ 
 $4,505,063 
Individually evaluated for impairment without specific reserve
  885,570 
  1,814,606 
   
   
  2,700,176 
Other loans not individually evaluated
  110,924,558 
  718,453,673 
  185,608,582 
  5,386,911 
  1,020,373,724 
Acquired loans:
    
    
    
    
    
Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition)
   
   
  377,212 
   
  377,212 
Individually evaluated for impairment without specific reserve (ASC 310-20 at acquisition)
  952,002 
  616,862 
  1,954,409 
   
  3,523,273 
Individually evaluated for impairment without specific reserve (ASC 310-30 at acquisition)
   
  5,789,245 
  4,310,565 
   
  10,099,810 
Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition)
  7,010,584 
  118,600,602 
  79,468,134 
  171,324 
  205,250,644 
Ending balance
 $120,782,226 
 $848,770,539 
 $271,718,902 
 $5,558,235 
 $1,246,829,902 
 
 
5. 
OTHER REAL ESTATE OWNED
 
At June 30, 2017 and December 31, 2016, the fair value of other real estate owned was $2.9 million and $2.7 million, respectively. As a result of the acquisitions of MB&T, WSB and Regal Bank, we have segmented the other real estate owned (“OREO”) into two components, real estate obtained as a result of loans originated by Old Line Bank (legacy) and other real estate acquired from MB&T, WSB and Regal Bank or obtained as a result of loans originated by MB&T, WSB and Regal Bank (acquired). We are currently aggressively either marketing these properties for sale or improving them in preparation for sale.
 
The following outlines the transactions in OREO during the period.
 
 
Six Months Ended June 30, 2017
 
Legacy
 
 
Acquired
 
 
Total
 
Beginning balance
 $425,000 
 $2,321,000 
 $2,746,000 
Real estate acquired through foreclosure of loans
  321,600 
  101,248 
  422,848 
Sales/deposit on sales
   
  (290,644)
  (290,644)
Net realized gain on sale of real estate owned
   
  17,689 
  17,689 
Ending balance
 $746,600 
 $2,149,293 
 $2,895,893 
 
 
Residential Foreclosures and Repossessed Assets — Once all potential alternatives for reinstatement are exhausted, past due loans collateralized by residential real estate are referred for foreclosure proceedings in accordance with local requirements of the applicable jurisdiction. Once possession of the property collateralizing the loan is obtained, the repossessed property will be recorded within other assets either as other real estate owned or, where management has both the intent and ability to recover its losses through a government guarantee, as a foreclosure claim receivable. At June 30, 2017, residential foreclosures classified as other real estate owned totaled $1.2 million. We had no loans secured by residential real estate in process of foreclosure at June 30, 2017 compared to $99 thousand at December 31, 2016.
 
 
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
 
 
Six Months Ended
 
 
 
June 30,
 
 
June 30,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
Weighted average number of shares
  10,951,464 
  10,816,429 
  10,938,892 
  10,812,314 
Dilutive average number of shares
  11,165,814 
  10,989,854 
  11,152,901 
  10,980,534 
 
 
7. 
STOCK BASED COMPENSATION
 
For the three and six months ended June 30, 2017 and 2016, we recorded stock-based compensation expense of $146,918 and $147,649, respectively.  For the six months ended June 30, 2017 and 2016, we recorded stock-based compensation expense of $262,031 and $262,080, respectively. At June 30, 2017, there was $1.3 million of total unrecognized compensation cost related to non-vested stock options and restricted stock awards that we expect to realize over the next 2.5 years. As of June 30, 2017, there were 307,746 shares remaining available for future issuance under the 2010 equity incentive plan. The officers exercised 14,300 options during the six month period ended June 30, 2017 compared to no options exercised during the six month period ended June 30, 2016.
 
For purposes of determining estimated fair value of stock options, we have computed the estimated fair values using the Black-Scholes option pricing model and, for stock options granted prior to December 31, 2016, have applied the assumptions set forth in Old Line Bancshares’ Annual Report on Form 10-K for the year ended December 31, 2016.  There were no stock options granted during the six months ended June 30, 2017 compared to 58,927 stock options granted during the six months ended June 30, 2016.  The weighted average grant date fair value of the 2016 stock options is $5.38 and was computed using the Black-Scholes option pricing model under similar assumptions.
 
During the six months ended June 30, 2017 and 2016, we granted 24,415 and 13,869 restricted common stock awards, respectively. The weighted average grant date fair value of these restricted stock awards is $28.63 at June 30, 2017. There were no restricted shares forfeited during the six month periods ending June 30, 2017 or 2016.
 
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 six months ended June 30, 2017 or the year ended December 31, 2016.
 
 
 
 
At June 30, 2017, 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.
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
 
 
At June 30, 2017 (In thousands)
 
 
 
 
 
 
Quoted Prices in
 
 
Other
 
 
Significant
 
 
 
 
 
 
Active Markets for
 
 
Observable
 
 
Unobservable
 
 
 
 
 
 
Identical Assets
 
 
Inputs
 
 
Inputs
 
 
 
Carrying Value
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Treasury securities
 $3,013 
 $3,013 
 $ 
 $ 
U.S. government agency
  18,345 
   
  18,345 
   
Corporate bonds
  9,243 
   
   
  9,243 
Municipal securities
  66,474 
   
  66,474 
   
FHLMC MBS
  20,957 
   
  20,957 
   
FNMA MBS
  66,916 
   
  66,916 
   
GNMA MBS
  13,424 
   
  13,424 
   
Total recurring assets at fair value
 $198,372 
 $3,013 
 $186,116 
 $9,243 
 
 
 
 
 
At December 31, 2016 (In thousands)
 
 
 
 
 
 
Quoted Prices in
 
 
Other
 
 
Significant
 
 
 
 
 
 
Active Markets for
 
 
Observable
 
 
Unobservable
 
 
 
 
 
 
Identical Assets
 
 
Inputs
 
 
Inputs
 
 
 
Carrying Value
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Treasury securities
 $2,996 
 $2,996 
 $ 
 $ 
U.S. government agency
  7,266 
   
  7,266 
   
Corporate bonds
  8,172 
   
   
  8,172 
Municipal securities
  67,687 
   
  67,687 
   
FHLMC MBS
  21,800 
   
  21,800 
   
FNMA MBS
  70,449 
   
  70,449 
   
GNMA MBS
  21,135 
   
  21,135 
   
Total recurring assets at fair value
 $199,505 
 $2,996 
 $188,337 
 $8,172 
 
 
 
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 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, 2017
 $8,172 
   Realized and unrealized gains (losses)
    
       Included in earnings
   
       Included in other comprehensive income
  71 
   Purchases, issuances, sales and settlements
  1,000 
   Transfers into or out of level 3
   
Balance at June 30, 2017
 $9,243 
 
 
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 June 30, 2017 and December 31, 2016 are included in the tables below.
 
We also measure certain non-financial assets such as other real estate owned, TDRs, and repossessed or foreclosed property at fair value on a non-recurring basis. Generally, we estimate the fair value of these items using Level 2 inputs based on observable market data or Level 3 inputs based on discounting criteria.
 
 
 
 
At June 30, 2017 (In thousands)
 
 
 
 
 
 
Quoted Prices in
 
 
Other
 
 
Significant
 
 
 
 
 
 
Active Markets for
 
 
Observable
 
 
Unobservable
 
 
 
 
 
 
Identical Assets
 
 
Inputs
 
 
Inputs
 
 
 
Carrying Value
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
Impaired Loans
 
 
 
 
 
 
 
 
 
 
 
 
Legacy:
 $4,423 
   
   
 $4,423 
Acquired:
  1,959 
   
   
  1,959 
Total Impaired Loans
  6,382 
   
   
  6,382 
 
    
    
    
    
Other real estate owned:
    
    
    
    
Legacy:
 $747 
   
   
 $747 
Acquired:
  2,149 
   
   
  2,149 
Total other real estate owned:
  2,896 
   
   
  2,896 
Total
 $9,278 
 $ 
 $ 
 $9,278 
 
 
 
 
 
 
At December 31, 2016 (In thousands)
 
 
 
 
 
 
Quoted Prices in
 
 
Other
 
 
Significant
 
 
 
 
 
 
Active Markets for
 
 
Observable
 
 
Unobservable
 
 
 
 
 
 
Identical Assets
 
 
Inputs
 
 
Inputs
 
 
 
Carrying Value
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
Impaired Loans
 
 
 
 
 
 
 
 
 
 
 
 
Legacy:
 $6,976 
   
   
 $6,976 
Acquired:
  1,088 
   
   
  1,088 
Total Impaired Loans
  8,064 
   
   
  8,064 
 
    
    
    
    
Other real estate owned:
    
    
    
    
Legacy:
 $425 
   
   
 $425 
Acquired:
  2,321 
   
   
  2,321 
Total other real estate owned:
  2,746 
   
   
  2,746 
Total
 $10,810 
 $ 
 $ 
 $10,810 
 
 
As of June 30, 2017 and December 31, 2016, we estimated the fair value of impaired assets using Level 3 inputs to be $9.2 million and $10.8 million, respectively. We determined these Level 3 inputs based on appraisal evaluations, offers to purchase and/or appraisals that we obtained from an outside third party during the preceding twelve months less costs to sell. Discounts have predominantly been in the range of 0% to 50%. As a result of the acquisitions of Maryland Bankcorp, WSB Holdings and Regal, we have segmented the OREO into two components, real estate obtained as a result of loans originated by Old Line Bank (legacy) and other real estate acquired from MB&T, WSB and Regal Bank or obtained as a result of loans originated by MB&T, WSB and Regal Bank (acquired).
 
We use the following methodologies for estimating fair values of financial instruments that we do not measure on a recurring basis. The estimated fair values of financial instruments equal the carrying value of the instruments except as noted.
 
Cash and Cash Equivalents - For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value because of the short maturities of these instruments.
 
Loans- We estimate the fair value of loans, segregated by type based on similar financial characteristics, by discounting future cash flows using current rates for which we would make similar loans to borrowers with similar credit histories. We then adjust this calculated amount for any credit impairment.
 
Loans held for Sale- Loans held for sale are carried at the lower of cost or market value. The fair values of loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics.
 
Investment Securities- We base the fair values of investment securities upon quoted market prices or dealer quotes.
 
Equity Securities- Equity securities are considered restricted stock and are carried at cost that approximates fair value.
 
Accrued Interest Receivable and Payable- The carrying amount of accrued interest and dividends receivable on loans and investments and payable on borrowings and deposits approximate their fair values.
 
Interest bearing deposits-The fair value of demand deposits and savings accounts is the amount payable on demand. We estimate the fair value of fixed maturity certificates of deposit using the rates currently offered for deposits of similar remaining maturities.
 
Non-Interest bearing deposits- The fair value of non-interest bearing accounts is the amount payable on demand at the reporting date.
 
 
 
 
Long and short term borrowings- The fair value of long and short term fixed rate borrowings is estimated by discounting the value of contractual cash flows using rates currently offered for advances with similar terms and remaining maturities.
 
Off-balance Sheet Commitments and Contingencies- Carrying amounts are reasonable estimates of the fair values for such financial instruments. Carrying amounts include unamortized fee income and, in some cases, reserves for any credit losses from those financial instruments. These amounts are not material to our financial position.
 
 
Under ASC Topic 825, entities may choose to measure eligible financial instruments at fair value at specified election dates. The fair value measurement option: (i) may be applied instrument by instrument, with certain exceptions; (ii) is generally irrevocable; and (iii) is applied only to entire instruments and not to portions of instruments. We must report in earnings unrealized gains and losses on items for which we have elected the fair value measurement option at each subsequent reporting date. We measure certain financial assets and financial liabilities at fair value on a non-recurring basis. These assets and liabilities are subject to fair value adjustments in certain circumstances such as when there is evidence of impairment.
 
 
 
June 30, 2017 (In thousands)
 
 
 
 
 
 
 
 
 
Quoted Prices
 
 
Significant
 
 
Significant
 
 
 
 
 
 
Total
 
 
in Active
 
 
Other
 
 
Other
 
 
 
Carrying
 
 
Estimated
 
 
Markets for
 
 
Observable
 
 
Unobservable
 
 
 
Amount
 
 
Fair
 
 
Identical Assets
 
 
Inputs
 
 
Inputs
 
 
  (000’s)
 
Value
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
Assets:
    
 
 
 
 
 
 
 
 
 
 
 
 
Cashand cash equivalents$
  26,465 
 $26,465 
 $26,465 
 $ 
 $ 
Loans receivable, net
  1,446,573 
  1,443,615 
   
   
  1,443,615 
Loans held for sale
  6,615 
  6,858 
   
  6,858 
   
Investment securities available for sale
  198,372 
  198,372 
  3,013 
  186,116 
  9,243 
Equity Securities at cost
  9,973 
  9,973 
   
  9,973 
   
Bank Owned Life Insurance
  38,026 
  38,026 
   
  38,026 
   
Accrued interest receivable
  4,145 
  4,145 
   
  936 
  3,209 
Liabilities:
    
    
    
    
    
Deposits:
    
    
    
    
    
Non-interest-bearing
  366,469 
  366,469 
   
  366,469 
   
Interest bearing
  1,012,960 
  1,016,434 
   
  1,016,434 
   
Short term borrowings
  203,781 
  203,781 
   
  203,781 
   
Long term borrowings
  37,974 
  37,974 
   
  37,974 
   
Accrued Interest payable
  1,341 
  1,341 
   
  1,341 
   
 
 
 
 
 
 
 
 
December 31, 2016 (In thousands)
 
 
 
 
 
 
 
 
 
Quoted Prices
 
 
Significant
 
 
Significant
 
 
 
 
 
 
Total
 
 
in Active
 
 
Other
 
 
Other
 
 
 
Carrying
 
 
Estimated
 
 
Markets for
 
 
Observable
 
 
Unobservable
 
 
 
Amount
 
 
Fair
 
 
Identical Assets
 
 
Inputs
 
 
Inputs
 
 
  (000’s)
 
Value
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
Assets:
    
 
 
 
 
 
 
 
 
 
 
 
 
Cashand cash equivalents$
  23,463 
 $23,463 
 $23,463 
 $ 
 $ 
Loans receivable, net
  1,361,175 
  1,364,361 
   
   
  1,364,361 
Loans held for sale
  8,418 
  8,707 
   
  8,707 
   
Investment securities available for sale
  199,505 
  199,505 
  2,996 
  188,337 
  8,172 
Equity Securities at cost
  8,303 
  8,303 
   
  8,303 
   
Bank Owned Life Insurance
  37,558 
  37,558 
   
  37,558 
   
Accrued interest receivable
  4,278 
  4,278 
   
  991 
  3,287 
Liabilities:
    
    
    
    
    
Deposits:
    
    
    
    
    
Non-interest-bearing
  331,331 
  331,331 
   
  331,331 
   
Interest bearing
  994,549 
  998,489 
   
  998,489 
   
Short term borrowings
  183,434 
  183,434 
   
  183,434 
   
Long term borrowings
  37,843 
  37,843 
   
  37,843 
   
Accrued Interest payable
  1,269 
  1,269 
   
  1,269 
   
 
 
9.            
SHORT TERM BORROWINGS
 
Short term borrowings consist of promissory notes or overnight repurchase agreements sold to Old Line Bank’s customers, federal funds purchased and advances from the Federal Home Loan Bank of Atlanta.
 
Securities Sold Under Agreements to Repurchase
 
To support the $18.8 million in repurchase agreements at June 30, 2017, we have provided collateral in the form of investment securities. At June 30, 2017 we have pledged $39.0 million in U.S. government agency securities and mortgage-backed securities to customers who require collateral for overnight repurchase agreements and deposits. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. As a result, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. We monitor collateral levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities in the event the collateral fair value falls below stipulated levels. We closely monitor the collateral levels to ensure adequate levels are maintained. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents. We have the right to sell or re-pledge the investment securities. For government entity repurchase agreements, the collateral is held by Old Line Bank in a segregated custodial account under a tri-party agreement. The repurchase agreements totaling $18.8 million mature daily and will remain fully collateralized until the account has been closed or terminated.
 
10
10. 
LONG TERM BORROWINGS
 
Long term borrowings consist of $35 million in aggregate principal amount of Old Line Bancshares 5.625% Fixed-to-Floating Rate Subordinated Notes due 2026 (the “Notes”). The Notes were issued pursuant to an indenture and a supplemental indenture, each dated as of August 15, 2016, between Old Line Bancshares and U.S. Bank National Association as Trustee. The Notes are unsecured subordinated obligations of Old Line Bancshares and rank equally with all other unsecured subordinated indebtedness currently outstanding or issued in the future. The Notes are subordinated in right of payment of all senior indebtedness. The fair value of the Notes is $34.0 million.
 
 
 
 
Also included in long term borrowings are trust preferred subordinated debentures totaling $4.0 million (net of $2.7 million fair value adjustment) at June 30, 2017 acquired in the Regal acquisition. The trust preferred subordinated debentures consists of two trusts – Trust 1 in the amount of $4.0 million (fair value adjustment of $1.5 million) maturing on March 17, 2034 and Trust 2 in the amount of $2.5 million (fair value adjustment $1.2 million) maturing on December 14, 2035.
 
11. 
SUBSEQUENT EVENT
 
On July 28, 2017, Old Line Bancshares acquired DCB Bancshares, Inc. (“DCB”), the parent company of Damascus Community Bank. Upon the consummation of the merger, all outstanding shares of DCB common stock were exchanged for shares of common stock of Old Line Bancshares. As a result of the merger, each share of common stock of DCB was converted into the right to receive 0.9269 shares of Old Line Bancshares’ common stock, provided that cash will be paid in lieu of any fractional shares of Old Line Bancshares common stock. As a result Old Line Bancshares will issue approximately 1,495,256 shares of its common stock in exchange for the shares of common stock of DCB in the merger. The aggregate merger consideration was approximately $40.9 million based on the closing sales price of Old Line Bancshares’ common stock on July 28, 2017.
 
In connection with the merger, the parties have caused Damascus Community Bank to merge with and into Old Line Bank, with Old Line Bank the surviving bank.
 
At June 30 2017, DCB had consolidated assets of approximately $313 million. This merger adds six banking locations located in market areas of Montgomery, Frederick and Carroll Counties in Maryland.
 
The initial accounting for the business combination is incomplete as of the date of this report due to the timing of the closing date for the acquisition. The required information is not yet available for Old Line Bancshares to perform the necessary financial reporting and fair values of the related acquisition.
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Introduction
 
Some of the matters discussed below include forward-looking statements. Forward-looking statements often use words such as “believe,” “expect,” “plan,” “may,” “will,” “should,” “project,” “contemplate,” “anticipate,” “forecast,” “intend” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. Our actual results and the actual outcome of our expectations and strategies could be different from those anticipated or estimated for the reasons discussed below and under the heading “Information Regarding Forward Looking Statements.”
 
In this report, references to the “Company,” “we,” “us,” and “ours” refer to Old Line Bancshares, Inc. and its subsidiaries, collectively, and references to the “Bank” refer to Old Line Bank.
 
Overview
 
Old Line Bancshares was incorporated under the laws of the State of Maryland on April 11, 2003 to serve as the holding company of Old Line Bank.
 
On April 1, 2011, we acquired Maryland Bankcorp, Inc. (“Maryland Bankcorp”), the parent company of Maryland Bank & Trust Company, N.A (“MB&T”), on May 10, 2013, we acquired WSB Holdings, Inc. (“WSB Holdings”), the parent company of The Washington Savings Bank, F.S.B. (“WSB”), on December 4, 2015, we acquired Regal Bancorp, Inc. (“Regal”), the parent company of Regal Bank & Trust (“Regal Bank”), and on July 28, 2017, we acquired DCB Bancshares, Inc. (“DCB”), the parent company of Damascus Community Bank. Following our latest acquisition, we have assets of more than $2.0 billion and 28 full service branches serving nine Maryland counties.
 
 
 
 
Summary of Recent Performance and Other Activities
 
Net loans held-for-investment at June 30, 2017 increased $85.4 million, or 6.27%, compared to December 31, 2016. Net income available to common stockholders increased $838 thousand, or 26.78%, to $4.0 million for the three months ended June 30, 2017, compared to $3.1 million for the three months ended June 30, 2016. Earnings were $0.36 per basic and diluted common share for the three months ended June 30, 2017 compared to $0.29 per basic and $0.28 per diluted common share for the same period in 2016. The increase in net income is primarily the result of a $1.3 million increase in net interest income, a decrease of $623 thousand in non-interest expense, partially offset by a decrease of $568 thousand in non-interest income.
 
Net income available to common stockholders was $7.9 million for the six months ended June 30, 2017, compared to $5.3 million for the same period last year, an increase of $2.6 million, or 50.38%. Earnings were $0.73 per basic and $0.71 per diluted common share for the six months ended June 30, 2017 compared to $0.49 per basic and $0.48 per diluted common share for the same period last year. The increase in net income is primarily the result of an increase of $2.8 million, or 11.04%, in net interest income and a $1.7 million decrease in non-interest expenses, partially offset by a decrease of $697 thousand, or 15.33%, in non-interest income.
 
The following highlights contain additional financial data and events that have occurred during the three and six month periods ended June 30, 2017:
 
Net loans held for investment increased $29.5 million, or 2.08%, and $85.4 million, or 6.27%, respectively, during the three and six month periods ended June 30, 2017, remaining at $1.4 billion at June 30, 2017 and December 31, 2016. The increase is a result of organic growth within our market area.
 
Average gross loans increased $225.6 million, or 18.58%, and $217.8 million, or 18.25%, respectively, during the three and six month periods ending June 30, 2017, to $1.4 billion during the three and six months ended June 30, 2017, from $1.2 billion during the three and six months ended June 30, 2016. The increases during the three and six month periods this year as compared to the same periods last year are due to organic growth.
 
Nonperforming assets decreased to 0.27% of total assets at June 30, 2017 from 0.59% at December 31, 2016.
 
Total assets increased $85.3 million, or 4.99%, since December 31, 2016.
 
The net interest margin during the three months ended June 30, 2017 was 3.60% compared to 3.85% for the same period in 2016. Total yield on interest earning assets decreased to 4.28% for the three months ending June 30, 2017, compared to 4.32% for the same period last year. Interest expense as a percentage of total interest-bearing liabilities was 0.90% for the three months ended June 30, 2017 compared to 0.61% for the same period of 2016.
 
 
 
 
 
The net interest margin during the six months ended June 30, 2017 was 3.66% compared to 3.85% for the same period in 2016. Total yield on interest earning assets increased to 4.32% for the six months ending June 30, 2017, compared to 4.31% for the same period last year. Interest expense as a percentage of total interest-bearing liabilities was 0.86% for the six months ended June 30, 2017 compared to 0.60% for the same period of 2016.
 
The second quarter Return on Average Assets (“ROAA”) and Return on Average Equity (“ROAE”) were 0.89% and 9.37%, respectively, compared to ROAA and ROAE of 0.81% and 8.63%, respectively, for the second quarter of 2016.
 
ROAA and ROAE were 0.91% and 9.50%, respectively, for the six months ended June 30, 2017, compared to ROAA and ROAE of 0.69% and 7.41%, respectively, for the six months ending June 30, 2016.
 
Total deposits grew by $53.5 million, or 4.04%, since December 31, 2016.
 
We ended the second quarter of 2017 with a book value of $14.70 per common share and a tangible book value of $13.52 per common share compared to $13.81 and $12.59, respectively, at December 31, 2016.
 
We maintained appropriate levels of liquidity and by all regulatory measures remained “well capitalized.”
 
On June 26, 2017, we opened our new Riverdale Branch, located in Riverdale Park, Maryland. This location expands our presence in Prince George’s County.
 
The following summarizes the highlights of our financial performance for the three and six month periods ended June 30, 2017 compared to same periods in 2016 (figures in the table may not match those discussed in the balance of this section due to rounding).
 
 
 
Three months ended June 30,
 
 
 
(Dollars in thousands)
 
 
 
2017
 
 
2016
 
 
$ Change
 
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income available to common stockholders
 $3,969 
 $3,131 
 $838 
  26.76%
Interest income
  17,054 
  14,614 
  2,440 
  16.70 
Interest expense
  2,801 
  1,638 
  1,163 
  71.00 
Net interest income before provision for loan losses
  14,253 
  12,976 
  1,277 
  9.84 
Provision for loan losses
  279 
  300 
  (21)
  (7.00)
Non-interest income
  1,996 
  2,564 
  (568)
  (22.15)
Non-interest expense
  9,929 
  10,553 
  (624)
  (5.91)
Average total loans
  1,439,841 
  1,214,193 
  225,648 
  18.58 
Average interest earning assets
  1,648,820 
  1,402,850 
  245,970 
  17.53 
Average total interest bearing deposits
  1,010,827 
  916,952 
  93,875 
  10.24 
Average non-interest bearing deposits
  357,710 
  313,709 
  44,001 
  14.03 
Net interest margin
  3.60%
  3.85%
    
  (6.49)
Return on average equity
  9.37%
  8.63%
    
  8.57 
Basic earnings per common share
 $0.36 
 $0.29 
 $0.07 
  24.14 
Diluted earnings per common share
  0.36 
  0.28 
  0.08 
  28.57 
 
 
 
 
Six months ended June 30,
 
 
 
(Dollars in thousands)
 
 
 
2017
 
 
2016
 
 
$ Change
 
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income available to common stockholders
 $7,943 
 $5,282 
 $2,661 
  50.37%
Interest income
  33,689 
  28,772 
  4,917 
  17.09 
Interest expense
  5,275 
  3,184 
  2,091 
  65.65 
Net interest income before provision for loan losses
  28,414 
  25,588 
  2,826 
  11.04 
Provision for loan losses
  719 
  1,079 
  (360)
  (33.36)
Non-interest income
  3,850 
  4,547 
  (697)
  (15.33)
Non-interest expense
  19,462 
  21,177 
  (1,715)
  (8.10)
Average total loans
  1,411,251 
  1,193,476 
  217,775 
  18.25 
Average interest earning assets
  1,621,318 
  1,385,537 
  235,781 
  17.02 
Average total interest bearing deposits
  999,834 
  912,731 
  87,103 
  9.54 
Average non-interest bearing deposits
  347,236 
  319,979 
  27,257 
  8.52 
Net interest margin
  3.66%
  3.85%
    
  (4.94)
Return on average equity
  9.50%
  7.41%
    
  28.21 
Basic earnings per common share
 $0.73 
 $0.49 
 $0.24 
  48.98 
Diluted earnings per common share
  0.71 
  0.48 
  0.23 
  47.92 
 
 
 
 
Strategic Plan
 
We have based our strategic plan on the premise of enhancing stockholder value and growth through branching and operating profits. Our short term goals include continuing our strong pattern of organic loan and deposit growth, enhancing and maintaining credit quality, collecting payments on non-accrual and past due loans, profitably disposing of certain acquired loans and other real estate owned, maintaining an attractive branch network, expanding fee income, generating extensions of core banking services, and using technology to maximize stockholder value. During the past few years, we have expanded organically in Montgomery County, Prince George’s County and Anne Arundel County, Maryland and, pursuant to the Regal merger, by acquisition into Baltimore and Carroll Counties, Maryland.
 
We use the Internet and technology to augment our growth plans. Currently, we offer our customers image technology, Internet banking with online account access and bill pay service and mobile banking. We provide selected commercial customers the ability to remotely capture their deposits and electronically transmit them to us. We will continue to evaluate cost effective ways that technology can enhance our management capabilities, products and services.
 
We may continue to take advantage of strategic opportunities presented to us via mergers occurring in our marketplace. For example, we may purchase branches that other banks close or lease branch space from other banks or hire additional loan officers. We also continually evaluate and consider opportunities with financial services companies or institutions with which we may become a strategic partner, merge or acquire such as we have done with Maryland Bankcorp, WSB Holdings, Regal and DCB. We believe the recent DCB acquisition will generate increased earnings and increase returns for our stockholders, including the former stockholders of DCB.
 
Although the current interest rate and regulatory climate continues to present challenges for our industry, we have worked diligently towards our goal of becoming the premier community bank in Maryland. During the past two years we have opened two branches in Montgomery County, Maryland. We also increased our presence in Prince George’s County with the opening of our new Riverdale office in June 2017. In addition, through the DCB merger, we have further expanded our presence in Montgomery and Carroll Counties and entered the Frederick County market. While we are uncertain about the pace of economic growth or the impact of the current political environment and the growing national debt, we remain cautiously optimistic that we have identified any problem assets, that our remaining borrowers will stay current on their loans and that we can continue to grow our balance sheet and earnings.
 
Although the Board of Governors of the Federal Reserve System has started to slowly increase the federal funds rate since December 2015, interest rates are still at historically low levels, and if the economy remains stable, we believe that we can continue to grow total loans during the remainder of 2017 even with the additional, expected incremental increases in the federal funds rate, which will increase market interest rates, and that we can continue to grow total deposits during remainder of 2017 even with interest rates that are, and are expected to remain through 2017, low by historical levels.  As a result of this expected growth, we expect that net interest income will continue to increase during 2017, although there can be no guarantee that this will be the case.
 
We also expect that salaries and benefits expenses and other operating expenses will be higher in 2017 than they were in 2016 as a result of the addition of Damascus Community Bank employees and staff associated with our newly-opened branch in our Riverdale, Maryland, and the occupancy costs associated with the Damascus Community Bank and Riverdale branches; such expenses may increase even further if we selectively take the opportunity to add more business development talent. We will continue to look for opportunities to reduce expenses as we did with the closing of three branches in 2016. We believe with our existing branches, our lending staff, our corporate infrastructure and our solid balance sheet and strong capital position, we can continue to focus our efforts on improving earnings per share and enhancing stockholder value.
 
Critical Accounting Policies
 
Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. As discussed in Old Line Bancshares’ Form 10-K for the fiscal year ended December 31, 2016, we consider our critical accounting policies to be the allowance for loan losses, other-than-temporary impairment of investment securities, goodwill and other intangible assets, income taxes, business combinations and accounting for acquired loans. There has been no material changes in our critical accounting policies during the six months ended June 30, 2017.
 
 
 
 
Results of Operations for the Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016.
 
Net Interest Income. Net interest income is the difference between income on interest earning assets and the cost of funds supporting those assets. Earning assets are comprised primarily of loans, investments, interest bearing deposits and federal funds sold. Cost of funds consists of interest paid on interest bearing deposits and other borrowings. Non-interest bearing deposits and capital are also funding sources. Changes in the volume and mix of earning assets and funding sources along with changes in associated interest rates determine changes in net interest income.
 
Net interest income before provision for loan losses for the three months ended June 30, 2017 increased $1.3 million, or 9.84%, to $14.3 million from $13.0 million for the same period in 2016. As outlined in detail in the Rate/Volume Variance Analysis, this increase was the result of an increase in total interest income, resulting primarily from an increase in the level of our average loans, partially offset by an increase in interest expense resulting from an increase in the average rate on and, to a lesser extent, the average balance of, our interest-bearing liabilities, all as discussed further below. We continue to adjust the mix and volume of interest earning assets and liabilities on the balance sheet to maintain a relatively strong net interest margin.
 
Total interest income increased $2.4 million, or 16.70%, to $17.1 million during the three months ended June 30, 2017 compared to $14.6 million during the three months ended June 30, 2016, primarily as a result of a $2.2 million increase in interest and fees on loans. The increase in interest and fees on loans is the result of a $225.6 million increase in the average balance of our loans for the three months ended June 30, 2017 compared to the same period in 2016 as a result of strong organic loan growth, partially offset by a decrease in the average yield quarter over quarter. The average yield on the loan portfolio decreased to 4.47% for the three months ended June 30, 2017 from 4.57% during the three months ended June 30, 2016 due to lower yields on new loans. The fair value accretion/amortization on acquired loans affects interest income, primarily due to payoffs on such acquired loans. Payoffs during the three months ended June 30, 2017 contributed a seven basis point increase in interest income, as compared to four basis points for the three months ending June 30, 2016. In addition, a $237 thousand increase in interest earned on investment and other securities over the 2016 period also contributed to the increase in total interest income for the 2017 period. This increase was primarily related to increases in the average balances of our corporate bonds, MBS and municipal securities.
 
Total interest expense increased $1.2 million, or 71.01%, to $2.8 million during the three months ended June 30, 2017 from $1.6 million for the same period in 2016, as a result of increases in the average rate paid on and, to a lesser extent, the average balance of, our interest bearing liabilities. The average interest rate paid on all interest bearing liabilities increased to 0.90% during the three months ended June 30, 2017 from 0.61% during the three months ended June 30, 2016, due to higher rates paid on our borrowings and, to a lesser extent, an increase in the rate paid on our money market and NOW accounts and our time deposits. The average rate on our borrowings increased primarily as a result of the interest rate on the Notes we issued in August 2016 being higher than our typical borrowings. The fair value accretion recorded on acquired deposits also affects interest expense. The benefit from accretion on such deposits was one basis point for the three months ending June 30, 2017.
 
The average balance of our interest bearing liabilities increased $169.2 million, or 15.62%, to $1.3 billion for the three months ended June 30, 2017 from $1.1 billion for the three months ended June 30, 2016, as a result of increases of $93.9 million, or 10.24%, in our average interest bearing deposits and $75.3 million, or 45.38%, in our average borrowings quarter over quarter. The increase in our average interest bearing deposits is due to organic deposit growth. The increase in our average borrowings is primarily due to the use of short-term Federal Home Loan Bank of Atlanta (“FHLB”) advances to fund new loan originations and the $35 million of Notes we issued in August 2016.
 
Non-interest bearing deposits allow us to fund growth in interest earning assets at minimal cost. As a result of the growth generated primarily from our branch network and also from the efforts of our commercial loan officers in working with loan clients to move their commercial deposits to Old Line Bank, average non-interest bearing deposits increased $44.0 million to $357.7 million for the three months ended June 30, 2017, compared to $313.7 million for the three months ended June 30, 2016.
 
Our net interest margin decreased to 3.60% for the three months ended June 30, 2017 from 3.85% for the three months ended June 30, 2016. This decrease is primarily due to the increase in the average rate paid on our interest bearing liabilities, as discussed above. In addition, the yield on our average interest earning assets decreased four basis points from 4.32% for the quarter ended June 30, 2016 to 4.28% for the quarter ended June 30, 2017 due primarily to the decrease in the average yield on our loan portfolio, offsetting an increase in the average yield on our investment portfolio.
 
 
 
 
During the three months ended June 30, 2017 and 2016, we continued to successfully collect payments on acquired loans that we had recorded at fair value at the acquisition date, which resulted in a positive impact in interest income. Total accretion increased by $125 thousand for the three months ended June 30, 2017, as compared to the same period last year. The higher level of accretion on acquired loans was due to a higher level of early payoffs on acquired loans with credit marks.
 
The accretion positively impacted the yield on loans and increased the net interest margin during these periods as follows:
 
 
 
Three months ended June 30,
 
 
 
2017
 
 
2016
 
 
 
 
 
 
% Impact on
 
 
 
 
 
% Impact on
 
 
 
Accretion
 
 
Net Interest
 
 
Accretion
 
 
Net Interest
 
 
 
Dollars
 
 
Margin
 
 
Dollars
 
 
Margin
 
Commercial loans
 $(6,028)
  %
 $(479)
  %
Mortgage loans
  302,687 
  0.07 
  127,100 
  0.04 
Consumer loans
  5,038 
   
  10,963 
   
Interest bearing deposits
  29,538 
  0.01 
  68,569 
  0.02 
Total accretion (amortization)
 $331,235 
  0.08%
 $206,153 
  0.06%
 
 
 
 
Average Balances, Yields and Accretion of Fair Value Adjustments Impact. The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the three months ended June 30, 2017 and 2016, showing the average distribution of assets, liabilities, stockholders’ equity and related income, expense and corresponding weighted average yields and rates. Non-accrual loans are included in total loan balances lowering the effective yield for the portfolio in the aggregate. The average balances used in this table and other statistical data were calculated using average daily balances.
 
 
 
Average Balances, Interest and Yields
 
 
 
2017
 
 
2016
 
 
 
Average
 
 
 
 
 
Yield/
 
 
Average
 
 
 
 
 
Yield/
 
Three months ended June 30,
 
balance
 
 
Interest
 
 
Rate
 
 
balance
 
 
Interest
 
 
Rate
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold (1)
 $334,761 
 $996 
  1.19%
 $327,683 
 $379 
  0.47%
Interest bearing deposits (1)
  1,139,932 
  4 
   
  1,520,554 
  3 
   
Investment securities (1)(2)
    
    
    
    
    
    
U.S. Treasury
  3,023,053 
  7,578 
  1.01 
  2,997,364 
  5,285 
  0.71 
U.S. government agency
  10,852,617 
  71,214 
  2.63 
  23,454,182 
  90,625 
  1.55 
Corporate bonds
  9,100,000 
  121,042 
  5.34 
   
   
   
Mortgage backed securities
  113,281,791 
  554,411 
  1.96 
  104,087,876 
  494,145 
  1.91 
Municipal securities
  67,296,987 
  646,047 
  3.85 
  55,881,307 
  591,467 
  4.26 
Other equity securities
  9,730,114 
  132,793 
  5.47 
  6,231,432 
  97,728 
  6.31 
Total investment securities
  213,284,562 
  1,533,085 
  2.88 
  192,652,161 
  1,279,250 
  2.67 
Loans(1)
    
    
    
    
    
    
Commercial
  179,581,927 
  1,723,985 
  3.85 
  145,376,806 
  1,458,969 
  4.04 
Mortgage real estate
  1,255,389,706 
  14,264,687 
  4.56 
  1,061,962,806 
  12,236,782 
  4.63 
Consumer
  4,869,487 
  62,228 
  5.13 
  6,853,629 
  87,168 
  5.12 
Total loans
  1,439,841,120 
  16,050,900 
  4.47 
  1,214,193,241 
  13,782,919 
  4.57 
Allowance for loan losses
  5,780,277 
   
    
  5,844,078 
   
    
Total loans, net of allowance
  1,434,060,843 
  16,050,900 
  4.49 
  1,208,349,163 
  13,782,919 
  4.59 
Total interest earning assets(1)
  1,648,820,098 
  17,584,985 
  4.28 
  1,402,849,561 
  15,062,551 
  4.32 
Non-interest bearing cash
  29,113,718 
    
    
  43,063,212 
    
    
Premises and equipment
  37,054,746 
    
    
  36,183,279 
    
    
Other assets
  75,941,367 
    
    
  73,789,163 
    
    
Total assets(1)
  1,790,929,929 
    
    
  1,555,885,215 
    
    
Liabilities and Stockholders’ Equity:
    
    
    
    
    
    
Interest bearing deposits
    
    
    
    
    
    
Savings
  105,199,972 
  31,542 
  0.12 
  102,310,829 
  30,739 
  0.12 
Money market and NOW
  434,279,367 
  422,991 
  0.39 
  381,648,262 
  227,643 
  0.24 
Time deposits
  471,347,240 
  1,252,460 
  1.07 
  432,992,550 
  1,050,997 
  0.98 
Total interest bearing deposits
  1,010,826,579 
  1,706,993 
  0.68 
  916,951,641 
  1,309,379 
  0.57 
Borrowed funds
  241,256,198 
  1,094,133 
  1.82 
  165,943,308 
  328,613 
  0.80 
Total interest bearing liabilities
  1,252,082,777 
  2,801,126 
  0.90 
  1,082,894,949 
  1,637,992 
  0.61 
Non-interest bearing deposits
  357,709,853 
    
    
  313,709,097 
    
    
 
  1,609,792,630 
    
    
  1,396,604,046 
    
    
Other liabilities
  11,261,452 
    
    
  13,171,739 
    
    
Non-controlling interest
   
    
    
  257,582 
    
    
Stockholders’ equity
  169,875,847 
    
    
  145,851,848 
    
    
Total liabilities and stockholders’ equity
 $1,790,929,929 
    
    
 $1,555,885,215 
    
    
Net interest spread(1) 
    
    
  3.38 
    
    
  3.71 
Net interest margin(1) 
    
 $14,783,859 
  3.60%
    
 $13,424,559 
  3.85%
 
 
(1)
Interest income is presented on a fully taxable equivalent (“FTE”) basis. The FTE basis adjusts for the tax favored status of these types of assets. Management believes providing this information on a FTE basis provides investors with a more accurate picture of our net interest spread and net interest income and we believe it to be the preferred industry measurement of these calculations. See “Reconciliation of Non-GAAP Measures.”
(2)
Available for sale investment securities are presented at amortized cost.  
 
 
 
 
The following table describes the impact on our interest income and expense resulting from changes in average balances and average rates for the three months ended June 30, 2017 and 2016. We have allocated the change in interest income, interest expense and net interest income due to both volume and rate proportionately to the rate and volume variances.
 
Rate/Volume Variance Analysis
 
 
 
 
Three months ended June 30,
 
 
 
2017 compared to 2016
 
 
 
Variance due to:
 
 
 
Total
 
 
Rate
 
 
Volume
 
 
 
 
 
 
 
 
 
 
 
Interest earning assets:
 
 
 
 
 
 
 
 
 
Federal funds sold(1)
 $617 
 $615 
 $2 
Interest bearing deposits
  1 
  2 
  (1)
Investment Securities(1)
    
    
    
U.S. treasury
  2,293 
  2,281 
  12 
U.S. government agency
  (19,411)
  65,575 
  (84,986)
Corporate bonds
  121,042 
   
  121,042 
Mortgage backed securities
  60,266 
  33,780 
  26,486 
Municipal securities
  54,580 
  (122,432)
  177,012 
Other
  35,065 
  (36,411)
  71,476 
Loans:(1)
    
    
    
Commercial
  265,016 
  (186,181)
  451,197 
Mortgage
  2,027,905 
  (653,221)
  2,681,126 
Consumer
  (24,940)
  700 
  (25,640)
Total interest income (1)
  2,522,434 
  (895,292)
  3,417,726 
 
    
    
    
Interest bearing liabilities 
    
    
    
Savings
  803 
  (379)
  1,182 
Money market and NOW
  195,348 
  185,216 
  10,132 
Time deposits
  201,463 
  162,370 
  39,093 
Borrowed funds
  765,520 
  703,526 
  61,994 
Total interest expense
  1,163,134 
  1,050,733 
  112,401 
 
    
    
    
Net interest income(1)
 $1,359,300 
 $(1,946,025)
 $3,305,325 

 
(1)
Interest income is presented on a FTE basis. The FTE basis adjusts for the tax favored status of these types of assets. Management believes providing this information on a FTE basis provides investors with a more accurate picture of our net interest spread and net interest income and we believe it to be the preferred industry measurement of these calculations. See “Reconciliation of Non-GAAP Measures.”
 
Provision for Loan Losses. The provision for loan losses for the three months ended June 30, 2017 was $279 thousand, a decrease of $21 thousand, or 7.03%, compared to $300 thousand for the three months ended June 30, 2016. This decrease is due to an improvement in the balance of our non-performing loans.
 
We had no charge-offs during the three month period ended June 30, 2017, as management did not identify any probable losses in the loan portfolio; this compares to charge-offs of $9 thousand for the three months ended June 30, 2016. Recoveries of $23 thousand were recognized for the three months ending June 30, 2017 compared to recoveries of $22 thousand for the same period in 2016.
 
The allowance for loan losses to gross loans held-for-investment was 0.41% and 0.45%, and the allowance for loan losses to non-accrual loans was 311.86% and 97.05%, at June 30, 2017 and December 31, 2016, respectively. The decrease in the allowance for loan losses as a percentage of gross loans held-for-investment was the result of the improvement in our asset quality. The increase in the allowance for loan losses to non-accrual loans is primarily the result of the decrease in the balance of our non-accrual loans.
 
 
 
 
Non-interest Income. Non-interest income totaled $2.0 million for the three months ended June 30, 2017, a decrease of $568 thousand, or 22.16%, from the corresponding period of 2016 amount of $2.6 million.
 
The following table outlines the amounts of and changes in non-interest income for the three month periods.
 
 
 
Three months ended June 30,
 
 
 
 
 
 
 
 
 
2017
 
 
2016
 
 
$ Change
 
 
% Change
 
Service charges on deposit accounts
 $434,272 
 $433,498 
 $774 
  0.18%
Gain on sales or calls of investment securities
  19,581 
  823,214 
  (803,633)
  (97.62)
Earnings on bank owned life insurance
  282,100 
  282,358 
  (258)
  (0.09)
Gain on disposal of assets
   
  22,784 
  (22,784)
  (100.00)
Gain on sale of loans
  94,714 
   
  94,714 
  100.00 
Rental income
  169,862 
  208,556 
  (38,694)
  (18.55)
Income on marketable loans
  726,647 
  587,030 
  139,617 
  23.78 
Other fees and commissions
  268,443 
  206,244 
  62,199 
  30.16 
Total non-interest income
 $1,995,619 
 $2,563,684 
 $(568,065)
  (22.16)%
 
 
Non-interest income decreased during the 2017 period primarily as a result of a decrease in gain on sales or calls of investment securities, partially offset by increases in income on marketable loans and gain on sale of loans.
 
The decrease in gains on sales and calls of investment securities is the result of our re-positioning our investment portfolio during the 2016 period, pursuant to which we sold approximately $74 million of our lowest yielding, longer duration investments, compared to $15.5 million in sales and calls for the three months ending June 30, 2017.
 
Income on marketable loans consists of gain on the sale of residential mortgage loans originated for sale and any fees we receive in connection with such sales. Income on marketable loans increased $140 thousand during the three months ended June 30, 2017, compared to the same period last year primarily due to gains recorded on the sale of residential mortgage loans as a result of higher volume of loans sold in the secondary market and the increased premiums received on such loans. The residential mortgage division originated loans aggregating $31.1 million in the secondary market during the first quarter of 2017 compared to $22.3 million for the same period last year.
 
The increase in gain on sale of loans (other than residential mortgage loans held for sale) is due to the sale of one SBA loan during the 2017 period, whereas we did not sell any portfolio loans during the 2016 period.
 
Non-interest Expense. Non-interest expense decreased $623 thousand, or 5.91%, for the three months ended June 30, 2017, compared to the three months ended June 30, 2016.
 
 
 
 
The following table outlines the amounts of and changes in non-interest expenses for the periods.
 
 
 
 
Three months ended June 30,
 
 
 
 
 
 
 
 
 
2017
 
 
2016
 
 
$ Change
 
 
% Change
 
Salaries and benefits
 $5,050,635 
 $5,079,143 
 $(28,508)
  (0.56)%
Severance expense
   
  393,495 
  (393,495)
  (100.00)
Occupancy and equipment
  1,655,270 
  1,647,490 
  7,780 
  0.47 
Data processing
  361,546 
  383,689 
  (22,143)
  (5.77)
FDIC insurance and State of Maryland assessments
  256,513 
  285,630 
  (29,117)
  (10.19)
Merger and integration
   
  301,538 
  (301,538)
  (100.00)
Core deposit premium amortization
  181,357 
  200,998 
  (19,641)
  (9.77)
Gain on sale of other real estate owned
   
  (48,099)
  48,099 
  (100.00)
OREO expense
  27,634 
  63,192 
  (35,558)
  (56.27)
Director fees
  159,700 
  162,900 
  (3,200)
  (1.96)
Network services
  164,232 
  146,334 
  17,898 
  12.23 
Telephone
  186,159 
  201,141 
  (14,982)
  (7.45)
Other operating
  1,886,405 
  1,735,287 
  151,118 
  8.71 
Total non-interest expenses
 $9,929,451 
 $10,552,738 
 $(623,287)
  (5.91)%
 
 
Non-interest expenses decreased quarter over quarter primarily as a result of decreases in severance and merger and integration expenses, partially offset by an increase in other operating expense, for the three months ended June 30, 2017 compared to the same period of 2016.
 
There were no severance expenses during the 2017 period compared to $393 thousand of severance expenses associated with strategic staff reductions during the three months ended June 30, 2016.
 
There were no merger expenses during the 2017 period whereas we incurred $302 thousand of merger and integration expenses during the second quarter of 2016 in connection with the Regal acquisition that was consummated in December 2015.
 
Other operating expense increased slightly quarter over quarter primarily due to higher fees associated with our Internet banking support.
 
Income Taxes. We had an income tax expense of $2.1 million (34.28% of pre-tax income) for the three months ended June 30, 2017 compared to an income tax expense of $1.6 million (33.16% of pre-tax income) for the same period in 2016. The effective tax rate increased for the 2017 period due to an reduction in the level of non-taxable interest income compared to the same period last year.
 
Net Income Available to Common Stockholders. Net income available to common stockholders was $4.0 million or $0.36 per basic and diluted common share for the three month period ending June 30, 2017 compared to $3.1 million, or $0.29 per basic and $0.28 per diluted common share, for the same period in 2016. The increase in net income is primarily the result of the $1.3 million increase in net interest income and the decrease of $623 thousand in non-interest expenses, partially offset by a decrease of $568 thousand in non-interest income.
 
Results of Operations for the Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016.
 
Net interest income before provision for loan losses for the six months ended June 30, 2017 increased $2.8 million, or 11.04%, to $28.4 million from $25.6 million for the same period in 2016. As outlined in detail in the Rate/Volume Variance Analysis, this increase was the result of an increase in total interest income, resulting primarily from an increase in the level of our average loans, partially offset by an increase in interest expense resulting from an increase in the average rate on and, to a lesser extent, the average balance of, our interest-bearing liabilities, all as discussed further below.
 
Total interest income increased $4.9 million, or 17.09%, to $33.7 million during the six months ended June 30, 2017 compared to $28.8 million during the six months ended June 30, 2016, primarily as a result of a $4.5 million increase in interest and fees on loans. The increase in interest and fees on loans is the result of a $217.8 million increase in the average balance of our loans for the six months ended June 30, 2017 compared to the same period in 2016, as a result of strong organic loan growth, slightly offset by a decrease in the average yield on such loans. The average yield on the loan portfolio decreased slightly to 4.53% for the six months ended June 30, 2017 from 4.56% during the six months ended June 30, 2016 due to lower yields on new loans. The fair value accretion/amortization on acquired loans affects interest income, primarily due to payoffs on such acquired loans. Payoffs during the six months ended June 30, 2017 contributed a seven basis point increase in interest income, as compared to four basis points for the six months ending June 30, 2016. In addition, a $406 thousand increase in interest earned on investment and other securities contributed to the increase in total interest income for the 2017 period. This increase was primarily related to increases in the average balances of our corporate bonds, MBS and municipal securities, partially offset by decreases in the average balance of our U.S. government agencies and the average yield on our MBS, municipal and other equity securities.
 
 
 
 
Total interest expense increased $2.1 million, or 65.67%, to $5.3 million during the six months ended June 30, 2017 from $3.2 million for the same period in 2016, as a result of increases in the average rate paid on and, to a lesser extent, the average balance of, our interest bearing liabilities. The average interest rate paid on all interest bearing liabilities increased to 0.86% during the six months ended June 30, 2017 from 0.60% during the six months ended June 30, 2016, due to higher rates paid on our borrowings and, to a lesser extent, an increase in the rate paid on our money market and NOW accounts and our time deposits. The average rate on our borrowings increased primarily as a result of the interest rate on the Notes we issued in August 2016 being higher than our typical borrowings. The fair value accretion recorded on acquired deposits also affects interest expense. The benefit from accretion on such deposits was one basis point for the six months ending June 30, 2017.
 
The average balance of our interest bearing liabilities increased $176.2 million, or 16.62%, to $1.2 billion for the six months ended June 30, 2017 from $1.1 billion for the six months ended June 30, 2016, as a result of increases of $87.1 million, or 9.55%, in our average interest bearing deposits and $89.1 million, or 60.33%, in our average borrowings quarter over quarter. The increase in our average interest bearing deposits is due to organic deposit growth. The increase in our average borrowings is due to the use of short-term FHLB advances to fund new loan originations and the $35 million of Notes we issued in August 2016.
 
As a result of the growth generated primarily from our branch network and also from the efforts of our commercial loan officers in working with loan clients to move their commercial deposits to Old Line Bank, average non-interest bearing deposits increased $27.3 million to $347.2 million for the six months ended June 30, 2017, compared to $320.0 million for the six months ended June 30, 2016.
 
Our net interest margin decreased to 3.66% for the six months ended June 30, 2017 from 3.85% for the six months ended June 30, 2016. The yield on average interest earning assets increased by one basis point from 4.31% for the six months ended June 30, 2016 to 4.32% for the six months ended June 30, 2017, due primarily to the increase on the yield on our investment portfolio. The average rate paid on our interest-bearing liabilities increased 26 basis points, as discussed above.
 
During the six months ended June 30, 2017 and 2016, we continued to successfully collect payments on acquired loans that we had recorded at fair value at the acquisition date, which resulted in a positive impact in interest income. Total accretion increased by $149 thousand for the six months ended June 30, 2017, as compared to the same period last year. The higher level of accretion on acquired loans was due to a higher level of early payoffs on acquired loans with credit marks.
 
 
 
 
The accretion positively impacted the yield on loans and increased the net interest margin during these periods as follows:
 
 
 
Six months ended June 30,
 
 
 
2017
 
 
2016
 
 
 
 
 
 
% Impact on
 
 
 
 
 
% Impact on
 
 
 
Accretion
 
 
Net Interest
 
 
Accretion
 
 
Net Interest
 
 
 
Dollars
 
 
Margin
 
 
Dollars
 
 
Margin
 
Commercial loans
 $3,699 
  %
 $26,925 
  %
Mortgage loans
  588,169 
  0.07 
  306,650 
  0.04 
Consumer loans
  10,315 
   
  22,516 
   
Interest bearing deposits
  64,574 
  0.01 
  161,402 
  0.02 
Total accretion (amortization)
 $666,757 
  0.08%
 $517,493 
  0.06%
 
 
 
 
Average Balances, Yields and Accretion of Fair Value Adjustments Impact. The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the three months ended June 30, 2017 and 2016, showing the average distribution of assets, liabilities, stockholders’ equity and related income, expense and corresponding weighted average yields and rates. Non-accrual loans are included in total loan balances lowering the effective yield for the portfolio in the aggregate. The average balances used in this table and other statistical data were calculated using average daily balances.
 
 
 
Average Balances, Interest and Yields
 
 
 
2017
 
 
2016
 
 
 
Average
 
 
 
 
 
Yield/
 
 
Average
 
 
 
 
 
Yield/
 
Six months ended June 30,
 
balance
 
 
Interest
 
 
Rate
 
 
balance
 
 
Interest
 
 
Rate
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold (1)
 $293,027 
 $1,619 
  1.11%
 $644,457 
 $1,509 
  0.47%
Interest bearing deposits (1)
  1,143,800 
  4 
   
  1,549,022 
  11 
   
Investment securities (1)(2)
    
    
    
    
    
    
U.S. Treasury
  3,028,386 
  12,948 
  0.86 
  3,006,641 
  9,285 
  0.62 
U.S. government agency
  9,604,138 
  122,514 
  2.57 
  29,694,920 
  223,604 
  1.51 
Corporate bonds
  8,995,028 
  238,878 
  5.36 
   
   
   
Mortgage backed securities
  115,082,500 
  1,108,840 
  1.94 
  102,632,817 
  1,007,450 
  1.97 
Municipal securities
  68,626,297 
  1,329,131 
  3.91 
  53,748,864 
  1,166,576 
  4.36 
Other equity securities
  9,249,015 
  245,062 
  5.34 
  6,231,432 
  199,207 
  6.43 
Total investment securities
  214,585,364 
  3,057,373 
  2.87 
  195,314,674 
  2,606,122 
  2.68 
Loans(1)
    
    
    
    
    
    
Commercial
  173,597,006 
  3,358,105 
  3.90 
  144,593,771 
  2,905,008 
  4.04 
Mortgage real estate
  1,232,592,239 
  28,193,171 
  4.61 
  1,041,826,785 
  23,993,295 
  4.63 
Consumer
  5,062,059 
  126,281 
  5.03 
  7,055,492 
  180,515 
  5.15 
Total loans
  1,411,251,304 
  31,677,557 
  4.53 
  1,193,476,048 
  27,078,818 
  4.56 
Allowance for loan losses
  5,955,492 
   
    
  5,447,403 
   
    
Total loans, net of allowance
  1,405,295,812 
  31,677,557 
  4.55 
  1,188,028,645 
  27,078,818 
  4.58 
Total interest earning assets(1)
  1,621,318,003 
  34,736,553 
  4.32 
  1,385,536,798 
  29,686,460 
  4.31 
Non-interest bearing cash
  28,955,509 
    
    
  43,437,395 
    
    
Premises and equipment
  36,160,555 
    
    
  36,172,478 
    
    
Other assets
  77,133,846 
    
    
  72,086,270 
    
    
Total assets(1)
  1,763,567,913 
    
    
  1,537,232,941 
    
    
Liabilities and Stockholders’ Equity:
    
    
    
    
    
    
Interest bearing deposits
    
    
    
    
    
    
Savings
  103,454,948 
  61,892 
  0.12 
  100,253,407 
  60,371 
  0.12 
Money market and NOW
  431,589,356 
  766,543 
  0.36 
  377,385,565 
  452,838 
  0.24 
Time deposits
  464,789,750 
  2,419,616 
  1.05 
  435,091,908 
  2,066,603 
  0.96 
Total interest bearing deposits
  999,834,054 
  3,248,051 
  0.66 
  912,730,880 
  2,579,812 
  0.57 
Borrowed funds
  236,796,669 
  2,027,021 
  1.73 
  147,692,134 
  604,272 
  0.82 
Total interest bearing liabilities
  1,236,630,723 
  5,275,072 
  0.86 
  1,060,423,014 
  3,184,084 
  0.60 
Non-interest bearing deposits
  347,235,809 
    
    
  319,978,869 
    
    
 
  1,583,866,532 
    
    
  1,380,401,883 
    
    
Other liabilities
  11,073,953 
    
    
  13,151,052 
    
    
Non-controlling interest
   
    
    
  256,956 
    
    
Stockholders’ equity
  168,627,428 
    
    
  143,423,050 
    
    
Total liabilities and stockholders’ equity
 $1,763,567,913 
    
    
 $1,537,232,941 
    
    
Net interest spread(1) 
    
    
  3.46 
    
    
  3.71 
Net interest margin(1) 
    
 $29,461,481 
  3.66%
    
 $26,502,376 
  3.85%
 
 
(1)
Interest income is presented on a FTE basis. The FTE basis adjusts for the tax favored status of these types of assets. Management believes providing this information on a FTE basis provides investors with a more accurate picture of our net interest spread and net interest income and we believe it to be the preferred industry measurement of these calculations. See “Reconciliation of Non-GAAP Measures.”
(2)
Available for sale investment securities are presented at amortized cost.
 
The following table describes the impact on our interest income and expense resulting from changes in average balances and average rates for the six months ended June 30, 2017 and 2016. We have allocated the change in interest income, interest expense and net interest income due to both volume and rate proportionately to the rate and volume variances.
 
 
 
 
Rate/Volume Variance Analysis
 
 
 
  Six months ended June 30,           
 
 
 
  2017 compared to 2016           
 
 
 
  Variance due to:           
 
 
 
Total
 
 
Rate
 
 
Volume
 
 
 
 
 
 
 
 
 
 
 
Interest earning assets:
 
 
 
 
 
 
 
 
 
Federal funds sold(1)
 $110 
 $1,467 
 $(1,357)
Interest bearing deposits
  (7)
  (6)
  (1)
Investment Securities(1)
    
    
    
U.S. treasury
  3,663 
  3,629 
  34 
U.S. government agency
  (101,090)
  135,555 
  (236,645)
Corporate bond
  238,878 
   
  238,878 
Mortgage backed securities
  101,390 
  (29,465)
  130,855 
Municipal securities
  162,555 
  (208,871)
  371,426 
Other
  45,855 
  (60,505)
  106,360 
Loans:(1)
    
    
    
Commercial
  453,097 
  (182,546)
  635,643 
Mortgage
  4,199,876 
  (195,108)
  4,394,984 
Consumer
  (54,234)
  (7,431)
  (46,803)
Total interest income (1)
  5,050,093 
  (543,281)
  5,593,374 
 
    
    
    
Interest bearing liabilities 
    
    
    
Savings
  1,521 
  (447)
  1,968 
Money market and NOW
  313,705 
  273,482 
  40,223 
Time deposits
  353,013 
  463,106 
  (110,093)
Borrowed funds
  1,422,749 
  1,118,103 
  304,646 
Total interest expense
  2,090,988 
  1,854,244 
  236,744 
 
    
    
    
Net interest income(1)
 $2,959,105 
 $(2,397,525)
 $5,356,630 
 
 
(1)
Interest income is presented on a FTE basis. The FTE basis adjusts for the tax favored status of these types of assets. Management believes providing this information on a FTE basis provides investors with a more accurate picture of our net interest spread and net interest income and we believe it to be the preferred industry measurement of these calculations. See “Reconciliation of Non-GAAP Measures.”
 
Provision for Loan Losses. The provision for loan losses for the six months ended June 30, 2017 was $719 thousand, a decrease of $359 thousand, or 33.30%, compared to $1.1 million for the six months ended June 30, 2016. This decrease is due to an improvement in our asset quality, in particular, a decrease in the balance of our non-accrual loans, and a decrease in our reserves on specific loans. The reserves on specific loans decreased primarily due to one hospitality loan for $1.3 million that was paid off during the first quarter and a large commercial borrower, consisting of 23 commercial loans totaling $3.0 million, of which $1.0 million was charged-off against the allowance for loan losses and $2.0 million was reclassified as TDRs during the first quarter of 2017. Amounts charged off in relation to this borrower during the six month period were in line with specific reserves at December 31, 2016. These TDRs are classified as impaired and all our impaired loans have been adequately reserved for at June 30, 2017.
 
Management identified probable losses in the loan portfolio and did not believe any additional charge-offs, other than the $1.0 million noted above, were necessary for the six months ended June 30, 2017; this compares to charge-offs of $14 thousand for the six months ended June 30, 2016. Recoveries of $29 thousand were recognized for the six months ending June 30, 2017 compared to $44 thousand for the same period in 2016.
 
 
 
 
Non-interest Income. Non-interest income totaled $3.9 million for the six months ended June 30, 2017, a decrease of $697 thousand, or 15.33%, from the corresponding period of 2016 amount of $4.5 million.
 
The following table outlines the amounts of and changes in non-interest income for the six month periods.
 
 
 
Six months ended June 30,
 
 
 
 
 
 
 
 
 
2017
 
 
2016
 
 
$ Change
 
 
% Change
 
Service charges on deposit accounts
 $846,431 
 $844,835 
 $1,596 
  0.19%
Gain on sales or calls of investment securities
  35,258 
  900,212 
  (864,954)
  (96.08)
Earnings on bank owned life insurance
  563,456 
  564,544 
  (1,088)
  (0.19)
Gain on disposal of assets
  112,594 
  22,784 
  89,810 
  394.18 
Gain on sale of loans
  94,714 
   
  94,714 
  100.00 
Rental income
  310,455 
  417,135 
  (106,680)
  (25.57)
Income on marketable loans
  1,357,577 
  964,168 
  393,409 
  40.80 
Other fees and commissions
  529,866 
  833,659 
  (303,793)
  (36.44)
Total non-interest income
 $3,850,351 
 $4,547,337 
 $(696,986)
  (15.33)%
 
 
Non-interest income decreased during the 2017 period primarily as a result of decreases in gain on sales or calls of investment securities, other fees and commissions, and rental income, partially offset by increases in income on marketable loans, gain on sale of loans and gain on disposal of assets.
 
The decrease of $865 thousand in gain on sales or calls or investment securities is the result of selling $19.8 million of our investment portfolio for the six months ending June 30, 2017 compared to $87.5 million sold during the six month period of 2016. The sales in 2016 were the result of selling our lower-yielding securities and using the net proceeds to purchase higher-yielding investment securities.
 
Other fees and commissions, which consists of other loan fees and the commissions earned on loans, decreased $304 thousand during the six months ended June 30, 2017 compared to the same period last year primarily due to a one-time incentive fee for our debit card program received in the first quarter of last year for which there was no corresponding income this year.
 
The decrease in rental income for the six month period ending June 30, 2017 is due to vacant space at our building located at 4201 Mitchellville Road in Bowie, Maryland, which was occupied during 2016.
 
Income on marketable loans increased $393 thousand during the six months ended June 30, 2017, compared to the same period last year primarily due to gains recorded on the sale of residential mortgage loans as a result of a higher volume of loans sold in the secondary market and an increase in the premiums received on such loans. The residential mortgage division originated loans aggregating $51.7 million in the secondary market during the six months ending June 30, 2017 compared to $39.0 million for the same period last year.
 
As for the three-month period ending June 30, 2017, the increase in gain on sale of loans (other than residential mortgage loans held for sale) is due to the sale of one SBA loan during the 2017 period, whereas we did not sell any portfolio loans during the 2016 period.
 
 The increase in gain on disposal of assets is due to the sale during 2017 of our previously-owned location, the Accokeek branch, which we closed in the third quarter of 2016.
 
Non-interest Expense. Non-interest expense decreased $1.7 million, or 8.10%, for the six months ended June 30, 2017 compared to the six months ended June 30, 2016.
 
 
 
 
The following table outlines the amounts of and changes in non-interest expenses for the periods.
 
 
 
Six months ended June 30,
 
 
 
 
 
 
 
 
 
2017
 
 
2016
 
 
$ Change
 
 
% Change
 
Salaries and benefits
 $9,918,166 
 $10,455,695 
 $(537,529)
  (5.14)%
Severance expense
   
  393,495 
  (393,495)
  (100.00)
Occupancy and equipment
  3,308,683 
  3,372,043 
  (63,360)
  (1.88)
Data processing
  718,194 
  781,481 
  (63,287)
  (8.10)
FDIC insurance and State of Maryland assessments
  518,113 
  520,914 
  (2,801)
  (0.54)
Merger and integration
   
  661,019 
  (661,019)
  (100.00)
Core deposit premium amortization
  379,258 
  427,239 
  (47,981)
  (11.23)
Gain on sale of other real estate owned
  (17,689)
  (52,307)
  34,618 
  (66.18)
OREO expense
  55,211 
  218,158 
  (162,947)
  (74.69)
Director fees
  336,900 
  331,700 
  5,200 
  1.57 
Network services
  303,839 
  283,230 
  20,609 
  7.28 
Telephone
  380,301 
  419,775 
  (39,474)
  (9.40)
Other operating
  3,560,605 
  3,364,815 
  195,790 
  5.82 
Total non-interest expenses
 $19,461,581 
 $21,177,257 
 $(1,715,676)
  (8.10)%
 
Non-interest expenses decreased quarter over quarter primarily as a result of decreases in salaries and benefits, merger and integration expenses, severance expense, and OREO expenses, partially offset by an increase in other operating expense, for the six months ended June 30, 2017 compared to the same period of 2016.
 
The decreases in salaries and benefits expense is associated with staff reductions and branch closures we implemented in the second and third quarters of 2016.
 
There were no merger expenses during the 2017 period whereas we incurred $661 thousand of merger and integration expenses during the six months ending June 30, 2017 in connection with the Regal acquisition that was consummated in December 2015.
 
There were no severance expenses during the 2017 period whereas we incurred $393 thousand of severance expenses during the six months ending June 30, 2016 in connection with the staff reductions and Regal Bancorp acquisition that was consummated in December 2015.
 
OREO expenses decreased for the 2017 period as a result of a reduction in our expenses associated with properties in our OREO portfolio.
 
Other operating expense increased during the 2017 period primarily due to higher fees associated with our Internet banking support.
 
Income Taxes. We had an income tax expense of $4.1 million (34.27% of pre-tax income) for the six months ended June 30, 2017 compared to an income tax expense of $2.6 million (32.96% of pre-tax income) for the same period in 2016. The effective tax rate increased for the 2017 period due to a reduction in the level of non-taxable interest income compared to the same period last year.
 
Net Income Available to Common Stockholders. Net income available to common stockholders was $7.9 million or $0.73 per basic and $0.71 per diluted common share for the six month period ending June 30, 2017 compared to $5.3 million, or $0.49 per basic and $0.48 per diluted common share, for the same period in 2016. The increase in net income is primarily the result of the $2.8 million increase in net interest income and the $1.7 million decrease in non-interest expenses, partially offset by the $697 thousand decrease in non-interest income.
 
Analysis of Financial Condition
 
Investment Securities. Our portfolio consists primarily of investment grade securities including U.S. Treasury securities, U.S. government agency securities, U.S. government sponsored entity securities, corporate bonds, securities issued by states, counties and municipalities, MBS and certain equity securities (recorded at cost), including Federal Home Loan Bank stock, Maryland Financial Bank stock, and Atlantic Community Bankers Bank stock.
 
 
 
 
We have prudently managed our investment portfolio to maintain liquidity and safety. The portfolio provides a source of liquidity, collateral for borrowings as well as a means of diversifying our earning asset portfolio. While we usually intend to hold the investment securities until maturity, currently we classify all of our investment securities as available for sale. This classification provides us the opportunity to divest of securities that may no longer meet our liquidity objectives. We account for investment securities at fair value and report the unrealized appreciation and depreciation as a separate component of stockholders’ equity, net of income tax effects. Although we may sell securities to reposition the portfolio, generally, we invest in securities for the yield they produce and not to profit from trading the securities. We continually evaluate our investment portfolio to ensure it is adequately diversified, provides sufficient cash flow and does not subject us to undue interest rate risk. There are no trading securities in our portfolio.
 
The investment securities at June 30, 2017 amounted to $198.4 million, a decrease of $1.1 million, or 0.57%, from the December 31, 2016 amount of $199.5 million. As outlined above, at June 30, 2017, all securities are classified as available for sale.
 
The fair value of available for sale securities included net unrealized losses of $2.4 million at June 30, 2017 (reflected as $1.4 million net of taxes) as compared to net unrealized losses of $8.2 million (reflected as $5.0 million net of taxes) at December 31, 2016. The improvement in the value of the investment securities is due to a decrease in market interest rates, which resulted in an increase in bond values. We have evaluated securities with unrealized losses for an extended period of time and determined that all such losses are temporary because, at this point in time, we expect to hold them until maturity. We have no intent or plan to sell these securities, it is not likely that we will have to sell these securities and we have not identified any portion of the loss that is a result of credit deterioration in the issuer of the security. As the maturity date moves closer and/or interest rates decline, any unrealized losses in the portfolio will decline or dissipate.
 
Loan Portfolio. Net of allowance, unearned fees and origination costs, loans held for investment increased $84.5 million, or 6.27%, during the six months ended June 30, 2017, remaining at $1.4 billion at June 30, 2017 and December 31, 2016. The loan growth during 2017 was primarily due to new commercial real estate originations resulting from our enhanced presence in our market area. Commercial real estate loans increased by $59.6 million, residential real estate loans increased by $12.8 million, commercial and industrial loans increased by $12.8 million and consumer loans decreased by $515 thousand from their respective balances at December 31, 2016.
 
Most of our lending activity occurs within the state of Maryland in the suburban Washington, D.C. and Baltimore market areas in Anne Arundel, Baltimore, Calvert, Carroll, Charles, Montgomery, 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. The following table summarizes the composition of the loan portfolio held for investment by dollar amount at the dates indicated:
 
 
 
 
 
 
 
June 30, 2017
 
 
December 31, 2016
 
 
 
Legacy(1)
 
 
Acquired
 
 
Total
 
 
Legacy(1)
 
 
Acquired
 
 
Total
 
Commercial Real Estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner Occupied
 $266,686,058 
 $45,923,998 
 $312,610,056 
 $238,220,475 
 $53,850,612 
 $292,071,087 
Investment
  453,597,514 
  32,857,002 
  486,454,516 
  414,012,709 
  37,687,804 
  451,700,513 
Hospitality
  157,457,044 
  6,814,105 
  164,271,149 
  141,611,858 
  11,193,427 
  152,805,285 
Land and A&D
  44,742,020 
  5,452,470 
  50,194,490 
  51,323,297 
  6,015,813 
  57,339,110 
Residential Real Estate
    
    
    
    
    
    
First Lien-Investment
  81,285,353 
  20,860,372 
  102,145,725 
  72,150,512 
  23,623,660 
  95,774,172 
First Lien-Owner Occupied
  61,719,823 
  40,800,994 
  102,520,817 
  54,732,604 
  42,443,767 
  97,176,371 
Residential Land and A&D
  43,290,769 
  5,012,688 
  48,303,457 
  39,667,222 
  5,558,232 
  45,225,454 
HELOC and Jr. Liens
  22,692,006 
  2,352,459 
  25,044,465 
  24,385,215 
  2,633,718 
  27,018,933 
Commercial and Industrial
  149,943,871 
  4,823,533 
  154,767,404 
  136,259,560 
  5,733,904 
  141,993,464 
Consumer
  4,405,042 
  88,696 
  4,493,738 
  4,868,909 
  139,966 
  5,008,875 
 
  1,285,819,500 
  164,986,317 
  1,450,805,817 
  1,177,232,361 
  188,880,903 
  1,366,113,264 
Allowance for loan losses
  (5,807,254)
  (104,588)
  (5,911,842)
  (6,084,478)
  (110,991)
  (6,195,469)
Deferred loan costs, net
  1,679,274 
   
  1,679,274 
  1,257,411 
   
  1,257,411 
 
 $1,281,691,520 
 $164,881,729 
 $1,446,573,249 
 $1,172,405,294 
 $188,769,912 
 $1,361,175,206 
 
 
(1)
As a result of the acquisitions of Maryland Bankcorp, the parent company of MB&T, in April 2011, WSB Holdings, the parent company of WSB, in May 2013, and Regal Bancorp, the parent company of Regal Bank, in December 2015, we have segmented the portfolio into two components, loans originated by Old Line Bank (legacy) and loans acquired from MB&T, WSB and Regal Bank (acquired).
 
Bank owned life insurance. At June 30, 2017 we have invested $38.0 million in life insurance policies on our executive officers, other officers of Old Line Bank, retired officers of MB&T, and former officers of WSB and Regal Bank. This represents a $468 thousand increase from December 31, 2016 as a result of interest earned on these policies. Earnings on bank owned life insurance were $563 thousand during the six months ended June 30, 2017, which earnings were partially offset by $95 thousand in expenses associated with the policies.
 
Deposits. The deposit portfolio increased $53.5 million, or 4.04%, during the six month period ending June 30, 2017, to $1.4 billion at June 30, 2017 compared to $1.3 billion at December 31, 2016. The deposit increase was comprised of increases of $18.4 million, or 1.85%, in interest bearing deposits and $35.1 million, or 10.60%, in non-interest bearing deposits.
 
The following table outlines the changes in interest bearing deposits:
 
 
 
June 30,
 
 
December 31,
 
 
 
 
 
 
 
 
 
2017
 
 
2016
 
 
$ Change
 
 
% Change
 
 
 
(Dollars in thousands)
 
Certificates of deposit
 $475,833 
 $460,595 
 $15,238 
  3.31%
Interest bearing checking
  430,095 
  433,195 
  (3,100)
  (0.72)
Savings
  107,032 
  100,759 
  6,273 
  6.23 
Total
 $1,012,960 
 $994,549 
 $18,411 
  1.85%
 
 
We acquire brokered certificates of deposit and money market accounts through the Promontory Interfinancial Network (Promontory). Through this deposit matching network and its certificate of deposit account registry service (CDARS) and money market account service, we have the ability to offer our customers access to Federal Deposit Insurance Corporation (the “FDIC”) insured deposit products in aggregate amounts exceeding current insurance limits. When we place funds through Promontory on behalf of a customer, we receive matching deposits through the network’s reciprocal deposit program. We can also place deposits through this network without receiving matching deposits. At June 30, 2017, we had $54.0 million in CDARS and $129.3 million in money market accounts through Promontory’s reciprocal deposit program compared to $39.9 million and $126.8 million, respectively, at December 31, 2016.
 
We do not currently have any brokered certificates of deposits other than CDARS. The $4.0 million of brokered certificates of deposit that we acquired in the WSB transaction matured during the first quarter of 2017. Old Line Bank did not obtain any brokered certificates of deposit during the six months ended June 30, 2017. We may, however, use brokered deposits in the future as an element of our funding strategy if and when required to maintain an acceptable loan to deposit ratio.
 
 
 
 
Borrowings. Short-term borrowings consist of short-term borrowings with the FHLB and short-term promissory notes issued to Old Line Bank’s commercial customers as an enhancement to the basic non-interest bearing demand deposit account. This service electronically sweeps excess funds from the customer’s account into a short term promissory note with Old Line Bank. These obligations are payable on demand and are secured by investments. At June 30, 2017, we had $185.0 million outstanding in short-term FHLB borrowings, compared to $150.0 million at December 31, 2016. At June 30, 2017 and December 31, 2016, we had no unsecured promissory notes and $18.8 million and $33.4 million, respectively, in secured promissory notes.
 
Long-term borrowings at June 30, 2017 consist primarily of the Notes in the amount of $35.0 million (fair value of $34.0 million) due in 2026. The initial interest rate on the Notes is 5.625% per annum from August 15, 2016 to August 14, 2021, payable semi-annually on each February 15 and August 15. Beginning August 15, 2021, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month LIBOR rate plus 450.2 basis points, payable quarterly on each February 15, May 15, August 15 and November 15 through maturity or early redemption. Also included in long-term borrowings are trust preferred subordinated debentures totaling $4.0 million (net of $2.7 million fair value adjustment) we acquired in the Regal acquisition. The trust preferred subordinated debentures consists of two trusts – Trust 1 in the amount of $4.0 million (fair value adjustment of $1.5 million) with an interest rate of floating 90-day LIBOR plus 2.85%, maturing in 2034 and Trust 2 in the amount of $2.5 million (fair value adjustment $1.2 million) with an interest rate of floating 90-day LIBOR plus 1.60%, maturing in 2035.
 
Liquidity and Capital Resources. Our overall asset/liability strategy takes into account our need to maintain adequate liquidity to fund asset growth and deposit runoff. Our management monitors the liquidity position daily in conjunction with regulatory guidelines. As further discussed below, we have credit lines, unsecured and secured, available from several correspondent banks totaling $43.5 million. Additionally, we may borrow funds from the FHLB and the Federal Reserve Bank of Richmond. We can use these credit facilities in conjunction with the normal deposit strategies, which include pricing changes to increase deposits as necessary. We can also sell available for sale investment securities or pledge investment securities as collateral to create additional liquidity. From time to time we may sell or participate out loans to create additional liquidity as required. Additional sources of liquidity include funds held in time deposits and cash flow from the investment and loan portfolios.
 
Our immediate sources of liquidity are cash and due from banks, federal funds sold and deposits in other banks. On June 30, 2017, we had $25.0 million in cash and due from banks, $1.1 million in interest bearing accounts, and $303 thousand in federal funds sold. As of December 31, 2016, we had $22.1 million in cash and due from banks, $1.2 million in interest bearing accounts, and $248 thousand in federal funds sold.
 
Old Line Bank has sufficient liquidity to meet its loan commitments as well as fluctuations in deposits. We usually retain maturing certificates of deposit as we offer competitive rates on certificates of deposit. Management is not aware of any demands, trends, commitments, or events that would result in Old Line Bank’s inability to meet anticipated or unexpected liquidity needs.
 
We did not have any unusual liquidity requirements during the six months ended June 30, 2017. Although we plan for various liquidity scenarios, if turmoil in the financial markets occurs and our depositors lose confidence in us, we could experience liquidity issues.
 
Old Line Bancshares has available a $5.0 million unsecured line of credit at June 30, 2017. In addition, Old Line Bank has $38.5 million in available lines of credit at June 30, 2017, consisting of overnight federal funds of $33.5 million and repurchase agreements of $5.0 million from its correspondent banks. Old Line Bank has an additional secured line of credit from the FHLB of $528.5 million at June 30, 2017. As a condition of obtaining the line of credit from the FHLB, the FHLB requires that Old Line Bank purchase shares of capital stock in the FHLB. Prior to allowing Old Line Bank to borrow under the line of credit, the FHLB also requires that Old Line Bank provide collateral to support borrowings. Therefore, we have provided collateral to support up to $296.2 million in lendable collateral value for FHLB borrowings. We may increase availability by providing additional collateral. Additionally, we have overnight repurchase agreements sold to Old Line Bank’s customers and have provided collateral in the form of investment securities to support the $18.8 million in repurchase agreements.
 
 
 
 
In July 2013, the Board of Governors of the Federal Reserve System and the FDIC have approved rules implementing Basel III. Under the rules, which became effective January 1, 2015, minimum requirements increased for both the quantity and quality of capital held by Old Line Bancshares and Old Line Bank. Among other things, the rules established a new minimum common equity Tier 1 capital for risk-weighted assets ratio of 4.5%, a minimum Tier 1 risk-based capital ratio of 6.0%, a minimum total risk-based capital ratio requirement of 8.0% and a minimum Tier 1 leverage ratio of 4.0%. These capital requirements also included changes in the risk-weights of certain assets to better reflect credit risk and other risk exposures. Additionally, subject to a transition schedule, the rule limits a banking organization’s ability to make capital distributions, engage in share repurchases and pay certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. Implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will increase ratably each subsequent January 1, until it reaches 2.5% on January 1, 2019. Old Line Bank has elected to permanently opt out of the inclusion of accumulated other comprehensive income in our capital calculations, as permitted by the regulations. This opt-out will reduce the impact of market volatility on our regulatory capital levels.
 
As of June 30, 2017, Old Line Bancshares’ capital levels remained characterized as “well-capitalized” under these rules.
 
Current regulations require subsidiaries of a financial institution to be separately capitalized and require investments in and extensions of credit to any subsidiary engaged in activities not permissible for a bank to be deducted in the computation of the institution’s regulatory capital. Regulatory capital and regulatory assets below also reflect increases of $2.4 million and $1.4 million, respectively, which represents unrealized losses (after-tax for capital additions and pre-tax for asset additions, respectively) on mortgage-backed securities and investment securities classified as available for sale. In addition, the risk-based capital reflects an increase of $5.9 million for the general loan loss reserve during the six months ended June 30, 2017.
 
As of June 30, 2017, Old Line Bank met all capital adequacy requirements to be considered well capitalized. There were no conditions or events since the end of the second quarter of 2017 that management believes have changed Old Line Bank’s classification as well capitalized.
 
The following table shows Old Line Bank’s regulatory capital ratios and the minimum capital ratios currently required by its banking regulator to be “well capitalized” at June 30, 2017.
 
 
 
 
 
 
 
 
 
 
Minimum capital
 
 
To be well
 
 
 
Actual
 
 
adequacy
 
 
capitalized
 
June 30, 2017
 
Amount
 
 
Ratio
 
 
Amount
 
 
Ratio
 
 
Amount
 
 
Ratio
 
 
 
(Dollars in 000’s)
 
Common equity tier 1 (to risk-weighted assets)
 $172,548 
  10.84%
 $71,609 
  4.5%
 $103,435 
  6.5 
Total capital (to risk weighted assets)
 $178,522 
  11.22%
 $127,305 
  8%
 $159,132 
  10 
Tier 1 capital (to risk weighted assets)
 $172,548 
  10.84%
 $95,479 
  6%
 $127,305 
  8 
Tier 1 leverage (to average assets)
 $172,548 
  9.79%
 $70,504 
  4%
 $88,130 
  5 
 
 
Our management believes that, under current regulations, and eliminating the assets of Old Line Bancshares, Old Line Bank remains well capitalized and will continue to meet its minimum capital requirements in the foreseeable future. However, events beyond our control, such as a shift in interest rates or an economic downturn in areas where we extend credit, could adversely affect future earnings and, consequently, our ability to meet minimum capital requirements in the future.
 
Asset Quality
 
Overview. Management performs reviews of all delinquent loans and foreclosed assets and directs relationship officers to work with customers to resolve potential credit issues in a timely manner. Management reports to the Loan Committee for their approval and recommendation to the board of directors on a monthly basis. The reports presented include information on delinquent loans and foreclosed real estate. We have formal action plans on criticized assets and provide status reports on OREO on a quarterly basis. These action plans include our actions and plans to cure the delinquent status of the loans and to dispose of the foreclosed properties. The Loan Committee consists of three executive officers and four non-employee members of the board of directors.
 
 
 
 
We classify any property acquired as a result of foreclosure on a mortgage loan as “other real estate owned” and record it at the lower of the unpaid principal balance or fair value at the date of acquisition and subsequently carry the property at the lower of cost or net realizable value. We charge any required write down of the loan to its net realizable value against the allowance for loan losses at the time of foreclosure. We charge to expense any subsequent adjustments to net realizable value. Upon foreclosure, Old Line Bank generally requires an appraisal of the property and, thereafter, appraisals of the property generally on an annual basis and external inspections on at least a quarterly basis.
 
As required by ASC Topic 310-Receivables and ASC Topic 450-Contingencies, we measure all impaired loans, which consist of all modified loans (TDRs) and other loans for which collection of all contractual principal and interest is not probable, based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, we recognize impairment through a valuation allowance and corresponding provision for loan losses. Old Line Bank considers consumer loans as homogenous loans and thus does not apply the impairment test to these loans. We write off impaired loans when collection of the loan is doubtful.
 
Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of a borrower has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. These loans do not meet the criteria for, and are therefore not included in, nonperforming assets. Management, however, classifies potential problem loans as either special mention, watch, or substandard. These loans were considered in determining the adequacy of the allowance for loan losses and are closely and regularly monitored to protect our interests. Potential problem loans, which are not included in nonperforming assets, amounted to $32.5 million at June 30, 2017 compared to $32.8 million at December 31, 2016. At June 30, 2017, we had $19.3 million and $13.2 million, respectively, of potential problem loans attributable to our legacy and acquired loan portfolios, compared to $17.3 million and $15.5 million, respectively, at December 31, 2016.
 
Acquired Loans. Loans acquired in mergers are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan losses. Generally accepted accounting principles require that we record acquired loans at fair value, which includes a discount for loans with credit impairment. These loans are not performing according to their contractual terms and meet our definition of a nonperforming loan. The discounts that arise from recording these loans at fair value were due to credit quality. Although we do not accrue interest income at the contractual rate on these loans, we may accrete these discounts to interest income as a result of pre-payments that exceed our expectations or payment in full of amounts due. Purchased, credit-impaired loans that perform consistent with the accretable yield expectations are not reported as non-accrual or nonperforming.
 
All acquired loans from MB&T, WSB and Regal Bank were recorded at fair value. The fair value of the acquired loans includes expected loan losses, and as a result there was no allowance for loan losses recorded for acquired loans at the time of acquisition. Accordingly, the existence of the acquired loans reduces the ratios of the allowance for loan losses to total gross loans and the allowance for loan losses to non-accrual loans, and this measure is not directly comparable to prior periods. Similarly, net loan charge-offs are normally lower for acquired loans since we recorded these loans net of expected loan losses. Therefore, the ratio of net charge-offs during the period to average loans outstanding is reduced as a result of the existence of acquired loans, and the measures are not directly comparable to prior periods. Other institutions may not have acquired loans, and therefore there may be no direct comparability of these ratios between and among other institutions when compared in total.
 
The accounting guidance also requires that if we experience a decrease in the expected cash flows of a loan subsequent to the acquisition date, we establish an allowance for loan losses for those acquired loans with decreased cash flows. At June 30, 2017, there was $105 thousand of allowance reserved for potential loan losses on acquired loans compared to $111 thousand at December 31, 2016.
 
 
 
 
Nonperforming Assets. As of June 30, 2017, our nonperforming assets totaled $4.8 million and consisted of $1.9 million of nonaccrual loans, $23 thousand of loans past due 90 days and still accruing and other real estate owned of $2.9 million.
 
The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.
 
 
 
Nonperforming Assets
 
 
 
June 30, 2017
 
 
December 31, 2016
 
 
 
Legacy
 
 
Acquired
 
 
Total
 
 
Legacy
 
 
Acquired
 
 
Total
 
Accruing loans 90 or more days past due
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner Occupied
 $ 
 $ 
 $ 
 $ 
 $634,290 
 $634,290 
Residential Real Estate:
    
    
    
    
    
    
First Lien-Owner Occupied
   
  3,360 
  3,360 
   
  250,000 
  250,000 
Commercial
  19,159 
   
  19,159 
   
   
   
Consumer
   
   
   
  19,242 
   
  19,242 
Total accruing loans 90 or more days past due
  19,159 
  3,360 
  22,519 
  19,242 
  884,290 
  903,532 
Non-accruing loans:
    
    
    
    
    
    
Commercial Real Estate
    
    
    
    
    
    
Owner Occupied
 $ 
 $225,432 
 $225,432 
 $2,370,589 
 $ 
 $2,370,589 
Hospitality
   
   
   
  1,346,736 
   
  1,346,736 
Land and A&D
   
  192,382 
  192,382 
  77,395 
  194,567 
  271,962 
Residential Real Estate:
    
    
    
    
    
    
First Lien-Investment
  233,759 
   
  233,759 
  312,061 
  99,293 
  411,354 
First Lien-Owner Occupied
  222,237 
  819,353 
  1,041,590 
  222,237 
   
  222,237 
Commercial and Industrial
  202,528 
   
  202,528 
  1,760,824 
   
  1,760,824 
Total Non-accruing loans:
  658,524 
  1,237,167 
  1,895,691 
  6,089,842 
  293,860 
  6,383,702 
 
    
    
    
    
    
    
Other real estate owned (“OREO”)
  746,600 
  2,149,293 
  2,895,893 
  425,000 
  2,321,000 
  2,746,000 
 
    
    
    
    
    
    
Total nonperforming assets
 $1,424,283 
 $3,389,820 
 $4,814,103 
 $6,534,084 
 $3,499,150 
 $10,033,234 
 
    
    
    
    
    
    
Accruing Troubled Debt Restructurings
    
    
    
    
    
    
Commercial Real Estate
    
    
    
    
    
    
Owner Occupied
 $1,584,912 
 $ 
 $1,584,912 
 $ 
 $ 
 $ 
Residential Real Estate:
    
    
    
    
    
    
Land and A&D
   
   
   
   
  91,669 
  91,669 
First Lien-Investment
   
  132,715 
  132,715 
   
  67,397 
  67,397 
First Lien-Owner Occupied
   
  653,501 
  653,501 
   
  662,661 
  662,661 
Commercial and Industrial
  405,368 
  74,197 
  479,565 
   
  75,701 
  75,701 
Total Accruing Troubled Debt Restructurings
 $1,990,280 
 $860,413 
 $2,850,693 
 $ 
 $897,428 
 $897,428 
 
 
 
 
 
 
The table below reflects our ratios of our nonperforming assets at June 30, 2017 and December 31, 2016.
 
 
 
June 30,
 
 
December 31,
 
 
 
2017
 
 
2016
 
Ratios, Excluding Acquired Assets 
 
 
 
 
 
 
Total nonperforming assets as a percentage of total loans held for investment and OREO
  0.11%
  0.55%
Total nonperforming assets as a percentage of total assets
  0.09%
  0.43%
Total nonperforming assets as a percentage of total loans held for investment
  0.11%
  0.56%
 
    
    
Ratios, Including Acquired Assets 
    
    
Total nonperforming assets as a percentage of total loans held for investment and OREO
  0.33%
  0.73%
Total nonperforming assets as a percentage of total assets
  0.27%
  0.59%
Total nonperforming assets as a percentage of total loans held for investment
  0.33%
  0.73%
 
 
The table below presents a breakdown of the recorded book balance of non-accruing loans at June 30, 2017 and December 31, 2016.
 
 
 
June 30, 2017
 
 
December 31, 2016
 
 
 
 
 
 
Unpaid
 
 
 
 
 
Interest
 
 
 
 
 
Unpaid
 
 
 
 
 
 
 
 
 
# of
 
 
Principal
 
 
Recorded
 
 
Not
 
 
# of
 
 
Principal
 
 
Recorded
 
 
Interest Not
 
 
 
Contracts
 
 
Balance
 
 
Investment
 
 
Accrued
 
 
Contracts
 
 
Balance
 
 
Investment
 
 
Accrued
 
Legacy
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner Occupied
  1 
 $252,687 
 $225,432 
 $ 
  3 
 $2,370,589 
 $2,370,589 
 $89,204 
Investment
   
   
   
   
  1 
  77,395 
  77,395 
  2,290 
Hospitality
   
   
   
   
  1 
  1,346,736 
  1,346,736 
  61,937 
Land and A & D
  2 
  484,701 
  192,382 
   
   
   
   
   
Residential Real Estate
    
    
    
    
    
    
    
    
First Lien-Investment
  4 
  928,391 
  819,353 
  11,794 
  3 
  312,061 
  312,061 
  12,229 
First Lien-Owner Occupied
   
   
   
   
  1 
  222,237 
  222,237 
  5,436 
Commercial
   
   
   
   
  24 
  1,760,824 
  1,760,824 
  264,259 
Total non-accrual loans
  7 
  1,665,779 
  1,237,167 
  11,794 
  33 
  6,089,842 
  6,089,842 
  435,355 
Acquired(1)
    
    
    
    
    
    
    
    
Commercial Real Estate:
    
    
    
    
    
    
    
    
Land and A & D
   
   
   
   
  2 
  485,905 
  194,567 
  5,503 
Residential Real Estate
    
    
    
    
    
    
    
    
First Lien-Investment
  2 
  233,759 
  233,759 
  17,856 
   
   
   
   
First Lien-Owner Occupied
  2 
  222,237 
  222,237 
  10,671 
    
    
    
    
Commercial
  2 
  202,528 
  202,528 
  22,799 
  1 
  158,224 
  99,293 
  22,130 
Total non-accrual loans
  6 
 $658,524 
 $658,524 
 $51,326 
  3 
 $644,129 
 $293,860 
 $27,633 
Total all non-accrual loans
  13 
 $2,324,303 
 $1,895,691 
 $63,120 
  36 
 $6,733,971 
 $6,383,702 
 $462,988 
 
 
(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 loans are not performing according to their contractual terms and meet our definition of a nonperforming loan. The discounts that arise from recording these loans at fair value were due to credit quality. Although we do not accrue interest income at the contractual rate on these loans, we may accrete these discounts to interest income as a result of pre-payments that exceed our cash flow expectations or payment in full of amounts due even though we classify them as 90 or more days past due.
 
Non-accrual legacy loans at June 30, 2017 decreased $4.9 million from December 31, 2016, primarily due to one hospitality loan for $1.3 million that paid off during the first quarter and one large commercial borrower, consisting of 23 commercial loans totaling $3.0 million, of which $1.0 million has been charged against the allowance for loan losses and $2.0 million has been reclassified as trouble debt restructurings.
 
 
 
 
Non-accrual acquired loans at June 30, 2017 increased $365 thousand from December 31, 2016, primarily due to an increase in residential real estate loans, offsetting the decrease in the commercial real estate loans portfolio.
 
At June 30, 2017, legacy OREO was $747 thousand, an increase of $322 thousand since December 31, 2016, due to the addition of one property.
 
Acquired OREO at June 30, 2017, decreased $172 thousand from December 31, 2016. The decrease in acquired OREO was driven by the sale of one property, which offset the transfer of one property into OREO.
 
Allowance for Loan Losses. We review the adequacy of the allowance for loan losses at least quarterly. Our review includes evaluation of impaired loans as required by ASC Topic 310-Receivables, and ASC Topic 450-Contingencies. Also incorporated in determining the adequacy of the allowance is guidance contained in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 102, Loan Loss Allowance Methodology and Documentation, the Federal Financial Institutions Examination Council’s Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions and the Interagency Policy Statement on the Allowance for Loan and Lease Losses. We also continue to measure the credit impairment at each period end on all loans that have been classified as a TDR using the guidance in ASC 310-10-35.
 
We have risk management practices designed to ensure timely identification of changes in loan risk profiles. Undetected losses, however, inherently exist within the portfolio. Although we may allocate specific portions of the allowance for specific loans or other factors, the entire allowance is available for any loans that we should charge off. We will not create a specific valuation allowance unless we consider a loan impaired.
 
The following tables provide an analysis of the allowance for loan losses for the periods indicated:
 
 
 
 
 
 
 
Commercial
 
 
Residential
 
 
 
 
 
 
 
Six months ended June 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
  514,972 
  238,360 
  (28,357)
  (5,568)
  719,407 
Recoveries
  1,563 
  833 
  900 
  25,532 
  28,828 
 
  1,888,770 
  4,229,345 
  796,063 
  29,526 
  6,943,704 
Loans charged off
  (570,523)
  (439,922)
  (2,268)
  (19,149)
  (1,031,862)
Ending Balance
 $1,318,247 
 $3,789,423 
 $793,795 
 $10,377 
 $5,911,842 
Amount allocated to:
    
    
    
    
    
Legacy Loans:
    
    
    
    
    
Individually evaluated for impairment
 $300,234 
 $28,803 
 $20,262 
 $ 
 $349,299 
Other loans not individually evaluated
  993,496 
  3,760,620 
  693,461 
  10,377 
  5,457,954 
Acquired Loans:
    
    
    
    
    
Individually evaluated for impairment
  24,517 
   
  80,072 
   
  104,589 
Ending balance
 $1,318,247 
 $3,789,423 
 $793,795 
 $10,377 
 $5,911,842 
 
 
 
 
 


 
 
 
 
Commercial
 
 
Residential
 
 
 
 
 
 
 
At December 31, 2016
 
Commercial
 
 
Real Estate
 
 
Real Estate
 
 
Consumer
 
 
Total
 
Beginning balance
 $1,161,318 
 $3,053,925 
 $682,962 
 $11,613 
 $4,909,818 
Provision for loan losses
  172,059 
  936,227 
  486,935 
  (10,679)
  1,584,542 
Recoveries
  43,330 
   
  49,464 
  18,482 
  111,276 
 
  1,376,707 
  3,990,152 
  1,219,361 
  19,416 
  6,605,636 
Loans charged off
  (4,472)
   
  (395,841)
  (9,854)
  (410,167)
Ending Balance
 $1,372,235 
 $3,990,152 
 $823,520 
 $9,562 
 $6,195,469 
Amount allocated to:
    
    
    
    
    
Legacy Loans:
    
    
    
    
    
Individually evaluated for impairment
 $609,152 
 $611,498 
 $61,365 
 $ 
 $1,282,015 
Other loans not individually evaluated
  735,876 
  3,378,654 
  678,371 
  9,562 
  4,802,463 
Acquired Loans:
    
    
    
    
    
Individually evaluated for impairment
  27,207 
   
  83,784 
   
  110,991 
Ending balance
 $1,372,235 
 $3,990,152 
 $823,520 
 $9,562 
 $6,195,469 
 
    
    
    
    
    
 
The ratios of the allowance for loan losses are as follows:
 
 
 
June 30, 2017
 
 
December 31, 2016
 
Ratio of allowance for loan losses to:
 
 
 
 
 
 
Total gross loans held for investment
  0.41%
  0.45%
Non-accrual loans
  311.86%
  97.05%
Net charge-offs to average loans
  0.08%
  0.02%
 
 
During the six months ended June 30, 2017, we charged off $1.0 million in loans through the allowance for loan losses.
 
The allowance for loan losses represented 0.41% and 0.45% of gross loans held for investment at June 30, 2017 and December 31, 2016, respectively and 0.45% and 0.52% of legacy loans at June 30, 2017 and December 31, 2016, respectively. We have no exposure to foreign countries or foreign borrowers. Based on our analysis and the satisfactory historical performance of the loan portfolio, we believe this allowance appropriately reflects the inherent risk of loss in our portfolio.
 
Overall, we continue to believe that the loan portfolio remains manageable in terms of charge-offs and nonperforming assets as a percentage of total loans. We remain diligent and aware of our credit costs and the impact that these can have on our financial institution, and we have taken proactive measures to identify problem loans, including in-house and independent review of larger transactions. Our policy for evaluating problem loans includes obtaining new certified real estate appraisals as needed. We continue to monitor and review frequently the overall asset quality within the loan portfolio.
 
Contractual Obligations, Commitments, Contingent Liabilities, and Off-balance Sheet Arrangements
 
Old Line Bancshares is a party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments primarily include commitments to extend credit, lines of credit and standby letters of credit. Old Line Bancshares uses these financial instruments to meet the financing needs of its customers. These financial instruments involve, to varying degrees, elements of credit, interest rate, and liquidity risk. These commitments do not represent unusual risks and management does not anticipate any losses that would have a material effect on Old Line Bancshares. Old Line Bancshares also has operating lease obligations.
 
 
 
 
Outstanding loan commitments and lines and letters of credit at June 30, 2017 and December 31, 2016, are as follows:
 
 
 
June 30, 2017
 
 
December 31, 2016
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
Commitments to extend credit and available credit lines:
 
 
 
 
 
 
Commercial
 $102,951 
 $92,263 
Real estate-undisbursed development and construction
  127,726 
  134,944 
Consumer
  23,816 
  26,204 
 
 $254,493 
 $253,411 
Standby letters of credit
 $18,422 
 $18,907 
 
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Old Line Bancshares generally requires collateral to support financial instruments with credit risk on the same basis as it does for on balance sheet instruments. The collateral is based on management’s credit evaluation of the counterparty. Commitments generally have interest rates fixed at current market rates, expiration dates or other termination clauses and may require payment of a fee. Available credit lines represent the unused portion of lines of credit previously extended and available to the customer so long as there is no violation of any contractual condition. These lines generally have variable interest rates. Since many of the commitments are expected to expire without being drawn upon, and since it is unlikely that all customers will draw upon their lines of credit in full at any time, the total commitment amount or line of credit amount does not necessarily represent future cash requirements. We evaluate each customer’s credit worthiness on a case by case basis. We regularly reevaluate many of our commitments to extend credit. Because we conservatively underwrite these facilities at inception, we generally do not have to withdraw any commitments. We are not aware of any loss that we would incur by funding our commitments or lines of credit.
 
Commitments for real estate development and construction, which totaled $127.7 million, or 50.19% of the $254.5 million of outstanding commitments at June 30, 2017, are generally short term and turn over rapidly with principal repayment from permanent financing arrangements upon completion of construction or from sales of the properties financed.
 
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Our exposure to credit loss in the event of non-performance by the customer is the contract amount of the commitment. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In general, loan commitments, credit lines and letters of credit are made on the same terms, including with respect to collateral, as outstanding loans. We evaluate each customer’s credit worthiness and the collateral required on a case by case basis.
 
Reconciliation of Non-GAAP Measures
 
Below is a reconciliation of the fully tax equivalent adjustments and the U.S. GAAP basis information presented in this report:
 
Three months ended June 30, 2017
 
 
 
 
 
 
 
 
 
Net
 
 
 
Net Interest
 
 
 
 
 
Interest
 
 
 
Income
 
 
Yield
 
 
Spread
 
GAAP net interest income
 $14,252,645 
  3.47%
  3.25%
Tax equivalent adjustment
    
    
    
Federal funds sold
  25 
   
   
Investment securities
  245,539 
  0.06 
  0.06 
Loans
  285,650 
  0.07 
  0.07 
Total tax equivalent adjustment
  531,214 
  0.13 
  0.13 
Tax equivalent interest yield
 $14,783,859 
  3.60%
  3.38%
 
 
 
 
 
Three months ended June 30, 2016
 
 
 
 
 
 
 
 
 
Net
 
 
 
Net Interest
 
 
 
 
 
Interest
 
 
 
Income
 
 
Yield
 
 
Spread
 
GAAP net interest income
 $12,975,748 
  3.72%
  3.58%
Tax equivalent adjustment
    
    
    
Federal funds sold
  3 
   
   
Investment securities
  228,532 
  0.07 
  0.07 
Loans
  220,276 
  0.06 
  0.06 
Total tax equivalent adjustment
  448,811 
  0.13 
  0.13 
Tax equivalent interest yield
 $13,424,559 
  3.85%
  3.71%
 
 
 
Six months ended June 30, 2017
 
 
 
 
 
 
 
 
 
Net
 
 
 
Net Interest
 
 
 
 
 
Interest
 
 
 
Income
 
 
Yield
 
 
Spread
 
GAAP net interest income
 $28,414,034 
  3.53%
  3.33%
Tax equivalent adjustment
    
    
    
Federal funds sold
  36 
   
   
Investment securities
  500,759 
  0.06 
  0.06 
Loans
  546,652 
  0.07 
  0.07 
Total tax equivalent adjustment
  1,047,447 
  0.13 
  0.13 
Tax equivalent interest yield
 $29,461,481 
  3.66%
  3.46%
 
Six months ended June 30, 2016
 
 
 
 
 
 
 
 
 
Net
 
 
 
Net Interest
 
 
 
 
 
Interest
 
 
 
Income
 
 
Yield
 
 
Spread
 
GAAP net interest income
 $25,587,983 
  3.71%
  3.57%
Tax equivalent adjustment
    
    
    
Federal funds sold
  8 
   
   
Investment securities
  455,393 
  0.07 
  0.07 
Loans
  458,992 
  0.07 
  0.07 
Total tax equivalent adjustment
  914,393 
  0.14 
  0.14 
Tax equivalent interest yield
 $26,502,376 
  3.85%
  3.71%
 
 
Non-GAAP financial measures included in this quarterly report should be read along with these tables providing a reconciliation of non-GAAP financial measures to U.S. GAAP financial measures. The Company’s management believes that the non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company and provide meaningful comparison to its peers. Non-GAAP financial measures should not be consider as an alternative to any measure of performance or financial condition as promulgated under U.S. GAAP, and investors should consider the Company’s performance and financial condition as reported under U.S. GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the results or financial condition as reported under U.S. GAAP.
 
 
Impact of Inflation and Changing Prices
 
Management has prepared the financial statements and related data presented herein in accordance with U.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.
 
 
 
Unlike industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, and may frequently reflect government policy initiatives or economic factors not measured by a price index. As discussed above, we strive to manage our interest sensitive assets and liabilities in order to offset the effects of rate changes and inflation.
 
Information Regarding Forward-Looking Statements
 
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We may also include forward-looking statements in other statements that we make. All statements that are not descriptions of historical facts are forward-looking statements. Forward-looking statements often use words such as “believe,” “expect,” “plan,” “may,” “will,” “should,” “project,” “contemplate,” “anticipate,” “forecast,” “intend” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.
 
The statements presented herein with respect to, among other things, Old Line Bancshares’ plans, objectives, expectations and intentions, including the anticipated impact of the merger with DCB, expanding fee income, continued increases in net interest income, maintenance of the net interest margin, expected increases in non-interest expenses, hiring and acquisition possibilities, our belief that we have identified any problem assets and that our borrowers will remain current on their loans, the impact of outstanding off-balance sheet commitments, sources of liquidity and that we have sufficient liquidity, the sufficiency of the allowance for loan losses, expected loan, deposit, balance sheet and earnings growth, expected losses on and our intentions with respect to our investment securities, the amount of potential problem loans, continuing to meet regulatory capital requirements, expectations with respect to the impact of pending legal proceedings, the anticipated impact of recent accounting pronouncements, improving earnings per share and stockholder value, and financial and other goals and plans are forward looking. Old Line Bancshares bases these statements on our beliefs, assumptions and on information available to us as of the date of this filing, which involves risks and uncertainties. These risks and uncertainties include generally, among others: those discussed in this report; the ability of Old Line Bancshares to retain key personnel; the ability of Old Line Bancshares to successfully implement its growth and expansion strategy; risk of loan losses; that the allowance for loan losses may not be sufficient; that changes in interest rates and monetary policy could adversely affect Old Line Bancshares; that changes in regulatory requirements and/or restrictive banking legislation may adversely affect Old Line Bancshares; that the market value of investments could negatively impact stockholders’ equity; risks associated with our lending limit; deterioration in general economic conditions or a return to recessionary conditions; and changes in competitive, governmental, regulatory, technological and other factors which may affect Old Line Bancshares specifically or the banking industry generally.
 
In addition, our statements with respect to the anticipated effects of the DCB acquisition are subject to the following additional risks and uncertainties: DCB’s business may not be integrated successfully with ours or such integration may be more difficult, time consuming or costly than expected; expected revenue synergies and cost savings from the merger may not be fully realized or realized within the expected timeframe; revenues following the merger may be lower than expected; and customer and employee relationships and business operations may be disrupted by the merger;.
 
For a more complete discussion of some of these risks and uncertainties referred to above, see “Risk Factors” in Old Line Bancshares’ Annual Report on Form 10-K for the year ended December 31, 2016.
 
Old Line Bancshares’ actual results and the actual outcome of our expectations and strategies could differ materially from those anticipated or estimated because of these risks and uncertainties and you should not put undue reliance on any forward-looking statements. All forward-looking statements speak only as of the date of this filing, and Old Line Bancshares undertakes no obligation to update the forward-looking statements to reflect factual assumptions, circumstances or events that have changed after we have made the forward-looking statements.
 
 
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. Various factors, including interest rates, foreign exchange rates, commodity prices, or equity prices, may cause these changes. We are subject to market risk primarily through the effect of changes in interest rates on our portfolio of assets and liabilities. Foreign exchange rates, commodity prices, or equity prices do not pose significant market risk to us. Due to the nature of our operations, only interest rate risk is significant to our consolidated results of operations or financial position. We have no material changes in our quantitative and qualitative disclosures about market risk as of June 30, 2017 from that presented in our Annual Report on Form 10-K for the year ended December 31, 2016.
 
 
Interest Rate Sensitivity Analysis and Interest Rate Risk Management
 
A principal objective of Old Line Bank’s asset/liability management policy is to minimize exposure to changes in interest rates by an ongoing review of the maturity and re-pricing of interest earning assets and interest bearing liabilities.
 
The tables below present Old Line Bank’s interest rate sensitivity at June 30, 2017 and December 31, 2016. Because certain categories of securities and loans are prepaid before their maturity date even without regard to interest rate fluctuations, we have made certain assumptions to calculate the expected maturity of securities and loans.
 
 
 
Interest Sensitivity Analysis
 
 
 
June 30, 2017
 
 
 
Maturing or Repricing
 

 
Within 
 
 
4 - 12 
 
 
1 - 5 
 
 
Over 
 
 
 
 

 
3 Months
 
 
Months
 
 
Years
 
 
5 Years
 
 
Total
 

              (Dollars in thousands)               
Interest Earning Assets:
 
 
 
     
     
 
 
 
 
 
 
Interest bearing accounts
 $30 
 $ 
 $ 
 $ 
 $30 
Time deposits in other banks
   
   
   
   
   
Federal funds sold
  303 
   
   
   
  303 
Investment securities
   
  3,013 
  2,771 
  193,088 
  198,872 
Loans
  247,262 
  89,069 
  623,492 
  490,982 
  1,450,805 
Total interest earning assets
  247,595 
  92,082 
  625,763 
  684,070 
  1,649,510 
Interest Bearing Liabilities:
    
    
    
    
    
Interest-bearing transaction deposits
  284,102 
  145,994 
   
   
  430,096 
Savings accounts
  35,677 
  35,677 
  35,677 
   
  107,031 
Time deposits
  73,300 
  207,993 
  194,540 
   
  475,833 
Total interest-bearing deposits
  393,079 
  389,664 
  230,217 
   
  1,012,960 
FHLB advances
  185,000 
   
   
   
  185,000 
Other borrowings
  18,781 
   
   
  37,974 
  56,755 
Total interest-bearing liabilities
  596,860 
  389,664 
  230,217 
  37,974 
  1,254,715 
Period Gap
 $(349,265)
 $(297,582)
 $395,546 
 $646,096 
 $394,795 
Cumulative Gap
 $(349,265)
 $(646,847)
 $(251,301)
 $394,795 
    
Cumulative Gap/Total Assets
  (19.47)%
  (36.05)%
  (14.01)%
  22.00%
    
 
 
 
 
 
 
Interest Sensitivity Analysis
 
 
 
December 31, 2016
 
 
 
Maturing or Repricing
 

 
  Within
 
 
4 - 12
 
 
1 - 5 
 
 
  Over
 
 
 
 

 
3 Months
 
 
Months
 
 
Years
 
 
5 Years
 
 
Total
 

    (Dollars in thousands) 
Interest Earning Assets:
 
 
 
    
    
 
 
 
 
 
 
Interest bearing accounts
 $30 
 $ 
 $ 
 $ 
 $30 
Time deposits in other banks
   
   
   
   
   
Federal funds sold
  248 
   
   
   
  248 
Investment securities
  1,500 
   
  4,801 
  193,204 
  199,505 
Loans
  229,057 
  87,073 
  681,793 
  368,191 
  1,366,114 
Total interest earning assets
  230,835 
  87,073 
  686,594 
  561,395 
  1,565,897 
Interest Bearing Liabilities:
    
    
    
    
    
Interest-bearing transaction deposits
  288,797 
  144,398 
   
   
  433,195 
Savings accounts
  33,586 
  33,586 
  33,586 
   
  100,758 
Time deposits
  68,952 
  182,481 
  209,163 
   
  460,596 
Total interest-bearing deposits
  391,335 
  360,465 
  242,749 
   
  994,549 
FHLB advances
  150,000 
   
   
   
  150,000 
Other borrowings
  33,434 
   
   
  37,843 
  71,277 
Total interest-bearing liabilities
  574,769 
  360,465 
  242,749 
  37,843 
  1,215,826 
Period Gap
 $(343,934)
 $(273,392)
 $443,845 
 $523,552 
 $350,071 
Cumulative Gap
 $(343,934)
 $(617,326)
 $(173,481)
 $350,071 
    
Cumulative Gap/Total Assets
  (20.12)%
  (36.12)%
  (10.15)%
  20.48%
    
 
 
Item 4. Controls and Procedures
 
As of the end of the period covered by this quarterly report on Form 10-Q, Old Line Bancshares’ Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of Old Line Bancshares’ disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based upon that evaluation, Old Line Bancshares’ Chief Executive Officer and Chief Financial Officer concluded that Old Line Bancshares’ disclosure controls and procedures are effective as of June 30, 2017. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by Old Line Bancshares in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
 
In addition, there were no changes in Old Line Bancshares’ internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2017, that have materially affected, or are reasonably likely to materially affect, Old Line Bancshares’ internal control over financial reporting.
 
PART II-OTHER INFORMATION
 
Item 1.  Legal Proceedings
 
From time to time, we may be involved in litigation relating to claims arising out of our normal course of business. Currently, we are not involved in any legal proceedings the outcome of which, in management’s opinion, would be material to our financial condition or results of operations.
 
Item 1A.  Risk Factors
 
There have been no material changes in the risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.
 
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
As reflected in the following table there were no share repurchases by the Company during the quarter ended June 30, 2017:
 
 
 
 
 
 
 
 
 
 
Shares Purchased during the period:
    
Total number of shares repurchased
    
Average Pricepaid per share
    
Total number ofshare purchased aspart of publicly announced program(1)
    
Maximum number of shares that may yet be purchased under the program (1)
 
 
 
 
 
 
 
 
 
April 1 - June 30, 2017
 
                                —
 
                         —
 
339,237
 
160,763
 
 
 
 
 
 
 
 
 
 
 
(1)
On February 25, 2015, Old Line Bancshares’ board of directors approved the repurchase of up to 500,000 shares of our outstanding common stock. As of June 30, 2017, 339,237 shares have been repurchased at an average price of $15.77 per share or a total cost of approximately $5.3 million.
 
Item 3. Defaults Upon Senior Securities
 
None
 
Item 4. Mine Safety Disclosures
 
Not applicable
 
Item 5. Other Information
 
None
 
Item 6. Exhibits
2
 
 
 
 
 
 
 
31.1
Rule 13a-14(a) Certification of Chief Executive Officer
 
 
31.2
Rule 13a-14(a) Certification of Chief Financial Officer
 
 
32
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
 
 
101
Interactive Data Files pursuant to Rule 405 of Regulation S-T.
 
 
 

 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
Old Line Bancshares, Inc.
 
 
 
 
 
 
Date: August 4, 2017
By:
/s/ James W. Cornelsen
 
 
James W. Cornelsen, President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
 
 
 
Date: August 4, 2017
By:
/s/ Elise M. Hubbard
 
 
Elise M. Hubbard, Senior Vice President and Chief Financial Officer
 
 
(Principal Accounting and Financial Officer)