Attached files
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
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20-0154352
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(State
or other jurisdiction
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(I.R.S.
Employer
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of
incorporation or organization)
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Identification
No.)
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1525 Pointer Ridge Place
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Bowie, Maryland
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20716
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(Address
of principal executive offices)
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(Zip
Code)
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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
|
☐
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Accelerated filer
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☒
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Non-accelerated
filer
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☐ (Do not check if a smaller reporting
company)
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Smaller reporting company
|
☐
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Emerging
growth company
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☐
|
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
October 31, 2017, the registrant had 12,467,518 shares of common
stock outstanding.
OLD LINE BANCSHARES, INC. AND
SUBSIDIARIES
FORM 10-Q
INDEX
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Page
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Number
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PART I.
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FINANCIAL
INFORMATION
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3
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Item
1.
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Financial
Statements
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Consolidated
Balance Sheets as of September30, 2017 (Unaudited) and
December 31, 2016
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3
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Consolidated
Statements of Income (Unaudited) for the Three and Nine Months
Ended September 30, 2017 and 2016
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4
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Consolidated
Statements of Comprehensive Income (Unaudited) for the Three and
Nine Months Ended September 30, 2017 and 2016
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5
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Consolidated
Statements of Changes in Stockholders’ Equity (Unaudited) for
the Nine Months Ended September 30, 2017
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6
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Consolidated
Statements of Cash Flows (Unaudited) for the Nine Months Ended
September 30, 2017 and 2016
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7
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Notes
to Consolidated Financial Statements (Unaudited)
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9
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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37
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Item
3.
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Quantitative and
Qualitative Disclosures about Market Risk
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67
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Item
4.
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Controls and
Procedures
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68
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PART II.
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Item
1.
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Legal
Proceedings
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69
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Item
1A.
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Risk
Factors
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69
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Item
2.
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Unregistered Sales
of Equity Securities and Use of Proceeds
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69
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Item
3.
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Defaults Upon
Senior Securities
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69
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Item
4.
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Mine
Safety Disclosures
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69
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Item
5.
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Other
Information
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69
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Item
6.
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Exhibits
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70
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Signatures
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71
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Old Line Bancshares, Inc. & Subsidiaries
Consolidated Balance Sheets
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September 30,
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December 31,
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2017
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2016
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(Unaudited)
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Assets
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Cash
and due from banks
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$33,063,210
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$22,062,912
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Interest
bearing accounts
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1,017,257
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1,151,917
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Federal
funds sold
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383,737
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248,342
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Total
cash and cash equivalents
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34,464,204
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23,463,171
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Investment
securities available for sale-at fair value
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213,664,343
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199,505,204
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Loans held for sale, fair value of
$2,877,937 and
$8,707,516
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2,729,060
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8,418,435
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Loans held for investment (net of allowance for
loan losses of $5,816,187 and
$6,195,469, respectively)
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1,666,505,168
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1,361,175,206
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Equity
securities at cost
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7,277,746
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8,303,347
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Premises
and equipment
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42,074,857
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36,744,704
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Accrued
interest receivable
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4,946,823
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4,278,229
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Deferred
income taxes
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7,774,629
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9,578,350
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Bank
owned life insurance
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41,360,871
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37,557,566
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Other
real estate owned
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2,003,998
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2,746,000
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Goodwill
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25,083,675
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9,786,357
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Core
deposit intangible
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6,615,238
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3,520,421
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Other
assets
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6,738,434
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3,942,640
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Total
assets
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$2,061,239,046
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$1,709,019,630
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Liabilities and Stockholders’ Equity
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Deposits
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Non-interest
bearing
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$436,645,881
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$331,331,263
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Interest
bearing
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1,217,988,749
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994,549,269
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Total
deposits
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1,654,634,630
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1,325,880,532
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Short
term borrowings
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152,179,112
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183,433,892
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Long
term borrowings
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38,040,618
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37,842,567
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Accrued
interest payable
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867,884
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1,269,356
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Supplemental
executive retirement plan
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5,823,391
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5,613,799
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Income
taxes payable
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864,260
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18,706
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Other
liabilities
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5,489,031
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4,293,993
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Total
liabilities
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1,857,898,926
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1,558,352,845
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Stockholders’
equity
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Common stock, par value $0.01 per share;
25,000,000 shares authorized; 12,467,518 and 10,910,915 shares issued and outstanding in
2017 and 2016, respectively
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124,675
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109,109
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Additional
paid-in capital
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148,351,881
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106,692,958
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Retained
earnings
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56,198,108
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48,842,026
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Accumulated
other comprehensive loss
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(1,334,544)
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(4,977,308)
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Total
Old Line Bancshares, Inc. stockholders’
equity
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203,340,120
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150,666,785
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Total
liabilities and stockholders’ equity
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$2,061,239,046
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$1,709,019,630
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The accompanying notes are an integral part of these consolidated
financial statements
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Income
(Unaudited)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2017
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2016
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2017
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2016
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Interest Income
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Loans,
including fees
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$18,022,324
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$14,191,639
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$49,153,228
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$40,811,462
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U.S.
treasury securities
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6,859
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5,032
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18,772
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13,806
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U.S.
government agency securities
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78,713
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23,139
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194,549
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234,557
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Corporate
bonds
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189,274
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42,188
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428,153
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42,188
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Mortgage
backed securities
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548,779
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562,518
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1,657,619
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1,569,968
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Municipal
securities
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455,227
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418,026
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1,301,582
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1,149,058
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Federal
funds sold
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3,797
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411
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5,381
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1,912
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Other
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186,829
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95,584
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421,623
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287,651
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Total
interest income
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19,491,802
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15,338,537
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53,180,907
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44,110,602
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Interest expense
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Deposits
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1,926,590
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1,421,842
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5,174,640
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4,001,653
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Borrowed
funds
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1,092,736
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577,709
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3,119,757
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1,181,980
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Total
interest expense
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3,019,326
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1,999,551
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8,294,397
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5,183,633
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Net
interest income
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16,472,476
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13,338,986
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44,886,510
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38,926,969
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Provision for loan losses
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135,701
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305,931
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855,108
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1,384,542
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Net
interest income after provision for loan losses
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16,336,775
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13,033,055
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44,031,402
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37,542,427
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Non-interest income
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|
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Service
charges on deposit accounts
|
542,909
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445,901
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1,389,340
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1,290,736
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Gain
on sales or calls of investment securities
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—
|
326,021
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35,258
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1,226,233
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Earnings
on bank owned life insurance
|
297,656
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284,982
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861,112
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849,525
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Gain/(loss)
on disposal of assets
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7,469
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(49,957)
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120,063
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(27,173)
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Gain
on sale of loans
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—
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—
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94,714
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—
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Rental
Income
|
188,505
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168,589
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498,961
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585,724
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Income
on marketable loans
|
482,641
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782,510
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1,840,218
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1,746,678
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Other
fees and commissions
|
632,191
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179,802
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1,162,058
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1,013,461
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Total
non-interest income
|
2,151,371
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2,137,848
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6,001,724
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6,685,184
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Non-interest expense
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|
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Salaries
and benefits
|
5,365,890
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4,812,949
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15,284,057
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15,268,644
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Severence
expense
|
—
|
49,762
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—
|
443,257
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Occupancy
and equipment
|
1,828,593
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1,907,090
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5,137,273
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5,279,134
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Data
processing
|
443,453
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384,382
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1,161,647
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1,165,862
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FDIC
insurance and State of Maryland assessments
|
281,587
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286,047
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799,700
|
806,960
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Merger
and integration
|
3,985,514
|
—
|
3,985,514
|
661,018
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Core
deposit premium amortization
|
272,354
|
202,129
|
651,613
|
629,368
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Gain/(loss)
on sales of other real estate owned
|
4,100
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(27,914)
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(13,589)
|
(80,220)
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OREO
expense
|
200,959
|
77,224
|
256,170
|
295,381
|
Directors
Fees
|
148,800
|
164,800
|
485,700
|
496,500
|
Network
services
|
133,301
|
127,219
|
437,140
|
410,448
|
Telephone
|
218,316
|
174,439
|
598,618
|
594,214
|
Other
operating
|
1,757,586
|
1,639,223
|
5,318,191
|
5,004,039
|
Total
non-interest expense
|
14,640,453
|
9,797,350
|
34,102,034
|
30,974,605
|
|
|
|
|
|
Income
before income taxes
|
3,847,693
|
5,373,553
|
15,931,092
|
13,253,006
|
Income
tax expense
|
1,684,505
|
1,830,921
|
5,824,713
|
4,428,287
|
Net
income
|
2,163,188
|
3,542,632
|
10,106,379
|
8,824,719
|
Less:
Net income attributable to the non-controlling
interest
|
—
|
—
|
—
|
62
|
Net income available to common stockholders
|
$2,163,188
|
$3,542,632
|
$10,106,379
|
$8,824,657
|
|
|
|
|
|
Basic
earnings per common share
|
$0.18
|
$0.33
|
$0.90
|
$0.82
|
Diluted
earnings per common share
|
$0.18
|
$0.32
|
$0.88
|
$0.80
|
Dividend
per common share
|
$0.08
|
$0.06
|
$0.24
|
$0.18
|
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 September 30,
|
2017
|
2016
|
Net
income
|
$2,163,188
|
$3,542,632
|
|
|
|
Other
comprehensive income:
|
|
|
Unrealized
gain/(loss) on securities available for sale, net of taxes of
$60,922, and ($149,886), respectively
|
93,526
|
(230,102)
|
Reclassification
adjustment for realized gain on securities available for sale
included in net income, net of taxes of $0 and $128,599,
respectively
|
—
|
(197,422)
|
Other
comprehensive income (loss)
|
93,526
|
(427,524)
|
Comprehensive
income
|
2,256,714
|
3,115,108
|
Comprehensive
loss attributable to the non-controlling interest
|
—
|
—
|
Comprehensive
income available to common stockholders
|
$2,256,714
|
$3,115,108
|
|
|
|
Nine Months Ended September 30,
|
2017
|
2016
|
Net
income
|
$10,106,379
|
$8,824,719
|
|
|
|
Other
comprehensive income:
|
|
|
Unrealized gain on
securities available for sale, net of taxes of $2,386,772 and
$837,835, respectively
|
3,664,114
|
1,286,223
|
Reclassification
adjustment for realized gain on securities available for sale
included in net income, net of taxes of $13,908 and $483,688,
respectively
|
(21,350)
|
(742,545)
|
Other
comprehensive income
|
3,642,764
|
543,678
|
Comprehensive
income
|
13,749,143
|
9,368,397
|
Comprehensive
income attributable to the non-controlling interest
|
—
|
62
|
Comprehensive
income available to common stockholders
|
$13,749,143
|
$9,368,335
|
|
|
|
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.
|
—
|
—
|
—
|
10,106,379
|
—
|
10,106,379
|
Other comprehensive
income, net of income tax of $2,372,864
|
—
|
—
|
—
|
—
|
3,642,764
|
3,642,764
|
Acquisition
of DCB Bancshares
|
1,495,090
|
14,951
|
40,830,925
|
—
|
—
|
40,845,876
|
Stock
based compensation awards
|
—
|
—
|
449,934
|
—
|
—
|
449,934
|
Stock
options exercised
|
20,800
|
208
|
378,471
|
—
|
—
|
378,679
|
Restricted
stock issued
|
40,713
|
407
|
(407)
|
—
|
—
|
—
|
Common
stock cash dividends $0.24 per share
|
—
|
—
|
—
|
(2,750,297)
|
—
|
(2,750,297)
|
Balance
September 30, 2017
|
12,467,518
|
$124,675
|
$148,351,881
|
$56,198,108
|
$(1,334,544)
|
$203,340,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated
financial statements
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
|
Nine Months Ended September 30,
|
|
|
2017
|
2016
|
Cash flows from operating activities
|
|
|
Net
income
|
$10,106,379
|
$8,824,719
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
|
|
Depreciation
and amortization
|
1,915,955
|
1,973,556
|
Provision
for loan losses
|
855,108
|
1,384,542
|
Change
in deferred loan fees net of costs
|
(203,092)
|
52,532
|
Gain
on sales or calls of securities
|
(35,258)
|
(1,226,233)
|
Amortization
of premiums and discounts
|
729,996
|
730,331
|
Origination
of loans held for sale
|
(71,093,124)
|
(70,857,656)
|
Proceeds
from sale of loans held for sale
|
76,782,499
|
71,391,859
|
Income
on marketable loans
|
(1,840,218)
|
(1,746,678)
|
Gain
on sales of other real estate owned
|
(13,589)
|
(80,220)
|
Gain
on sale of loans
|
(94,714)
|
—
|
Gain
on sale of fixed assets
|
(120,062)
|
(27,173)
|
Amortization
of intangible assets
|
651,613
|
629,368
|
Deferred
income taxes
|
30,193
|
(133,650)
|
Stock
based compensation awards
|
449,935
|
444,664
|
Increase
(decrease) in
|
|
|
Accrued
interest payable
|
(448,720)
|
295,394
|
Income
tax payable
|
845,554
|
3,061,425
|
Supplemental
executive retirement plan
|
209,592
|
210,667
|
Other
liabilities
|
(1,558,077)
|
765,453
|
Decrease
(increase) in
|
|
|
Accrued
interest receivable
|
(83,399)
|
128,385
|
Bank
owned life insurance
|
(717,522)
|
(715,112)
|
Income
tax receivable
|
—
|
—
|
Other
assets
|
1,899,050
|
(732,638)
|
Net
cash provided by operating activities
|
$18,268,099
|
$14,373,535
|
Cash flows from investing activities
|
|
|
Net
Cash and cash equivalents of acquired bank
|
$35,566,945
|
$—
|
Purchase
of investment securities available for sale
|
(39,289,497)
|
(136,228,056)
|
Proceeds
from disposal of investment securities
|
|
|
Available
for sale at maturity, call or paydowns
|
18,998,110
|
22,554,663
|
Available
for sale sold
|
53,802,337
|
107,941,909
|
Loans
made, net of principal collected
|
(88,297,883)
|
(145,453,165)
|
Proceeds
from sale of other real estate owned
|
1,178,439
|
983,440
|
Change
in equity securities
|
1,025,601
|
(1,661,000)
|
Purchase
of premises and equipment
|
(3,075,960)
|
(1,924,469)
|
Proceeds
from the sale of premises and equipment
|
120,062
|
—
|
Net
cash used in investing activities
|
$(19,971,846)
|
$(153,786,678)
|
Cash flows from financing activities
|
|
|
Net
increase (decrease) in
|
|
|
Time
deposits
|
$83,108,361
|
$12,894,797
|
Other
deposits
|
(32,221,712)
|
52,518,077
|
Short
term borrowings
|
(36,008,301)
|
34,218,438
|
Long
term borrowings
|
198,051
|
28,183,523
|
Proceeds
from stock options exercised
|
378,679
|
262,832
|
Cash
dividends paid-common stock
|
(2,750,298)
|
(1,949,171)
|
Distributions
on minority member(s)
|
—
|
(258,181)
|
Net
cash provided by financing activities
|
$12,704,780
|
$125,870,315
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
11,001,033
|
(13,542,828)
|
|
|
|
Cash
and cash equivalents at beginning of period
|
23,463,171
|
43,700,692
|
Cash
and cash equivalents at end of period
|
$34,464,204
|
$30,157,864
|
|
|
|
The accompanying notes are an integral part of these consolidated
financial statements
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited) cont’d
|
Nine Months Ended September 30,
|
||
Supplemental Disclosure of Cash Flow Information:
|
2017
|
|
2016
|
Cash
paid during the period for:
|
|
|
|
Interest
|
$8,695,869
|
|
$4,732,158
|
Income
taxes
|
$5,018,000
|
|
$1,405,000
|
Supplemental Disclosure of Non-Cash Flow Operating
Activities:
|
|
|
|
Loans
transferred to other real estate owned
|
$422,848
|
|
$365,895
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
|
Fair value of assets and liabilities from acquisition:
|
|
|
|
Fair
value of tangible assets acquired
|
$310,974,425
|
|
$—
|
Other
intangible assets acquired
|
15,297,318
|
|
—
|
Fair
value of liabilities assumed
|
(285,421,333)
|
|
—
|
Total
merger consideration
|
$40,850,410
|
|
$—
|
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, Frederick,
Montgomery, Prince George’s, and St. Mary’s Counties in
Maryland and surrounding areas.
On
September 27, 2017, Old Line Bancshares entered into an Agreement
and Plan of Merger with Bay Bancorp, Inc. (“BYBK”), the
parent company of Bay Bank, FSB (“Bay Bank”). Pursuant
to the terms of the Agreement and Plan of Merger, upon the
consummation of the merger, all outstanding shares of BYBK common
stock will be exchanged for shares of common stock of Old Line
Bancshares. Consummation of the merger is contingent upon the
approval of Old Line Bancshares’ and BYBK’s
stockholders as well as receipt of all necessary regulatory and
third party approvals and consents. We expect the merger to close
during the second quarter of 2018. At June 30, 2017, BYBK had
consolidated assets of approximately $646 million. Bay Bank has 11
banking locations located in its primary market areas of Baltimore,
Anne Arundel, Howard and Harford Counties in Maryland.
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 Old Line Bank’s wholly-owned
subsidiary Pointer Ridge Office Investments, LLC (Pointer Ridge), a
real estate investment company. We have eliminated all significant
intercompany transactions and balances.
The
foregoing consolidated financial statements for the periods ended
September 30, 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. This ASU will be
effective for us in our first quarter of 2018. Old Line
Bancshares is continuing to assess its
revenue streams and reviewing its contracts with customers that are
potentially affected by the new guidance including fees on
deposits, gains and losses on the sale of other real estate owned,
credit and debit card interchange fees, and rental income, to
determine the potential impact the new guidance is expected to have
on Old Line Bancshares consolidated financial statements. However,
Old Line Bancshares revenue recognition pattern for these revenue
streams is not expected to change materially from current practice.
In addition, Old Line Bancshares continues to follow implementation
issues specific to financial institutions which are still under
discussion by the FASB’s Transition Resource Group. Old Line
Bancshares is currently planning to adopt the ASU on January 1,
2018 utilizing the modified retrospective approach. 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 2019. Old Line
Bancshares is currently assessing the impact that the adoption of
this standard will have on its financial condition and results of
operations and will closely monitor any new developments or
additional guidance to determine the potential impact the new
standard will 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.
In
March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable
Debt Securities. This ASU shortens the amortization period
for the premium on certain purchased callable debt securities to
the earliest call date. Today, entities generally amortize the
premium over the contractual life of the security. The new guidance
does not change the accounting for purchased callable debt
securities held at a discount; the discount continues to be
amortized to maturity. ASU No. 2017-08 is effective for interim and
annual reporting periods beginning after December 15, 2018; early
adoption is permitted. The guidance calls for a modified
retrospective transition approach under which a cumulative-effect
adjustment will be made to retained earnings as of the beginning of
the first reporting period in which the guidance is adopted. Old
Line Bancshares is currently evaluating the provisions of ASU No.
2017-08 to determine the potential impact the new standard will
have on its consolidated financial statements.
In
August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for
Hedging Activities. This ASU’s objectives are to: (1)
improve the transparency and understandability of information
conveyed to financial statement users about an entity’s risk
management activities by better aligning the entity’s
financial reporting for hedging relationships with those risk
management activities; and (2) reduce the complexity of and
simplify the application of hedge accounting by preparers. ASU No.
2017-12 is effective for interim and annual reporting periods
beginning after December 15, 2018; early adoption is permitted. Old
Line Bancshares currently does not designate any derivative
financial instruments as formal hedging relationships, and
therefore, does not utilize hedge accounting. However, Old Line
Bancshares is currently evaluating this ASU to determine whether
its provisions will enhance Old Line Bancshares ability to employ
risk management strategies, while improving the transparency and
understanding of those strategies for financial statement
users.
2.
ACQUISITION
OF DCB BANCSHARES, INC.
On July
28, 2017, Old Line Bancshares acquired DCB Bancshares, Inc.
(“DCB”), the parent company of Damascus Community Bank
(“Damascus”). Upon the consummation of the merger, each
share of common stock of DCB outstanding immediately before the
merger was converted into the right to receive 0.9269 shares of Old
Line Bancshares’ common stock, provided that cash was paid in
lieu of any fractional shares of Old Line Bancshares common stock.
As a result, Old Line Bancshares issued 1,495,090 shares of its
common stock in exchange for the shares of DCB common stock in the
merger. The aggregate merger consideration was approximately $40.9
million based on the closing sales price of Old Line
Bancshares’ common stock on July 28, 2017.
In
connection with the merger, Damascus merged with and into Old Line
Bank, with Old Line Bank the surviving bank.
At July
28, 2017, DCB had consolidated assets of approximately $311
million. This merger added six banking locations located in
Montgomery, Frederick and Carroll Counties in
Maryland.
The
acquired assets and assumed liabilities of DCB were measured at
estimated fair value. Management made significant estimates and
exercised significant judgement in accounting for the acquisition
of DCB. Management judgmentally assigned risk ratings to loans
based on appraisals and estimated collateral values, expected cash
flows, prepayment speeds and estimated loss factors to measure fair
value for loans. Management used quoted or current market prices to
determine the fair value of DCB’s investment
securities.
The
following table provides the purchase price as of the acquisition
date and the identifiable assets acquired and liabilities assumed
at their estimated fair values.
Cash
consideration
|
$4,534
|
Purchase
price assigned to shares exchanged for stock
|
40,845,876
|
Total
purchase price for DCB acquisition
|
40,850,410
|
|
|
Fair Value of Assets Acquired
|
|
Cash
and due from banks
|
$35,571,479
|
Investment
securities available for sale
|
42,349,201
|
Loans,
net
|
216,172,008
|
Premises
and equipment
|
5,214,193
|
Accrued
interest receivable
|
585,195
|
Deferred
income taxes
|
599,336
|
Bank
owned life insurance
|
3,085,783
|
Core
deposit intangible
|
3,746,430
|
Other
assets
|
3,650,800
|
Total assets acquired
|
$310,974,425
|
Fair Value of Liabilities assumed
|
|
Deposits
|
$277,867,449
|
Short
term borrowings
|
4,753,521
|
Other
liabilities
|
2,800,363
|
Total liabilities assumed
|
$285,421,333
|
Fair
Value of net assets acquired
|
25,553,092
|
Total
Purchase Price
|
40,850,410
|
|
|
Goodwill recorded for DCB
|
$15,297,318
|
The
following pro forma information combines the historical results of
Old Line Bancshares and pre-merger DCB. The pro forma
financial information does not include the potential impacts of
possible business model changes, current market conditions, revenue
enhancements, expense efficiencies, or other factors.
The pro forma results exclude the impact merger-related expenses of
$4.0 million. While adjustments were made for the
estimated impact of certain fair value adjustments, the following
results are not indicative of what would have occurred had the DCB
acquisition taken place on indicated dates.
If
the DCB acquisition had been completed on January 1, 2017, net
interest income would have been approximately $17.4 million and
$51.1 million for the three and nine months ended September 30,
2017. Net income would have been approximately $2.0
million and $10.8 million for the same three and nine month
periods.
If
the DCB acquisition had been completed on January 1, 2016, net
interest income would have been approximately $15.8 million and
$45.9 million for the three and nine months ended September 30,
2016. Net income would have been approximately $3.8
million and $9.5 million for the same three and nine month
periods.
The disclosure of DCB’s post-DCB merger, net
interest income, and net income is not practicable due to the
integration of operations shortly after the DCB merger.
Additionally, Old Line Bancshares expects to achieve further
operational cost savings and other efficiencies as a result of the
acquisition which are not reflected in the unaudited pro forma
amounts.
The
following is an outline of the expenses that we have incurred
during the three months ended September 30, 2017 in conjunction
with the DCB merger.
Three months ending September 30,
|
2017
|
Data
processing
|
$1,376,269
|
Severence
costs
|
1,565,207
|
Advisory &
legal fees
|
703,224
|
Other
|
340,814
|
|
$3,985,514
|
3.
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 remaining 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. On
September 28, 2017, Old Line Bancshares transferred and assigned
its ownership interest in Pointer Ridge to Old Line Bank, and as a
result Old Line Bank acquired all rights, title and interest in
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.
4. INVESTMENT
SECURITIES
Presented below is
a summary of the amortized cost and estimated fair value of
securities.
|
|
Gross
|
Gross
|
|
|
Amortized
|
unrealized
|
unrealized
|
Estimated
|
|
cost
|
gains
|
losses
|
fair value
|
September 30, 2017
|
|
|
|
|
Available for sale
|
|
|
|
|
U.S.
treasury
|
$3,013,631
|
$—
|
$(3,084)
|
$3,010,547
|
U.S.
government agency
|
18,221,474
|
43,276
|
(163,864)
|
18,100,885
|
Corporate
bonds
|
14,622,679
|
154,609
|
(19,616)
|
14,757,673
|
Municipal
securities
|
74,034,582
|
277,491
|
(871,403)
|
73,440,670
|
Mortgage
backed securities:
|
|
|
|
|
FHLMC
certificates
|
20,597,923
|
4,599
|
(335,083)
|
20,267,438
|
FNMA
certificates
|
65,740,054
|
13,312
|
(1,091,359)
|
64,662,008
|
GNMA
certificates
|
19,637,855
|
202
|
(212,935)
|
19,425,122
|
|
$215,868,198
|
$493,489
|
$(2,697,344)
|
$213,664,343
|
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
September 30, 2017 and December 31, 2016, securities with
unrealized losses segregated by length of impairment were as
follows:
|
September 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
|
$3,010,547
|
$3,084
|
$—
|
$—
|
$3,010,547
|
$3,084
|
U.S.
government agency
|
11,075,817
|
62,476
|
2,084,889
|
101,388
|
13,160,706
|
163,864
|
Corporate
bonds
|
4,997,000
|
19,616
|
—
|
—
|
4,997,000
|
19,616
|
Municipal
securities
|
17,186,661
|
168,484
|
24,534,256
|
702,919
|
41,720,917
|
871,403
|
Mortgage
backed securities
|
|
|
|
|
|
|
FHLMC
certificates
|
15,747,725
|
235,788
|
4,354,251
|
99,295
|
20,101,976
|
335,083
|
FNMA
certificates
|
38,311,728
|
507,061
|
24,926,353
|
584,298
|
63,238,081
|
1,091,359
|
GNMA
certificates
|
5,166,734
|
19,529
|
9,214,273
|
193,406
|
14,381,008
|
212,935
|
Total
|
$95,496,212
|
$1,016,038
|
$65,114,022
|
$1,681,306
|
$160,610,235
|
$2,697,344
|
|
|
|
|
|
|
|
|
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
September 30, 2017 and December 31, 2016, we had 67 and 7
investment securities, respectively, in an unrealized loss position
greater than the 12 month time frame and 69 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 September 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 September 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 September 30, 2017, we received $45.8
million in proceeds from sales, maturities or calls and principal
pay-downs on investment securities for a net gain of $0. The net
proceeds of these transactions were used to pay down our Federal
Home Loan Bank of Atlanta (“FHLB”) borrowings and
purchase new investment securities. We acquired a total
of $42.3 million investment portfolio as a result of the DCB
merger. The securities sold included $41.8 million of
securities that we acquired in the DCB merger and sold immediately after the closing of the
merger, resulting in no gain or
loss on such sales. During the three month period ended
September 30, 2016, we received proceeds of $35.1 million from
sales, maturities or calls and principal pay-downs on investment
securities. Such transactions consisted of 22 mortgage backed
securities (“MBS”) pools and two municipal bonds,
resulting in realized gains of $326 thousand. We used all the net
proceeds of these transactions to purchase new investment
securities during the three months ended September 30, 2016. During
the nine months ended September 30, 2017, we received $72.5 million
in proceeds from sales, maturities or calls and principal pay-downs
on investment securities, and realized gains of $164 thousand and
losses of $129 thousand for total realized net gain of $35
thousand. We used the net proceeds of these transactions to
re-balance our investment portfolio, which resulted in an overall
slightly higher yield on our security investments.
We acquired a total
of $42.3 million investment portfolio as a result of the DCB
merger. As with the three month period, the
securities sold included $41.8 million of securities that we
acquired in the DCB merger and sold immediately after the closing
of the merger, resulting in no gain or loss on such sales. For the
nine month period ended September 30, 2016, we received $130.5
million in proceeds from sales, maturities or calls and principal
pay-downs on investment securities and realized gains of $1.3
million and losses of $92 thousand for total realized net gain of
$1.2 million. We used the proceeds of these transactions for
re-investment in our investment portfolio to increase the yield on
such investments.
Contractual
maturities and pledged securities at September 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
|
September 30, 2017
|
cost
|
value
|
|
|
|
Maturing
|
|
|
Within
one year
|
$3,319,218
|
$3,320,735
|
Over
one to five years
|
2,146,215
|
2,147,312
|
Over
five to ten years
|
49,368,110
|
49,385,381
|
Over
ten years
|
161,034,655
|
158,810,915
|
|
$215,868,198
|
$213,664,343
|
Pledged
securities
|
$57,585,531
|
$56,807,119
|
5. LOANS
Major
classifications of loans held for investment are as
follows:
|
September 30, 2017
|
December 31, 2016
|
||||
|
Legacy (1)
|
Acquired
|
Total
|
Legacy (1)
|
Acquired
|
Total
|
|
|
|
|
|
|
|
Commercial
Real Estate
|
|
|
|
|
|
|
Owner
Occupied
|
$274,369,718
|
$87,103,763
|
$361,473,481
|
$238,220,475
|
$53,850,612
|
$292,071,087
|
Investment
|
449,038,012
|
57,878,673
|
506,916,685
|
414,012,709
|
37,687,804
|
451,700,513
|
Hospitality
|
164,225,752
|
7,479,763
|
171,705,515
|
141,611,858
|
11,193,427
|
152,805,285
|
Land
and A&D
|
57,483,395
|
9,402,012
|
66,885,407
|
51,323,297
|
6,015,813
|
57,339,110
|
Residential
Real Estate
|
|
|
|
|
|
|
First
Lien-Investment
|
82,184,576
|
22,145,004
|
104,329,580
|
72,150,512
|
23,623,660
|
95,774,172
|
First
Lien-Owner Occupied
|
65,465,065
|
64,885,116
|
130,350,181
|
54,732,604
|
42,443,767
|
97,176,371
|
Residential
Land and A&D
|
39,072,030
|
7,340,894
|
46,412,924
|
39,667,222
|
5,558,232
|
45,225,454
|
HELOC
and Jr. Liens
|
21,881,331
|
16,846,856
|
38,728,187
|
24,385,215
|
2,633,718
|
27,018,933
|
Commercial
and Industrial
|
143,734,225
|
39,174,650
|
182,908,875
|
136,259,560
|
5,733,904
|
141,993,464
|
Consumer
|
7,076,344
|
53,726,972
|
60,803,316
|
4,868,909
|
139,966
|
5,008,875
|
|
1,304,530,448
|
365,983,703
|
1,670,514,151
|
1,177,232,361
|
188,880,903
|
1,366,113,264
|
Allowance
for loan losses
|
(5,634,135)
|
(182,052)
|
(5,816,187)
|
(6,084,478)
|
(110,991)
|
(6,195,469)
|
Deferred
loan costs, net
|
1,807,204
|
—
|
1,807,204
|
1,257,411
|
—
|
1,257,411
|
|
$1,300,703,517
|
$365,801,651
|
$1,666,505,168
|
$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, Regal Bancorp, Inc.
(“Regal”), the parent company of Regal Bank & Trust
(“Regal Bank), in December 2015 and DCB, the parent company
of Damascus in July 2017, we have segmented the portfolio into two
components, “Legacy” loans originated by Old Line Bank
and “Acquired” loans acquired from MB&T, WSB, Regal
Bank and Damascus.
Credit Policies and Administration
We have
adopted a comprehensive lending policy, which includes stringent
underwriting standards for all types of loans. We have designed our
underwriting standards to promote a complete banking relationship
rather than a transactional relationship. In an effort to manage
risk, prior to funding, the loan committee consisting of the
Executive Officers and seven members of the Board of Directors must
approve by a majority vote all credit decisions in excess of a
lending officer’s lending authority.
Management believes
that it employs experienced lending officers, secures appropriate
collateral and carefully monitors the financial condition of its
borrowers and loan concentrations.
In
addition to the internal business processes employed in the credit
administration area, Old Line Bank retains an outside independent
firm to review the loan portfolio. This firm performs a detailed
annual review and an interim update. We use the results of the
firm’s report to validate our internal ratings and we review
the commentary on specific loans and on our loan administration
activities in order to improve our operations.
Commercial Real Estate Loans
We
finance commercial real estate for our clients, for owner occupied
and investment properties, hospitality and land acquisition and
development. Commercial real estate loans totaled $1.1 billion and
$953.9 million at September 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
September 30, 2017, we had approximately $171.7 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 $319.8
million and $265.2 million at September 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 the Federal Housing
Administration’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 September 30, 2017 and December 31,
2016.
Age Analysis of Past Due Loans
|
September 30, 2017
|
December 31, 2016
|
||||
|
Legacy
|
Acquired
|
Total
|
Legacy
|
Acquired
|
Total
|
Current
|
$1,299,139,428
|
$360,763,398
|
$1,659,902,826
|
$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
|
2,768,500
|
99,545
|
2,868,045
|
2,799,802
|
—
|
2,799,802
|
Investment
|
811,088
|
757,439
|
1,568,527
|
—
|
794,037
|
794,037
|
Residential
Real Estate:
|
|
|
|
|
|
|
First
Lien-Investment
|
576,366
|
514,381
|
1,090,747
|
517,498
|
397,944
|
915,442
|
First
Lien-Owner Occupied
|
—
|
1,229,547
|
1,229,547
|
—
|
879,718
|
879,718
|
HELOC
and Jr. Liens
|
167,578
|
108,092
|
275,670
|
99,946
|
—
|
99,946
|
Commercial
and Industrial
|
381,404
|
12,624
|
394,028
|
325,161
|
—
|
325,161
|
Consumer
|
—
|
1,177,880
|
1,177,880
|
—
|
—
|
—
|
Total
30-89 days past due
|
4,704,936
|
3,899,508
|
8,604,444
|
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
|
—
|
76,761
|
76,761
|
—
|
250,000
|
250,000
|
Commercial
|
—
|
8,306
|
8,306
|
—
|
—
|
—
|
Consumer
|
—
|
21,810
|
21,810
|
19,242
|
—
|
19,242
|
Total
90 or more days past due
|
—
|
106,877
|
106,877
|
19,242
|
884,290
|
903,532
|
Total
accruing past due loans
|
4,704,936
|
4,006,385
|
8,711,321
|
3,761,649
|
2,955,989
|
6,717,638
|
|
|
|
|
|
|
|
Commercial
Real Estate:
|
|
|
|
|
|
|
Owner
Occupied
|
—
|
226,998
|
226,998
|
2,370,589
|
—
|
2,370,589
|
Hospitality
|
—
|
—
|
—
|
1,346,736
|
—
|
1,346,736
|
Land
and A&D
|
—
|
191,202
|
191,202
|
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
|
452,325
|
795,720
|
1,248,045
|
222,237
|
—
|
222,237
|
Commercial
and Industrial
|
—
|
—
|
—
|
1,760,824
|
—
|
1,760,824
|
Non-accruing
loans:
|
686,084
|
1,213,920
|
1,900,004
|
6,089,842
|
293,860
|
6,383,702
|
Total
Loans
|
$1,304,530,448
|
$365,983,703
|
$1,670,514,151
|
$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 September
30, 2017 and December 31, 2016.
|
Impaired at September 30, 2017
|
|
|
|
|
||
|
|
|
|
Three Months September 30, 2017
|
Nine Months September 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
|
$1,811,565
|
$1,811,565
|
$—
|
$1,808,332
|
$19,104
|
$1,917,603
|
$51,535
|
Investment
|
1,170,410
|
1,170,410
|
—
|
1,166,385
|
12,447
|
1,189,072
|
38,448
|
Residential
Real Estate:
|
|
|
|
|
|
|
|
First
Lien-Investment
|
41,258
|
41,258
|
—
|
41,258
|
—
|
41,258
|
—
|
First
Lien-Owner Occupied
|
233,443
|
233,443
|
—
|
233,110
|
5,733
|
234,617
|
5,733
|
Commercial
|
399,351
|
399,351
|
—
|
395,928
|
3,582
|
363,683
|
26,712
|
With
an allowance recorded:
|
|
|
|
|
|
|
|
Commercial
Real Estate:
|
|
|
|
|
|
|
|
Owner
Occupied
|
—
|
—
|
—
|
—
|
—
|
|
|
Investment
|
597,053
|
597,053
|
69,903
|
597,053
|
7,676
|
603,536
|
23,040
|
Residential
Real Estate:
|
|
|
|
|
|
|
|
First
Lien-Investment
|
192,501
|
192,501
|
20,263
|
192,501
|
—
|
192,501
|
—
|
First
Lien-Owner Occupied
|
218,882
|
218,882
|
15,384
|
222,237
|
—
|
222,237
|
|
Commercial
|
96,712
|
96,712
|
96,712
|
96,712
|
1,648
|
97,861
|
4,141
|
Total
legacy impaired
|
4,761,175
|
4,761,175
|
202,262
|
4,753,516
|
50,190
|
4,862,368
|
149,609
|
Acquired(1)
|
|
|
|
|
|
|
|
With
no related allowance recorded:
|
|
|
|
|
|
|
|
Commercial
Real Estate:
|
|
|
|
|
|
|
|
Owner
Occupied
|
253,279
|
253,279
|
—
|
253,385
|
—
|
252,872
|
2,155
|
Land
and A&D
|
334,271
|
45,000
|
—
|
334,271
|
—
|
334,271
|
—
|
Residential
Real Estate:
|
|
|
|
|
|
|
|
First
Lien-Owner Occupied
|
1,304,412
|
1,192,153
|
—
|
1,303,921
|
5,811
|
1,310,921
|
27,659
|
First
Lien-Investment
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Land
and A&D
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
With
an allowance recorded:
|
|
|
|
|
|
|
|
Commercial
Real Estate:
|
|
|
|
|
|
|
|
Land
and A&D
|
149,226
|
149,226
|
80,072
|
155,332
|
751
|
155,701
|
1,574
|
Residential
Real Estate:
|
|
|
|
|
|
|
|
First
Lien-Investment
|
—
|
—
|
—
|
—
|
—
|
|
|
First
Lien-Owner Occupied
|
250,194
|
250,194
|
77,464
|
273,618
|
23,424
|
273,597
|
23,424
|
Land
and A&D
|
—
|
—
|
—
|
—
|
—
|
|
|
Commercial
|
73,167
|
73,167
|
24,517
|
72,840
|
955
|
74,485
|
2,856
|
Total
acquired impaired
|
2,364,549
|
1,963,019
|
182,053
|
2,393,367
|
30,941
|
2,401,847
|
57,668
|
Total
impaired
|
$7,125,724
|
$6,724,194
|
$384,315
|
$7,146,883
|
$81,131
|
$7,264,215
|
$207,277
|
|
|
|
|
|
|
|
|
(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 September 30, 2017 consisted of seven loans for $2.7
million compared to seven loans at December 31, 2016 for $897
thousand.
We had
no loan modifications reported as TDR's for three months ended
September 30, 2017 and 2016. The following table includes the
recorded investment in and number of modifications of TDRs for the
nine months ended September 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 nine month periods ended September
30, 2017 or 2016.
|
Loans Modified as a TDR for the nine
months ended
|
|||||
|
September 30, 2017
|
September 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
|
1,572,976
|
—
|
—
|
—
|
Commercial
|
1
|
414,324
|
399,351
|
—
|
—
|
—
|
Total
legacy TDR's
|
2
|
2,011,064
|
1,972,327
|
—
|
—
|
—
|
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
|
$1,972,327
|
2
|
$392,842
|
$158,382
|
Acquired impaired loans
The
following table documents changes in the accretable (premium)
discount on acquired impaired loans during the nine months ended
September 30, 2017 and 2016, along with the outstanding balances
and related carrying amounts for the beginning and end of those
respective periods.
|
September 30, 2017
|
September 30, 2016
|
Balance
at beginning of period
|
$(22,980)
|
$276,892
|
Accretion
of fair value discounts
|
(83,099)
|
(200,353)
|
Additions
due to DCB acquisition
|
99,981
|
—
|
Reclassification
from non-accretable discount
|
(15,428)
|
91,289
|
Balance
at end of period
|
$(21,526)
|
$167,828
|
|
|
|
|
Contractually
|
|
|
Required Payments
|
|
|
Receivable
|
Carrying Amount
|
At
September 30, 2017
|
$8,301,260
|
$6,611,444
|
At
December 31, 2016
|
9,597,703
|
7,558,415
|
At
September 30, 2016
|
12,457,556
|
9,924,121
|
At
December 31, 2015
|
14,875,352
|
10,675,943
|
For our
acquisition of Damascus on July 28, 2017, we recorded all loans
acquired at the estimated fair value on their purchase date with no
carryover of the related allowance for loan losses. On the
acquisition date, we segregated the loan portfolio into two loan
pools, performing and non-performing.
We had
an independent third party determine the net discounted value of
cash flows on 5,022 performing loans totaling $218.9 million. The
valuation took into consideration the loans’ underlying
characteristics including account types, remaining terms, annual
interest rates, interest types, past delinquencies, timing of
principal and interest payments, current market rates,
loan-to-value ratios, loss exposures, and remaining balances. These
performing loans were segregated into pools based on loan and
payment type and in some cases, risk grade. The effect of this fair
valuation process was a net discount of $158 thousand at
acquisition. We then adjusted these values for inherent credit risk
within each pool, which resulted in a total credit adjustment of
$2.6 million.
We also
individually evaluated two impaired loans totaling $116 thousand to
determine their fair value as of the July 28, 2017 measurement
date. In determining the fair value for each individually evaluated
impaired loan, we considered a number of factors including the
remaining life of the acquired loans, estimated prepayments,
estimated loss ratios, estimated value of the underlying collateral
and net present value of cash flows we expect to receive, among
others.
We
established a credit related non-accretable difference of $93
thousand relating to these purchased credit impaired loans,
reflected in the recorded fair value. We further estimated the
timing and amount of expected cash flows in excess of the estimated
fair value and established an accretable discount of $2 thousand on
the acquisition date relating to those impaired loans.
The
following table outlines the contractually required payments
receivable, cash flows we expect to receive, non-accretable credit
adjustment and the accretable yield for all Damascus impaired loans
as of the acquisition date, July 28, 2017.
|
Purchased
|
|
Credit
|
|
Impaired
|
Contractually
required principal at acquisition
|
$218,969
|
Contractual
cash flows not expected to be colledted (non-accretable
difference)
|
(2,652)
|
Expected
cash flows at acquisition
|
216,317
|
Basis
in purchased credit impaired loans at acquisition - estimated fair
value
|
(160)
|
|
$216,157
|
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
September 30, 2017 and December 31, 2016:
September 30, 2017
|
Legacy
|
Acquired
|
Total
|
Risk
Rating
|
|
|
|
Pass(1
- 5)
|
|
|
|
Commercial
Real Estate:
|
|
|
|
Owner
Occupied
|
$268,553,325
|
$81,831,578
|
$350,384,903
|
Investment
|
446,882,439
|
56,002,393
|
502,884,832
|
Hospitality
|
164,225,752
|
7,479,763
|
171,705,515
|
Land
and A&D
|
55,084,381
|
9,227,747
|
64,312,128
|
Residential
Real Estate:
|
|
|
|
First
Lien-Investment
|
81,189,983
|
20,751,232
|
101,941,215
|
First
Lien-Owner Occupied
|
64,943,780
|
60,226,991
|
125,170,771
|
Land
and A&D
|
36,649,736
|
6,521,943
|
43,171,679
|
HELOC
and Jr. Liens
|
21,881,331
|
16,846,856
|
38,728,187
|
Commercial
|
140,453,809
|
38,769,965
|
179,223,774
|
Consumer
|
7,076,344
|
53,658,133
|
60,734,477
|
|
1,286,940,880
|
351,316,601
|
1,638,257,481
|
Special
Mention(6)
|
|
|
|
Commercial
Real Estate:
|
|
|
|
Owner
Occupied
|
3,207,960
|
3,494,880
|
6,702,840
|
Investment
|
388,110
|
1,047,629
|
1,435,739
|
Hospitality
|
—
|
—
|
—
|
Land
and A&D
|
2,399,014
|
129,265
|
2,528,279
|
Residential
Real Estate:
|
|
|
|
First
Lien-Investment
|
487,656
|
1,045,804
|
1,533,460
|
First
Lien-Owner Occupied
|
68,960
|
1,863,798
|
1,932,758
|
Land
and A&D
|
2,422,294
|
672,749
|
3,095,043
|
Commercial
|
1,405,764
|
78,678
|
1,484,442
|
Consumer
|
—
|
68,839
|
68,839
|
|
10,379,758
|
8,401,642
|
18,781,400
|
Substandard(7)
|
|
|
|
Commercial
Real Estate:
|
|
|
|
Owner
Occupied
|
2,608,433
|
1,777,305
|
4,385,738
|
Investment
|
1,767,463
|
828,651
|
2,596,114
|
Land
and A&D
|
—
|
45,000
|
45,000
|
Residential
Real Estate:
|
|
|
|
First
Lien-Investment
|
506,937
|
347,968
|
854,905
|
First
Lien-Owner Occupied
|
452,325
|
2,794,327
|
3,246,652
|
Land
and A&D
|
—
|
146,202
|
146,202
|
Commercial
|
1,874,652
|
326,007
|
2,200,659
|
|
7,209,810
|
6,265,460
|
13,475,270
|
Doubtful(8)
|
—
|
—
|
—
|
Loss(9)
|
—
|
—
|
—
|
Total
|
$1,304,530,448
|
$365,983,703
|
$1,670,514,151
|
|
|
|
|
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 nine month periods ended
September 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 September 30, 2017
|
Commercial
|
Real Estate
|
Real Estate
|
Consumer
|
Total
|
Beginning
balance
|
$1,318,247
|
$3,789,423
|
$793,795
|
$10,377
|
$5,911,842
|
Provision
for loan losses
|
81,378
|
113,694
|
(97,691)
|
38,320
|
135,701
|
Recoveries
|
786
|
417
|
—
|
6,280
|
7,483
|
|
1,400,411
|
3,903,534
|
696,104
|
54,977
|
6,055,026
|
Loans
charged off
|
(202,528)
|
—
|
—
|
(36,311)
|
(238,839)
|
Ending
Balance
|
$1,197,883
|
$3,903,534
|
$696,104
|
$18,666
|
$5,816,187
|
|
|
Commercial
|
Residential
|
|
|
Nine Months Ended September 30, 2017
|
Commercial
|
Real Estate
|
Real Estate
|
Consumer
|
Total
|
Beginning
balance
|
$1,372,235
|
$3,990,152
|
$823,520
|
$9,562
|
$6,195,469
|
Provision
for loan losses
|
596,350
|
352,054
|
(126,048)
|
32,752
|
855,108
|
Recoveries
|
2,350
|
1,250
|
900
|
31,811
|
36,311
|
|
1,970,935
|
4,343,456
|
698,372
|
74,125
|
7,086,888
|
Loans
charged off
|
(773,052)
|
(439,922)
|
(2,268)
|
(55,459)
|
(1,270,701)
|
Ending
Balance
|
$1,197,883
|
$3,903,534
|
$696,104
|
$18,666
|
$5,816,187
|
Amount
allocated to:
|
|
|
|
|
|
Legacy
Loans:
|
|
|
|
|
|
Individually
evaluated for impairment
|
$96,712
|
$69,903
|
$35,647
|
$—
|
$202,262
|
Other
loans not individually evaluated
|
1,076,654
|
3,753,559
|
582,994
|
18,666
|
5,431,873
|
Acquired
Loans:
|
|
|
|
|
|
Individually
evaluated for impairment
|
24,517
|
80,072
|
77,463
|
—
|
182,052
|
Ending
balance
|
$1,197,883
|
$3,903,534
|
$696,104
|
$18,666
|
$5,816,187
|
|
|
|
|
|
|
|
|
Commercial
|
Residential
|
|
|
Three Months Ended September 30, 2016
|
Commercial
|
Real Estate
|
Real Estate
|
Consumer
|
Total
|
Beginning
balance
|
$1,142,852
|
$3,939,232
|
$927,072
|
$9,767
|
$6,018,923
|
Provision
for loan losses
|
70,275
|
71,108
|
169,157
|
(4,609)
|
305,931
|
Recoveries
|
28,147
|
—
|
2,979
|
3,813
|
34,939
|
|
1,241,274
|
4,010,340
|
1,099,208
|
8,971
|
6,359,793
|
Loans
charged off
|
—
|
—
|
(7,100)
|
(300)
|
(7,400)
|
Ending
Balance
|
$1,241,274
|
$4,010,340
|
$1,092,108
|
$8,671
|
$6,352,393
|
|
|
Commercial
|
Residential
|
|
|
Nine Months Ended September 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
|
34,785
|
963,626
|
397,153
|
(11,022)
|
1,384,542
|
Recoveries
|
42,431
|
—
|
22,147
|
14,666
|
79,244
|
|
1,245,745
|
4,010,340
|
1,102,262
|
15,257
|
6,373,604
|
Loans
charged off
|
(4,471)
|
—
|
(10,154)
|
(6,586)
|
(21,211)
|
Ending
Balance
|
$1,241,274
|
$4,010,340
|
$1,092,108
|
$8,671
|
$6,352,393
|
Amount
allocated to:
|
|
|
|
|
|
Legacy
Loans:
|
|
|
|
|
|
Individually
evaluated for impairment
|
$525,195
|
$606,577
|
$—
|
$—
|
$1,131,772
|
Other
loans not individually evaluated
|
716,079
|
3,403,763
|
707,197
|
8,671
|
4,835,710
|
Acquired
Loans:
|
|
|
|
|
|
Individually
evaluated for impairment
|
—
|
—
|
384,911
|
—
|
384,911
|
Ending
balance
|
$1,241,274
|
$4,010,340
|
$1,092,108
|
$8,671
|
$6,352,393
|
|
|
|
|
|
|
Our
recorded investment in loans at September 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
|
|
|
September 30, 2017
|
Commercial
|
Real Estate
|
Real Estate
|
Consumer
|
Total
|
Legacy loans:
|
|
|
|
|
|
Individually
evaluated for impairment with specific reserve
|
$96,712
|
$597,053
|
$411,383
|
$—
|
$1,105,148
|
Individually
evaluated for impairment without specific reserve
|
399,351
|
2,981,975
|
274,701
|
—
|
3,656,027
|
Other
loans not individually evaluated
|
143,238,162
|
941,537,848
|
207,916,920
|
7,076,344
|
1,299,769,274
|
Acquired loans:
|
|
|
|
|
|
Individually
evaluated for impairment with specific reserve subsequent to
acquisition (ASC 310-20 at acquisition)
|
73,167
|
149,226
|
250,194
|
—
|
472,587
|
Individually
evaluated for impairment without specific reserve (ASC 310-20 at
acquisition)
|
—
|
298,279
|
1,192,153
|
—
|
1,490,432
|
Individually
evaluated for impairment without specific reserve (ASC 310-30 at
acquisition)
|
—
|
3,492,464
|
3,156,119
|
14,000
|
6,662,583
|
Collectively
evaluated for impairment without reserve (ASC 310-20 at
acquisition)
|
39,101,483
|
157,924,243
|
106,619,402
|
53,712,972
|
357,358,100
|
Ending
balance
|
$182,908,875
|
$1,106,981,088
|
$319,820,872
|
$60,803,316
|
$1,670,514,151
|
|
|
|
|
|
|
|
|
Commercial
|
Residential
|
|
|
September 30, 2016
|
Commercial
|
Real Estate
|
Real Estate
|
Consumer
|
Total
|
Legacy loans:
|
|
|
|
|
|
Individually
evaluated for impairment with specific reserve
|
$990,704
|
$3,432,224
|
$—
|
$—
|
$4,422,928
|
Individually
evaluated for impairment without specific reserve
|
865,728
|
1,792,666
|
192,501
|
—
|
2,850,895
|
Other
loans not individually evaluated
|
129,561,224
|
766,744,513
|
184,618,494
|
5,237,924
|
1,086,162,155
|
Acquired loans:
|
|
|
|
|
|
Individually
evaluated for impairment with specific reserve subsequent to
acquisition (ASC 310-20 at acquisition)
|
873,796
|
—
|
377,212
|
—
|
1,251,008
|
Individually
evaluated for impairment without specific reserve (ASC 310-20 at
acquisition)
|
77,230
|
334,271
|
1,370,360
|
—
|
1,781,861
|
Individually
evaluated for impairment without specific reserve (ASC 310-30 at
acquisition)
|
—
|
4,283,712
|
5,640,409
|
—
|
9,924,121
|
Collectively
evaluated for impairment without reserve (ASC 310-20 at
acquisition)
|
5,929,815
|
111,164,672
|
73,918,702
|
155,756
|
191,168,945
|
Ending
balance
|
$138,298,497
|
$887,752,058
|
$266,117,678
|
$5,393,680
|
$1,297,561,913
|
|
|
|
|
|
|
6.
OTHER
REAL ESTATE OWNED
At
September 30, 2017 and December 31, 2016, the fair value of
other real estate owned was $2.0 million and $2.7 million,
respectively. As a result of the acquisitions of MB&T, WSB,
Regal Bank and Damascus, 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, Regal Bank and
Damascus or obtained as a result of loans originated by MB&T,
WSB, Regal Bank and Damascus (acquired). Hoever, we did not
acquire any OREO properties with the DCB acquisition. 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.
Nine Months Ended September 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
|
Additional
valuation adjustment of real estate owned
|
—
|
(166,550)
|
(166,550)
|
Sales/deposit
on sales
|
(363,714)
|
(648,175)
|
(1,011,889)
|
Net
realized gain/(loss) on sale of real estate owned
|
42,114
|
(28,525)
|
13,589
|
Ending
balance
|
$425,000
|
$1,578,998
|
$2,003,998
|
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
September 30, 2017, residential foreclosures classified as other
real estate owned totaled $966 thousand. We had $280 thousand
secured by residential real estate in process of foreclosure at
September 30, 2017 compared to $99 thousand at December 31,
2016.
7.
EARNINGS
PER COMMON SHARE
We
determine basic earnings per common share by dividing net income
available to common stockholders by the weighted average number of
shares of common stock outstanding giving retroactive effect to
stock dividends.
We
calculate diluted earnings per common share by including the
average dilutive common stock equivalents outstanding during the
period. Dilutive common equivalent shares consist of stock options,
calculated using the treasury stock method.
|
Three Months Ended
|
Nine Months Ended
|
||
|
September 30,
|
September 30,
|
||
|
2017
|
2016
|
2017
|
2016
|
Weighted
average number of shares
|
11,969,536
|
10,848,418
|
11,286,215
|
10,824,436
|
Dilutive
average number of shares
|
12,172,868
|
11,033,655
|
11,496,659
|
10,998,150
|
8.
STOCK
BASED COMPENSATION
For the
three months ended September 30, 2017 and 2016, we recorded
stock-based compensation expense of $187,904 and $147,649,
respectively. For the nine months ended September 30, 2017
and 2016, we recorded stock-based compensation expense of $449,935
and $262,080, respectively. At September 30, 2017, there was $1.6
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 September 30, 2017, there
were 291,448 shares remaining available for future issuance under
the 2010 equity incentive plan. The officers exercised 14,300
options during the nine month period ended September 30, 2017
compared to 20,053 options exercised during the nine month period
ended September 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 nine months ended September 30, 2017
compared to 58,927 stock options granted during the nine months
ended September 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 nine months ended September 30, 2017 and 2016, we granted
40,713 and 36,461 restricted common stock awards, respectively. The
weighted average grant date fair value of these restricted stock
awards is $28.23 at September 30, 2017. There were no
restricted shares forfeited during the nine month periods ending
September 30, 2017 or 2016.
9. 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 (1)
independent, (2) knowledgeable, (3) able to transact and (4)
willing to transact.
The
fair value hierarchy established by accounting standards defines
three input levels for fair value measurement. The applicable
standard describes three levels of inputs that may be used to
measure fair value: Level 1 is based on quoted market prices in
active markets for identical assets. Level 2 is based on
significant observable inputs other than Level 1 prices. Level 3 is
based on significant unobservable inputs that reflect a
company’s own assumptions about the assumption that market
participants would use in pricing an asset or liability. We
evaluate fair value measurement inputs on an ongoing basis in order
to determine if there is a change of sufficient significance to
warrant a transfer between levels. There were no transfers between
levels during the three and nine months ended September 30, 2017 or
the year ended December 31, 2016.
At
September 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 September 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
|
$3,010
|
$3,010
|
$—
|
$—
|
U.S.
government agency
|
18,101
|
—
|
18,101
|
—
|
Corporate
bonds
|
14,758
|
—
|
—
|
14,758
|
Municipal
securities
|
73,441
|
—
|
73,441
|
—
|
FHLMC
MBS
|
20,267
|
—
|
20,267
|
—
|
FNMA
MBS
|
64,662
|
—
|
64,662
|
—
|
GNMA
MBS
|
19,425
|
—
|
19,425
|
—
|
Total
recurring assets at fair value
|
$213,664
|
$3,010
|
$195,896
|
$14,758
|
|
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
|
Investments
available-for-sale
|
|
Balance
as of January 1, 2017
|
$8,172
|
Realized
and unrealized gains (losses)
|
|
Included
in earnings
|
—
|
Included
in other comprehensive income
|
47
|
Purchases,
issuances, sales and settlements
|
6,539
|
Transfers
into or out of level 3
|
—
|
Balance
at September 30, 2017
|
$14,758
|
The
fair value calculated may not be indicative of net realized value
or reflective of future fair values.
Assets and Liabilities Measured at Fair Value on a Nonrecurring
Basis
We may
be required, from time to time, to measure certain assets at fair
value on a non-recurring basis in accordance with U.S. generally
accepted accounting principles. These include assets that are
measured at the lower of cost or market that were recognized at
fair value below cost at the end of the period. Assets measured at
fair value on a nonrecurring basis at September 30, 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 September 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:
|
$4,559
|
—
|
—
|
$4,559
|
Acquired:
|
1,781
|
—
|
—
|
1,781
|
Total
Impaired Loans
|
6,340
|
—
|
—
|
6,340
|
|
|
|
|
|
Other
real estate owned:
|
|
|
|
|
Legacy:
|
$425
|
—
|
—
|
$425
|
Acquired:
|
1,579
|
—
|
—
|
1,579
|
Total
other real estate owned:
|
2,004
|
—
|
—
|
2,004
|
Total
|
$8,344
|
$—
|
$—
|
$8,344
|
|
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
September 30, 2017 and December 31, 2016, we estimated the fair
value of impaired assets using Level 3 inputs to be $8.3 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, Regal and DCB, we
have segmented the OREO into two components, real estate obtained
as a result of loans originated by Old Line Bank (legacy) and other
real estate acquired from MB&T, WSB, Regal Bank and Damascus or
obtained as a result of loans originated by MB&T, WSB, Regal
Bank and Damascus (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: (1) may be applied instrument by
instrument, with certain exceptions; (2) is generally irrevocable;
and (3) 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.
|
September 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:
|
|
|
|
|
|
Cash
and cash equivalents $
|
34,464
|
$34,464
|
$34,464
|
$—
|
$—
|
Loans
receivable, net
|
1,666,505
|
1,663,786
|
—
|
—
|
1,663,786
|
Loans
held for sale
|
2,729
|
2,729
|
—
|
2,729
|
—
|
Investment
securities available for sale
|
213,664
|
213,664
|
3,011
|
195,895
|
14,758
|
Equity
Securities at cost
|
7,278
|
7,278
|
—
|
7,278
|
—
|
Bank
Owned Life Insurance
|
41,361
|
41,361
|
—
|
41,361
|
—
|
Accrued
interest receivable
|
4,947
|
4,947
|
—
|
991
|
3,956
|
Liabilities:
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
Non-interest-bearing
|
436,646
|
436,646
|
—
|
436,646
|
—
|
Interest
bearing
|
1,217,989
|
1,222,375
|
—
|
1,222,375
|
—
|
Short
term borrowings
|
152,179
|
152,179
|
—
|
152,179
|
—
|
Long
term borrowings
|
38,041
|
38,041
|
—
|
38,041
|
—
|
Accrued
Interest payable
|
868
|
868
|
—
|
868
|
—
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
Cash
and 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
|
—
|
|
|
|
|
|
|
10.
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 $37.2 million in repurchase agreements at September 30,
2017, we have provided collateral in the form of investment
securities. At September 30, 2017, we have pledged $56.8 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 $37.2 million mature
daily and will remain fully collateralized until the account has
been closed or terminated.
0
11.
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 September 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.
[M
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Introduction
Some of
the matters discussed below include forward-looking statements.
Forward-looking statements often use words such as
“believe,” “expect,” “plan,”
“may,” “will,” “should,”
“project,” “contemplate,”
“anticipate,” “forecast,”
“intend” or other words of similar meaning. You can
also identify them by the fact that they do not relate strictly to
historical or current facts. Our actual results and the actual
outcome of our expectations and strategies could be different from
those anticipated or estimated for the reasons discussed below and
under the heading “Information Regarding Forward Looking
Statements.”
In this
report, references to the “Company,” “we,”
“us,” and “ours” refer to Old Line
Bancshares, Inc. and its subsidiaries, collectively, and references
to the “Bank” refer to Old Line Bank.
Overview
Old
Line Bancshares was incorporated under the laws of the State of
Maryland on April 11, 2003 to serve as the holding company of
Old Line Bank.
On
April 1, 2011, we acquired Maryland Bankcorp, Inc.
(“Maryland Bankcorp”), the parent company of Maryland
Bank & Trust Company, N.A (“MB&T”), on
May 10, 2013, we acquired WSB Holdings, Inc. (“WSB
Holdings”), the parent company of The Washington Savings
Bank, F.S.B. (“WSB”), on December 4, 2015, we acquired
Regal Bancorp, Inc. (“Regal”), the parent company of
Regal Bank & Trust (“Regal Bank”), and on July 28,
2017, we acquired DCB Bancshares, Inc. (“DCB”), the
parent company of Damascus Community Bank (“Damascus”).
Following our latest acquisition, we have assets of approximately
$2.1 billion and 28 full service branches serving nine Maryland
counties.
Summary of Recent Performance and Other Activities
Net
income available to common stockholders decreased $1.4 million, or
38.94%, to $2.2 million for the three months ended September 30,
2017, compared to $3.5 million for the three month period ended
September 30, 2016. Earnings were $0.18 per basic and diluted
common share for the three months ended September 30, 2017,
compared to $0.33 per basic share and $0.32 per diluted common
share for the three months ended September 30, 2016. Net income
included $4.0 million in merger-related expenses (or $0.24 per
basic and diluted common share) in connection with the
Company’s acquisition of DCB in July 2017. Excluding the
merger-related expenses, adjusted operating earnings, which is a
non-GAAP financial measure, increased $2.9 million, or 57.30% to
$5.1 million, or $0.42 per basic and diluted share for the three
months ended September 30, 2017.
Net
income available to common stockholders was $10.1 million for the
nine months ended September 30, 2017, compared to $8.8 million for
the same period last year, an increase of $1.3 million, or 14.52%.
Earnings were $0.90 per basic and $0.88 per diluted common share
for the nine months ended September 30, 2017 compared to $0.82 per
basic and $0.80 per diluted common share for the same period last
year. The increase in net income is primarily the result of an
increase of $6.0 million, or 15.31%, in net interest income,
partially offset by a $683 thousand decrease in non-interest income
and a $3.1 million increase in non-interest expenses. Included in
net income for the 2017 period was $4.0 million ($2.9 million net
of taxes, or $0.25 per basic and diluted common share) of
merger-related expenses associated with the acquisition of DCB as
discussed above. Included in net income for the nine months ended
September 30, 2016 was $661 thousand ($530 thousand net of taxes,
or $0.04 per basic and $.05 per diluted common share) of
merger-related expenses associated with the acquisition of Regal
Bancorp consummated in December 2015. Excluding the merger-related
expenses, adjusted earnings, which is a non-GAAP financial measure,
for the nine month period ended September 30, 2017 increased $3.7
million, or 39.08% to $13.0 million, or $1.15 per basic and $1.13
per diluted share compared to $0.86 per basic and $0.85 per diluted
share for the nine months ended September 30, 2016.
The
following highlights contain additional financial data and events
that have occurred during the three and nine month periods ended
September 30, 2017:
●
The merger with DCB
became effective on July 28, 2017 resulting in total assets of $2.1
billion at September 30, 2017.
●
Net loans held for
investment increased $219.9 million, or 15.20%, and $305.3 million,
or 22.44%, respectively, during the three and nine month periods
ended September 30, 2017, bringing the balance to $1.7 billion at
September 30, 2017 compared to $1.4 billion at both June 30, 2017
and December 31, 2016. The increase is a result of the acquisition
of DCB and, to a lesser extent, organic growth. Excluding the DCB
acquisition, net loans held for investment during the three and
nine month periods grew $10.0 million and $95.4 million,
respectively, due to organic growth. The acquisition of the
Damascus loan portfolio accounted for approximately $210.0 million
of our loan portfolio at September 30, 2017.
●
Average gross loans
increased $329.3 million, or 25.90%, and $255.4 million, or 20.95%,
respectively, during the three and nine month periods ended
September 30, 2017, to $1.6 billion and $1.5 billion, respectively,
during the three and nine months ended September 30, 2017, from
$1.3 billion and $1.2 billion, respectively, during the three and
nine months ended September 30, 2016. The increases during the 2017
periods compared to the same periods last year are the result of
the acquisition of DCB and organic growth.
●
Nonperforming
assets decreased to a 10 year low of 0.19% of total assets at
September 30, 2017 from 0.59% at December 31, 2016.
●
Total assets
increased $352.2 million, or 20.61%, since December 31, 2016, with
the DCB acquisition accounting for $232.8 million of such
increase.
●
The net interest
margin during the three months ended September 30, 2017 was 3.71%
compared to 3.73% for the same period in 2016. Total yield on
interest earning assets increased to 4.37% for the three months
ending September 30, 2017, compared to 4.27% for the same period
last year. Interest expense as a percentage of total
interest-bearing liabilities was 0.89% for the three months ended
September 30, 2017 compared to 0.71% for the same period of
2016.
●
The net interest
margin during the nine months ended September 30, 2017 was 3.68%
compared to 3.81% for the same period in 2016. Total yield on
interest earning assets increased to 4.34% for the nine months
ended September 30, 2017, compared to 4.30% for the same period
last year. Interest expense as a percentage of total
interest-bearing liabilities was 0.87% for the nine months ended
September 30, 2017 compared to 0.64% for the same period of
2016.
●
The third quarter
Return on Average Assets (“ROAA”) and Return on Average
Equity (“ROAE”) were 0.43% and 4.26%, respectively,
compared to ROAA and ROAE of 0.88% and 9.37%, respectively, for the
third quarter of 2016. Excluding the merger-related expenses
(non-GAAP financial measure), ROAA and ROAE would have been 1.01%
and 9.98% for the third quarter of 2017.
●
ROAA and ROAE were
0.73% and 7.52%, respectively, for the nine months ended September
30, 2017, compared to ROAA and ROAE of 0.75% and 8.02%,
respectively, for the nine months ended September 30, 2016.
Excluding the merger-related expense (non-GAAP financial measure),
ROAA and ROAE would have been 0.94% and 9.68% for the nine months
ended September 30, 2017 compared to 0.80% and 8.50% for the nine
months ended September 30, 2016.
●
Total deposits grew
by $328.8 million, or 24.80%, since December 31, 2016. The DCB
acquisition provided approximately $278.0 million in deposits while
new organic deposits were approximately $50.8 million for the nine
months ended September 30, 2017.
●
We ended the third
quarter of 2017 with a book value of $16.31 per common share and a
tangible book value of $13.77 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.”
The
following summarizes the highlights of our financial performance
for the three and nine month periods ended September 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 September 30,
|
|||
|
(Dollars in thousands)
|
|||
|
2017
|
2016
|
$ Change
|
% Change
|
|
|
|
|
|
Net
income available to common stockholders
|
$2,163
|
$3,543
|
$(1,380)
|
(38.95) %
|
Interest
income
|
19,492
|
15,339
|
4,153
|
27.07
|
Interest
expense
|
3,019
|
2,000
|
1,019
|
50.95
|
Net
interest income before provision for loan losses
|
16,472
|
13,339
|
3,133
|
23.49
|
Provision
for loan losses
|
136
|
306
|
(170)
|
(55.56)
|
Non-interest
income
|
2,151
|
2,138
|
13
|
0.61
|
Non-interest
expense
|
14,640
|
9,797
|
4,843
|
49.43
|
Average
total loans
|
1,600,429
|
1,271,171
|
329,258
|
25.90
|
Average
interest earning assets
|
1,820,594
|
1,469,516
|
351,078
|
23.89
|
Average
total interest bearing deposits
|
1,142,438
|
962,098
|
180,340
|
18.74
|
Average
non-interest bearing deposits
|
430,326
|
326,480
|
103,846
|
31.81
|
Net
interest margin
|
3.71%
|
3.73%
|
|
(0.54)
|
Return
on average equity
|
4.26%
|
9.37%
|
|
(54.54)
|
Basic
earnings per common share
|
$0.18
|
$0.33
|
$0.10
|
30.30
|
Diluted
earnings per common share
|
0.18
|
0.32
|
(0.14)
|
(43.75)
|
|
Nine months ended September 30,
|
|||
|
(Dollars in thousands)
|
|||
|
2017
|
2016
|
$ Change
|
% Change
|
|
|
|
|
|
Net
income available to common stockholders
|
$10,106
|
$8,825
|
$1,281
|
14.51%
|
Interest
income
|
53,181
|
44,111
|
9,070
|
20.56
|
Interest
expense
|
8,294
|
5,184
|
3,110
|
59.97
|
Net
interest income before provision for loan losses
|
44,887
|
38,927
|
5,960
|
15.31
|
Provision
for loan losses
|
855
|
1,385
|
(530)
|
(38.27)
|
Non-interest
income
|
6,002
|
6,685
|
(683)
|
(10.22)
|
Non-interest
expense
|
34,102
|
30,975
|
3,127
|
10.10
|
Average
total loans
|
1,475,004
|
1,219,563
|
255,441
|
20.95
|
Average
interest earning assets
|
1,688,473
|
1,413,764
|
274,709
|
19.43
|
Average
total interest bearing deposits
|
1,047,891
|
929,307
|
118,584
|
12.76
|
Average
non-interest bearing deposits
|
375,237
|
322,162
|
53,075
|
16.47
|
Net
interest margin
|
3.68%
|
3.81%
|
|
(3.41)
|
Return
on average equity
|
7.52%
|
8.02%
|
|
(6.23)
|
Basic
earnings per common share
|
$0.90
|
$0.82
|
$(0.09)
|
(10.98)
|
Diluted
earnings per common share
|
0.88
|
0.80
|
0.08
|
10.00
|
Recent Acquisition
On July
28, 2017, Old Line Bancshares acquired DCB, the parent company of
Damascus. Upon the consummation of the merger, each share of common
stock of DCB outstanding immediately before the merger was
converted into the right to receive 0.9269 shares of Old Line
Bancshares’ common stock, provided that cash was paid in lieu
of any fractional shares of Old Line Bancshares common stock. As a
result, Old Line Bancshares issued 1,495,090 shares of its common
stock in exchange for the shares of DCB common stock in the merger.
The aggregate merger consideration was approximately $40.9 million
based on the closing sales price of Old Line Bancshares’
common stock on July 28, 2017.
In
connection with the merger, Damascus merged with and into Old Line
Bank, with Old Line Bank the surviving bank.
At July
28, 2017, DCB had consolidated assets of approximately $311
million. This merger added six banking locations located in
Montgomery, Frederick and Carroll Counties in
Maryland.
The
acquired assets and assumed liabilities of DCB were measured at
estimated fair value. Management made significant estimates and
exercised significant judgement in accounting for the acquisition
of DCB. Management judgmentally assigned risk ratings to loans
based on appraisals and estimated collateral values, expected cash
flows, prepayment speeds and estimated loss factors to measure fair
value for loans. Management used quoted or current market prices to
determine the fair value of Damascus’ investment
securities.
Pending Acquisition
On
September 27, 2017, Old Line Bancshares entered into an Agreement
and Plan of Merger with Bay Bancorp, Inc. (“BYBK”), the
parent company of Bay Bank, FSB (“Bay Bank”). Pursuant
to the terms of the Agreement and Plan of Merger, upon the
consummation of the merger, all outstanding shares of BYBK common
stock will be exchanged for shares of common stock of Old Line
Bancshares. Consummation of the merger is contingent upon the
approval of Old Line Bancshares’ and BYBK’s
stockholders as well as receipt of all necessary regulatory and
third party approvals and consents. We expect the merger to close
during the second quarter of 2018. At June 30, 2017, BYBK had
consolidated assets of approximately $646 million. Bay Bank has 11
banking locations located in its primary market areas of Baltimore,
Anne Arundel, Howard and Harford Counties in Maryland.
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. In addition, through the DCB merger, we
have further expanded our presence in Montgomery and Carroll
Counties and entered the Frederick County market.
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. 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 and during 2018 even with the additional
expected incremental increases in the federal funds rate, which
will increase market interest rates, and that we can continue to
grow total deposits during the remainder of 2017 and during 2018
even with interest rates that are, and are expected to remain
through 2017 and 2018, low by historical levels. As a result of
this expected growth, we expect that net interest income will
continue to increase during the remainder of 2017 and during 2018,
although there can be no guarantee that this will be the
case.
We also
expect that salaries and benefits expenses and occupancy and
equipment expenses will be higher for full-year 2017 than they were
in 2016 as a result of the addition of the former Damascus
employees and staff associated with our newly-opened branch in our
Riverdale, Maryland, and the occupancy costs associated with the
new Damascus and Riverdale branches, and that such expenses will
continue to increase during 2018 as a result of including the
former Damascus employees and Riverdale branch employees and
branches during the full year and the addition of BYBK employees
and branches upon consummation of the pending merger; 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 nine months ended September 30, 2017.
Results of Operations for the Three Months Ended September 30, 2017
Compared to the Three Months Ended September 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 September 30, 2017 increased $3.1 million, or 23.49%,
to $16.5 million from $13.3 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 total 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 $4.2 million, or 27.08%, to $19.5 million during the
three months ended September 30, 2017 compared to $15.3 million
during the three months ended September 30, 2016, primarily as a
result of a $3.8 million increase in interest and fees on loans.
The increase in interest and fees on loans is almost entirely the
result of a $329.3 million increase in the average balance of our
loans for the three months ended September 30, 2017 compared to the
same period in 2016 as a result of loans acquired in the DCB merger
and, to a lesser extent, organic loan growth. The average yield on
the loan portfolio increased slightly to 4.54% for the three months
ended September 30, 2017 from 4.50% during the three months ended
September 30, 2016 due to slightly higher yields on new commercial
and consumer loans, partially offset by a six basis point decrease
in the average rate on real estate loans due to lower average yield
on real estate loans, which had a slight positive impact on
interest and fees on loans income during the quarter. 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 September 30, 2017 contributed a five
basis point increase in interest income, compared to two basis
points for the three months ended September 30, 2016. In addition,
a $323 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, U.S. government agency securities and municipal
securities. The average yield on the investment portfolio increased
to 3.07% for the three months ended September 30, 2017 from 2.72%
during the three months ended September 30, 2016, primarily due to
higher yields on our corporate bonds and U.S. government agencies
partially offset by a decrease in the average yield on our
municipal securities.
Total interest expense
increased $1.0 million, or 51.00%, to $3.0 million during the three
months ended September 30, 2017 from $2.0 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 0.89% during the three months
ended September 30, 2017 from 0.71% during the three months ended
September 30, 2016, due to higher rates paid on our borrowings as
well as on our money market and NOW accounts and our time deposits.
The average rate on our borrowings increased primarily as a result
of the inclusion of the subordinated notes we issued in August 2016
(the “Notes”) during the entire third quarter of 2017
compared to only part of the third quarter of 2016, as the interest
rate we pay on the Notes is higher than the rate we typically pay
on our other borrowings, and to a lesser extent, the average rate
paid on our FHLB borrowings. The increase in the average rate paid
on FHLB borrowings, money market and NOW accounts is the result of
slightly higher rates due to the Federal Reserve rate
increases. The fair
value accretion recorded on acquired deposits also affects interest
expense. The benefit from accretion on such deposits was two basis
point for the three months ended September 30, 2017, compared to
one basis point for the three months ended September 30,
2016.
The
average balance of our interest bearing liabilities increased
$235.5 million, or 21.14%, to $1.3 billion for the three months
ended September 30, 2017 from $1.1 billion for the three months
ended September 30, 2016, as a result of increases of $180.3
million, or 18.75%, in our average interest bearing deposits and
$55.2 million, or 36.28%, in our average borrowings quarter over
quarter. The increase in our average interest bearing deposits is
due to the deposits acquired in the DCB merger and, to a lesser
extent, organic deposit growth The increase in our average
borrowings is primarily due to the use of short-term FHLB advances
to fund new loan originations 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 $103.8 million to $430.3 million for the three months
ended September 30, 2017, compared to $326.5 million for the three
months ended September 30, 2016. Included in average non-interest
deposits is $75.9 million acquired in the DCB merger.
Our net
interest margin decreased to 3.71% for the three months ended
September 30, 2017 from 3.73% for the three months ended September
30, 2016. This decrease is primarily due to an 18 basis point
increase in the average rate paid on our interest bearing
liabilities, as discussed above, partially offset by a 10 basis
point increase in the average yield on our interest earning assets,
from 4.27% for the quarter ended September 30, 2016 to 4.37% for
the quarter ended September 30, 2017, due primarily to the
increases in the average yield on our investment portfolio and, to
a lesser extent, the average yield on our loan
portfolio.
During
the three months ended September 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
$189 thousand for the three months ended September 30, 2017,
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 September 30,
|
|||
|
2017
|
2016
|
||
|
|
% Impact on
|
|
% Impact on
|
|
Accretion
|
Net Interest
|
Accretion
|
Net Interest
|
|
Dollars
|
Margin
|
Dollars
|
Margin
|
Commercial
loans
|
$28,420
|
0.01%
|
$12,442
|
—%
|
Mortgage
loans
|
159,941
|
0.03
|
67,300
|
0.02
|
Consumer
loans
|
57,514
|
0.01
|
12,947
|
—
|
Interest
bearing deposits
|
88,766
|
0.02
|
52,728
|
0.01
|
Total
accretion (amortization)
|
$334,641
|
0.07%
|
$145,417
|
0.03%
|
|
|
|
|
|
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 September 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 September 30,
|
balance
|
Interest
|
Rate
|
balance
|
Interest
|
Rate
|
Assets:
|
|
|
|
|
|
|
Federal
funds sold (1)
|
$1,260,824
|
$3,974
|
1.25%
|
$351,894
|
$415
|
0.47%
|
Interest
bearing deposits (1)
|
1,127,347
|
861
|
0.30
|
1,152,554
|
420
|
0.14
|
Investment
securities (1)(2)
|
|
|
|
|
|
|
U.S.
Treasury
|
3,017,254
|
7,593
|
1.01
|
2,998,957
|
5,322
|
0.70
|
U.S.
government agency
|
12,820,505
|
83,300
|
2.58
|
5,121,632
|
24,473
|
1.90
|
Corporate
bonds
|
13,881,570
|
189,274
|
5.41
|
3,385,870
|
42,188
|
4.94
|
Mortgage
backed securities
|
111,341,791
|
548,779
|
1.96
|
131,321,653
|
562,518
|
1.84
|
Municipal
securities
|
74,532,759
|
710,453
|
3.78
|
64,016,259
|
655,391
|
4.06
|
Other
equity securities
|
8,139,686
|
192,797
|
9.40
|
6,142,247
|
99,685
|
6.44
|
Total
investment securities
|
223,733,565
|
1,732,196
|
3.07
|
212,986,618
|
1,389,577
|
2.72
|
Loans(1)
|
|
|
|
|
|
|
Commercial
|
198,584,446
|
2,056,390
|
4.11
|
156,392,273
|
1,520,582
|
3.86
|
Mortgage
real estate
|
1,357,993,372
|
15,518,319
|
4.53
|
1,108,655,692
|
12,818,877
|
4.59
|
Consumer
|
43,851,679
|
733,422
|
6.64
|
6,123,000
|
83,715
|
5.42
|
Total
loans
|
1,600,429,497
|
18,308,131
|
4.54
|
1,271,170,965
|
14,423,174
|
4.50
|
Allowance
for loan losses
|
5,956,956
|
—
|
|
6,145,988
|
—
|
|
Total
loans, net of allowance
|
1,594,472,541
|
18,308,131
|
4.56
|
1,265,024,977
|
14,423,174
|
4.52
|
Total
interest earning assets(1)
|
1,820,594,277
|
20,045,162
|
4.37
|
1,479,516,043
|
15,813,586
|
4.27
|
Non-interest
bearing cash
|
38,671,275
|
|
|
28,168,294
|
|
|
Premises
and equipment
|
40,923,913
|
|
|
36,486,228
|
|
|
Other
assets
|
93,604,324
|
|
|
71,838,944
|
|
|
Total
assets(1)
|
1,993,793,789
|
|
|
1,606,009,509
|
|
|
Liabilities and Stockholders’ Equity:
|
|
|
|
|
|
|
Interest
bearing deposits
|
|
|
|
|
|
|
Savings
|
126,473,041
|
33,417
|
0.10
|
103,011,292
|
31,349
|
0.12
|
Money
market and NOW
|
490,678,732
|
496,535
|
0.40
|
402,595,725
|
246,339
|
0.24
|
Time
deposits
|
525,286,683
|
1,396,638
|
1.05
|
456,490,764
|
1,144,153
|
0.99
|
Total
interest bearing deposits
|
1,142,438,456
|
1,926,590
|
0.67
|
962,097,781
|
1,421,841
|
0.59
|
Borrowed
funds
|
207,268,687
|
1,092,736
|
2.09
|
152,091,696
|
577,709
|
1.51
|
Total
interest bearing liabilities
|
1,349,707,143
|
3,019,326
|
0.89
|
1,114,189,477
|
1,999,550
|
0.71
|
Non-interest
bearing deposits
|
430,325,956
|
|
|
326,480,191
|
|
|
|
1,780,033,099
|
|
|
1,440,669,668
|
|
|
Other
liabilities
|
12,465,862
|
|
|
15,260,196
|
|
|
Stockholders’
equity
|
201,294,828
|
|
|
150,079,645
|
|
|
Total
liabilities and stockholders’ equity
|
$1,993,793,789
|
|
|
$1,606,009,509
|
|
|
Net interest
spread(1)
|
|
|
3.48
|
|
|
3.56
|
Net interest
margin(1)
|
|
$17,025,836
|
3.71%
|
|
$13,814,036
|
3.73%
|
(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 September 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 September 30,
|
||
|
2017 compared to 2016
|
||
|
Variance due to:
|
||
|
Total
|
Rate
|
Volume
|
|
|
|
|
Interest earning assets:
|
|
|
|
Federal
funds sold(1)
|
$3,559
|
$2,559
|
$1,000
|
Interest
bearing deposits
|
441
|
457
|
(16)
|
Investment
Securities(1)
|
|
|
|
U.S.
treasury
|
2,271
|
2,263
|
8
|
U.S.
government agency
|
58,827
|
28,499
|
30,328
|
Corporate
bonds
|
147,086
|
—
|
147,086
|
Mortgage
backed securities
|
(13,739)
|
58,784
|
(72,523)
|
Municipal
securities
|
55,062
|
(101,859)
|
156,921
|
Other
|
93,112
|
78,911
|
14,201
|
Loans:(1)
|
|
|
|
Commercial
|
535,808
|
255,817
|
279,991
|
Mortgage
|
2,699,442
|
(623,998)
|
3,323,440
|
Consumer
|
649,707
|
80,595
|
569,112
|
Total
interest income (1)
|
4,231,576
|
(217,972)
|
4,449,548
|
|
|
|
|
Interest bearing
liabilities
|
|
|
|
Savings
|
2,068
|
(8,580)
|
10,648
|
Money
market and NOW
|
250,196
|
230,610
|
19,586
|
Time
deposits
|
252,485
|
152,467
|
100,018
|
Borrowed
funds
|
515,027
|
416,007
|
99,020
|
Total
interest expense
|
1,019,776
|
790,504
|
229,272
|
|
|
|
|
Net
interest income(1)
|
$3,211,800
|
$(1,008,476)
|
$4,220,276
|
(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 September 30, 2017 was $136 thousand, a decrease of $170
thousand, or 55.64%, compared to $306 thousand for the three months
ended September 30, 2016. This decrease is due to an improvement in
the balance of our non-performing loans.
Management
identified additional probable losses in the loan portfolio and
recorded $239 thousand in charge-offs during the three month period
ended September 30, 2017, compared to charge-offs of $7 thousand
for the three months ended September 30, 2016. Recoveries of $7
thousand were recognized during the three months ended September
30, 2017 compared to recoveries of $35 thousand during the same
period in 2016.
The allowance for loan losses to gross loans held-for-investment
was 0.35% and 0.45%, and the allowance for loan losses to
non-accrual loans was 306.11% and 97.05%, at September 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 $2.2 million for the three months ended
September 30, 2017, an increase of $14 thousand, or 0.63%, from the
corresponding period of 2016 amount of $2.1 million.
The
following table outlines the amounts of and changes in non-interest
income for the three month periods.
|
Three months ended September 30,
|
|
|
|
|
2017
|
2016
|
$ Change
|
% Change
|
Service
charges on deposit accounts
|
$542,909
|
$445,901
|
$97,008
|
21.76%
|
Gain
on sales or calls of investment securities
|
—
|
326,021
|
(326,021)
|
(100.00)
|
Earnings
on bank owned life insurance
|
297,656
|
284,982
|
12,674
|
4.45
|
Gain
(loss) on disposal of assets
|
7,469
|
(49,957)
|
57,426
|
(114.95)
|
Rental
income
|
188,505
|
168,589
|
19,916
|
11.81
|
Income
on marketable loans
|
482,641
|
782,510
|
(299,869)
|
(38.32)
|
Other
fees and commissions
|
632,191
|
179,802
|
452,389
|
251.60
|
Total non-interest income
|
$2,151,371
|
$2,137,848
|
$13,523
|
0.63%
|
Non-interest income
increased during the 2017 period primarily as a result of increases
in other fees and commissions and service charges on deposit
accounts, almost entirely offset by decreases in gain on sales or
calls of investment securities and income on marketable
loans.
Other fees and
commissions, which consists of loan fees paid up front upon
origination of a loan or other credit arrangements (not amortized
as part of the loan), and other miscellaneous fees, increased
primarily as a result of recoveries of
previously charged-off acquired loans. The increase in service
charges on deposit accounts is primarily the result of the
additional accounts acquired in the DCB merger.
The decrease in gain on sales
or calls of investment securities is the result of our
re-positioning our investment portfolio during the 2016 period,
pursuant to which we sold approximately $29.9 million of our lowest
yielding, longer duration investments, compared to $45.8 million in
sales and calls for the three months ended September 30,
2017, $41.8 million of which was acquired in the DCB merger
and sold immediately after the closing of the merger, resulting in
no gain or loss on such sales.
Income on marketable loans
consists of gain on the sale of residential mortgage loans
originated for sale and any fees we receive in connection with such
sales. Income on marketable loans decreased $300 thousand during
the three months ended September 30, 2017, compared to the same
period last year primarily due to lower gains recorded on the sale
of residential mortgage loans as a result of the lower volume of
loans sold in the secondary market. The residential mortgage
division originated loans aggregating $21.3 million in the
secondary market during the third quarter of 2017 compared to $31.6
million for the same period last year.
Non-interest
Expense. Non-interest expense increased $4.8 million, or
49.43%, for the three months ended September 30, 2017, compared to
the three months ended September 30, 2016.
The
following table outlines the amounts of and changes in non-interest
expenses for the three month periods.
|
Three months ended September 30,
|
|
|
|
|
2017
|
2016
|
$ Change
|
% Change
|
Salaries
and benefits
|
$5,365,890
|
$4,812,949
|
$552,941
|
11.49%
|
Severance
expense
|
—
|
49,762
|
(49,762)
|
(100.00)
|
Occupancy
and equipment
|
1,828,593
|
1,907,090
|
(78,497)
|
(4.12)
|
Data
processing
|
443,453
|
384,382
|
59,071
|
15.37
|
FDIC
insurance and State of Maryland assessments
|
281,587
|
286,047
|
(4,460)
|
(1.56)
|
Merger
and integration
|
3,985,514
|
—
|
3,985,514
|
100.00
|
Core
deposit premium amortization
|
272,354
|
202,129
|
70,225
|
34.74
|
Gain
on sale of other real estate owned
|
4,100
|
(27,914)
|
32,014
|
(114.69)
|
OREO
expense
|
200,959
|
77,224
|
123,735
|
160.23
|
Directors
fees
|
148,800
|
164,800
|
(16,000)
|
(9.71)
|
Network
services
|
133,301
|
127,219
|
6,082
|
4.78
|
Telephone
|
218,316
|
174,439
|
43,877
|
25.15
|
Other
operating
|
1,757,586
|
1,639,223
|
118,363
|
7.22
|
Total non-interest expenses
|
$14,640,453
|
$9,797,350
|
$4,843,103
|
49.43%
|
Non-interest
expenses increased quarter over quarter almost entirely as a result
of increases in merger and integration expenses and, to a lesser
extent, salaries and benefits, for the three months ended September
30, 2017 compared to the same period of 2016.
We
incurred $4.0 million in merger and integration expenses during the
three months ended September 30, 2017 in connection with the DCB
acquisition compared to no merger and integration expenses during
the same period last year. Included in merger and integration
expenses is approximately $1.5 million in severance payments.
Salaries and benefits increased by $503 thousand quarter over
quarter primarily due to the additional staff acquired in the DCB
merger.
Income Taxes. We had
an income tax expense of $1.7 million (43.78% of pre-tax income)
for the three months ended September 30, 2017 compared to an income
tax expense of $1.8 million (34.08% of pre-tax income) for the same
period in 2016. The effective tax rate increased for the 2017
period due to an increase in the level of non-deductible expenses
associated with the DCB acquisition as compared to the same period
last year.
Net Income Available to
Common Stockholders. Net income available to common
stockholders was $2.2 million or $0.18 per basic and diluted common
share for the three month period ending September 30, 2017 compared
to $3.5 million, or $0.33 per basic and $0.32 per diluted common
share, for the same period in 2016. The decrease in net income is
primarily the result of the increase of $4.8 million in
non-interest expenses, partially offset by an increase of $3.1
million in net interest income.
Results of Operations for the Nine Months Ended September 30, 2017
Compared to the Nine Months Ended September 30, 2016.
Net
interest income before provision for loan losses for the nine
months ended September 30, 2017 increased $6.0 million, or 15.31%,
to $44.9 million from $38.9 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 from an increase in the level of our average loans,
partially offset by an increase in total 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 $9.1 million, or 20.56%, to $53.2 million during the nine
months ended September 30, 2017 compared to $44.1 million during
the nine months ended September 30, 2016, primarily as a result of
an $8.3 million increase in interest and fees on loans. The
increase in interest and fees on loans is the result of a $255.4
million increase in the average balance of our loans for the nine
months ended September 30, 2017 compared to the same period in
2016, as a result of organic loan growth and, to a lesser extent,
the loans acquired in the DCB acquisition. The average yield on the
loan portfolio decreased slightly to 4.53% for the nine months
ended September 30, 2017 from 4.55% during the nine months ended
September 30, 2016 due to lower average 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 nine months ended September 30, 2017 contributed
a seven basis point increase in interest income, compared to four
basis points for the nine months ended September 30, 2016. In
addition, a $729 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 municipal securities.
Total interest
expense increased $3.1 million, or 60.01%, to $8.3 million during
the nine months ended September 30, 2017 from $5.2 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 0.87% during the nine
months ended September 30, 2017 from 0.64% during the nine months
ended September 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. Rates
increased due to the Federal Reserve rate increases. 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 and an increase in the average rate
paid on our FHLB borrowings compared to the same nine month period
last year due to increases in the federal funds rate period over
period. Interest expense with respect to the subordinated notes was
significantly lower during the nine months ended September 30,
2016, due to their issuance in August of last year. 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 nine months ended September 30, 2017 compared to two
basis points for the same period in 2016.
The average balance of
our interest bearing liabilities increased $196.3 million, or
18.20%, to $1.3 billion for the nine months ended September 30,
2017 from $1.1 billion for the nine months ended September 30,
2016, as a result of increases of $118.6 million, or 12.76%, in our
average interest bearing deposits and $77.7 million, or 52.07%, in
our average borrowings quarter over quarter. The increase in our
average interest bearing deposits is due to organic deposit growth,
and to a lesser extent, deposits acquired in the DCB merger. 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 $53.1
million to $375.2 million for the nine months ended September 30,
2017, compared to $322.2 million for the nine months ended
September 30, 2016. Included in average non-interest deposits is
$77.5 million acquired in the DCB merger.
Our net
interest margin decreased to 3.68% for the nine months ended
September 30, 2017 from 3.81% for the nine months ended September
30, 2016. The yield on average interest earning assets increased by
four basis point from 4.30% for the nine months ended September 30,
2016 to 4.34% for the nine months ended September 30, 2017, due to
the 24 basis point increase in the average yield on our investment
portfolio, partially offset by the two basis point decrease in the
average yield on our loan portfolio.
During
the nine months ended September 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
$338 thousand for the nine months ended September 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:
|
Nine months ended September 30,
|
|||
|
2017
|
2016
|
||
|
|
% Impact on
|
|
% Impact on
|
|
Accretion
|
Net Interest
|
Accretion
|
Net Interest
|
|
Dollars
|
Margin
|
Dollars
|
Margin
|
Commercial
loans
|
$32,120
|
—%
|
$39,367
|
—%
|
Mortgage
loans
|
748,109
|
0.06
|
373,950
|
0.04
|
Consumer
loans
|
67,830
|
0.01
|
35,463
|
—
|
Interest
bearing deposits
|
153,340
|
0.01
|
214,130
|
0.02
|
Total
accretion (amortization)
|
$1,001,399
|
0.08%
|
$662,910
|
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 nine months ended September 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/
|
Nine months ended September 30,
|
balance
|
Interest
|
Rate
|
balance
|
Interest
|
Rate
|
Assets:
|
|
|
|
|
|
|
Federal
funds sold (1)
|
$619,171
|
$5,594
|
1.21%
|
$546,224
|
$1,924
|
0.47%
|
Interest
bearing deposits (1)
|
1,138,256
|
870
|
0.10
|
1,415,901
|
—
|
—
|
Investment
securities (1)(2)
|
|
|
|
|
|
|
U.S.
Treasury
|
3,024,635
|
20,540
|
0.91
|
3,004,061
|
14,607
|
0.65
|
U.S.
government agency
|
10,688,042
|
205,813
|
2.57
|
21,444,035
|
248,077
|
1.55
|
Corporate
bonds
|
10,641,774
|
428,153
|
5.38
|
1,136,861
|
42,188
|
4.96
|
Mortgage
backed securities
|
113,821,895
|
1,657,619
|
1.95
|
108,907,901
|
1,569,968
|
1.93
|
Municipal
securities
|
70,616,753
|
2,039,585
|
3.86
|
57,196,311
|
1,821,877
|
4.25
|
Other
equity securities
|
8,875,175
|
437,854
|
6.60
|
6,231,432
|
299,324
|
6.42
|
Total
investment securities
|
217,668,274
|
4,789,564
|
2.94
|
197,920,601
|
3,996,041
|
2.70
|
Loans(1)
|
|
|
|
|
|
|
Commercial
|
182,017,682
|
5,414,494
|
3.98
|
148,555,312
|
4,425,592
|
3.98
|
Mortgage
real estate
|
1,274,851,962
|
43,711,489
|
4.58
|
1,064,265,688
|
36,812,172
|
4.62
|
Consumer
|
18,134,018
|
859,704
|
6.34
|
6,742,330
|
264,226
|
5.23
|
Total
loans
|
1,475,003,662
|
49,985,687
|
4.53
|
1,219,563,330
|
41,501,990
|
4.55
|
Allowance
for loan losses
|
5,955,985
|
—
|
—
|
5,681,965
|
—
|
—
|
Total
loans, net of allowance
|
1,469,047,677
|
49,985,687
|
4.55
|
1,213,881,365
|
41,501,990
|
4.57
|
Total
interest earning assets(1)
|
1,688,473,378
|
54,781,715
|
4.34
|
1,413,764,091
|
45,499,955
|
4.30
|
Non-interest
bearing cash
|
32,229,686
|
|
|
38,310,630
|
|
|
Premises
and equipment
|
37,765,947
|
|
|
36,276,841
|
|
|
Other
assets
|
82,684,424
|
|
|
73,661,099
|
|
|
Total
assets(1)
|
1,841,153,435
|
|
|
1,562,012,661
|
|
|
Liabilities and Stockholders’ Equity:
|
|
|
|
|
|
|
Interest
bearing deposits
|
|
|
|
|
|
|
Savings
|
111,211,961
|
95,308
|
0.11
|
101,179,412
|
91,720
|
0.12
|
Money
market and NOW
|
451,502,260
|
1,263,078
|
0.37
|
385,850,290
|
699,177
|
0.24
|
Time
deposits
|
485,176,995
|
3,816,254
|
1.05
|
442,276,925
|
3,210,756
|
0.97
|
Total
interest bearing deposits
|
1,047,891,216
|
5,174,640
|
0.66
|
929,306,627
|
4,001,653
|
0.58
|
Borrowed
funds
|
226,845,847
|
3,119,758
|
1.84
|
149,174,160
|
1,181,980
|
1.06
|
Total
interest bearing liabilities
|
1,274,737,063
|
8,294,398
|
0.87
|
1,078,480,787
|
5,183,633
|
0.64
|
Non-interest
bearing deposits
|
375,236,607
|
|
|
322,161,864
|
|
|
|
1,649,973,670
|
|
|
1,400,642,651
|
|
|
Other
liabilities
|
11,543,009
|
|
|
13,858,179
|
|
|
Non-controlling
interest
|
—
|
|
|
500,161
|
|
|
Stockholders’
equity
|
179,636,756
|
|
|
147,011,670
|
|
|
Total
liabilities and stockholders’ equity
|
$1,841,153,435
|
|
|
$1,562,012,661
|
|
|
Net interest
spread(1)
|
|
|
3.47
|
|
|
3.66
|
Net interest
margin(1)
|
|
$46,487,317
|
3.68%
|
|
$40,316,322
|
3.81%
|
(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 nine months ended September 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
|
Nine months ended September 30,
|
||
|
2017 compared to 2016
|
||
|
Variance due to:
|
||
|
Total
|
Rate
|
Volume
|
|
|
|
|
Interest earning assets:
|
|
|
|
Federal
funds sold(1)
|
$3,670
|
$3,449
|
$221
|
Interest
bearing deposits
|
870
|
870
|
—
|
Investment
Securities(1)
|
|
|
|
U.S.
treasury
|
5,933
|
5,858
|
75
|
U.S.
government agency
|
(42,264)
|
132,015
|
(174,279)
|
Corporate
bond
|
385,965
|
—
|
385,965
|
Mortgage
backed securities
|
87,651
|
21,807
|
65,844
|
Municipal
securities
|
217,708
|
(219,562)
|
437,270
|
Other
|
138,530
|
11,237
|
127,293
|
Loans:(1)
|
|
|
|
Commercial
|
988,902
|
(3,267)
|
992,169
|
Mortgage
|
6,899,317
|
(383,808)
|
7,283,125
|
Consumer
|
595,478
|
85,147
|
510,331
|
Total
interest income (1)
|
9,281,760
|
(346,254)
|
9,628,014
|
|
|
|
|
Interest bearing
liabilities
|
|
|
|
Savings
|
3,588
|
(6,129)
|
9,717
|
Money
market and NOW
|
563,901
|
457,194
|
106,707
|
Time
deposits
|
605,498
|
325,761
|
279,737
|
Borrowed
funds
|
1,937,778
|
1,268,013
|
669,765
|
Total
interest expense
|
3,110,765
|
2,044,839
|
1,065,926
|
|
|
|
|
Net
interest income(1)
|
$6,170,995
|
$(2,391,093)
|
$8,562,088
|
(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 nine months
ended September 30, 2017 was $855 thousand, a decrease of $529
thousand, or 38.24%, compared to $1.4 million for the nine months
ended September 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 nine 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 September 30,
2017.
Management
identified probable losses in the loan portfolio and charged-off
$1.3 million, compared to charge-offs of $21 thousand for the nine
months ended September 30, 2016. Recoveries of $36 thousand were
recognized for the nine months ended September 30, 2017 compared to
$79 thousand for the same period in 2016.
Non-interest Income. Non-interest income totaled $6.0
million for the nine months ended September 30, 2017, a decrease of
$683 thousand, or 10.22%, from the corresponding period of 2016
amount of $6.7 million.
The following table outlines the amounts of and changes in
non-interest income for the nine month periods.
|
Nine months ended September 30,
|
|
|
|
|
2017
|
2016
|
$ Change
|
% Change
|
Service
charges on deposit accounts
|
$1,389,340
|
$1,290,736
|
$98,604
|
7.64%
|
Gain
on sales or calls of investment securities
|
35,258
|
1,226,233
|
(1,190,975)
|
(97.12)
|
Earnings
on bank owned life insurance
|
861,111
|
849,525
|
11,586
|
1.36
|
Gain
(loss) on disposal of assets
|
120,062
|
(27,173)
|
147,235
|
(541.84)
|
Gain
on sale of loans
|
94,714
|
—
|
94,714
|
100.00
|
Rental
income
|
498,961
|
585,724
|
(86,763)
|
(14.81)
|
Income
on marketable loans
|
1,840,218
|
1,746,678
|
93,540
|
5.36
|
Other
fees and commissions
|
1,162,058
|
1,013,461
|
148,597
|
14.66
|
Total non-interest income
|
$6,001,722
|
$6,685,184
|
$(683,462)
|
(10.22) %
|
The $1.2 million decrease in
gain on sales or calls of investment securities is the result
of re-positioning our investment
portfolio during the 2016 period, pursuant to which we sold
approximately $100.0 million of our lowest yielding, longer
duration investments, compared to $60.6 million in sales and calls
during the nine months ended September 30, 2017.
The sales during the 2017 period
includes approximately $41.8 million of investment securities
acquired in the DCB merger and sold immediately after the
closing of the merger, resulting in no gain or loss on such
sales.
The
decrease in rental income for the nine month period ended September
30, 2017 is due to vacant space at our building located at 4201
Mitchellville Road in Bowie, Maryland, which was occupied during
2016.
Other
fees and commissions increased $149 thousand during the nine months
ended September 30, 2017 compared to the same period last year
primarily due to $537 thousand in recoveries of previously
charged-off acquired loans during the 2017 period compared to $36
thousand during the 2016 period , partially offset by a decrease of
$250 thousand due to a one-time incentive fee for our debit card
program we received in the first quarter of last year, for which there was no corresponding income this
year.
The increase in
service charges on deposit accounts is the result of income on bank
debit cards. This increase is primarily due to the increase in our
customer deposit base as a result of the DCB merger.
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.
The increase in gain on sale of loans
(other than residential mortgage loans held for sale) during the
nine-month period ended September 30, 2017 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.
Income on marketable loans increased $94
thousand during the nine months ended September 30, 2017, compared
to the same period last year, primarily due to an increase in the
premiums received on residential mortgage loans sold in the
secondary market, although an increase in gains recorded on the
sale of such loans as a result of a higher volume of loans sold was
responsible for approximately 10.6% of the increase. The
residential mortgage division originated loans aggregating $71.1
million in the secondary market during the nine months ended
September 30, 2017 compared to $70.9 million for the same period
last year.
Non-interest Expense. Non-interest expense increased $3.1
million, or 10.10%, for the nine months ended September 30, 2017
compared to the nine months ended September 30, 2016.
The
following table outlines the amounts of and changes in non-interest
expenses for the nine month periods.
|
Nine months ended September 30,
|
|
|
|
|
2017
|
2016
|
$ Change
|
% Change
|
Salaries
and benefits
|
$15,284,057
|
$15,268,644
|
$15,413
|
0.10%
|
Severance
expense
|
—
|
443,257
|
(443,257)
|
(100.00)
|
Occupancy
and equipment
|
5,137,273
|
5,279,134
|
(141,861)
|
(2.69)
|
Data
processing
|
1,161,647
|
1,165,862
|
(4,215)
|
(0.36)
|
FDIC
insurance and State of Maryland assessments
|
799,700
|
806,960
|
(7,260)
|
(0.90)
|
Merger
and integration
|
3,985,514
|
661,018
|
3,324,496
|
502.94
|
Core
deposit premium amortization
|
651,613
|
629,368
|
22,245
|
3.53
|
Gain
on sale of other real estate owned
|
(13,589)
|
(80,220)
|
66,631
|
(83.06)
|
OREO
expense
|
256,170
|
295,381
|
(39,211)
|
(13.27)
|
Directors
fees
|
485,700
|
496,500
|
(10,800)
|
(2.18)
|
Network
services
|
437,140
|
410,448
|
26,692
|
6.50
|
Telephone
|
598,618
|
594,214
|
4,404
|
0.74
|
Other
operating
|
5,318,189
|
5,004,039
|
314,150
|
6.28
|
Total non-interest expenses
|
$34,102,032
|
$30,974,605
|
$3,127,427
|
10.10%
|
Non-interest
expense increased during the nine months ended September 30, 2017
compared to the same period last year almost entirely as a result
of increases in merger and integration expenses and other operating
expenses, partially offset by a lack of severance payments in the
2017 period and decreases in salaries and benefits and occupancy
and equipment expense.
Merger
and integration expenses increased $3.3 million to $4.0 million for
the nine months ended September 30, 2017 in connection with the DCB
acquisition, compared to $661 thousand of merger and integration
expenses during the first nine months of 2016 in connection with
the Regal Bancorp acquisition that was consummated in December
2015.
Other
operating expense increased during the 2017 period primarily due to
higher fees associated with our Internet banking support due to
additional customer base acquired in the DCB merger.
We had
no severance payments during the nine months ended September 30,
2017 compared to $443 thousand of such payments for the
corresponding period last year, which payments related to staff
reductions implemented in the second and third quarters of
2016.
The
decreases in salaries and benefits and occupancy and equipment
expense is associated with staff reductions and branch closures we
implemented in the second and third quarters of 2016.
Income Taxes. We had
an income tax expense of $5.8 million (36.57% of pre-tax income)
for the nine months ended September 30, 2017 compared to an income
tax expense of $4.4 million (33.42% of pre-tax income) for the same
period in 2016. The effective tax rate increased for the 2017
period due to reduction in the level of non-taxable interest income
as compared to the same period last year in addition to an increase
in non-deductible merger and integration expenses associated with
the DCB acquisition.
Net Income Available to
Common Stockholders. Net income available to common
stockholders was $10.1 million or $0.90 per basic and $0.88 per
diluted common share for the nine month period ended September 30,
2017 compared to $8.8 million, or $0.82 per basic and $0.80 per
diluted common share, for the same period in 2016. The increase in
net income is primarily the result of the $9.1 million increase in
net interest income, partially offset by the $683 thousand decrease
in non-interest income and $3.1 million increase in non-interest
expenses.
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 September 30, 2017 amounted to $213.7
million, an increase of $14.2 million, or 7.10%, from the
December 31, 2016 amount of $199.5 million. As outlined above,
at September 30, 2017, all securities are classified as available
for sale.
The
fair value of available for sale securities included net unrealized
losses of $2.2 million at September 30, 2017 (reflected as $1.3
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 $305.3 million, or 22.43%, to $1.7 billion at
September 30, 2017, from $1.4 billion at December 31, 2016. The
loan growth during 2017 was primarily due to the loans acquired
from Damascus, and to a lesser extent, new commercial real estate
originations resulting from our enhanced presence in our market
area. Commercial real estate loans increased by $153.1 million,
residential real estate loans increased by $52.6 million,
commercial and industrial loans increased by $40.9 million and
consumer loans increased by $55.8 million from their respective
balances at December 31, 2016. Excluding the loans acquired in
the DCB acquisition, net loans held for investment during the three
and nine month period grew $10.0 million and $95.4 million,
respectively, due to organic growth; the acquisition of the
Damascus loan portfolio accounted for approximately $210.0 million
of the growth in net loans held for investment during the three and
nine month periods ended September 30, 2017.
Most of
our lending activity occurs within the state of Maryland in the
suburban Washington, D.C. and Baltimore market areas in Anne
Arundel, Baltimore, Calvert, Carroll, Charles, Montgomery, 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:
|
September 30, 2017
|
December 31, 2016
|
||||
|
Legacy(1)
|
Acquired
|
Total
|
Legacy(1)
|
Acquired
|
Total
|
Commercial
Real Estate
|
|
|
|
|
|
|
Owner
Occupied
|
$274,369,718
|
$87,103,763
|
$361,473,481
|
$238,220,475
|
$53,850,612
|
$292,071,087
|
Investment
|
449,038,012
|
57,878,673
|
506,916,685
|
414,012,709
|
37,687,804
|
451,700,513
|
Hospitality
|
164,225,752
|
7,479,763
|
171,705,515
|
141,611,858
|
11,193,427
|
152,805,285
|
Land
and A&D
|
57,483,395
|
9,402,012
|
66,885,407
|
51,323,297
|
6,015,813
|
57,339,110
|
Residential
Real Estate
|
|
|
|
|
|
|
First
Lien-Investment
|
82,184,576
|
22,145,004
|
104,329,580
|
72,150,512
|
23,623,660
|
95,774,172
|
First
Lien-Owner Occupied
|
65,465,065
|
64,885,116
|
130,350,181
|
54,732,604
|
42,443,767
|
97,176,371
|
Residential
Land and A&D
|
39,072,030
|
7,340,894
|
46,412,924
|
39,667,222
|
5,558,232
|
45,225,454
|
HELOC
and Jr. Liens
|
21,881,331
|
16,846,856
|
38,728,187
|
24,385,215
|
2,633,718
|
27,018,933
|
Commercial
and Industrial
|
143,734,225
|
39,174,650
|
182,908,875
|
136,259,560
|
5,733,904
|
141,993,464
|
Consumer
|
7,076,344
|
53,726,972
|
60,803,316
|
4,868,909
|
139,966
|
5,008,875
|
|
1,304,530,448
|
365,983,703
|
1,670,514,151
|
1,177,232,361
|
188,880,903
|
1,366,113,264
|
Allowance
for loan losses
|
(5,634,135)
|
(182,052)
|
(5,816,187)
|
(6,084,478)
|
(110,991)
|
(6,195,469)
|
Deferred
loan costs, net
|
1,807,204
|
—
|
1,807,204
|
1,257,411
|
—
|
1,257,411
|
|
$1,300,703,517
|
$365,801,651
|
$1,666,505,168
|
$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, Regal Bancorp, the parent company of Regal Bank, in December
2015, and DCB, the parent company of Damascus, we have segmented
the portfolio into two components, loans originated by Old Line
Bank (legacy) and loans acquired from MB&T, WSB, Regal Bank and
Damascus (acquired).
Bank owned life
insurance. At September 30, 2017 we have invested $41.4
million in life insurance policies on our executive officers, other
officers of Old Line Bank, retired officers of MB&T, and former
officers of WSB, Regal Bank and Damascus. Bank owned life insurance
increased $3.8 million during the nine months ended September 30,
2017, primary due to $3.1 million of bank owned life insurance
acquired in the DCB acquisition. The increase also includes
interest earned on these policies. Earnings on bank owned life
insurance were $861 thousand during the nine months ended September
30, 2017, which earnings were partially offset by $137 thousand in
expenses associated with the policies.
Deposits. The
deposit portfolio increased $328.8 million, or 24.80%, during the
nine month period ended September 30, 2017, to $1.7 billion at
September 30, 2017 compared to $1.3 billion at December 31, 2016.
The deposit increase was comprised of increases of $223.4 million,
or 22.47%, in interest bearing deposits and $105.3 million, or
31.79%, in non-interest bearing deposits. These increases are due
primarily to the deposits acquired from Damascus and, to a lesser
exten, as a result of continued efforts to enhance our deposit
customer base in our surrounding areas.
The
following table outlines the changes in interest bearing
deposits:
|
September 30,
|
December 31,
|
|
|
|
2017
|
2016
|
$ Change
|
% Change
|
|
(Dollars in thousands)
|
|||
Certificates
of deposit
|
$543,704
|
$460,595
|
$83,109
|
18.04%
|
Interest
bearing checking
|
540,897
|
433,195
|
107,702
|
24.86
|
Savings
|
133,388
|
100,759
|
32,629
|
32.38
|
Total
|
$1,217,989
|
$994,549
|
$223,440
|
22.47%
|
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 September 30, 2017,
we had $42.0 million in CDARS and $151.8 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 nine months ended September 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 September 30, 2017, we had $115.0 million outstanding in
short-term FHLB borrowings, compared to $150.0 million at December
31, 2016. We used the proceeds from the sale of the investment
securities we acquired in the DCB acquisition to repay a portion of
our FHLB borrowings. At September 30, 2017 and December 31, 2016,
we had no unsecured promissory notes and $37.2 million and $33.4
million, respectively, in secured promissory notes.
Long-term
borrowings at September 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 September 30, 2017, we
had $33.1 million in cash and due from banks, $1.0 million in
interest bearing accounts, and $384 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 nine months
ended September 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 September 30, 2017. In addition, Old Line Bank has $38.5
million in available lines of credit at September 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 $537.0 million at September 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
$325.8 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 $37.2 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
September 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 $2.2 million and $1.3 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 $5.8 million for the general loan loss reserve during
the nine months ended September 30, 2017.
As of
September 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 third 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 September
30, 2017.
|
|
|
Minimum capital
|
To be well
|
||
|
Actual
|
adequacy
|
capitalized
|
|||
September 30, 2017
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
(Dollars in 000’s)
|
|||||
Common
equity tier 1 (to risk-weighted assets)
|
$198,902
|
10.97%
|
$81,611
|
4.5%
|
$117,882
|
6.5%
|
Total
capital (to risk weighted assets)
|
$204,777
|
11.29%
|
$145,086
|
8%
|
$181,357
|
10%
|
Tier
1 capital (to risk weighted assets)
|
$198,902
|
10.97%
|
$108,814
|
6%
|
$145,086
|
8%
|
Tier
1 leverage (to average assets)
|
$198,902
|
10.22%
|
$77,882
|
4%
|
$97,353
|
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 $30.2 million at
September 30, 2017 compared to $32.8 million at December 31, 2016.
At September 30, 2017, we had $16.9 million and $13.3 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, Regal Bank and Damascus 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 September 30, 2017, there was
$182 thousand of allowance reserved for potential loan losses on
acquired loans compared to $111 thousand at December 31,
2016.
Nonperforming
Assets. As of September 30, 2017, our nonperforming assets
totaled $4.0 million and consisted of $1.9 million of nonaccrual
loans, $107 thousand of loans past due 90 days and still accruing
and other real estate owned of $2.0 million.
The
table below sets forth the amounts and categories of our
nonperforming assets at the dates indicated.
|
Nonperforming Assets
|
|||||
|
September 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
|
—
|
76,761
|
76,761
|
—
|
250,000
|
250,000
|
Commercial
|
—
|
8,306
|
8,306
|
—
|
—
|
—
|
Consumer
|
—
|
21,810
|
21,810
|
19,242
|
—
|
19,242
|
Total
accruing loans 90 or more days past due
|
—
|
106,877
|
106,877
|
19,242
|
884,290
|
903,532
|
Non-accruing
loans:
|
|
|
|
|
|
|
Commercial
Real Estate
|
|
|
|
|
|
|
Owner
Occupied
|
$—
|
$226,998
|
$226,998
|
$2,370,589
|
$—
|
$2,370,589
|
Hospitality
|
—
|
—
|
—
|
1,346,736
|
—
|
1,346,736
|
Land
and A&D
|
—
|
191,202
|
191,202
|
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
|
452,325
|
795,720
|
1,248,045
|
222,237
|
—
|
222,237
|
Commercial
and Industrial
|
—
|
—
|
—
|
1,760,824
|
—
|
1,760,824
|
Total
Non-accruing loans:
|
686,084
|
1,213,920
|
1,900,004
|
6,089,842
|
293,860
|
6,383,702
|
|
|
|
|
|
|
|
Other
real estate owned (“OREO”)
|
425,000
|
1,578,998
|
2,003,998
|
425,000
|
2,321,000
|
2,746,000
|
|
|
|
|
|
|
|
Total
nonperforming assets
|
$1,111,084
|
$2,899,795
|
$4,010,879
|
$6,534,084
|
$3,499,150
|
$10,033,234
|
|
|
|
|
|
|
|
Accruing
Troubled Debt Restructurings
|
|
|
|
|
|
|
Commercial
Real Estate
|
|
|
|
|
|
|
Owner
Occupied
|
$1,572,976
|
$—
|
$1,572,976
|
$—
|
$—
|
$—
|
Residential
Real Estate:
|
|
|
|
|
|
|
Land
and A&D
|
—
|
—
|
—
|
—
|
91,669
|
91,669
|
First
Lien-Investment
|
—
|
—
|
—
|
—
|
67,397
|
67,397
|
First
Lien-Owner Occupied
|
—
|
649,639
|
649,639
|
—
|
662,661
|
662,661
|
Commercial
and Industrial
|
399,351
|
73,167
|
472,518
|
—
|
75,701
|
75,701
|
Total
Accruing Troubled Debt Restructurings
|
$1,972,327
|
$722,806
|
$2,695,133
|
$—
|
$897,428
|
$897,428
|
The
table below reflects our ratios of our nonperforming assets at
September 30, 2017 and December 31, 2016.
|
September 30,
|
December 31,
|
|
2017
|
2016
|
Ratios, Excluding Acquired
Assets
|
|
|
Total
nonperforming assets as a percentage of total loans held for
investment and OREO
|
0.09%
|
0.55%
|
Total
nonperforming assets as a percentage of total assets
|
0.06%
|
0.43%
|
Total
nonperforming assets as a percentage of total loans held for
investment
|
0.09%
|
0.56%
|
|
|
|
Ratios, Including Acquired
Assets
|
|
|
Total
nonperforming assets as a percentage of total loans held for
investment and OREO
|
0.24%
|
0.73%
|
Total
nonperforming assets as a percentage of total assets
|
0.19%
|
0.59%
|
Total
nonperforming assets as a percentage of total loans held for
investment
|
0.24%
|
0.73%
|
The
table below presents a breakdown of the recorded book balance of
non-accruing loans at September 30, 2017 and December 31,
2016.
|
September 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
|
—
|
$—
|
$—
|
$—
|
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
|
Residential
Real Estate
|
|
|
|
|
|
|
|
|
First
Lien-Investment
|
2
|
233,759
|
233,759
|
21,686
|
3
|
312,061
|
312,061
|
12,229
|
First
Lien-Owner Occupied
|
2
|
452,325
|
452,325
|
13,486
|
1
|
222,237
|
222,237
|
5,436
|
Commercial
|
—
|
—
|
—
|
—
|
24
|
1,760,824
|
1,760,824
|
264,259
|
Total
non-accrual loans
|
4
|
686,084
|
686,084
|
35,172
|
33
|
6,089,842
|
6,089,842
|
435,355
|
Acquired(1)
|
|
|
|
|
|
|
|
|
Commercial
Real Estate:
|
|
|
|
|
|
|
|
|
Owner
Occupied
|
1
|
253,279
|
226,998
|
9,094
|
—
|
—
|
—
|
—
|
Land
and A & D
|
1
|
334,271
|
45,000
|
153,004
|
2
|
485,905
|
194,567
|
5,503
|
Residential
Real Estate
|
|
|
|
|
|
|
|
|
First
Lien-Owner Occupied
|
4
|
904,967
|
795,720
|
59,452
|
—
|
—
|
—
|
—
|
Land
and A & D
|
1
|
149,226
|
146,202
|
10,743
|
—
|
—
|
—
|
—
|
Commercial
|
—
|
—
|
—
|
—
|
1
|
158,224
|
99,293
|
22,130
|
Total
non-accrual loans
|
7
|
$1,641,743
|
$1,213,920
|
$232,293
|
3
|
$644,129
|
$293,860
|
$27,633
|
Total
all non-accrual loans
|
11
|
$2,327,827
|
$1,900,004
|
$267,465
|
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 September 30, 2017 decreased $5.4 million from
December 31, 2016, primarily due to one hospitality loan for
$1.3 million that was 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 September 30, 2017 increased $920 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
September 30, 2017, legacy OREO was $425 thousand. During the nine
months ended September 30, 2017, one property was transferred into
legacy OREO during the first quarter and sold for a gain on sale of
OREO of $35 thousand during the third quarter.
Acquired OREO at
September 30, 2017, decreased $742 thousand from December 31,
2016. The decrease in acquired OREO was driven by the sale of three
properties, 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
|
|
|
Nine months ended September 30, 2017
|
Commercial
|
Real Estate
|
Real Estate
|
Consumer
|
Total
|
Beginning
balance
|
$1,372,235
|
$3,990,152
|
$823,520
|
$9,562
|
$6,195,469
|
Provision
for loan losses
|
596,350
|
271,982
|
(45,976)
|
32,752
|
855,108
|
Recoveries
|
2,350
|
1,250
|
900
|
31,811
|
36,311
|
|
1,970,935
|
4,263,384
|
778,444
|
74,125
|
7,086,888
|
Loans
charged off
|
(773,052)
|
(439,922)
|
(2,268)
|
(55,459)
|
(1,270,701)
|
Ending
Balance
|
$1,197,883
|
$3,823,462
|
$776,176
|
$18,666
|
$5,816,187
|
Amount
allocated to:
|
|
|
|
|
|
Legacy
Loans:
|
|
|
|
|
|
Individually
evaluated for impairment
|
$96,712
|
$69,903
|
$35,647
|
$—
|
$202,262
|
Other
loans not individually evaluated
|
1,076,654
|
3,673,487
|
663,066
|
18,666
|
5,431,873
|
Acquired
Loans:
|
|
|
|
|
|
Individually
evaluated for impairment
|
24,517
|
80,072
|
77,463
|
—
|
182,052
|
Ending
balance
|
$1,197,883
|
$3,823,462
|
$776,176
|
$18,666
|
$5,816,187
|
|
|
Commercial
|
Residential
|
|
|
Twelve months ended 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:
|
September 30, 2017
|
December 31, 2016
|
Ratio
of allowance for loan losses to:
|
|
|
Total
gross loans held for investment
|
0.35%
|
0.45%
|
Non-accrual
loans
|
306.11%
|
97.05%
|
Net
charge-offs to average loans
|
0.08%
|
0.02%
|
During
the nine months ended September 30, 2017, we charged off $1.3
million in loans through the allowance for loan
losses.
The
allowance for loan losses represented 0.35% and 0.45% of gross
loans held for investment at September 30, 2017 and
December 31, 2016, respectively and 0.43% and 0.52% of legacy
loans at September 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 September 30, 2017
and December 31, 2016, are as follows:
|
September 30, 2017
|
December 31, 2016
|
|
(Dollars in thousands)
|
|
|
|
|
Commitments
to extend credit and available credit lines:
|
|
|
Commercial
|
$128,678
|
$92,263
|
Real
estate-undisbursed development and construction
|
119,956
|
134,944
|
Consumer
|
42,981
|
26,204
|
|
$291,615
|
$253,411
|
Standby
letters of credit
|
$13,374
|
$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 $120.0
million, or 41.14% of the $291.6 million of outstanding commitments
at September 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
As the
magnitude of the merger expenses distorts our operational results,
we present in the GAAP reconciliation below and in the accompanying
text certain performance measures excluding the effect of the
merger expenses during the three and nine month periods ended
September 30, 2017. We believe this information is important to
enable shareholders and other interested parties to assess our
operational performance, in other words, our performance based on
our ongoing operations
Reconciliation of Non-GAAP measures (Unaudited)
|
Three Months ending September 30, 2017
|
Nine Months ending September 30, 2017
|
|
Nine Months ending September 30, 2016
|
Net Income (GAAP)
|
$2,163,187
|
$10,106,379
|
|
8,824,657
|
Merger-related
expenses, net of tax
|
2,902,912
|
2,902,912
|
|
529,604
|
Operating
Net Income (non-GAAP)
|
$5,066,099
|
$13,009,291
|
|
9,354,261
|
|
|
|
|
|
Net income available to common shareholders
|
$2,163,187
|
$10,106,379
|
|
8,824,657
|
Merger-related
expenses, net of tax
|
2,902,912
|
2,902,912
|
|
529,604
|
Operating
earnings (non-GAAP)
|
$5,066,099
|
$13,009,291
|
|
9,354,261
|
|
|
|
|
|
|
|
|
|
|
Earnings
per weighted average common shares, basic (GAAP)
|
$0.18
|
$0.90
|
|
0.82
|
Meger-related
expenses, net of tax
|
0.24
|
0.25
|
|
0.04
|
Operating
earnings per weighted average common share basic (non
GAAP)
|
$0.42
|
$1.15
|
|
0.86
|
|
|
|
|
|
|
|
|
|
|
Earnings
per weighted average common shares, diluted (GAAP)
|
$0.18
|
$0.88
|
|
0.80
|
Meger-related
expenses, net of tax
|
0.24
|
0.25
|
|
0.05
|
Operating
earnings per weighted average common share basic
(non-GAAP)
|
$0.42
|
$1.13
|
|
0.85
|
|
|
|
|
|
Summary Operating Results (non-GAAP)
|
|
|
|
|
Noninterest
expense (GAAP)
|
$14,640,453
|
$34,102,034
|
|
30,974,605
|
Merger-related
expenses, gross
|
3,985,514
|
3,985,514
|
|
661,018
|
Operating
noninterest expense (non-GAAP)
|
10,654,939
|
$30,116,520
|
|
30,313,587
|
|
|
|
|
|
Operating
efficiency ratio (non-GAAP)
|
57.21%
|
59.18
|
%
|
66.46
|
|
|
|
|
|
Operating
noninterest expense as a % of average assets
|
0.53%
|
1.64
|
%
|
1.94
|
|
|
|
|
|
Return on average assets
|
|
|
|
|
Net
income
|
$2,163,187
|
$10,106,379
|
|
8,824,657
|
Merger-related
expenses, net of tax
|
2,902,912
|
2,902,912
|
|
529,604
|
Operating
net income (non-GAAP)
|
$5,066,099
|
$13,009,291
|
|
9,354,261
|
|
|
|
|
|
Adjusted Return of Average Assets
|
|
|
|
|
Return
on average assets (GAAP)
|
0.43
|
0.73
|
|
0.75
|
Effect
to adjust for merger-related expenses, net of tax
|
0.58
|
0.21
|
|
0.05
|
Adjusted
return on average assets
|
1.01%
|
0.94
|
%
|
0.80
|
|
|
|
|
|
Return on average common equity
|
|
|
|
|
Net
income available to common shareholders
|
$2,163,187
|
$10,106,379
|
|
8,824,657
|
Merger-related
expenses, net of tax
|
2,902,912
|
2,902,912
|
|
529,604
|
Operating
earnings (non-GAAP)
|
$5,066,099
|
$13,009,291
|
|
9,354,261
|
|
|
|
|
|
Adjusted Return on Average Equity
|
|
|
|
|
Return
on Average Equity (GAAP)
|
4.26
|
7.52
|
|
8.02
|
Effect
to adjust for merger-related expenses, net of tax
|
5.72
|
2.16
|
|
0.48
|
Adjusted
return on average common equity (non-GAAP)
|
9.98%
|
9.68
|
%
|
8.50
|
Below
is a reconciliation of the fully tax equivalent adjustments and the
U.S. GAAP basis information presented in this report:
Three months ended September 30, 2017
|
|
|
Net
|
|
Net Interest
|
|
Interest
|
|
Income
|
Yield
|
Spread
|
GAAP
net interest income
|
$16,472,476
|
3.59%
|
3.36%
|
Tax
equivalent adjustment
|
|
|
|
Federal
funds sold
|
177
|
—
|
—
|
Investment
securities
|
267,376
|
0.06
|
0.06
|
Loans
|
285,807
|
0.06
|
0.06
|
Total
tax equivalent adjustment
|
553,360
|
0.12
|
0.12
|
Tax
equivalent interest yield
|
$17,025,836
|
3.71%
|
3.48%
|
Three months ended September 30, 2016
|
|
|
Net
|
|
Net Interest
|
|
Interest
|
|
Income
|
Yield
|
Spread
|
GAAP
net interest income
|
$13,338,986
|
3.60%
|
3.43%
|
Tax
equivalent adjustment
|
|
|
|
Federal
funds sold
|
4
|
—
|
—
|
Investment
securities
|
243,510
|
0.07
|
0.07
|
Loans
|
231,536
|
0.06
|
0.06
|
Total
tax equivalent adjustment
|
475,050
|
0.13
|
0.13
|
Tax
equivalent interest yield
|
$13,814,036
|
3.73%
|
3.56%
|
Nine months ended September 30, 2017
|
|
|
Net
|
|
Net Interest
|
|
Interest
|
|
Income
|
Yield
|
Spread
|
GAAP
net interest income
|
$44,886,510
|
3.55%
|
3.34%
|
Tax
equivalent adjustment
|
|
|
|
Federal
funds sold
|
213
|
—
|
—
|
Investment
securities
|
768,136
|
0.06
|
0.06
|
Loans
|
832,458
|
0.07
|
0.07
|
Total
tax equivalent adjustment
|
1,600,807
|
0.13
|
0.13
|
Tax
equivalent interest yield
|
$46,487,317
|
3.68%
|
3.47%
|
Nine months ended September 30, 2016
|
|
|
Net
|
|
Net Interest
|
|
Interest
|
|
Income
|
Yield
|
Spread
|
GAAP
net interest income
|
$38,926,969
|
3.68%
|
3.53%
|
Tax
equivalent adjustment
|
|
|
|
Federal
funds sold
|
12
|
—
|
—
|
Investment
securities
|
698,813
|
0.06
|
0.06
|
Loans
|
690,528
|
0.07
|
0.07
|
Total
tax equivalent adjustment
|
1,389,353
|
0.13
|
0.13
|
Tax
equivalent interest yield
|
$40,316,322
|
3.81%
|
3.66%
|
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 closing of the merger with
BYBK during the second quarter of 2018 and the impact of the merger
on non-interest expenses, expanding fee income, extensions of core
banking services, that the recent DCB acquisition will generate
increased earnings and increase returns for our stockholders,
continued increases in net interest income, 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; changes
in competitive, governmental, regulatory, technological and other
factors which may affect Old Line Bancshares specifically or the
banking industry generally; and, with respect to the timing of the
BYBK merger, the ability to obtain required regulatory and
stockholder approvals.
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 September 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 September 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
|
||||
|
September 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
|
384
|
—
|
—
|
—
|
384
|
Investment
securities
|
—
|
3,321
|
2,147
|
208,196
|
213,664
|
Loans
|
297,565
|
100,127
|
716,864
|
555,958
|
1,670,514
|
Total
interest earning assets
|
297,979
|
103,448
|
625,763
|
764,154
|
1,791,344
|
Interest
Bearing Liabilities:
|
|
|
|
|
|
Interest-bearing
transaction deposits
|
357,290
|
178,645
|
—
|
—
|
535,935
|
Savings
accounts
|
44,463
|
44,463
|
44,463
|
—
|
133,389
|
Time
deposits
|
95,844
|
201,762
|
246,098
|
—
|
543,704
|
Total
interest-bearing deposits
|
497,597
|
424,870
|
290,561
|
—
|
1,213,028
|
FHLB
advances
|
115,000
|
—
|
—
|
—
|
115,000
|
Other
borrowings
|
37,179
|
—
|
—
|
38,041
|
75,220
|
Total
interest-bearing liabilities
|
649,776
|
424,870
|
290,561
|
38,041
|
1,403,248
|
Period
Gap
|
$(351,797)
|
$(321,422)
|
$335,202
|
$726,113
|
$388,096
|
Cumulative
Gap
|
$(351,797)
|
$(673,219)
|
$(338,017)
|
$388,096
|
|
Cumulative
Gap/Total Assets
|
(17.07) %
|
(32.66) %
|
(16.40) %
|
18.83%
|
|
|
|
|
|
|
|
|
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 September
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 September 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 September 30,
2017:
Shares Purchased during the period:
|
Total number ofshares repurchased
|
Average Pricepaid per share
|
Total number ofshare purchased aspart of
publiclyannounced program(1)
|
Maximum number
ofshares that may yet bepurchased under
theprogram (1)
|
|
|
|
|
|
July
1 - Seeptmber 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 September 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
Agreement and Plan
of Merger, dated as of September 27, 2017, by and between Old Line
Bancshares, Inc. and Bay Bancorp, Inc. (incorporated by reference
from Exhibit 2.1 of the Company's Form 8-K/A filed on September 28,
2017) (the schedules and certain exhibits have been omitted
pursuant to Item 601(b)(2) of Regulation S-K. Old Line Bancshares
undertakes to furnish supplemental copies of any of the omitted
schedules or exhibits upon request by the Securities and Exchange
Commission.)
|
|
|
|
21
|
Subsidiaries of the
registrant
|
|
|
Rule 13a-14(a) Certification
of Chief Executive Officer
|
|
|
|
Rule 13a-14(a) Certification
of Chief Financial Officer
|
|
|
|
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:
November 6, 2017
|
By:
|
/s/
James W. Cornelsen
|
|
|
James
W. Cornelsen, President and Chief Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
Date:
November 6, 2017
|
By:
|
/s/
Elise M. Hubbard
|
|
|
Elise
M. Hubbard, Senior Vice President and Chief Financial
Officer
|
|
|
(Principal
Accounting and Financial Officer)
|
71