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EX-32 - EXHIBIT 32 - OLD LINE BANCSHARES INCexh_32.htm
EX-31.2 - EXHIBIT 31.2 - OLD LINE BANCSHARES INCexh_312.htm
EX-31.1 - EXHIBIT 31.1 - OLD LINE BANCSHARES INCexh_311.htm
EX-10.4 - EXHIBIT 10.4 - OLD LINE BANCSHARES INCexh_104.htm
EX-10.3 - EXHIBIT 10.3 - OLD LINE BANCSHARES INCexh_103.htm
EX-10.2 - EXHIBIT 10.2 - OLD LINE BANCSHARES INCexh_102.htm
EX-10.1 - EXHIBIT 10.1 - OLD LINE BANCSHARES INCexh_101.htm

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2018

 

OR

 

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

 

Commission File Number: 000-50345

 

Old Line Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

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

 

 

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

 

 

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

 

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

 

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

 

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

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

 

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

 

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

 

Yes o No x

 

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

 

 

OLD LINE BANCSHARES, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

 

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

 

 2 

Part 1. Financial Information

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Balance Sheets

 

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

 

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

 

 3 

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Income

(Unaudited)

 

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

 

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

 

 4 

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

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

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 5 

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

 

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

 

 

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

 

 

 6 

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

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

 

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

 

 7 

OLD LINE BANCSHARES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Description of Business - Old Line Bancshares, Inc. (“Old Line Bancshares”) was incorporated under the laws of the State of Maryland on April 11, 2003 to serve as the holding company of Old Line Bank. The primary business of Old Line Bancshares is to own all of the capital stock of Old Line Bank. We provide a full range of banking services to customers located in Anne Arundel, Baltimore, Calvert, Carroll, Charles, Frederick, Montgomery, Prince George’s, and St. Mary’s Counties in Maryland and surrounding areas.

 

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

 

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

 

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

 

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

 

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

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

 

 8 

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

 

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

 

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

 

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

 

 9 

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

 

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

 

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

 

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

 

 10 

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

 

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

 

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

 

2.ACQUISITION OF DCB BANCSHARES, INC.

 

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

 

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

 

 11 

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

 

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

 

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

 

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

 

 

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

 

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3.INVESTMENT SECURITIES

 

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

 

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

 

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

 

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

 

 13 

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

 

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

 

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

 

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

 

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

 

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4.LOANS

 

Major classifications of loans held for investment are as follows:

 

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

 

____________________________

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

 

Credit Policies and Administration

 

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

 

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

 

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

 

Commercial Real Estate Loans

 

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

 

 15 

Commercial real estate lending entails significant risks. Risks inherent in managing our commercial real estate portfolio relate to sudden or gradual drops in property values as well as changes in the economic climate that may detrimentally impact the borrower’s ability to repay. We monitor the financial condition and operating performance of the borrower through a review of annual tax returns and updated financial statements. In addition, we meet with the borrower and/or perform site visits as required.

 

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

 

Residential Real Estate Loans

 

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

 

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

 

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

 

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

 

We also offer fixed rate home improvement loans. Our home equity and home improvement loan portfolio gives us a diverse client base. Although most of these loans are in our market area, the diversity of the individual loans in the portfolio reduces our potential risk. Usually, we secure our home equity loans and lines of credit with a security interest in the borrower’s primary or secondary residence.

 

 16 

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

 

Commercial and Industrial Lending

 

Our commercial and industrial lending consists of lines of credit, revolving credit facilities, accounts receivable financing, term loans, equipment loans, Small Business Administration loans, standby letters of credit and unsecured loans. We originate commercial loans for any business purpose including the financing of leasehold improvements and equipment, the carrying of accounts receivable, general working capital, and acquisition activities. We have a diverse client base and we do not have a concentration of these types of loans in any specific industry segment. We generally secure commercial business loans with accounts receivable, equipment, deeds of trust and other collateral such as marketable securities, cash value of life insurance and time deposits at Old Line Bank.

 

Commercial business loans have a higher degree of risk than residential mortgage loans because the availability of funds for repayment generally depends on the success of the business. They may also involve high average balances, increased difficulty monitoring and a high risk of default. To help manage this risk, we typically limit these loans to proven businesses and we generally obtain appropriate collateral and personal guarantees from the borrower’s principal owners and monitor the financial condition of the business. For loans in excess of $250,000, monitoring generally includes a review of the borrower’s annual tax returns and updated financial statements.

 

Consumer Installment Lending

 

We offer various types of secured and unsecured consumer loans. We make consumer loans for personal, family or household purposes as a convenience to our customer base. Consumer loans, however, are not a focus of our lending activities. The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of his or her ability to meet existing obligations and payments on the proposed loan. As a general guideline, a consumer’s total debt service should not exceed 40% of his or her gross income.

 

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

 

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

 

 17 

Concentrations of Credit

 

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

 

Non-Accrual and Past Due Loans

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 18 

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

 

Age Analysis of Past Due Loans

 

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

 

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

 

 19 

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

_________________________

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

 

 20 

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

______________________

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

 

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

 

 21 

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

 

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

 

Acquired impaired loans

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

 

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

 

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

 

Credit Quality Indicators

 

We review the adequacy of the allowance for loan losses at least quarterly. We base the evaluation of the adequacy of the allowance for loan losses upon loan categories. We categorize loans as residential real estate loans, commercial real estate loans, commercial loans and consumer loans. We further divide commercial real estate loans by owner occupied, investment, hospitality and land acquisition and development. We also divide residential real estate by owner occupied, investment, land acquisition and development and junior liens. All categories are divided by risk rating and loss factors and weighed by risk rating to determine estimated loss amounts. We evaluate delinquent loans and loans for which management has knowledge about possible credit problems of the borrower or knowledge of problems with collateral separately and assign loss amounts based upon the evaluation.

 

 22 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 23 

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

 

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

 

 24 

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

 

 25 

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

 

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

 

 

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

 

 

 26 

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

 

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

 

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

 

5.OTHER REAL ESTATE OWNED

 

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

 

 27 

The following outlines the transactions in OREO during the period.

 

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

 

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

 

6.EARNINGS PER COMMON SHARE

 

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

 

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

 

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

 

7.STOCK-BASED COMPENSATION

 

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

 

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

 

 28 

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

 

8.FAIR VALUE MEASUREMENT

 

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

 

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

 

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

 

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

 

 29 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

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

 

 

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

 

 

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

 

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

 

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

 

 30 

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

 

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

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

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

 

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

 

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

 

 

 

 

 

 

 31 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

 32 

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

 

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

 

9.SHORT TERM BORROWINGS

 

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

 

 33 

Securities Sold Under Agreements to Repurchase

 

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

 

10.LONG TERM BORROWINGS

 

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

 

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

 

11.SUBSEQUENT EVENT

 

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

 

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

 

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

 

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

 

 34 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Introduction

 

Some of the matters discussed below include forward-looking statements. Forward-looking statements often use words such as “believe,” “expect,” “plan,” “may,” “will,” “should,” “project,” “contemplate,” “anticipate,” “forecast,” “intend” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. Our actual results and the actual outcome of our expectations and strategies could be different from those anticipated or estimated for the reasons discussed below and under the heading “Information Regarding Forward Looking Statements.”

 

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

 

Overview

 

Old Line Bancshares was incorporated under the laws of the State of Maryland on April 11, 2003 to serve as the holding company of Old Line Bank.

 

On April 1, 2011, we acquired Maryland Bankcorp, Inc. (“Maryland Bankcorp”), the parent company of Maryland Bank & Trust Company, N.A (“MB&T”), on May 10, 2013, we acquired WSB Holdings, Inc. (“WSB Holdings”), the parent company of The Washington Savings Bank, F.S.B. (“WSB”), on December 4, 2015, we acquired Regal Bancorp, Inc. (“Regal”), the parent company of Regal Bank & Trust (“Regal Bank”), and on July 28, 2017, we acquired DCB Bancshares, Inc. (“DCB”), the parent company of Damascus Community Bank (“Damascus”). On April 13, 2018, we acquired Bay Bancorp, Inc. (“BYBK”), the parent company of Bay Bank, FSB. This acquisition brought our assets to approximately $2.8 billion and we now operate 39 full service branches serving 11 counties and Baltimore City.

 

Summary of Recent Performance and Other Activities

 

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

 

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

 

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

 

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

 

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

 

 35 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Recent Acquisitions

 

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

 

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

 

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

 

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

 

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

 

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Strategic Plan

 

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

 

We use the Internet and technology to augment our growth plans. Currently, we offer our customers image technology, Internet banking with online account access and bill pay service and mobile banking. We provide selected commercial customers the ability to remotely capture their deposits and electronically transmit them to us. We will continue to evaluate cost effective ways that technology can enhance our management capabilities, products and services.

 

We may continue to take advantage of strategic opportunities presented to us via mergers occurring in our marketplace. For example, we may purchase branches that other banks close or lease branch space from other banks or hire additional loan officers. We also continually evaluate and consider opportunities with financial services companies or institutions with which we may become a strategic partner, merge or acquire such as we have done with Maryland Bankcorp, WSB Holdings, Regal, DCB and BYBK. We believe the BYBK acquisition will generate increased earnings and increased returns for our stockholders, including the former stockholders of BYBK.

 

Although the current interest rate climate continues to present challenges for our industry, we have worked diligently towards our goal of becoming the premier community bank in Maryland. While we are uncertain about the continued pace of economic growth or the impact of the current political environment and the growing national debt, we remain cautiously optimistic that we have identified any problem assets, that our remaining borrowers will stay current on their loans and that we can continue to grow our balance sheet and earnings.

 

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

 

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

 

Critical Accounting Policies

 

Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. As discussed in Old Line Bancshares’ Form 10-K for the fiscal year ended December 31, 2017, we consider our critical accounting policies to be the allowance for loan losses, other-than-temporary impairment of investment securities, goodwill and other intangible assets, income taxes, business combinations and accounting for acquired loans. There have been no material changes in our critical accounting policies during the three months ended March 31, 2018.

 

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

 

Net Interest Income. Net interest income is the difference between income on interest earning assets and the cost of funds supporting those assets. Earning assets are comprised primarily of loans, investments, interest bearing deposits and federal funds sold. Cost of funds consists of interest paid on interest bearing deposits and other borrowings. Non-interest bearing deposits and capital are also funding sources. Changes in the volume and mix of earning assets and funding sources along with changes in associated interest rates determine changes in net interest income.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

 

 

 

 

 

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

 

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

____________________

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

 

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

 

Rate/Volume Variance Analysis

 

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

__________________________

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Analysis of Financial Condition

 

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

 

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

 

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

 

 43 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 44 

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

 

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

______________________

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

 

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

 

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

 

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

 

 45 

The following table outlines the changes in interest bearing deposits:

 

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

 

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

 

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

 

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

 

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

 

Liquidity and Capital Resources. Our overall asset/liability strategy takes into account our need to maintain adequate liquidity to fund asset growth and deposit runoff. Our management monitors the liquidity position daily in conjunction with regulatory guidelines. As further discussed below, we have credit lines, unsecured and secured, available from several correspondent banks totaling $43.5 million. Additionally, we may borrow funds from the FHLB and the Federal Reserve Bank of Richmond. We can use these credit facilities in conjunction with the normal deposit strategies, which include pricing changes to increase deposits as necessary. We can also sell available for sale investment securities or pledge investment securities as collateral to create additional liquidity. From time to time we may sell or participate out loans to create additional liquidity as required. Additional sources of liquidity include funds held in time deposits and cash flow from the investment and loan portfolios.

 

 46 

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

 

Old Line Bank has sufficient liquidity to meet its loan commitments as well as fluctuations in deposits. We usually retain maturing certificates of deposit as we offer competitive rates on certificates of deposit. Management is not aware of any demands, trends, commitments, or events that would result in Old Line Bank’s inability to meet anticipated or unexpected liquidity needs.

 

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

 

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

 

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

 

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

 

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

 

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

 

 47 

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

 

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

 

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

 

Asset Quality

 

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

 

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

 

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

 

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

 

 48 

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

 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 49 

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

 

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

 

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

 

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

 

 

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

 

   March 31, 2018  December 31, 2017
      Unpaid     Interest     Unpaid      
   # of  Principal  Recorded  Not  # of  Principal  Recorded  Interest Not
   Contracts  Balance  Investment  Accrued  Contracts  Balance  Investment  Accrued
Legacy                        
Residential Real Estate                                        
First Lien-Investment   1   $192,501   $192,501   $25,030    1   $192,501   $192,501   $21,901 
First Lien-Owner Occupied   2    275,433    275,433    1,263    2    281,130    281,130    13,303 
Commercial                                
Total non-accrual loans   3    467,934    467,934    26,293    3    473,631    473,631    35,204 
Acquired(1)                                        
Commercial Real Estate:                                        
Owner Occupied   1    254,445    230,082    15,512    1    253,865    228,555    12,334 
Land and A & D   2    483,148    196,171    176,334    2    482,467    190,193    169,657 
Residential Real Estate                                        
Owner Occupied   5    987,505    872,064    98,976    5    987,505    872,272    82,452 
Total non-accrual loans   8   $1,725,098   $1,298,317   $290,822    8   $1,723,837   $1,291,020   $264,443 
Total all non-accrual loans   11   $2,193,032   $1,766,251   $317,115    11   $2,197,468   $1,764,651   $299,647 

_____________________

(1)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 non-performing 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 March 31, 2018 decreased $6 thousand from December 31, 2017, due to principal reduction on residential owner occupied loans.

 

Non-accrual acquired loans at March 31, 2018 increased $8 thousand from December 31, 2017.

 

At March 31, 2018, legacy OREO stands at $425 thousand.

 

Acquired OREO at March 31, 2018, decreased $204 thousand from December 31, 2017, as a result of the sale of one property.

 

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.

 

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The following tables provide an analysis of the allowance for loan losses for the periods indicated:

 

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

 

      Commercial  Residential      
December 31, 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   660,497    231,488    22,203    40,920    955,108 
Recoveries   2,350    2,017    900    35,525    40,792 
Total   2,035,082    4,223,657    846,623    86,007    7,191,369 
Loans charged off   (773,052)   (439,922)   (2,268)   (55,541)   (1,270,783)
Ending Balance  $1,262,030   $3,783,735   $844,355   $30,466   $5,920,586 
Amount allocated to:                         
Legacy Loans:                         
Individually evaluated for impairment  $96,212   $69,903   $76,496   $   $242,611 
Other loans not individually evaluated   1,141,301    3,633,760    690,396    30,466    5,495,923 
Acquired Loans:                         
Individually evaluated for impairment   24,517    80,072    77,463        182,052 
Ending balance  $1,262,030   $3,783,735   $844,355   $30,466   $5,920,586 

 

The ratios of the allowance for loan losses are as follows:

 

   March 31, 2018  December 31, 2017
Ratio of allowance for loan losses to:          
Total gross loans held for investment   0.36%   0.35%
Non-accrual loans   354.28%   335.51%
Net charge-offs to average loans   0.00%   0.08%

 

 

During the three months ended March 31, 2018, we charged off $62 thousand in loans through the allowance for loan losses.

 

The allowance for loan losses represented 0.36% and 0.35% of gross loans held for investment at March 31, 2018 and December 31, 2017, respectively and 0.42% and 0.42% of legacy loans at March 31, 2018 and December 31, 2017, 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.

 

 52 

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 March 31, 2018 and December 31, 2017, are as follows:

 

   March 31, 2018  December 31, 2017
   (Dollars in thousands)
       
Commitments to extend credit and available credit lines:          
Commercial  $139,711   $132,246 
Real estate-undisbursed development and construction   117,051    132,855 
Consumer   44,000    41,151 
Total  $300,762   $306,252 
Standby letters of credit  $12,618   $12,362 

 

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 $117.1 million, or 38.92% of the $300.8 million of outstanding commitments at March 31, 2018, 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.

 

 

 53 

Reconciliation of Non-GAAP Measures

 

Below is a reconciliation of the fully tax equivalent adjustments and the U.S. GAAP basis information presented in this report:

 

Three months ended March 31, 2018

 

         Net
   Net Interest     Interest
   Income  Yield  Spread
GAAP net interest income  $17,682,775    3.68%   3.41%
Tax equivalent adjustment               
Federal funds sold   36         
Investment securities   160,911    0.04    0.04 
Loans   190,036    0.04    0.04 
Total tax equivalent adjustment   350,983    0.08    0.08 
Tax equivalent interest yield  $18,033,758    3.76%   3.49%

 

 

Three months ended March 31, 2017

 

         Net
   Net Interest     Interest
   Income  Yield  Spread
GAAP net interest income  $14,161,389    3.60%   3.40%
Tax equivalent adjustment               
Federal funds sold   11         
Investment securities   255,220    0.07    0.07 
Loans   261,002    0.07    0.07 
Total tax equivalent adjustment   516,233    0.14    0.14 
Tax equivalent interest yield  $14,677,622    3.74%   3.54%

 

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.

 

 54 

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 forward-looking statements presented herein with respect to, among other things: (a) our objectives, expectations and intentions, including (i) that the recent BYBK acquisition will generate increased earnings and increased returns for our stockholders and the impact of the Merger on non-interest expenses,  , (ii) anticipated increases in certain non-interest expenses and that net interest income will continue to increase during 2018, (iii) the amount of potential problem loans, (iv) our belief that we have identified any problem assets and that our borrowers will continue to remain current on their loans, (v) expected losses on and our intentions with respect to our investment securities, (vi) earnings on bank owned life insurance, (vii) expanding fee income and generating extensions of core banking services, and (viii) hiring and acquisition possibilities; (b) sources of and sufficiency of liquidity; (c) the impact of outstanding off-balance sheet commitments; (d) the adequacy of the allowance for loan losses; (e) expected loan, deposit, balance sheet and earnings growth; (f)  expectations with respect to the impact of pending legal proceedings; (g) the anticipated impact of recent accounting pronouncements; (h) continuing to meet regulatory capital requirements; (i) improving earnings per share and stockholder value; and (j) financial and other goals and plans.

 

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, among others: those discussed in this report; our ability to retain key personnel; our ability to successfully implement our 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 our investments could negatively impact stockholders’ equity; risks associated with our lending limit; expenses associated with operating as a public company; potential conflicts of interest associated with our interest in Pointer Ridge; deterioration in general economic conditions or a return to recessionary conditions; and changes in competitive, governmental, regulatory, technological and other factors that may affect us specifically or the banking industry generally; and other risks otherwise discussed in this report, including under “Item 1A. Risk Factors.”

 

In addition, our statements with respect to the anticipated effects of the BYBK acquisition are subject to the following additional risks and uncertainties: BYBK’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, 2017.

 

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.

 

 55 

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 March 31, 2018 from that presented in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

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 March 31, 2018 and December 31, 2017. 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
   March 31, 2018
   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   200                200 
Investment securities   1,501    1,795    2,091    204,967    210,354 
Loans   294,828    112,173    794,442    559,018    1,760,461 
Total interest earning assets   296,559    113,968    796,533    763,985    1,971,045 
Interest Bearing Liabilities:                         
Interest-bearing transaction deposits   348,367    178,134            526,501 
Savings accounts   45,185    45,185    45,185        135,555 
Time deposits   86,267    197,967    267,296        551,530 
Total interest-bearing deposits   479,819    421,286    312,481        1,213,586 
FHLB advances   125,000                125,000 
Other borrowings   36,478            38,173    74,651 
Total interest-bearing liabilities   641,297    421,286    312,481    38,173    1,413,237 
Period Gap  $(344,738)  $(307,318)  $484,052   $725,812   $557,808 
Cumulative Gap  $(344,738)  $(652,056)  $(168,004)  $557,808      
Cumulative Gap/Total Assets   (15.59)%   (29.50)%   (7.60)%   25.23%     

 

 56 

   Interest Sensitivity Analysis
   December 31, 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   257                257 
Investment securities   1,499    3,304    623    212,927    218,353 
Loans   291,403    115,769    771,105    521,991    1,700,268 
Total interest earning assets   293,189    119,073    771,728    734,918    1,918,908 
Interest Bearing Liabilities:                         
Interest-bearing transaction deposits   355,498    182,605            538,103 
Savings accounts   44,323    44,324    44,324        132,971 
Time deposits   98,292    183,750    247,984        530,026 
Total interest-bearing deposits   498,113    410,679    292,308        1,201,100 
FHLB advances   155,000                155,000 
Other borrowings   37,612            38,107    75,719 
Total interest-bearing liabilities   690,725    410,679    292,308    38,107    1,431,819 
Period Gap  $(397,536)  $(291,606)  $479,420   $696,811   $487,089 
Cumulative Gap  $(397,536)  $(689,142)  $(209,722)  $487,089      
Cumulative Gap/Total Assets   (18.88)%   (32.73)%   (9.96)%   23.13%     

 

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 March 31, 2018. 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 March 31, 2018, 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, 2017.

 

 57 

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 March 31, 2018:

 

Shares Purchased during the period:  Total number of
shares repurchased
  Average Price
paid per share
  Total number of
share purchased as
part of publicly
announced program(1)
  Maximum number of
shares that may yet be
purchased under the
program (1)
                     
January 1 - March 31, 2018           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 March 31, 2018, 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

 

Entry into New Employment Agreements

 

On May 7, 2018, Old Line Bank entered into an amended and restated employment agreement with Mark A. Semanie, our Executive Vice President and Chief Operating Officer, and M. John Miller, our Executive Vice President and Chief Credit Officer, and entered into employment agreements with Elise Hubbard, our Executive Vice President and Chief Financial Officer, and Jack Welborn, our Executive Vice President and Chief Lending Officer.

 

Mr. Semanie’s amended and restated employment agreement provides that he will serve as an Executive Vice President of Old Line Bank. The agreement provides for an initial term ending on March 31, 2020 and, unless either party notifies the other that the agreement will not be renewed, is renewed for an additional six months on each September 30 and March 31 beginning on September 30, 2018, such that the remaining term at each renewal will be two years.

 

Mr. Semanie’s amended and restated employment agreement provides for an initial annual base salary of $315,000, which is subject to annual review and increase as may be determined by the Board of Directors. Mr. Semanie is also entitled to receive health, dental, life, and insurance benefits consistent with what Old Line Bank provides for its employees generally.

 

Mr. Semanie’s amended and restated employment agreement terminates upon Mr. Semanie’s death or physical or mental incapacitation that has left him unable to perform his duties for a period of 60 consecutive days. In addition, Mr. Semanie may terminate his employment for good reason, as defined in the agreement, or without good reason, and Old Line Bank may terminate Mr. Semanie’s employment for certain events constituting cause as defined in the agreement, or without cause.

 

If Mr. Semanie terminates his employment for Good Reason or Old Line Bank terminates Mr. Semanie’s employment without cause, Mr. Semanie is entitled to receive, within ten business days of the effective date of termination or resignation, a lump sum payment equal to his salary (at the amount of such salary on the date of resignation or termination) over the remaining term of the agreement. In addition, all unvested stock options previously granted to Mr. Semanie will immediately vest, and he will be entitled to payment of any unpaid salary and Retirement Benefits, as defined in the agreement, as of the effective date of his resignation or termination.

 

 58 

The agreement also contains non-compete, non-solicitation and confidentiality provisions.

 

Mr. Miller’s amended and restated employment agreement provides that he will serve as an Executive Vice President of Old Line Bank at an initial annual base salary of $242,700. The other substantive provisions of Mr. Miller’s employment agreement are identical to those of Mr. Semanie’s amended and restated employment agreement as described above.

 

Ms. Hubbard’s employment agreement provides that she will serve as the Chief Financial Officer of Old Line Bank at an initial annual base salary of $225,000 per year. Further, if Ms. Hubbard terminates her employment for Good Reason or Old Line Bank terminates her employment without cause, Ms. Hubbard is entitled to receive her salary, as of the date of her resignation or termination, for the remaining term of the agreement. The other substantive provisions of Ms. Hubbard’s employment agreement are identical to those of Mr. Semanie’s amended and restated employment agreement as described above.

 

Mr. Welborn’s employment agreement provides that he will serve as the Chief Lending Officer of Old Line Bank at an initial annual base salary of $250,000 per year. The other substantive provisions of Mr. Welborn’s employment agreement are identical to those of Mr. Semanie’s amended and restated employment agreement as described above.

 

Salary Continuation Agreements and Supplemental Executive Retirement Plan

 

Also on May 7, 2018, Old Line Bank entered into a new supplemental executive retirement plan, and amendments to its existing salary continuation plan agreements, with James W. Cornelsen, its President and Chief Executive Officer, and an amendment to its existing salary continuation agreement with Mark A. Semanie, its Executive Vice President and Chief Operating Officer. Together, this new agreement and the amendments to the existing agreements have the effect of extending certain payment benefits the executives are eligible for thereunder from a 15-year period into lifetime payments.

 

As noted above, we invested $6.0 million during the fourth quarter of 2017 to fund the additional benefits under these new or amended plans (collectively, the “Annuity Contracts”).

 

James W. Cornelsen

 

As amended, the salary continuation agreement we entered into with Mr. Cornelsen in January 2006 provides that, if still employed with Old Line Bank upon reaching age 65, Mr. Cornelsen will be paid an annual amount of $131,607 (in monthly installments) beginning upon the termination of his employment and continuing until his death. Further, if Mr. Cornelsen becomes no longer employed by Old Line Bank (voluntarily or involuntarily) prior to age 65 as a result of his disability, as defined in the agreement, he will be paid an annual amount ranging from $116,378 to $126,076, depending on the date his employment is terminated, beginning on the first day of the month following his 65th birthday and continuing through his death. In either case, if Mr. Cornelsen dies before 15 years’ worth of payments have been made under this agreement, the payments due under the agreement will continue to be paid to his beneficiary until 15 years’ worth of payments have been made.

 

The amendment to the 2006 salary continuation agreement did not amend the other benefits payable thereunder. Therefore, if Mr. Cornelsen becomes no longer employed by Old Line Bank (voluntarily or involuntarily) prior to age 65 other than due to his death, Disability or following a change in control, he will be paid an annual amount ranging from $116,378 to $126,076, depending on the date his employment is terminated, beginning on the first day of the month following his 65th birthday. If Mr. Cornelsen dies prior to age 65 and while employed by Old Line Bank, his beneficiary will receive annual payments of $131,607. This agreement also provides that if Mr. Cornelsen’s employment is terminated following a change in control of Old Line Bank, as defined in the agreement, then in lieu of the payments discussed above he will be entitled to an annual payment of $122,818. All of these payments will be paid in monthly installments for a 15-year period, and if Mr. Cornelsen dies while receiving these payments, but prior to receiving all the payments due, the balance of these payments due under the agreement will continue to be paid to his beneficiary.

 

 59 

Effective February 26, 2010, Old Line Bank entered into an additional salary continuation plan agreement with Mr. Cornelsen. Under the 2010 salary continuation plan agreement, as amended by the May 7, 2018 amendment, upon reaching the age of 65, Mr. Cornelsen will be paid an annual amount of $28,131 (in monthly installments) for the rest of his life. Under this agreement, as amended, if Mr. Cornelsen becomes disabled, as defined in the agreement, while employed by Old Line Bank, he will be paid an annual amount ranging from $23,722 to $26,687, depending on the date of the event, in monthly installments beginning on the first day of the second month following the earlier of the date Mr. Cornelsen reaches age 65 or dies. If Mr. Cornelsen dies before 15 years’ worth of payments have been made under this agreement, the payments due under the agreement will be made to, or continue to be paid to, as applicable, his beneficiary until 15 years’ worth of payments have been made.

 

The amendment to the 2010 salary continuation agreement did not amend the other benefits payable thereunder. Therefore, if Mr. Cornelsen dies before reaching age 65 while employed by Old Line Bank, or he otherwise becomes no longer employed by Old Line Bank (voluntarily or involuntarily) other than due to his death or following a change in control (as defined in the agreement), he or his beneficiary will be paid an annual amount ranging from $23,722 to $26,687 (payable in monthly installments), depending on the date of the event. Such payments begin on the first day of the second month following the earlier of the date Mr. Cornelsen reaches age 65 or dies and continue for 15 years. This agreement also provides for change in control payments to be paid to Mr. Cornelsen if he is employed with Old Line Bank upon a change in control of Old Line Bank that occurs prior to his normal retirement age or any termination of his employment. The change in control payments range from $26,040 to $27,342 annually (payable in monthly installments), depending on the date of the change in control, and will be paid to Mr. Cornelsen or his beneficiary, as applicable, beginning (in most cases) the second month following the month in which his employment is terminated and continuing for a period of 15 years. If, however, Mr. Cornelsen’s employment with Old Line Bank is terminated for any reason (whether voluntarily or involuntarily) within 24 months following a change in control, he may instead opt to be paid the change in control payments in (i) a lump sum, (ii) monthly installments over two years, or (iii) monthly installments over five years.

 

Effective October 1, 2012, Old Line Bank entered into two additional salary continuation plan agreements with Mr. Cornelsen pursuant to which he is entitled additional benefits. The first 2012 salary continuation plan agreement, as amended, provides that if Mr. Cornelsen remains employed by Old Line Bank until he reaches the age of 65, he will be entitled to receive, beginning on the first day of the second month following his 65th birthday, an annual payment of $63,991. Such payments will continue for the rest of his life, provided that, if Mr. Cornelsen dies before 15 years’ worth of payments have been made under this agreement, the payments due under the agreement will continue to be paid to his beneficiary until 15 years’ worth of payments have been made. In addition, if Mr. Cornelsen becomes disabled, as defined in the agreement, while employed by Old Line Bank, he will be paid an annual amount ranging from $40,680 to $51,745, depending on the date of the event. Such benefits are payable monthly generally beginning on the first day of the second month following the earlier of Mr. Cornelsen’s 65th birthday or death, and will continue for the rest of his life or, if Mr. Cornelsen dies before 15 years’ worth of payments have been made, will continue to be paid to his beneficiary until 15 years’ worth of payments have been made.

 

The amendment to the first 2012 salary continuation agreement did not amend the other benefits payable thereunder. Therefore, if Mr. Cornelsen dies before reaching age 65 while employed by Old Line Bank, or he otherwise becomes no longer employed by Old Line Bank (voluntarily or involuntarily) other than because of his disability or following a change in control, he or his beneficiary will be paid an annual amount ranging from $40,680 to $51,745, depending on the date of the event, for a period of 15 years. Such benefits are payable monthly generally beginning on the first day of the second month following the earlier of Mr. Cornelsen’s 65th birthday or death. The agreement also provides for change in control payments to be paid to Mr. Cornelsen if he is employed with Old Line Bank upon a change in control (as defined in the agreement) of Old Line Bank that occurs prior to his 65th birthday. The change in control payments range from $59,416 to $62,386 annually, depending on the date of the change in control, and will be paid on a monthly basis to Mr. Cornelsen or his beneficiary, as applicable, for a period of 15 years beginning (in most cases) on the first day of the second month following the date of termination of Mr. Cornelsen’s employment with Old Line Bank. If, however, Mr. Cornelsen’s employment with Old Line Bank is terminated for any reason (whether voluntarily or involuntarily) within 24 months following a change in control, he may instead opt to be paid the change in control payments in (i) a lump sum, (ii) monthly installments over two years, or (iii) monthly installments over five years.

 

 60 

The second 2012 salary continuation plan agreement, prior to the May 7 amendment, provided, among other things, that if Mr. Cornelsen remains employed by Old Line Bank until he reaches the age of 65, he will be entitled to receive, beginning on the first day of the second month following his 80th birthday, an annual payment of $223,729 for life, but with five years of payments guaranteed. The amendment provides that if this benefit becomes payable, the benefit amount will be offset by the benefit payments made by Old Line Bank under the salary continuation agreements discussed above, including any amendments to such agreements. The amendment did not otherwise alter the terms of the second 2012 salary continuation plan agreement or the benefits Mr. Cornelsen is entitled to thereunder.

 

Finally, on May 7, 2018, Old Line Bank entered into a new supplemental executive retirement plan agreement with Mr. Cornelsen. This agreement provides that upon Mr. Cornelsen’s termination of employment with Old Line Bank after he has reached the age of 67 for any reason other than his death or disability, as defined in the agreement, he will be entitled to receive, beginning on the first day of the second month following the termination of his employment and continuing for his lifetime, an annual benefit equal to $50,000 (the “Normal Retirement Benefit”). If instead Mr. Cornelsen’s employment is terminated before he reaches age 67 but after reaching age 64 for any reason other than his death, he will be entitled to receive, beginning on the first day of the second month following the termination of his employment and continuing for his lifetime, an annual payment that ranges from $976 to $27,404, depending on the date of termination. If in either case Mr. Cornelsen dies while receiving payments under this agreement, but before 15 years’ of payments have been made, the monthly payments will continue to be paid to his beneficiary until 15 years’ worth of payments have been made.

 

If instead Mr. Cornelsen dies while employed by Old Line Bank, his beneficiary will be entitled to a lump sum payment that ranges from $141,258 to $476,152 depending on the date of death. Finally, upon a change in control, as defined in the agreement, Mr. Cornelsen will be entitled to receive the Normal Retirement Benefit beginning on the first day of the second month following the later of the date Mr. Cornelsen reaches age 65 or his employment is terminated.

 

Mark A. Semanie

 

As amended, Mr. Semanie’s salary continuation plan agreement provides that if Mr. Semanie remains employed by Old Line Bank until he reaches the age of 65, he will be entitled to receive, beginning on the first day of the second month following his 65th birthday and until his death, an annual payment of $154,435. If Mr. Semanie dies prior to receiving 15 years of benefits under the plan, the payments due under the agreement will continue to be paid to his beneficiary until such time as 15 years of benefits have been paid. If Mr. Semanie becomes disabled, as defined in the agreement, while employed by Old Line Bank, or becomes no longer employed by Old Line Bank other than following a change in control, he or his beneficiary will be paid an annual amount ranging from $43,350 and $151,726, depending on the date of the event. Such benefits are payable monthly and generally to Mr. Semanie or his beneficiary beginning on the first day of the second month following the earlier of Mr. Semanie’s 65th birthday or his death and will be paid until his death or, if he dies prior to receiving 15 years of benefits under the plan, until such time as 15 years of benefits have been paid.

 

The amended agreement also provides for change in control payments to be paid to Mr. Semanie if he is employed with Old Line Bank upon a change in control (as defined in the agreement) of Old Line Bank that occurs prior to his 65th birthday. The change in control payments range from $93,660 to $152,563 annually, depending on the date of the change in control, and will be paid on a monthly basis to Mr. Semanie or his beneficiary, as applicable, for a period of 15 years beginning (in most cases) on the first day of the second month following the date of termination of Mr. Semanie’s employment with Old Line Bank. If, however, Mr. Semanie’s employment with Old Line Bank is terminated for any reason (whether voluntarily or involuntarily) within 24 months following a change in control, then in lieu of such payments Old Line Bank will transfer ownership of the Annuity Contracts purchased by Old Line Bank to satisfy its obligations to Mr. Semanie under his salary continuation plan agreement, which will constitute payment in full for Mr. Semanie’s change in control benefit under the agreement. The amount of such Annuity Contracts will vary depending on the date of Mr. Semanie’s termination.

 

 61 

General

 

The salary continuation plan agreements and supplemental executive retirement plan agreement described above all provide, however, that the executive is not entitled to any benefits under the agreement if he is terminated for cause, as described in the applicable agreement.

 

The following charts show the annual amount of payments that will be made to Messrs. Cornelsen and Semanie pursuant to the salary continuation agreements:

 

James W. Cornelsen

2006 Plan

 

 

End of Year

 

 

Plan Year

 

 

End of Year Age

 

Normal Retirement Benefit

 

Early Termination Benefit

 

 

Disability Benefit

 

Pre-Retirement Death Benefit

 

Change in Control Benefit

 1/1/2018    1    64    0    116,378    116,378    131,607    122,818 
 1/1/2019    2    65    0    126,076    126,076    131,607    128,959 
 7/1/2019    2    66    131,607                     

 

 

James W. Cornelsen

2010 Plan

 

 

End of Year

 

 

Plan Year

 

 

End of Year Age

 

Normal Retirement Benefit

 

Early Termination Benefit

 

 

Disability Benefit

 

Pre-Retirement Death Benefit

 

Change in Control Benefit

 1/1/2018    1    64    0    23,722    23,722    0    26,040 
 1/1/2019    2    65    0    26,687    26,687    0    27,342 
 7/1/2019    3    66    28,131                     

 

 

James W. Cornelsen

2012 Plan

 

 

End of Year

 

 

Plan Year

 

 

End of Year Age

 

Normal Retirement Benefit

 

Early Termination Benefit

 

 

Disability Benefit

 

Pre-Retirement Death Benefit

 

Change in Control Benefit

 1/1/2018    1    64    0    40,680    40,680    0    59,416 
 1/1/2019    2    65    0    56,405    56,405    0    62,386 
 7/1/2019    3    66    63,991                     

 

 

 62 

 

James W. Cornelsen

2018 Plan

 

 

End of Year

 

 

Plan Year

 

 

End of Year Age

 

 

Disc. Rate

 

Normal Retirement Accrued Balance

  Normal Retirement Benefit  Early Termination Benefit 

 

Pre-Retirement Death Benefit

 

 

Post-Retirement Death Benefit

  Change in Control Benefit
 12/31/2018    1    64    6.00%   141,258    0    976    141,258         42,217 
 12/31/2019    2    65    6.00%   299,467    0    13,443    299,467         47,832 
 12/31/2020    3    66    6.00%   476,152    0    27,404    476,152         49,266 
 7/1/2021    4    67    6.00%   570,531    50,000    0    0    570,531    50,000 
 12/31/2021    4    67    6.00%   563,412    50,000              563,412      
 12/31/2022    5    68    6.00%   545,607    50,000              545,607      
 12/31/2023    6    69    6.00%   526,732    50,000              526,732      
 12/31/2024    7    70    6.00%   506,726    50,000              506,726      
 12/31/2025    8    71    6.00%   485,519    50,000              485,519      
 12/31/2026    9    72    6.00%   463,039    50,000              463,039      
 12/31/2027    10    73    6.00%   439,211    50,000              439,211      
 12/31/2028    11    74    6.00%   413,953    50,000              413,953      
 12/31/2029    12    75    6.00%   387,180    50,000              387,180      
 12/31/2030    13    76    6.00%   358,800    50,000              358,800      
 12/31/2031    14    77    6.00%   328,718    50,000              328,718      
 12/31/2032    15    78    6.00%   296,830    50,000              296,830      
 12/31/2033    16    79    6.00%   263,030    50,000              263,030      
 12/31/2034    17    80    6.00%   227,201    50,000              227,201      
 12/31/2035    18    81    6.00%   189,222    50,000              189,222      
 12/31/2036    19    82    6.00%   148,965    50,000              0      
 12/31/2037    20    83    6.00%   106,293    50,000                     
 12/31/2038    21    84    6.00%   61,060    50,000                     
 12/31/2039    22    85    6.00%   13,113    50,000                     
 12/31/2040    23    86    6.00%   (0)   50,000                     
 12/31/2041    24    87    6.00%   (0)   50,000                     

 

Mark A. Semanie

 

 

End of Year

 

 

Plan Year

 

 

End of Year Age

 

 

Disc. Rate

 

Normal Retirement Accrued Balance

  Normal Retirement Benefit  Early Termination Benefit 

 

Pre-Retirement Death Benefit

 

 

Post-Retirement Death Benefit

  Change in Control Benefit
 12/31/2018    1    64    6.00%   141,258    0    976    141,258         42,217 
 12/31/2019    2    65    6.00%   299,467    0    13,443    299,467         47,832 
 12/31/2020    3    66    6.00%   476,152    0    27,404    476,152         49,266 
 7/1/2021    4    67    6.00%   570,531    50,000    0    0    570,531    50,000 
 12/31/2021    4    67    6.00%   563,412    50,000              563,412      
 12/31/2022    5    68    6.00%   545,607    50,000              545,607      
 12/31/2023    6    69    6.00%   526,732    50,000              526,732      
 12/31/2024    7    70    6.00%   506,726    50,000              506,726      
 12/31/2025    8    71    6.00%   485,519    50,000              485,519      
 12/31/2026    9    72    6.00%   463,039    50,000              463,039      
 12/31/2027    10    73    6.00%   439,211    50,000              439,211      
 12/31/2028    11    74    6.00%   413,953    50,000              413,953      
 12/31/2029    12    75    6.00%   387,180    50,000              387,180      
 12/31/2030    13    76    6.00%   358,800    50,000              358,800      
 12/31/2031    14    77    6.00%   328,718    50,000              328,718      
 12/31/2032    15    78    6.00%   296,830    50,000              296,830      
 12/31/2033    16    79    6.00%   263,030    50,000              263,030      
 12/31/2034    17    80    6.00%   227,201    50,000              227,201      
 12/31/2035    18    81    6.00%   189,222    50,000              189,222      
 12/31/2036    19    82    6.00%   148,965    50,000              0      
 12/31/2037    20    83    6.00%   106,293    50,000                     
 12/31/2038    21    84    6.00%   61,060    50,000                     
 12/31/2039    22    85    6.00%   13,113    50,000                     
 12/31/2040    23    86    6.00%   (0)   50,000                     
 12/31/2041    24    87    6.00%   (0)   50,000                     

 

 63 

 

Item 6.Exhibits

 

10.1 Amended and Restated Executive Employment Agreement by and between Old Line Bank and Mark A. Semanie dated as of May 7, 2018
   
10.2 Executive Employment Agreement by and between Old Line Bank and Elise Hubbard dated as of May 7, 2018
   
10.3 Executive Employment Agreement by and between Old Line Bank and Jack Welborn dated as of May 7, 2018
   
10.4 Amended and Restated Executive Employment Agreement by and between Old Line Bank and Martin John Miller dated as of May 7, 2018
   
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
   
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
   
32 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
   
101 Interactive Data Files pursuant to Rule 405 of Regulation S-T.

 

 

 

 

 

 

 64 

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: May 9, 2018 By: /s/ James W. Cornelsen
    James W. Cornelsen,
President and Chief Executive Officer
    (Principal Executive Officer)
     
     
Date: May 9, 2018 By: /s/ Elise M. Hubbard
    Elise M. Hubbard,
Executive Vice President and Chief Financial Officer
    (Principal Accounting and Financial Officer)

 

 

 

 

 

 

 

 

 

 

 

 

65