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Section 1: 10-Q (FORM 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2019

 

OR

 

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

 

Commission File Number: 000-50345

 

Old Line Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

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

 

 

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

 

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No ☐

 

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

 

Large accelerated filer ☐ Accelerated filer ☒
Non-accelerated filer ☐ Smaller reporting company ☐
  Emerging growth company ☐

 

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

 

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

 

Yes ☐   No ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading symbol(s) Name of each exchange on which registered
Common Stock, par value $0.01 per share OLBK The Nasdaq Stock Market LLC

 

As of April 30, 2019, the registrant had 17,039,647 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, 2019 (Unaudited) and December 31, 2018 3
       
    Consolidated Statements of Income (Unaudited) for the Three Months Ended March 31, 2019 and 2018 4
       
    Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2019 and 2018 5
       
    Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2019 and 2018 6
       
    Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2019 and 2018 7
       
    Notes to Consolidated Financial Statements (Unaudited) 9
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35
       
  Item 3. Quantitative and Qualitative Disclosures about Market Risk 55
       
  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 59
       
  Item 4. Mine Safety Disclosures 59
       
  Item 5. Other Information 59
       
  Item 6. Exhibits 59
       
  Signatures   60
         

 

 

2

 

 

Part 1. Financial Information

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Balance Sheets

 

   March 31,
2019
  December 31,
2018
   (Unaudited)   
Assets          
Cash and due from banks  $49,619,806   $41,495,763 
Interest bearing accounts   2,107,845    2,051,273 
Federal funds sold   961,329    953,582 
Total cash and cash equivalents   52,688,980    44,500,618 
Investment securities available for sale-at fair value   307,034,351    219,705,762 
Loans held for sale, fair value of $9,875,442 and $11,860,147   9,632,523    11,564,993 
Loans held for investment (net of allowance for loan losses of $7,808,142 and $7,471,023, respectively)   2,417,186,160    2,409,227,698 
Equity securities at cost   13,863,550    11,150,750 
Premises and equipment   42,561,705    42,624,787 
Accrued interest receivable   8,607,100    7,958,511 
Income taxes receivable   2,157,137    5,014,510 
Deferred income taxes   3,410,385    4,660,278 
Bank owned life insurance   68,333,419    67,920,021 
Annuity Plan   6,269,638    6,268,426 
Other real estate owned   882,510    882,510 
Goodwill   94,668,455    94,668,455 
Core deposit intangible   14,704,408    15,362,232 
Other assets   35,245,726    8,497,544 
Total assets  $3,077,246,047   $2,950,007,095 
           
Liabilities and Stockholders’ Equity          
Deposits          
Non-interest bearing  $579,962,005   $559,059,672 
Interest bearing   1,755,472,767    1,736,989,227 
Total deposits   2,335,434,772    2,296,048,899 
Short term borrowings   282,141,546    228,184,856 
Long term borrowings   38,437,015    38,371,291 
Accrued interest payable   2,460,829    2,844,715 
Supplemental executive retirement plan   6,089,246    5,997,819 
Other liabilities   32,559,241    7,788,981 
Total liabilities   2,697,122,649    2,579,236,561 
Stockholders’ equity          
Common stock, par value $0.01 per share; 25,000,000 shares authorized; 17,051,569 and 17,031,052 shares issued and outstanding in 2019 and 2018, respectively   170,516    170,311 
Additional paid-in capital   293,590,357    293,501,107 
Retained earnings   89,084,561    82,628,356 
Accumulated other comprehensive loss   (2,722,036)   (5,529,240)
Total stockholders’ equity   380,123,398    370,770,534 
Total liabilities and stockholders’ equity  $3,077,246,047   $2,950,007,095 

 

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,
   2019  2018
Interest Income          
Loans, including fees  $28,850,931   $19,700,762 
U.S. treasury securities   16,119    10,029 
U.S. government agency securities   295,453    81,542 
Corporate bonds   258,964    200,469 
Foreign bonds   21,255     
Mortgage backed securities   672,018    575,018 
Municipal securities   495,972    500,620 
Federal funds sold   5,323    665 
Other   294,208    255,234 
Total interest income   30,910,243    21,324,339 
Interest expense          
Deposits   5,616,515    2,306,733 
Borrowed funds   1,982,713    1,334,831 
Total interest expense   7,599,228    3,641,564 
Net interest income   23,311,015    17,682,775 
Provision for loan losses   414,175    394,896 
Net interest income after provision for loan losses   22,896,840    17,287,879 
Non-interest income          
Account service charges   627,260    576,584 
Point of sale sponsorship program   600,061     
Earnings on bank owned life insurance   494,180    292,936 
Gain on disposal of assets       14,366 
Rental income   216,597    198,444 
Income on marketable loans   496,843    418,472 
Other fees and commissions   327,838    294,219 
Total non-interest income   2,762,779    1,795,021 
Non-interest expense          
Salaries and benefits   7,133,583    5,485,450 
Occupancy and equipment   2,452,773    1,980,401 
Data processing   727,183    609,639 
FDIC insurance and State of Maryland assessments   247,249    188,071 
Core deposit premium amortization   657,824    312,313 
Loss on sales of other real estate owned       12,516 
OREO expense   25,666    184,994 
Directors fees   180,650    170,550 
Network services   114,450    79,205 
Telephone   247,030    204,424 
Other operating   2,462,305    1,764,396 
Total non-interest expense   14,248,713    10,991,959 
           
Income before income taxes   11,410,906    8,090,941 
Income tax expense   2,906,732    2,025,759 
Net income    8,504,174    6,065,182 
           
Basic earnings per common share  $0.50   $0.48 
Diluted earnings per common share  $0.50   $0.48 
Dividend per common share  $0.12   $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

(Unaudited)

 

Three Months Ended March 31,  2019  2018
Net income  $8,504,174   $6,065,182 
           
Other comprehensive income (loss):          
Unrealized (loss) gain on securities available for sale, net of taxes of $1,065,736, and ($1,216,115), respectively   2,807,204    (3,203,310)
Other comprehensive income (loss)   2,807,204    (3,203,310)
Comprehensive income  $11,311,378   $2,861,872 

 

 

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)

 

   Common stock  Additional
paid-in
  Retained  Accumulated
other
comprehensive
  Total
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                   (2,303,310)   (2,303,310)
Tax Cut 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   $(5,098,532)  $211,292,790 
                               
                               
Balance December 31, 2018   17,031,052   $170,311   $293,501,107   $82,628,356   $(5,529,240)  $370,770,534 
Net income attributable to Old Line Bancshares, Inc.               8,504,174        8,504,174 
Other comprehensive income                   2,807,204    2,807,204 
Stock based compensation awards           291,715            291,715 
Stock options exercised   2,400    24    48,907            48,931 
Restricted stock issued   28,191    282    (282)            
Stock buyback   (10,074)   (101)   (251,090)           (251,191)
Common stock cash dividends $0.12 per share               (2,047,969)       (2,047,969)
Balance March 31, 2019   17,051,569   $170,516   $293,590,357   $89,084,561   $(2,722,036)  $380,123,398 

 

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,
   2019  2018
Cash flows from operating activities          
Net income  $8,504,174   $6,065,182 
Adjustments to reconcile net income to net cash provided by operating activities          
Depreciation and amortization   792,851    725,225 
Provision for loan losses   414,175    394,896 
Change in deferred loan fees net of costs   (370,625)   (360,813)
Amortization of premiums and discounts   152,251    205,833 
Origination of loans held for sale   (27,285,030)   (19,299,766)
Proceeds from sale of loans held for sale   29,217,500    19,769,974 
Income on marketable loans   (496,843)   (418,472)
Loss on sales of other real estate owned       12,516 
Gain on sale of fixed assets       (14,366)
Amortization of intangible assets   657,824    312,313 
Deferred income taxes   184,157    (14,181)
Stock based compensation awards   291,715    288,559 
Increase (decrease) in          
Accrued interest payable   (383,886)   (366,124)
Income tax payable       2,025,374 
Supplemental executive retirement plan   91,427    81,904 
Other liabilities   24,770,260    (1,041,292)
Decrease (increase) in          
Accrued interest receivable   (648,589)   166,079 
Bank owned life insurance   (413,398)   (237,073)
Annuity plan   (1,212)    
Income tax receivable   2,857,373     
Other assets   (26,748,182)   (612,437)
Net cash provided by operating activities  $11,585,942   $7,683,331 
Cash flows from investing activities          
Purchase of investment securities available for sale   (87,021,376)   (2,875,007)
Proceeds from disposal of investment securities          
Available for sale at maturity, call or paydowns   3,413,477    6,248,518 
Loans made, net of principal collected   (7,505,170)   (59,831,012)
Proceeds from sale of other real estate owned       191,884 
Change in equity securities   (2,712,800)   1,194,900 
Purchase of premises and equipment   (729,769)   (529,017)
Net cash used in investing activities   (94,555,638)   (55,599,734)
Cash flows from financing activities          
Net increase (decrease) in          
Time deposits   3,108,697    21,502,593 
Other deposits   36,277,176    111,298,482 
Short term borrowings   53,956,690    (31,134,099)
Long term borrowings   65,724    65,723 
Proceeds from stock options exercised   48,931    520,896 
Repurchase of stock through stock repurchase program   (251,191)    
Cash dividends paid-common stock   (2,047,969)   (1,005,723)
Net cash provided by financing activities   91,158,058    101,247,872 
           
Net increase in cash and cash equivalents   8,188,362    53,331,469 
           
Cash and cash equivalents at beginning of period   44,500,618    35,174,111 
Cash and cash equivalents at end of period  $52,688,980   $88,505,580 

 

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

 

7

 

 

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Cash Flows (continued)

(Unaudited)

 

   Three Months Ended March 31,
   2019  2018
Supplemental Disclosure of Cash Flow Information:      
Cash paid during the period for:      
Interest  $7,983,114   $4,007,688 
Income taxes  $   $ 
Supplemental Disclosure of Non-Cash Flow Operating Activities:          
Loans transferred to other real estate owned  $   $ 
Initial recognition of right of use asset  $26,395,472   $ 
Initial recognition of right of use liability  $26,692,114   $ 

 

 

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

 

8

 

 

OLD LINE BANCSHARES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

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

 

The foregoing consolidated financial statements for the periods ended March 31, 2019 and 2018 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, 2018 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, 2018. We have made no significant changes to Old Line Bancshares’ accounting policies as disclosed in the Form 10-K, except as described in the Recent Accounting Pronouncements section below.

 

Accounting Changes - Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842)” requires that lessees and lessors recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements.  ASU 2016-02 was effective for us on January 1, 2019.  ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients.  We have elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and have not restated comparative periods.

 

Our operating leases relate primarily to office space and bank branches.  As a result of implementing ASU 2016-02, we recognized an operating lease right-of-use (“ROU”) asset of $26.2 million and an operating lease liability of $26.5 million on January 1, 2019, with no impact on our consolidated statements of income or consolidated statements of cash flows compared to the prior lease accounting model. The ROU asset and operating lease liability are recorded in other assets and other liabilities, respectively, in the consolidated balance sheets. See Note 11 - Leases for additional information.

 

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

 

Reclassifications - We have made certain reclassifications to the 2018 financial presentation to conform to the 2019 presentation. These reclassifications did not change net income or stockholders’ equity.

 

9

 

 

Recent Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which sets forth a “current expected credit loss” (“CECL”) model requiring Old Line Bancshares to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. For public business entities that are U.S. Securities and Exchange Commission filers, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Old Line Bancshares has constituted a committee that has the responsibility to gather loan information and consider acceptable methodologies to comply with this ASU. The committee meets periodically to discuss the latest developments and committee members keep themselves updated on such developments via webcasts, publications, and conferences. We have also evaluated and selected a third party vendor solution to assist us in the application of ASU 2016-13. The adoption of ASU 2016-13 is likely to result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. We expect to run our current model parallel to the CECL model by the end of the second quarter in 2019. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses on debt securities held to maturity. Old Line Bancshares’ evaluation indicates that the provisions of ASU 2016-13 will impact its consolidated financial statements, in particular the level of the reserve for loan losses. We are, however, continuing to evaluate the extent of the potential impact.

 

In March 2017, FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption was 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. The adoption of this guidance did not have a material impact on Old Line Bancshares’ consolidated financial statements.

 

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

 

ASU 2019-01, Leases (Topic 842), provides clarifications to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing essential information about leasing transactions. Specifically, ASU 2019-01 (i) allows the fair value of the underlying asset reported by lessors that are not manufacturers or dealers to continue to be its cost and not fair value as measured under the fair value definition, (ii) allows for the cash flows received for sales-type and direct financing leases to continue to be presented as results from investing, and (iii) clarifies that entities do not have to disclose the effect of the lease standard on adoption year interim amounts. ASU 2019-01 will be effective for us on January 1, 2020 and will not have a material impact on our consolidated financial statements.

 

10

 

 

2.ACQUISITION OF BAY BANCORP, INC.

 

On April 13, 2018, Old Line Bancshares acquired Bay Bancorp, Inc. (“BYBK”), the parent company of Bay Bank, FSB (“Bay Bank”). Upon the consummation of the merger, each share of common stock of BYBK outstanding immediately before the merger was converted into the right to receive 0.4088 shares of Old Line Bancshares’ common stock, provided that cash was paid in lieu of any fractional shares of Old Line Bancshares common stock. As a result, Old Line Bancshares issued 4,408,087 shares of its common stock in exchange for the shares of BYBK common stock in the merger. The aggregate merger consideration was approximately $143.6 million based on the closing sales price of Old Line Bancshares’ common stock on April 13, 2018.

 

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

 

At April 13, 2018, BYBK had consolidated assets of approximately $661 million. This merger added eleven banking locations located in BYBK’s primary market areas of Baltimore City and Anne Arundel, Baltimore, Howard and Harford Counties in Maryland.

 

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

 

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

 

Purchase Price Consideration   
Cash consideration  $973,383 
Purchase price assigned to shares exchanged for stock   142,645,695 
Total purchase price for BYBK acquisition   143,619,078 

 

 

11

 

 

Fair Value of Assets Acquired   
Cash and due from banks  $22,590,994 
Investment securities   51,895,757 
Restricted equity securities, at cost   2,339,700 
Loans, net   546,215,988 
Premises and equipment   3,127,963 
Accrued interest receivable   1,714,054 
Accrued taxes receivable   1,912,807 
Deferred income taxes   1,219,602 
Bank owned life insurance   16,319,198 
Other real estate owned   1,041,079 
Core deposit intangible   11,243,714 
Other assets   1,817,233 
Total assets acquired  $661,438,089 
Fair Value of Liabilities assumed     
Deposits  $541,368,907 
Short term borrowings   41,100,000 
Other liabilities   4,934,884 
Total liabilities assumed  $587,403,791 
Fair Value of net assets acquired   74,034,298 
Total Purchase Price   143,619,078 
      
Goodwill recorded for BYBK  $69,584,780 

 

 

12

 

 

3.INVESTMENT SECURITIES

 

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

 

 
 
 
 
 
 
 
Amortized
cost
 
 
 
Gross
unrealized
gains
 
 
 
Gross
unrealized
losses
 
 
 
 
Estimated
fair value
March 31, 2019                    
Available for sale                    
U.S. treasury  $3,000,457   $   $(5,379)  $2,995,078 
U.S. government agency   96,472,874    217,719    (262,471)   96,428,122 
Corporate bonds   18,614,263    124,085    (3,038)   18,735,310 
Foreign bonds   3,500,000    89    (2,994)   3,497,095 
Municipal securities   78,627,930    220,780    (692,362)   78,156,348 
Mortgage backed securities:                    
FHLMC certificates   18,562,486    747    (632,632)   17,930,601 
FNMA certificates   64,468,935    3,276    (2,022,007)   62,450,204 
GNMA certificates   27,542,845    2,288    (703,540)   26,841,593 
Total available for sale securities  $310,789,790   $568,984   $(4,324,423)  $307,034,351 
                     
December 31, 2018                    
Available for sale                    
U.S. treasury  $3,003,410   $   $(10,910)  $2,992,500 
U.S. government agency   19,123,653        (517,475)   18,606,178 
Corporate bonds   22,115,768    227,789    (4,231)   22,339,326 
Municipal securities   79,416,920    19,392    (2,147,608)   77,288,704 
Mortgage backed securities                    
FHLMC certificates   19,079,921    962    (1,007,115)   18,073,768 
FNMA certificates   56,720,930        (3,062,170)   53,658,760 
GNMA certificates   27,873,539        (1,127,013)   26,746,526 
Total available for sale securities  $227,334,141   $248,143   $(7,876,522)  $219,705,762 

 

At March 31, 2019 and December 31, 2018, securities with unrealized losses segregated by length of impairment were as follows:

 

   March 31, 2019
   Less than 12 months  12 Months or More  Total
 
 
 
 
Fair
value
 
 
Unrealized
losses
 
 
Fair
value
 
 
Unrealized
losses
 
 
Fair
value
 
 
Unrealized
losses
U.S. treasury  $1,501,172   $391   $1,493,906   $4,988   $2,995,078   $5,379 
U.S. government agency   17,583,100    675    15,385,407    261,796    32,968,507    262,471 
Corporate bonds   4,496,963    3,038            4,496,963    3,038 
Foreign debt securities   2,997,006    2,994            2,997,006    2,994 
Municipal securities           35,457,987    692,362    35,457,987    692,362 
Mortgage backed securities                              
FHLMC certificates   1,730,387    3,519    16,150,038    629,113    17,880,425    632,632 
FNMA certificates   3,002,122    1,913    51,829,711    2,020,094    54,831,833    2,022,007 
GNMA certificates   7,448,968    47,480    17,917,972    656,060    25,366,940    703,540 
Total  $38,759,718   $60,010   $138,235,021   $4,264,413   $176,994,739   $4,324,423 

 

13

 

 

   December 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  $1,503,516   $1,313   $1,488,984   $9,597   $2,992,500   $10,910 
U.S. government agency   1,357,980    26,795    15,288,957    490,680    16,646,937    517,475 
Corporate bonds   2,995,769    4,231            2,995,769    4,231 
Municipal securities   13,707,759    100,387    54,243,374    2,047,221    67,951,133    2,147,608 
Mortgage backed securities                              
FHLMC certificates   1,715,756    26,062    16,293,413    981,053    18,009,169    1,007,115 
FNMA certificates   1,164,291    11,023    52,494,470    3,051,147    53,658,761    3,062,170 
GNMA certificates   8,871,024    138,099    17,875,503    988,914    26,746,527    1,127,013 
Total  $31,316,095   $307,910   $157,684,701   $7,568,612   $189,000,796   $7,876,522 

 

At March 31, 2019 and December 31, 2018, we had 134 and 166 investment securities, respectively, in an unrealized loss position for 12 months or more and 18 and 34 securities, respectively, in an unrealized loss position for less than 12 months.  We consider all unrealized losses on securities as of March 31, 2019 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, 2019, 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, 2019, we received $3.4 million in proceeds from maturities and principal pay-downs on investment securities. The net proceeds of these transactions were used to purchase new investments. During the three months ended March 31, 2018, we received $6.2 million in proceeds from sales, maturities or calls of, and principal pay-downs on, investment securities and realized no gains or losses. The net proceeds of these transactions were used to pay down our Federal Home Loan Bank of Atlanta (“FHLB”) borrowings and purchase new investment securities.

 

Contractual maturities and pledged securities at March 31, 2019 are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. We classify mortgage-backed securities (“MBS”) based on contractual maturity date. However, we receive payments on a monthly basis.

 

   Available for Sale

March 31, 2019
 
 
Amortized
cost
 
 
Fair
value
       
Maturing          
Within one year  $6,275,457   $6,267,466 
Over one to five years   2,055,037    2,059,672 
Over five to ten years   109,353,992    109,150,442 
Over ten years   193,105,304    189,556,771 
Total  $310,789,790   $307,034,351 
Pledged securities  $127,039,972   $123,535,266 

 

 

14

 

 

4.LOANS

 

Major classifications of loans held for investment are as follows:

 

   March 31, 2019  December 31, 2018
   Legacy (1)  Acquired  Total  Legacy (1)  Acquired  Total
                   
Commercial Real Estate                              
Owner Occupied  $300,801,706   $138,198,872   $439,000,578   $299,266,275   $140,892,706   $440,158,981 
Investment   582,015,759    191,197,053    773,212,812    592,529,807    195,883,002    788,412,809 
Hospitality   180,062,301    13,451,634    193,513,935    172,189,046    13,134,019    185,323,065 
Land and A&D   82,358,822    22,791,313    105,150,135    71,908,761    21,760,867    93,669,628 
Residential Real Estate                              
First Lien-Investment   112,538,462    45,291,275    157,829,737    104,084,050    48,483,340    152,567,390 
First Lien-Owner Occupied   108,852,047    136,182,761    245,034,808    108,696,078    140,221,589    248,917,667 
Residential Land and A&D   44,332,786    15,842,288    60,175,074    42,639,161    16,828,434    59,467,595 
HELOC and Jr. Liens   21,433,155    39,695,513    61,128,668    20,749,184    41,939,123    62,688,307 
Commercial and Industrial   257,247,741    82,159,083    339,406,824    239,766,662    91,431,724    331,198,386 
Consumer   15,270,415    31,814,054    47,084,469    16,289,147    34,919,111    51,208,258 
Total loans   1,704,913,194    716,623,846    2,421,537,040    1,668,118,171    745,493,915    2,413,612,086 
Allowance for loan losses   (7,449,768)   (358,374)   (7,808,142)   (7,004,839)   (466,184)   (7,471,023)
Deferred loan costs, net   3,457,262        3,457,262    3,086,635        3,086,635 
Net loans  $1,700,920,688   $716,265,472   $2,417,186,160   $1,664,199,967   $745,027,731   $2,409,227,698 

_______________________

(1)As a result of the acquisitions of Maryland Bankcorp, Inc. (“Maryland Bankcorp”), the parent company of Maryland Bank & Trust Company, N.A. (“MB&T”), in April 2011, WSB Holdings Inc., the parent company of The Washington Savings Bank (“WSB”), in May 2013, Regal Bancorp, Inc. (“Regal”), the parent company of Regal Bank & Trust (“Regal Bank”), in December 2015, DCB Bancshares, Inc. (“DCB”), the parent company of Damascus Community Bank (“Damascus”), in July 2017, and BYBK, the parent company of Bay Bank, in April 2018, we have segmented the portfolio into two components, “Legacy” loans originated by Old Line Bank and “Acquired” loans acquired from MB&T, WSB, Regal Bank, Damascus and Bay Bank.

 

Credit Policies and Administration

 

We have adopted a comprehensive lending policy, which includes stringent underwriting standards for all types of loans. We have designed our underwriting standards to promote a complete banking relationship rather than a transactional relationship. Our lending staff follows pricing guidelines established periodically by our management team. In an effort to manage risk, prior to funding the loan committee, consisting of four non-employee members of the board of directors and four executive officers, must approve by majority vote all credit decisions in excess of a lending officer’s lending authority. Management believes that we employ experienced lending officers, secure appropriate collateral and carefully monitor the financial condition of our borrowers and the concentrations of loans in the portfolio.

 

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

 

Commercial Real Estate Loans

 

We finance commercial real estate for our clients, for owner occupied and investment properties, hospitality and land acquisition and development. Commercial real estate loans totaled $1.51 billion at both March 31, 2019 and December 31, 2018. 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, 2019, we had approximately $193.5 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 $524.2 million and $523.6 million at March 31, 2019 and December 31, 2018, respectively. Although most of these loans are in our market area, the diversity of the individual loans in the portfolio reduces our potential risk. Usually, we secure our residential real estate loans with a security interest in the borrower’s primary or secondary residence with a loan to value not exceeding 85%. Our initial underwriting includes an analysis of the borrower’s debt/income ratio which generally may not exceed 43%, collateral value, length of employment and prior credit history. A credit score of at least 640 is required, except for loans originated for sale in the secondary market, as discussed below. 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.

 

16

 

 

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

 

Under our loan approval policy, all residential real estate loans approved must comply with federal regulations. Generally, we will make residential mortgage loans in amounts up to the limits established by Fannie Mae and Freddie Mac for secondary market resale purposes. Currently this amount for single-family residential loans varies from $484,350 up to a maximum of $726,525 for certain high-cost designated areas. We also make residential mortgage loans up to limits established by the Federal Housing Administration, which currently is $726,525. The Washington, D.C. and Baltimore areas are both considered high-cost designated areas. We will, however, make loans in excess of these amounts if we believe that we can sell the loans in the secondary market or that the loans should be held in our portfolio. For loans we originate for sale in the secondary market, we typically require a credit score of 620 or higher, with some exceptions provided we receive an approval recommendation from FannieMae, FreddieMac or the Federal Housing Administration’s automated underwriting approval system.  Loans sold in the secondary market are sold to investors on a servicing released basis and recorded as loans as held for sale.  The premium is recorded in income on marketable loans in non-interest income, net of commissions paid to the loan officers.

 

Commercial and Industrial Lending

 

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

 

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

 

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 Baltimore City and Anne Arundel, Baltimore, Calvert, Carroll, Charles, Frederick, Harford, Howard, Montgomery, Prince George’s and St. Mary’s Counties. The majority of our loan portfolio consists of commercial real estate loans and residential real estate loans.

 

Non-Accrual and Past Due Loans

 

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

 

 

 

 

 

 

 

18

 

 

The table below presents an age analysis of the loans held for investment portfolio at March 31, 2019 and December 31, 2018.

 

Age Analysis of Past Due Loans

 

   Age Analysis of Past Due Loans
   March 31, 2019  December 31, 2018
   Legacy  Acquired  Total  Legacy  Acquired  Total
Current  $1,695,749,348   $706,863,709   $2,402,613,057   $1,659,191,112   $729,738,007   $2,388,929,119 
Accruing past due loans:                              
30 - 89 days past due                              
Commercial Real Estate:                              
Owner Occupied   3,958,783        3,958,783    3,990,558        3,990,558 
Investment   66,753    1,908,182    1,974,935    1,729,404    3,849,944    5,579,348 
Land and A&D   1,015,998        1,015,998             
Residential Real Estate:                              
First Lien-Investment   178,881    589,787    768,668    179,701    896,227    1,075,928 
First Lien-Owner Occupied   113,936    1,735,989    1,849,925    94,178    3,062,084    3,156,262 
Land and A&D   464,649    338,036    802,685    883,460    413,191    1,296,651 
HELOC and Jr. Liens   137,746    574,487    712,233    119,924    790,989    910,913 
Commercial and Industrial   408,106    106,718    514,824    670,318    1,444,347    2,114,665 
Consumer   109,122    664,188    773,310    320,071    1,338,813    1,658,884 
Total 30 - 89 days past due   6,453,974    5,917,387    12,371,361    7,987,614    11,795,595    19,783,209 
90 or more days past due                              
Commercial Real Estate:                              
Owner Occupied   1,050,000         1,050,000             
Investment                   139,247    139,247 
Residential Real Estate:                              
First Lien-Owner Occupied       150,588    150,588        103,365    103,365 
Commercial and Industrial   75,137        75,137             
Consumer                   54    54 
Total 90 or more days past due   1,125,137    150,588    1,275,725        242,666    242,666 
Total accruing past due loans   7,579,111    6,067,975    13,647,086    7,987,614    12,038,261    20,025,875 
Recorded Investment Non-accruing loans:                              
Commercial Real Estate:                              
Owner Occupied       246,165    246,165        182,261    182,261 
Investment   576,671    51,595    628,266        51,070    51,070 
Land and A&D       45,000    45,000        45,000    45,000 
Residential Real Estate:                              
First Lien-Investment   192,501    303,891    496,392    192,501    292,758    485,259 
First Lien-Owner Occupied   257,059    1,991,129    2,248,188    262,194    2,027,974    2,290,168 
Land and A&D   284,179    200,209    484,388    277,704    201,737    479,441 
HELOC and Jr. Liens       653,634    653,634        690,732    690,732 
Commercial and Industrial   250,247    45,294    295,541    191,388    45,269    236,657 
Consumer   24,078    155,245    179,323    15,658    180,846    196,504 
Non-accruing past due loans:   1,584,735    3,692,162    5,276,897    939,445    3,717,647    4,657,092 
Total Loans  $1,704,913,194   $716,623,846   $2,421,537,040   $1,668,118,171   $745,493,915   $2,413,612,086 

 

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, 2019 and December 31, 2018.

 

19

 

 

Impaired Loans

March 31, 2019

 

 
 
 
 
 
 
Unpaid
Principal
Balance
 
 
 
 
Recorded
Investment
 
 
 
 
Related
Allowance
 
 
 
Average
Recorded
Investment
 
 
 
Interest
Income
Recognized
Legacy                         
With no related allowance recorded:                         
Commercial Real Estate:                         
Owner Occupied  $1,726,708   $1,726,708   $   $1,735,411   $13,300 
Investment   1,673,721    1,673,721        1,681,508    21,024 
Residential Real Estate:                         
First Lien-Owner Occupied   257,059    257,059        279,950    2,129 
Commercial and Industrial   351,344    351,344        357,469    2,483 
Consumer   12,081    12,081         12,081     
With an allowance recorded:                         
Residential Real Estate:                         
First Lien-Investment   192,501    192,501    39,420    192,501     
Land and A&D   284,179    284,179    25,000    282,613     
Commercial and Industrial   241,972    241,972    76,307    242,610     
Consumer   11,997    11,997    1,328    12,785    446 
Total legacy impaired   4,751,562    4,751,562    142,055    4,796,928    39,382 
Acquired(1)                         
With no related allowance recorded:                         
Commercial Real Estate:                         
Owner Occupied   267,231    267,231        267,012     
Land and A&D                         
Residential Real Estate:                         
First Lien-Owner Occupied   2,362,303    2,234,524        2,422,433    20,169 
First Lien-Investment                         
Land and A&D   56,939    56,939        61,289    1,061 
HELOC and Jr. Lien   477,025    477,025        501,237    6,491 
Commercial and Industrial   66,661    66,661        67,063    844 
Consumer   74,762    74,762        89,750    1,289 
With an allowance recorded:                         
Commercial Real Estate:                         
Investment   72,408    72,408    14,340    163,876     
Land and A&D   328,851    45,000    45,000    328,851     
Residential Real Estate:                         
First Lien-Owner Occupied   175,873    175,873    5,620    175,873     
First Lien-Investment   309,170    309,170    85,653    315,785     
Land and A&D   154,297    154,297    86,296    161,153     
HELOC and Jr. Lien   187,136    187,136    53,711    187,136     
Commercial and Industrial   48,750    48,750    48,750    48,750     
Consumer   108,569    108,569    19,004    120,781    2,630 
Total acquired impaired   4,689,975    4,278,345    358,374    4,910,989    32,484 
Total impaired  $9,441,537   $9,029,907   $500,429   $9,707,917   $71,866 

_______________________

(1)U.S. GAAP requires 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, 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  $1,737,394   $1,737,394   $   $1,766,117   $74,203 
Investment   1,688,661    1,688,661        1,716,183    88,410 
Residential Real Estate:                         
First Lien-Owner Occupied   262,194    262,194        285,514    11,412 
Land and A&D   277,704    277,704        277,704     
Consumer   1,495    1,495        10,707    1,130 
With an allowance recorded:                         
Residential Real Estate:                         
First Lien-Owner Occupied                         
First Lien-Investment   192,501    192,501    39,420    192,501     
Commercial and Industrial   148,349    148,349    13,149    152,898    3,926 
Consumer   14,163    14,163    1,416    27,217    1,129 
Total legacy impaired   4,808,509    4,808,509    53,985    4,938,812    198,805 
Acquired(1)                         
With no related allowance recorded:                         
Commercial Real Estate:                         
Owner Occupied   283,083    232,635        542,654    3,281 
Residential Real Estate:                         
First Lien-Owner Occupied   2,127,854    2,011,286        2,159,327    38,636 
Land and A&D   58,659    58,659        62,178    2,896 
Consumer   22,139    22,139        26,027    364 
With an allowance recorded:                         
Commercial Real Estate:                         
Owner Occupied                         
Investment   72,408    72,408    14,340    163,876    2,750 
First Lien-Owner Occupied   459,033    459,033    98,008    482,422    7,695 
First Lien-Investment   298,187    298,187    62,701    310,862    7,871 
Land and A&D   154,297    154,297    99,517    159,819     
HELOC and Jr. Lien   533,565    533,565    78,814    534,204    12,254 
Commercial and Industrial   48,750    48,750    48,750    48,750    237 
Consumer   188,102    188,102    19,053    231,978    11,619 
Total acquired impaired   4,810,584    4,359,717    466,183    5,289,532    96,107 
Total impaired  $9,619,093   $9,168,226   $520,168   $10,228,344   $294,912 

_______________________

(1)U.S. GAAP requires 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, 2019 consisted of seven loans for an aggregate of $2.3 million compared to seven loans for an aggregate of $2.4 million at December 31, 2018.

 

We had no loan modifications reported as TDRs during the three months ended March 31, 2019 or 2018. We had no loans that were modified as a TDR that defaulted during the three month period ended March 31, 2019 or 2018.

 

21

 

 

Acquired impaired loans

The following table documents changes in the accretable (premium) discount on acquired impaired loans during the three months ended March 31, 2019 and 2018, along with the outstanding balances and related carrying amounts for the beginning and end of those respective periods.

 

   March 31, 2019  March 31, 2018
Balance at beginning of period  $124,090   $115,066 
Accretion of fair value discounts   (407,618)   (27,770)
Reclassification (to)/from non-accretable discount   375,326    23,195 
Balance at end of period  $91,798   $110,491 

 

 
 
 
 
 
 
Contractually
Required Payments
Receivable
 
 
 
 
 
Carrying Amount
At March 31, 2019  $10,994,414   $9,627,828 
At December 31, 2018   11,146,165    9,396,862 
At March 31, 2018   8,421,446    6,799,657 
At December 31, 2017   8,277,731    6,617,774 

 

Credit Quality Indicators

 

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

 

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

 

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

 

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

 

22

 

 

The following tables outline the class of loans by risk rating at March 31, 2019 and December 31, 2018:

 

   Account Balance
March 31, 2019  Legacy  Acquired  Total
Risk Rating               
Pass(1 - 5)               
Commercial Real Estate:               
Owner Occupied  $294,532,310   $135,256,420   $429,788,730 
Investment   579,274,406    189,422,802    768,697,208 
Hospitality   180,062,301    13,451,634    193,513,935 
Land and A&D   82,358,822    22,550,396    104,909,218 
Residential Real Estate:               
First Lien-Investment   111,733,083    42,161,186    153,894,269 
First Lien-Owner Occupied   108,534,276    130,794,217    239,328,493 
Land and A&D   41,975,994    15,541,118    57,517,112 
HELOC and Jr. Liens   21,433,155    38,992,054    60,425,209 
Commercial   255,249,209    80,452,219    335,701,428 
Consumer   15,246,337    31,603,019    46,849,356 
    1,690,399,893    700,225,065    2,390,624,958 
Special Mention(6)               
Commercial Real Estate:               
Owner Occupied   416,239    1,289,117    1,705,356 
Investment   1,067,632    941,188    2,008,820 
Land and A&D       195,917    195,917 
Residential Real Estate:               
First Lien-Investment   286,659    1,700,354    1,987,013 
First Lien-Owner Occupied   60,712    1,506,258    1,566,970 
Land and A&D   2,072,613    100,961    2,173,574 
Commercial   322,215    1,584,961    1,907,176 
Consumer       24,815    24,815 
    4,226,070    7,343,571    11,569,641 
Substandard(7)               
Commercial Real Estate:               
Owner Occupied   5,853,157    1,653,335    7,506,492 
Investment   1,673,721    833,063    2,506,784 
Land and A&D       45,000    45,000 
Residential Real Estate:               
First Lien-Investment   518,720    1,429,735    1,948,455 
First Lien-Owner Occupied   257,059    3,882,286    4,139,345 
Land and A&D   284,179    200,209    484,388 
HELOC and Jr. Liens       703,459    703,459 
Commercial   1,676,317    121,903    1,798,220 
Consumer   24,078    186,220    210,298 
    10,287,231    9,055,210    19,342,441 
Doubtful(8)            
Loss(9)            
Total  $1,704,913,194   $716,623,846   $2,421,537,040 

 

 

23

 

 

   Account Balance
December 31, 2018  Legacy  Acquired  Total
Risk Rating               
Pass(1 - 5)               
Commercial Real Estate:               
Owner Occupied  $293,682,007   $137,978,800   $431,660,807 
Investment   589,763,511    194,092,985    783,856,496 
Hospitality   172,189,046    13,134,019    185,323,065 
Land and A&D   71,908,761    21,514,420    93,423,181 
Residential Real Estate:               
First Lien-Investment   103,270,617    45,431,446    148,702,063 
First Lien-Owner Occupied   108,371,748    134,959,907    243,331,655 
Land and A&D   40,268,376    16,524,667    56,793,043 
HELOC and Jr. Liens   20,749,184    41,196,500    61,945,684 
Commercial   237,713,832    89,049,308    326,763,140 
Consumer   16,273,489    34,674,679    50,948,168 
    1,654,190,571    728,556,731    2,382,747,302 
Special Mention(6)               
Commercial Real Estate:               
Owner Occupied   420,347    1,303,849    1,724,196 
Investment   1,077,635    557,687    1,635,322 
Land and A&D       201,447    201,447 
Residential Real Estate:               
First Lien-Investment   289,618    1,709,025    1,998,643 
First Lien-Owner Occupied   62,136    1,522,737    1,584,873 
Land and A&D   2,093,081    102,030    2,195,111 
Commercial   174,729    174,429    349,158 
Consumer       30,848    30,848 
    4,117,546    5,602,052    9,719,598 
Substandard(7)               
Commercial Real Estate:               
Owner Occupied   5,163,921    1,610,057    6,773,978 
Investment   1,688,661    1,232,330    2,920,991 
Land and A&D       45,000    45,000 
Residential Real Estate:               
First Lien-Investment   523,815    1,342,869    1,866,684 
First Lien-Owner Occupied   262,194    3,738,945    4,001,139 
Land and A&D   277,704    201,737    479,441 
HELOC and Jr. Liens       742,623    742,623 
Commercial   1,878,101    2,207,987    4,086,088 
Consumer   15,658    213,584    229,242 
    9,810,054    11,335,132    21,145,186 
Doubtful(8)            
Loss(9)            
Total  $1,668,118,171   $745,493,915   $2,413,612,086 

 

The following table details activity in the allowance for loan losses by portfolio segment for the three month periods ended March 31, 2019 and 2018. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

24

 

 

 
March 31, 2019
 
 
Commercial
and Industrial
 
 
Commercial
Real Estate
 
 
Residential
Real Estate
 
 
 
Consumer
 
 
 
Total
Beginning balance  $1,562,740   $4,728,694   $1,081,394   $98,195   $7,471,023 
Provision for loan losses   232,962    128,045    (4,002)   57,170    414,175 
Recoveries   10,753    417    3,119    27,552    41,841 
Total   1,806,455    4,857,156    1,080,511    182,917    7,927,039 
Loans charged off   (4,108)       (1,028)   (113,761)   (118,897)
Ending Balance  $1,802,347   $4,857,156   $1,079,483   $69,156   $7,808,142 
Amount allocated to:                         
Legacy Loans:                         
Individually evaluated for impairment  $76,307   $   $64,420   $1,328   $142,055 
Other loans not individually evaluated   1,677,290    4,797,816    783,783    48,824    7,307,713 
Acquired Loans:                         
Individually evaluated for impairment   48,750    59,340    231,280    19,004    358,374 
Ending balance  $1,802,347   $4,857,156   $1,079,483   $69,156   $7,808,142 

 

 
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 

 

Our recorded investment in loans at March 31, 2019 and 2018 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:

 

25

 

 

 
March 31, 2019
 
 
Commercial
and Industrial
 
 
Commercial
Real Estate
 
 
Residential
Real Estate
 
 
 
Consumer
 
 
 
Total
Legacy loans:                         
Individually evaluated for impairment with specific reserve  $241,972   $   $476,680   $11,997   $730,649 
Individually evaluated for impairment without specific reserve   351,344    3,400,429    257,059    12,081    4,020,913 
Other loans not individually evaluated   256,654,426    1,141,838,159    286,422,712    15,246,338    1,700,161,633 
Acquired loans:                         
Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition)   48,750    117,408    826,476    108,569    1,101,203 
Individually evaluated for impairment without specific reserve (ASC 310-20 at acquisition)   66,661    267,231    2,768,488    74,762    3,177,142 
Individually evaluated for impairment without specific reserve (ASC 310-30 at acquisition)   201,052    4,551,734    4,875,042        9,627,828 
Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition)   81,842,619    360,702,499    228,541,830    31,630,722    702,717,672 
Ending balance  $339,406,823   $1,510,877,460   $524,168,286   $47,084,471   $2,421,537,040 

 

 
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 

 

5.OTHER REAL ESTATE OWNED

 

The fair value of other real estate owned was $883 thousand at March 31, 2019 and December 31, 2018. As a result of the acquisitions of Maryland Bankcorp, WSB Holdings, Regal and BYBK, we have segmented other real estate owned (“OREO”) into two components, real estate obtained as a result of loans originated by Old Line Bank (legacy) and other real estate acquired from MB&T, WSB, Regal Bank and Bay Bank or obtained as a result of loans originated by MB&T, WSB, Regal Bank and Bay Bank (acquired); we did not acquire any OREO properties in the DCB acquisition. We are currently aggressively either marketing these properties for sale or improving them in preparation for sale.

 

26

 

 

The following outlines the transactions in OREO during the period.

 

Three months ended March 31, 2019  Legacy  Acquired  Total
Beginning balance  $   $882,510   $882,510 
Sales/deposits on sales            
Net realized gain/(loss)            
Total end of period  $   $882,510   $882,510 

 

Residential Foreclosures and Repossessed Assets — Once all potential alternatives for reinstatement are exhausted, past due loans collateralized by residential real estate are referred for foreclosure proceedings in accordance with local requirements of the applicable jurisdiction. Once possession of the property collateralizing the loan is obtained, the repossessed property will be recorded within other assets either as OREO or, where management has both the intent and ability to recover its losses through a government guarantee, as a foreclosure claim receivable. At March 31, 2019, residential foreclosures classified as OREO totaled $234 thousand. We had seven loans for an aggregate of $973 thousand secured by residential real estate in process of foreclosure at March 31, 2019 compared to five loans for $786 thousand at December 31, 2018.

 

6.EARNINGS PER COMMON SHARE

 

We determine basic earnings per common share by dividing net income 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,
   2019  2018
Weighted average number of shares   17,039,961    12,544,266 
Dilutive average number of shares   17,170,507    12,743,282 

 

7.STOCK-BASED COMPENSATION

 

For the three months ended March 31, 2019 and 2018, we recorded stock-based compensation expense of $291,715 and $288,559, respectively.  At March 31, 2019, there was $2.1 million of total unrecognized compensation cost related to non-vested stock options that we expect to realize over the next 2.0 years. As of March 31, 2019, there were 156,646 shares remaining available for future issuance under the 2010 equity incentive plan. The officers exercised 2,400 options during the three month period ended March 31, 2019 compared to 38,921 options exercised during the three month period ended March 31, 2018.

 

For purposes of determining estimated fair value of stock options, we have computed the estimated fair value of all stock-based compensation using the Black-Scholes option pricing model and, for stock options granted prior to December 31, 2018, we have applied the assumptions set forth in Old Line Bancshares’ Annual Report on Form 10-K for the year ended December 31, 2018.  Restricted stock awards are valued at the current stock price on the date of the award. During the three months ended March 31, 2019, there were no stock options granted compared to 40,000 stock options granted during the three months ended March 31, 2018.

 

During the three months ended March 31, 2019 and 2018, we granted 28,191 and 19,443 restricted common stock awards, respectively. The weighted average grant date fair value of these restricted stock awards was $28.74 at March 31, 2019.  At March 31, 2019, there was $5.7 million of total unrecognized compensation cost related to restricted stock awards that we expect to realize over the next 2.5 years. There were no restricted shares forfeited during the three month periods ended March 31, 2019 or 2018.

 

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8.FAIR VALUE MEASUREMENT

 

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

 

The fair value hierarchy established by accounting standards defines three input levels for fair value measurement. The applicable standard describes three levels of inputs that may be used to measure fair value: Level 1 is based on quoted market prices in active markets for identical assets. Level 2 is based on significant observable inputs other than Level 1 prices. Level 3 is based on significant unobservable inputs that reflect a company’s own assumptions about the assumption that market participants would use in pricing an asset or liability. We evaluate fair value measurement inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer between levels. There were no transfers between levels during the three months ended March 31, 2019 or the year ended December 31, 2018.

 

At March 31, 2019, we hold, as part of our investment portfolio, available for sale securities reported at fair value consisting of municipal securities, U.S. government sponsored entities, corporate bonds, and MBS. Prior to March 31, 2019, corporate bonds included our foreign debt securities (Israel bonds) that we have now moved into a separate classification. 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, which inputs are used by a third-party pricing service we use to make these determinations.

 

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, which fall into Level 1, and our corporate bonds, which fall into Level 3.

 

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

   At March 31, 2019 (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  $2,995   $2,995   $   $   $ 
U.S. government agency   96,428        96,428         
Corporate bonds   18,735            18,735     
Foreign debt securities   3,497            3,497      
Municipal securities   78,156        78,156         
FHLMC MBS   17,931        17,931         
FNMA MBS   62,450        62,450         
GNMA MBS   26,842        26,842         
Total recurring assets at fair value  $307,034   $2,995   $281,807   $22,232   $ 

 

   At December 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  $2,993   $2,993   $   $   $ 
U.S. government agency   18,606        18,606         
Corporate bonds   18,843            18,843     
Foreign debt securities   3,496            3,496     
Municipal securities   77,289        77,289         
FHLMC MBS   18,074        18,074         
FNMA MBS   53,659        53,659         
GNMA MBS   26,746        26,746         
Total recurring assets at fair value  $219,706   $2,993   $194,374   $22,339   $ 

 

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, which inputs are used by a third-party pricing service we use to make these determinations.

 

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

 

(in thousands)  Level 3
Investment available-for-sale     
Balance as of January 1, 2019  $22,339 
Realized and unrealized gains (losses)     
Included in earnings    
Included in other comprehensive income   (107)
Purchases, issuances, sales and settlements    
Transfers into or out of level 3    
Balance at March 31, 2019  $22,232 

 

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

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

We may be required, from time to time, to measure certain assets at fair value on a non-recurring basis in accordance with U.S. GAAP. 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, 2019 and December 31, 2018 are included in the tables below.

 

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

 

   At March 31, 2019 (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:  $4,610           $4,610 
Acquired:   3,920            3,920 
Total Impaired Loans   8,530            8,530 
                     
Other real estate owned:                    
Legacy:  $           $ 
Acquired:   883            883 
Total other real estate owned:   883            883 
Total  $9,413   $   $   $9,413 

 

   At December 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:  $2,745           $2,745 
Acquired:   3,894            3,894 
Total Impaired Loans   6,639            6,639 
                     
Other real estate owned:                    
Legacy:  $           $ 
Acquired:   883            883 
Total other real estate owned:   883            883 
Total  $7,522   $   $   $7,522 

 

As of March 31, 2019, and December 31, 2018, we estimated the fair value of impaired assets using Level 3 inputs to be $9.4 million and $7.5 million, respectively. We determined these Level 3 inputs based on appraisal evaluations, offers to purchase and/or appraisals that we obtained from an outside third party during the preceding twelve months less costs to sell. Discounts have predominantly been in the range of 0% to 50%. As a result of the acquisitions of Maryland Bankcorp, WSB Holdings, Regal, DCB and BYBK, we have segmented the impaired loans and OREO into two components, impaired assets obtained as a result of loans originated by Old Line Bank (legacy) and impaired assets acquired from MB&T, WSB, Regal Bank, DCB and Bay Bank or obtained as a result of loans originated by MB&T, WSB, Regal Bank and Bay Bank (acquired).

 

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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, 2019 and December 31, 2018.  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 receivable, an exit price notion is used consistent with ASC Topic 820-Fair Value Measurement. 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.

 

   March 31, 2019 (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  $52,689   $52,689   $52,689   $   $ 
Loans receivable, net   2,417,186    2,393,316            2,393,316 
Loans held for sale   9,633    9,875        9,875     
Equity Securities at cost   13,864    13,864        13,864     
Accrued interest receivable   8,607    8,607        1,874    6,733 
Liabilities:                         
Deposits:                         
Non-interest-bearing   579,962    579,962        579,962     
Interest bearing   1,755,473    1,772,876        1,772,876     
Short term borrowings   282,142    282,142        282,142     
Long term borrowings   38,437    38,437        37,437     
Accrued Interest payable   2,461    2,461        2,461     

 

   December 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  $44,501   $44,501   $44,501   $   $ 
Loans receivable, net   2,409,228    2,383,673            2,383,673 
Loans held for sale   11,564    11,860        11,860     
Equity Securities at cost   11,151    11,151        11,151     
Accrued interest receivable   7,959    7,959        1,393    6,566 
Liabilities:                         
Deposits:                         
Non-interest-bearing   559,060    559,060        559,060     
Interest bearing   1,736,989    1,752,883        1,752,883     
Short term borrowings   228,185    228,185        228,185     
Long term borrowings   38,371    38,371        38,371     
Accrued Interest payable   2,845    2,845        2,845     

 

 

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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 FHLB. At March 31, 2019, we had $250.0 million outstanding in short term FHLB borrowings, compared to $190.0 million at December 31, 2018. At March 31, 2019 and December 31, 2018, we had no unsecured promissory notes and $32.1 million and $38.2 million, respectively, in secured promissory notes.

 

Securities Sold Under Agreements to Repurchase

 

To support the $32.1 million in repurchase agreements at March 31, 2019, we have provided collateral in the form of investment securities. At March 31, 2019 we have pledged $123.5 million in U.S. government agency securities and MBS 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 $32.1 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 $34.2 million at March 31, 2019.

 

Also included in long term borrowings are trust preferred subordinated debentures totaling $4.2 million (net of $2.5 million fair value adjustment) at March 31, 2019 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 $1.1 million) maturing on December 14, 2035.

 

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11.LEASES

 

We have operating leases in which we are the lessee, and such leases are recorded on our consolidated balance sheets as operating lease ROU assets in other assets and operating lease liabilities in other liabilities. We are not a party to any significant finance leases pursuant to which we are the lessee.

 

Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease during the lease term. We recognize ROU assets and operating lease liabilities at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental collateralized borrowing rate at the lease commencement date. We further adjust ROU assets for lease incentives. We recognize operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, on a straight-line basis over the lease term, and record operating lease expense in net occupancy expense in the consolidated statements of income and other comprehensive income.

 

Our leases relate primarily to office space and bank branches with remaining lease terms of generally 1 to 20 years. Certain lease arrangements contain extension options that typically range from 5 to 10 years at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, we do not include them in the lease term.

 

The tables below summarizes our net lease cost:

 

The components of leases expense were as follows:

 

Three months ended March 31, 2019  2019
    
Operating lease cost  $719,215 

 

Supplemental cash flow information related to leases was as follows:

 

Three months ended March 31, 2019  2019
    
Operating cash flows from operating leases  $636,202 
      
Right-of-use assets obtained in exchange for lease     
Operating leases  $443,550 

 

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Supplemental balance sheet information related to leases was as follows:

 

Three months ended March 31, 2019  2019
    
Operating lease right-of-use assets  $25,868,929 
      
Lease liabilities  $26,248,563 
      
Weighted Average Remaining Operating Lease Term In Years   12.34 
      
Weighted Average Discount Rate on Operating Leases   3.00%

 

Maturities of lease liabilities were as follows: (includes extensions of leases)

 

   Operating
Leases
    
    
One year or less  $1,353,185 
One to three years   3,715,584 
Three to five years   3,917,571 
Thereafter   19,162,606 
Total undiscounted cash flows   28,148,946 
Discount of cash flows   (1,900,383)
Total lease liability  $26,248,563 

 

 

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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 subsidiary Old Line Bank, collectively, unless the context otherwise requires, 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”), on July 28, 2017, we acquired DCB Bancshares, Inc. (“DCB”), the parent company of Damascus Community Bank (“Damascus”), and on April 13, 2018, we acquired Bay Bancorp, Inc. (“BYBK”), the parent company of Bay Bank, FSB. The BYBK acquisition brought our assets to approximately $2.8 billion and we now operate 37 full service branches serving 11 Maryland counties and Baltimore City.

 

Summary of Recent Performance and Other Activities

 

Net income increased $2.4 million, or 40.21%, to $8.5 million for the three months ended March 31, 2019, compared to $6.1 million for the three month period ended March 31, 2018. Earnings were $0.50 per basic and diluted common share for the three months ended March 31, 2019, compared to $0.48 per basic and diluted common share for the three months ended March 31, 2018. The increase in net income for the first quarter of 2019 compared to the same 2018 period is primarily the result of increases of $5.6 million in net interest income and $968 thousand in non-interest income, partially offset by a $3.3 million increase in non-interest expense.

 

The following highlights contain additional financial data and events that have occurred during the three month period ended March 31, 2019:

 

 Average gross loans increased $697.5 million, or 40.54% to $2.4 billion during the three month period ended March 31, 2019, from $1.7 billion during the three months ended March 31, 2018. The increase in average loans compared to the three months ended March 31, 2018 is due to both organic growth and the acquisition of BYBK.
   
 Average yield on total interest earning assets increased to 4.74% for the three months ended March 31, 2019, compared to 4.52% for the same period of 2018.
   
 Return on average assets (“ROAA”) and return on average equity (“ROAE”) were 1.16% and 8.99%, respectively, compared to ROAA and ROAE of 1.16% and 11.36%, respectively, for the first quarter of 2018.
   
 Total assets increased $127.2 million, or 4.31%, during the quarter, primarily due to an increase of $87.3 million in our investment securities available for sale and the addition of $25.9 million for operating lease right of use assets.
   

 

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 Total deposits grew by $39.4 million, or 1.72%, during the quarter.
   
 We ended the first quarter of 2019 with a book value of $22.29 per common share and a tangible book value of $15.88 per common share compared to $21.77 and $15.39, respectively, at December 31, 2018.
   
 We increased our quarterly dividend by 20% to $0.12 per share during the quarter.
   
 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, 2019 compared to same period in 2018 (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)
   2019  2018  $ Change  % Change
             
Net income available to common stockholders  $8,504   $6,065   $2,439    40.21 
Interest income   30,910    21,324    9,586    44.95 
Interest expense   7,599    3,642    3,957    108.65 
Net interest income before provision for loan losses   23,311    17,683    5,628    31.83 
Provision for loan losses   414    395    19    4.81 
Non-interest income   2,763    1,795    968    53.93 
Non-interest expense   14,249    10,992    3,257    29.63 
Average total loans   2,418,266    1,720,721    697,545    40.54 
Average interest earning assets   2,676,378    1,946,208    730,170    37.52 
Average total interest bearing deposits   1,741,184    1,200,932    540,252    44.99 
Average non-interest bearing deposits   565,081    457,851    107,230    23.42 
Net interest margin   3.59%   3.76%        (4.52)
Return on average assets   1.16%   1.16%        0.00 
Return on average equity   8.99%   11.36%        (20.86)
Basic earnings per common share  $0.50   $0.48   $0.02    4.17 
Diluted earnings per common share   0.50    0.48    0.02    4.17 

 

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 (“OREO”), 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, 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. We believe that the BYBK acquisition will continue to generate increased earnings and increased returns for our stockholders, including the former stockholders of BYBK.

 

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Although the current interest rate environment 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, uncertainty regarding recent tariffs imposed and that may be imposed on imports into the United States, 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 (which in turn increases market interest rates) since December 2015, including four times during 2018, interest rates are still low compared to typical interest rates before the 2007-2009 recession. Current expectations indicate that additional rate hikes during 2019 are unlikely and that the Federal Reserve Board may even cut rates at some point during the year. Given the resulting expectation that interest rates will, therefore, remain at historically low levels during 2019, we believe that we can continue to grow total loans during 2019 even if there is a modest slowdown in the economy this year, as some economists have been predicting, although this may not come to fruition if the economy experiences a more severe slowdown than we anticipate. We also believe that we can continue to grow total deposits during 2019 despite the expected continuation of historically low interest rate levels. As a result of this expected growth, we expect that net interest income will continue to increase during 2019, although there can be no guarantee that this will be the case.

 

We also expect that salaries and benefits expenses and occupancy and equipment expenses will be higher for 2019 and going forward generally than they were in 2018 as a result of including the expenses related to the new employees and branches that we acquired in the BYBK merger. Such expenses may increase even further if we selectively take the opportunity to add more business development talent, although we will continue to look for opportunities to reduce expenses. 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, 2018, 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, 2019.

 

Results of Operations for the Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018.

 

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, 2019 increased $5.6 million, or 31.83%, to $23.3 million from $17.7 million for the same period in 2018. As outlined in detail in the Rate/Volume Variance Analysis, this increase was almost entirely due to an increase in loan interest income resulting from increases in both the average balance of and 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.

 

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Total interest income increased $9.6 million, or 44.95%, to $30.9 million during the three months ended March 31, 2019 compared to $21.3 million during the three months ended March 31, 2018, almost entirely as a result of a $9.2 million increase in interest and fees on loans. The increase in interest and fees on loans is the result of a $697.5 million increase in the average balance of our loans, driven primarily by an increase in the average balance of our mortgage loans, and an 18 basis point increase in the average yield on our loan portfolio due to higher yields on new mortgage loans and, to a lesser extent, commercial loans. The increase in the average balance of our loans was a result of the loans we acquired in the BYBK acquisition in April 2018 and, to a lesser extent, organic growth.

 

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, 2019 contributed a 14 basis point increase in interest income, compared to five basis points for the three months ended March 31, 2018.

 

Total interest expense increased $4.0 million, or 108.68%, to $7.6 million during the three months ended March 31, 2019 from $3.6 million for the same period in 2018, primarily as a result of a 50 basis point increase in the average interest rate paid on our interest bearing liabilities, which increased to 1.53% during the three months ended March 31, 2019, from 1.03% during the three months ended March 31, 2018. This increase was due to higher rates paid on our deposits, primarily on our time deposits but also on our money market and NOW accounts. While the average rate paid on our borrowings increased 71 basis points quarter over quarter, primarily as a result of the increased rate paid on our FHLB borrowings, this increase had a much smaller impact on our total interest expense given the relative average balance of our borrowings compared to the average balance of our loans. The increases in the average rates paid on both our deposits and our FHLB borrowings is the result of us paying higher rates as a result of Federal Reserve Board rate increases implemented during 2018.

 

A $572.5 million, or 39.84%, increase in the average balance of our interest bearing liabilities also contributed to the increase in total interest expense. The average balance of our interest bearing liabilities increased to $2.0 billion for the three months ended March 31, 2019 from $1.4 billion for the three months ended March 31, 2018, as a result of increases of $540.3 million, or 44.99%, in our average interest bearing deposits and $32.3 million, or 13.67%, in our average borrowings quarter over quarter. The increase in our average interest bearing deposits is due to the deposits acquired in the BYBK 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 $107.2 million to $565.1 million for the three months ended March 31, 2019, compared to $457.9 million for the three months ended March 31, 2018, primarily as a result of deposits we acquired in the BYBK merger.

 

Our net interest margin decreased to 3.59% for the three months ended March 31, 2019 from 3.76% for the three months ended March 31, 2018. The net interest margin decreased due to an increase in the average rate paid on our interest bearing liabilities, partially offset by the improvement in the yield on average interest earning assets, which increased 22 basis points from 4.52% for the quarter ended March 31, 2018 to 4.74% for the quarter ended March 31, 2019, as well as an increase in non-interest bearing deposits as a source of funding.

 

The net interest margin during the 2019 period was also affected by the amount of accretion on acquired loans. Accretion increased due to a higher amount of early payoffs on acquired loans with credit marks during the three months ended March 31, 2019 compared to the same period of 2018. The fair value accretion/amortization is recorded on pay-downs recognized during the period, which contributed 15 basis points for the three months ended March 31, 2019 compared to seven basis points for the three months ended March 31, 2018.

 

During the three months ended March 31, 2019 and 2018, we continued to successfully collect payments on acquired loans that we had recorded at fair value at the acquisition date, which resulted in a positive impact in interest income. Total accretion increased by $671 thousand for the three months ended March 31, 2019, 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.

 

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

 

   Three months ended March 31,
   2019  2018
   Accretion
Dollars
  % Impact on
Net Interest
Margin
  Accretion
Dollars
  % Impact on
Net Interest
Margin
Commercial loans  $44,430    0.01%  $47,705    0.01%
Mortgage loans   678,636    0.10    78,188    0.02 
Consumer loans   197,086    0.03    97,544    0.02 
Interest bearing deposits   54,947    0.01    80,886    0.02 
Total accretion  $975,099    0.15%  $304,323    0.07%

 

 

 

 

 

 

 

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Average Balances, Yields and Net Interest Margin Analysis. The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the three months ended March 31, 2019 and 2018, 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
   2019  2018
Three months ended March 31,  Average
balance
  Interest  Yield/
Rate
  Average
balance
  Interest  Yield/
Rate
Assets:                              
Federal funds sold (1)  $927,614   $5,426    2.37%  $193,669   $701    1.47%
Interest bearing deposits (1)   1,863,536    1,061    0.23    1,809,700    4     
Investment securities (1)(2)                              
U.S. Treasury   3,002,304    17,236    2.33    3,003,977    10,945    1.40 
U.S. government agency   37,444,601    312,483    3.38    13,344,333    86,325    2.66 
Corporate and foreign bonds   22,115,387    280,219    4.77    14,620,840    200,469    5.56 
Mortgage backed securities   110,154,218    672,018    2.47    109,516,824    575,018    2.13 
Municipal securities   79,026,733    636,805    3.27    80,023,423    644,411    3.27 
Other equity securities   11,169,894    303,472    11.02    9,147,367    266,651    11.82 
Total investment securities   262,912,937    2,222,233    3.43    229,656,764    1,783,819    3.15 
Loans(1)                              
Commercial   352,233,058    4,068,990    4.68    211,783,107    2,263,192    4.33 
Mortgage real estate   2,016,690,124    24,061,503    4.84    1,450,874,975    16,648,703    4.65 
Consumer   49,343,719    919,834    7.56    58,063,394    978,903    6.84 
Total loans   2,418,266,901    29,050,327    4.87    1,720,721,476    19,890,798    4.69 
Allowance for loan losses   7,593,472             5,973,556          
Total loans, net of allowance   2,410,673,429    29,050,327    4.89    1,714,747,920    19,890,798    4.70 
Total interest earning assets(1)   2,676,377,516    31,279,047    4.74    1,946,408,053    21,675,322    4.52 
Non-interest bearing cash   46,270,628              36,844,268           
Goodwill and intangibles   109,791,837              31,272,865           
Premises and equipment   44,403,507              41,088,624           
Other assets   99,169,559              69,837,318           
Total assets(1)   2,976,013,047              2,125,451,128           
Liabilities and Stockholders’ Equity:                              
Interest bearing deposits                              
Savings   214,811,939    94,253    0.18    133,091,341    34,791    0.11 
Money market and NOW   660,779,941    1,186,196    0.73    527,497,875    649,317    0.50 
Time deposits   865,592,240    4,336,066    2.03    540,342,764    1,622,625    1.22 
Total interest bearing deposits   1,741,184,120    5,616,515    1.31    1,200,931,980    2,306,733    0.78 
Borrowed funds   268,178,852    1,982,713    3.00    235,924,800    1,334,831    2.29 
Total interest bearing liabilities   2,009,362,972    7,599,228    1.53    1,436,856,780    3,641,564    1.03 
Non-interest bearing deposits   565,081,492              457,850,993           
    2,574,444,464              1,894,707,773           
Other liabilities   17,825,648              13,931,983           
Stockholders’ equity   383,742,935              216,611,372           
Total liabilities and stockholders’ equity  $2,976,013,047             $2,125,251,128           
Net interest spread(1)              3.21              3.49 
Net interest margin(1)        $23,679,819    3.59%       $18,033,758    3.76%

_______________________

(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, 2019 and 2018. 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,
2019 compared to 2018
Variance due to:
   Total  Rate  Volume
          
Interest earning assets:               
Federal funds sold(1)  $4,725   $2,316   $2,409 
Interest bearing deposits   1,057    947    110 
Investment Securities(1)               
U.S. treasury   6,291    6,299    (8)
U.S. government agency   226,158    91,860    134,298 
Corporate bonds and foreign bonds   79,750    (34,139)   113,889 
Mortgage backed securities   97,000    96,472    528 
Municipal securities   (7,606)   (7,437)   (169)
Other   36,821    27,965    8,856 
Loans:(1)               
Commercial   1,805,798    832,589    973,209 
Mortgage   7,412,800    3,074,796    4,338,004 
Consumer   (59,069)   178,704    (237,773)
Total interest income (1)   9,603,725    4,237,312    5,366,413 
                
Interest bearing liabilities                
Savings   59,462    49,081    10,381 
Money market and NOW   536,879    498,972    37,907 
Time deposits   2,713,441    2,341,661    371,780 
Borrowed funds   647,882    601,249    46,633 
Total interest expense   3,957,664    3,490,963    466,701 
                
Net interest income(1)  $5,646,061   $746,349   $4,899,712 

_______________________

(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, 2019 was $414 thousand, an increase of $19 thousand, or 4.88%, compared to $395 thousand for the three months ended March 31, 2018. This increase was due to organic growth in our loan portfolio.

 

Management identified additional probable losses in the loan portfolio and recorded $119 thousand in charge-offs during the three month period ended March 31, 2019, compared to $62 thousand in charge-offs for the three months ended March 31, 2018. We recognized recoveries of $42 thousand during the three months ended March 31, 2019 compared to recoveries of $4 thousand during the same period in 2018.

 

The allowance for loan losses to gross loans held for investment was 0.32% and 0.31%, and the allowance for loan losses to non-accrual loans was 147.97% and 160.42%, at March 31, 2019 and December 31, 2018, respectively. The decrease in the allowance for loan losses to non-accrual loans is primarily the result of an increase in our non-accrual loans.

 

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Non-interest Income. Non-interest income totaled $2.8 million for the three months ended March 31, 2019, an increase of $968 thousand, or 53.91%, from the corresponding period of 2018 amount of $1.8 million.

 

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

 

   Three months ended March 31,      
   2019  2018  $ Change  % Change
Service charges on deposit accounts  $326,044   $265,912   $60,132    22.61%
POS sponsorship program   600,061        600,061    100.00 
Wire transfer fees   31,834    26,965    4,869    18.06 
ATM Income   269,382    283,707    (14,325)   (5.05)
Earnings on bank owned life insurance   494,180    292,936    201,244    68.70 
Loss on disposal of assets       14,366    (14,366)   (100.00)
Rental income   216,597    198,444    18,153    9.15 
Income on marketable loans   496,843    418,472    78,371    18.73 
Other fees and commissions   327,838    294,219    33,619    11.43 
Total non-interest income  $2,762,779   $1,795,021   $967,758    53.91%

 

Non-interest income increased during the 2019 period primarily as a result of income of $600 thousand from our point of sale (“POS”) sponsorship program, which was not in place during the first quarter of 2018, and, to a lesser extent, an increase in earnings on bank owned life insurance (“BOLI”). Various other categories of non-interest income also increased quarter over quarter.

 

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

 

Earnings on BOLI increased $201 thousand due to the $16.3 million of BOLI acquired in the BYBK acquisition.

 

The $60 thousand increase in service charges on deposit accounts is due to the increase in the Bank’s deposit customers, primarily as a result of the BYBK acquisition.

 

Income on marketable loans consists of gain on the sale of residential mortgage loans originated for sale and any fees we receive in connection with such sales. Income on marketable loans increased $78 thousand during the three months ended March 31, 2019, compared to the same period last year due to an increase in gains recorded on the sale of residential mortgage loans primarily as a result of an increase in the volume of mortgage loans sold in the secondary market, which resulted in an increase in the aggregate amount of premiums we received for such sales. The residential mortgage division sold loans in the secondary market aggregating $27.3 million during the first quarter of 2019 compared to $19.3 million for the same period last year.

 

Other fees and commissions, which consists of other loan fees and the commissions earned on loans increased $34 thousand during the three months ended March 31, 2019 compared to the same period last year, primarily due to an increase in other loan fees compared to the same quarter of last year, which resulted primarily from an increase in renewal fees on letters of credit due to more letters of credit being renewed in the 2019 period.

 

Non-interest Expense. Non-interest expense increased $3.3 million, or 29.63%, for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

 

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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,      
   2019  20118  $ Change  % Change
Salaries and benefits  $7,133,583   $5,485,450   $1,648,133    30.05%
Occupancy and equipment   2,452,773    1,980,401    472,372    23.85 
Data processing   727,183    609,639    117,544    19.28 
FDIC insurance and State of Maryland assessments   247,249    188,071    59,178    31.47 
Core deposit premium amortization   657,824    312,313    345,511    110.63 
Loss on sale of other real estate owned       12,516    (12,516)   100.00 
OREO expense   25,666    184,994    (159,328)   (86.13)
Director fees   180,650    170,550    10,100    5.92 
Network services   114,450    79,205    35,245    44.50 
Telephone   247,030    204,424    42,606    20.84 
Other operating   2,462,305    1,764,396    697,909    39.56 
Total non-interest expenses  $14,248,713   $10,991,959   $3,256,754    29.63%

 

Non-interest expenses increased quarter over quarter primarily as a result of increases in salaries and benefits, occupancy and equipment, core deposit premium amortization, data processing and other operating expenses for the three months ended March 31, 2019 compared to the same period of 2018.

 

The $1.6 million increase in salaries and benefits and the $472 thousand increase in occupancy and equipment expenses are primarily due to the additional staff and new branches, respectively, that we acquired in the BYBK merger. Also included in occupancy and equipment is the expense related to the new right of use asset for operating leases incurred in connection with a new accounting standard as discussed in Note 1 to the consolidated financial statements. This expense was approximately $75 thousand for the quarter ended March 31, 2019.

 

Core deposit premium amortization increased $346 thousand as a result of the higher amortization of premiums resulting from the deposits we acquired in the BYBK acquisition.

 

The $118 thousand increase in data processing expenses resulted primarily from additional customer transactions primarily due to the additional branches, and therefore additional customers, resulting from our acquisition of BYBK.

 

Other operating expenses (which includes, for example, office supplies, software expense, marketing and advertising expenses) increased $698 thousand, primarily as a result of the additional branches and staff we acquired in the BYBK merger.

 

Income Taxes. We had income tax expense of $2.9 million (25.48% of pre-tax income) for the three months ended March 31, 2019 compared to income tax expense of $2.0 million (25.04% of pre-tax income) for the same period in 2018. The effective tax rate increased slightly for the 2019 period primarily as a result increased non-tax exempt earnings for the three months ended March 31, 2019 compared to same three months ended March 31, 2018.

 

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, foreign debt securities, 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 and 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.

 

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The investment securities at March 31, 2019 amounted to $307.0 million, an increase of $87.3 million, or 39.75%, from the December 31, 2018 amount of $219.7 million. As outlined above, at March 31, 2019, all securities are classified as available for sale.

 

The fair value of available for sale securities included net unrealized losses of $3.8 million at March 31, 2019 (reflected as $2.7 million net of taxes) compared to net unrealized losses of $7.6 million (reflected as $5.5 million net of taxes) at December 31, 2018. The increase in the value of the investment securities is due to the decrease in market interest rates, which resulted in an increase in bond values. We have evaluated securities with unrealized losses for an extended period of time and determined that all such losses are temporary because, at this point in time, we expect to hold them until maturity. We have no intent or plan to sell these securities, it is not likely that we will have to sell these securities and we have not identified any portion of the loss that is a result of credit deterioration in the issuer of the security. As the maturity date moves closer and/or interest rates decline, any unrealized losses in the portfolio will decline or dissipate.

 

Loan Portfolio. Net of allowance, unearned fees and origination costs, loans held for investment increased $8.0 million, or 0.33%, during the three months ended March 31, 2019, remaining at $2.4 billion at March 31, 2019. The loan growth during the three months ended March 31, 2019 was a result of net organic growth of $36.8 million, primarily due to new commercial and industrial and commercial real estate loan originations, partially offset by $28.9 million in paydowns on previously acquired loans. Commercial real estate loans increased by $3.3 million, residential real estate loans increased by $527 thousand, commercial and industrial loans increased by $8.2 million, and consumer loans decreased by $4.1 million from their respective balances at December 31, 2018.

 

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

 

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

 

   March 31, 2019  December 31, 2018
   Legacy (1)  Acquired  Total  Legacy (1)  Acquired  Total
                   
Commercial Real Estate                              
Owner Occupied  $300,801,706   $138,198,872   $439,000,578   $299,266,275   $140,892,706   $440,158,981 
Investment   582,015,759    191,197,053    773,212,812    592,529,807    195,883,002    788,412,809 
Hospitality   180,062,301    13,451,634    193,513,935    172,189,046    13,134,019    185,323,065 
Land and A&D   82,358,822    22,791,313    105,150,135    71,908,761    21,760,867    93,669,628 
Residential Real Estate                              
First Lien-Investment   112,538,462    45,291,275    157,829,737    104,084,050    48,483,340    152,567,390 
First Lien-Owner Occupied   108,852,047    136,182,761    245,034,808    108,696,078    140,221,589    248,917,667 
Residential Land and A&D   44,332,786    15,842,288    60,175,074    42,639,161    16,828,434    59,467,595 
HELOC and Jr. Liens   21,433,155    39,695,513    61,128,668    20,749,184    41,939,123    62,688,307 
Commercial and Industrial   257,247,741    82,159,083    339,406,824    239,766,662    91,431,724    331,198,386 
Consumer   1,270,415    31,814,054    33,084,469    16,289,147    34,919,111    51,208,258 
Total loans   1,690,913,194    716,623,846    2,407,537,040    1,668,118,171    745,493,915    2,413,612,086 
Allowance for loan losses   (7,449,768)   (358,374)   (7,808,142)   (7,004,839)   (466,184)   (7,471,023)
Deferred loan costs, net   3,457,262        3,457,262    3,086,635        3,086,635 
Net loans  $1,686,920,688   $716,265,472   $2,403,186,160   $1,664,199,967   $745,027,731   $2,409,227,698 

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

 

Bank Owned Life Insurance (“BOLI”). At March 31, 2019, we have invested $68.3 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, Damascus and Bay Bank. Bank owned life insurance increased $413 thousand during the three months ended March 31, 2019. The increase also includes interest earned on these policies. Gross earnings on BOLI were $494 thousand during the three months ended March 31, 2019, which earnings were partially offset by $78 thousand in expenses associated with the policies, for total net earnings of $413 thousand in 2019. 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 and 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 $196 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, Damascus or Bay Bank.

 

Annuity Plan. Our 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. We invested $6.0 million during the fourth quarter of 2017 and the annuity plan was effective January 1, 2018. The annuity plan was valued at $6.3 million at March 31, 2019.

 

Deposits. Deposits increased $39.4 million during the three months ended March 31, 2019, remaining at $2.3 billion at March 31, 2019. This increase is comprised of a $20.9 million increase in our non-interest bearing deposits and an $18.5 million increase in our interest bearing deposits.

 

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The following table outlines the changes in interest bearing deposits:

 

   March 31,
2019
  December 31,
2018
  $ Change  % Change
   (Dollars in thousands)
Certificates of deposit  $868,364   $865,255   $3,109    0.36%
Interest bearing checking   672,175    657,061    15,114    2.30 
Savings   214,934    214,673    261    0.12 
Total  $1,755,473   $1,736,989   $18,484    1.06%

 

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, 2019, we had $38.8 million in CDARS and $190.3 million in money market accounts through Promontory’s reciprocal deposit program compared to $47.9 million and $168.8 million, respectively, at December 31, 2018.

 

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, 2019. 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, 2019, we had $250.0 million outstanding in short term FHLB borrowings, compared to $190.0 million at December 31, 2018. At March 31, 2019 and December 31, 2018, we had no unsecured promissory notes and $32.1 million and $38.2 million, respectively, in secured promissory notes.

 

Long term borrowings at March 31, 2019 consist primarily of the Notes in the amount of $35.0 million (fair value of $34.2 million) due in 2026. The initial interest rate on the Notes is 5.625% per annum from August 15, 2016 to August 14, 2021, payable semi-annually on each February 15 and August 15. Beginning August 15, 2021, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month LIBOR rate plus 450.2 basis points, payable quarterly on each February 15, May 15, August 15 and November 15 through maturity or early redemption. Also included in long term borrowings are trust preferred subordinated debentures totaling $4.0 million (net of $2.5 million fair value adjustment) that 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 $1.1 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 $70.0 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.

 

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Our immediate sources of liquidity are cash and due from banks, federal funds sold and deposits in other banks. On March 31, 2019 we had $49.6 million in cash and due from banks, $2.1 million in interest bearing accounts, and $961 thousand in federal funds sold. As of December 31, 2018, we had $41.5 million in cash and due from banks, $2.1 million in interest bearing accounts, and $954 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, 2019. 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