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

 
 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2019

 

OR

 

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

 

Commission File Number: 000-50345

 

Old Line Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

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

 

 

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

  

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

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically 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 x No o

 

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 o Accelerated filer x
Non-accelerated filer o Smaller reporting company o
Emerging growth company o

 

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

 

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

 

Yes    o               No    x

 

As of August 01, 2019, the registrant had 16,999,146 shares of common stock outstanding.

 

 

 

OLD LINE BANCSHARES, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

 

     
    Page
    Number
     
PART I. FINANCIAL INFORMATION 3
     
Item 1. Financial Statements  
     
  Consolidated Balance Sheets as of June 30, 2019 (Unaudited) and December 31, 2018 3
     
  Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June 30, 2019 and 2018 4
     
  Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2019 and 2018 5
     
  Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three and Six Months Ended June 30, 2019 and 2018 6
     
  Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 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 36
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 64
     
Item 4. Controls and Procedures 65
     
PART II.    
     
Item 1. Legal Proceedings 66
     
Item 1A. Risk Factors 66
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 66
     
Item 3. Defaults Upon Senior Securities 66
     
Item 4. Mine Safety Disclosures 66
     
Item 5. Other Information 66
     
Item 6. Exhibits 67
     
Signatures   68

 

2

 

Part 1. Financial Information

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Balance Sheets

 

   June 30,  December 31,
   2019  2018
   (Unaudited)   
Assets
Cash and due from banks  $56,392,900   $41,495,763 
Interest bearing accounts   1,832,209    2,051,273 
Federal funds sold   781,033    953,582 
Total cash and cash equivalents   59,006,142    44,500,618 
Investment securities available for sale-at fair value   295,969,550    219,705,762 
Loans held for sale, fair value of $15,599,437 and $11,860,147   15,443,340    11,564,993 
Loans held for investment (net of allowance for loan losses of $7,889,735 and $7,471,023, respectively)   2,420,437,144    2,409,227,698 
Equity securities at cost   11,524,301    11,150,750 
Premises and equipment   42,326,703    42,624,787 
Accrued interest receivable   9,131,984    7,958,511 
Income taxes receivable   957,268    5,014,510 
Deferred income taxes   2,120,886    4,660,278 
Bank owned life insurance   68,750,106    67,920,021 
Annuity Plan   6,293,571    6,268,426 
Other real estate owned   882,510    882,510 
Goodwill   94,668,455    94,668,455 
Core deposit intangible   14,054,647    15,362,232 
Other assets   34,046,238    8,497,544 
Total assets  $3,075,612,845   $2,950,007,095 
           
Liabilities and Stockholders’ Equity          
Deposits          
Non-interest bearing  $620,754,339   $559,059,672 
Interest bearing   1,763,727,019    1,736,989,227 
Total deposits   2,384,481,358    2,296,048,899 
Short term borrowings   221,654,780    228,184,856 
Long term borrowings   38,503,032    38,371,291 
Accrued interest payable   3,040,219    2,844,715 
Supplemental executive retirement plan   6,180,673    5,997,819 
Other liabilities   32,441,274    7,788,981 
Total liabilities   2,686,301,336    2,579,236,561 
Stockholders’ equity          
Common stock, par value $0.01 per share; 25,000,000 shares authorized; 16,999,146 and 17,031,052 shares issued and outstanding in 2019 and 2018, respectively   169,991    170,311 
Additional paid-in capital   292,653,644    293,501,107 
Retained earnings   95,956,286    82,628,356 
Accumulated other comprehensive income (loss)   531,588    (5,529,240)
Total stockholders’ equity   389,311,509    370,770,534 
Total liabilities and stockholders’ equity  $3,075,612,845   $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  Six Months Ended
   June 30,  June 30,
   2019  2018  2019  2018
Interest Income                    
Loans, including fees  $29,125,229   $26,448,727   $57,976,160   $46,149,489 
U.S. Treasury securities   16,148    16,599    32,267    26,628 
U.S. government agency securities   753,096    91,410    1,048,549    172,952 
Corporate bonds   259,054    221,116    518,018    421,585 
Foreign bonds   31,391        52,646     
Mortgage backed securities   668,022    551,897    1,340,040    1,126,915 
Municipal securities   492,363    499,343    988,335    999,963 
Federal funds sold   3,466    2,861    8,789    3,526 
Other   354,183    336,765    648,391    591,999 
Total interest income   31,702,952    28,168,718    62,613,195    49,493,057 
Interest expense                    
Deposits   6,103,812    3,146,235    11,720,327    5,452,968 
Borrowed funds   2,130,630    1,714,250    4,113,343    3,049,081 
Total interest expense   8,234,442    4,860,485    15,833,670    8,502,049 
Net interest income   23,468,510    23,308,233    46,779,525    40,991,008 
Provision for loan losses   72,583    532,257    486,758    927,153 
Net interest income after provision for loan losses   23,395,927    22,775,976    46,292,767    40,063,855 
Non-interest income                    
Account service charges   712,623    722,879    1,339,883    1,299,463 
Point of sale sponsorship program   636,756    673,502    1,236,817    673,502 
Gain on sales or calls of investment securities   15,927        15,927     
Earnings on bank owned life insurance   524,753    461,056    1,018,933    753,992 
Gain on disposal of assets   32,599        32,599    14,366 
Loss on write down of stock       (60,998)       (60,998)
Rental income   214,033    199,050    430,630    397,494 
Income on marketable loans   841,843    511,879    1,338,686    930,351 
Other fees and commissions   279,238    680,683    607,076    974,902 
Total non-interest income   3,257,772    3,188,051    6,020,551    4,983,072 
Non-interest expense                    
Salaries and benefits   7,600,771    7,201,335    14,734,354    12,686,785 
Occupancy and equipment   2,396,021    2,242,641    4,848,794    4,223,042 
Data processing   760,727    702,182    1,487,910    1,311,821 
FDIC insurance and State of Maryland assessments   261,367    320,326    508,616    508,397 
Merger and integration       7,121,802        7,121,802 
Core deposit premium amortization   649,761    540,736    1,307,585    853,049 
Loss on sales of other real estate owned       41,956        54,472 
OREO expense   41,833    27,995    67,499    212,989 
Directors fees   168,850    196,650    349,500    367,200 
Network services   116,315    95,607    230,765    174,812 
Telephone   234,667    252,482    481,697    456,906 
Other operating   2,501,406    2,333,694    4,963,711    4,098,090 
Total non-interest expense   14,731,718    21,077,406    28,980,431    32,069,365 
                     
Income before income taxes   11,921,981    4,886,621    23,332,887    12,977,562 
Income tax expense   3,009,901    2,160,788    5,916,633    4,186,547 
Net income   8,912,080    2,725,833    17,416,254    8,791,015 
                     
Basic earnings per common share  $0.52   $0.17   $1.02   $0.61 
Diluted earnings per common share  $0.52   $0.17   $1.02   $0.60 

 

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 June 30,  2019  2018
Net income  $8,912,080   $2,725,833 
           
Other comprehensive income (loss):          
Unrealized (loss) gain on securities available for sale, net of taxes of $1,239,600, and ($100,738), respectively   3,265,168    (265,351)
Reclassification adjustment for realized gain on securities available for sale included in net income, net of taxes of ($4,383) and $0, respectively   (11,544)    
Other comprehensive income (loss)   3,253,624    (265,351)
Comprehensive income  $12,165,704   $2,460,482 

 

Six Months Ended June 30,  2019  2018
Net income  $17,416,254   $8,791,015 
           
Other comprehensive income (loss):          
Unrealized (loss) gain on securities available for sale, net of taxes of $2,305,337, and ($1,316,854), respectively   6,072,372    (3,468,661)
Reclassification adjustment for realized gain on securities available for sale included in net income, net of taxes of ($4,383) and $0, respectively   (11,544)    
Other comprehensive income (loss)   6,060,828    (3,468,661)
Comprehensive income   23,477,082    5,322,354 

 

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

5

 

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

 

               Accumulated   
         Additional     other  Total
   Common stock  paid-in  Retained  comprehensive  Stockholders’
   Shares  Par value  capital  earnings  income (loss)  Equity
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 
Net income attributable to Old Line Bancshares, Inc.               8,912,080        8,912,080 
Other comprehensive income                   3,253,624    3,253,624 
Stock based compensation awards           368,206            368,206 
Stock buyback   (52,423)   (525)   (1,304,919)           (1,305,444)
Common stock cash dividends $0.12 per share               (2,040,355)       (2,040,355)
Balance June 30, 2019   16,999,146   $169,991   $292,653,644   $95,956,286   $531,588   $389,311,509 
                               
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 
                               
Net income attributable to Old Line Bancshares, Inc.               2,725,833        2,725,833 
Other comprehensive loss                   (1,165,351)   (1,165,351)
Acquisition of Bay Bancorp, Inc.   4,408,087    44,081    142,601,614            142,645,695 
Stock based compensation awards           280,751            280,751 
Stock options exercised   14,100    141    262,578            262,719 
Common stock cash dividends $0.10 per share               (1,698,000)       (1,698,000)
Balance June 30, 2018   16,988,883   $169,889   $292,836,679   $67,601,752   $(6,263,883)  $354,344,437 
                               
                               
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.               17,416,254        17,416,254 
Other comprehensive income                   6,060,828    6,060,828 
Stock based compensation awards           659,921            659,921 
Stock options exercised   2,400    24    48,907            48,931 
Restricted stock issued   28,191    282    (282)            
Stock buyback   (62,497)   (626)   (1,156,009)           (1,156,635)
Common stock cash dividends $0.24 per share               (4,088,324)       (4,088,324)
Balance June 30, 2019   16,999,146   $169,991   $293,053,644   $95,956,286   $531,588   $389,711,509 

 

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

 

6

 

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

 

   Six Months Ended June 30,
   2019  2018
Cash flows from operating activities          
Net income  $17,416,254   $8,791,015 
Adjustments to reconcile net income to net cash provided by operating activities          
Depreciation and amortization   1,588,215    1,533,864 
Provision for loan losses   486,758    927,153 
Change in deferred loan fees net of costs   (467,138)   (350,424)
Gain on sales or calls of securities   (15,927)    
Amortization of premiums and discounts   329,100    422,136 
Origination of loans held for sale   (68,956,898)   (48,030,581)
Proceeds from sale of loans held for sale   63,739,865    39,110,284 
Loss on write down of stock       60,998 
Loss on sales of other real estate owned       54,472 
Gain on sale of fixed assets   (32,599)   (14,366)
Amortization of intangible assets   1,307,585    853,049 
Deferred income taxes   238,439    292,620 
Stock based compensation awards   659,921    569,310 
Increase (decrease) in          
Accrued interest payable   195,504    355,651 
Income tax payable       (2,157,375)
Supplemental executive retirement plan   182,854    163,808 
Other liabilities   (2,278,028)   127,504 
Decrease (increase) in          
Accrued interest receivable   (1,173,473)   (524,839)
Bank owned life insurance   (830,085)   (631,226)
Annuity plan   (25,145)   (294,511)
Income tax receivable   4,057,242    428,874 
Other assets   1,381,626    (764,969)
Net cash provided by operating activities  $17,804,070   $922,447 
Cash flows from investing activities          
Cash and cash equivalents of acquired bank, net of cash consideration       21,617,610 
Purchase of investment securities available for sale   (97,025,115)   (8,139,803)
Proceeds from disposal of investment securities          
Available for sale at maturity, call or paydowns   28,809,936    7,193,758 
Available for sale sold       56,045,175 
Loans made, net of principal collected   (9,890,381)   (126,594,746)
Purchase of bank owned life insurance       (8,500,000)
Proceeds from sale of other real estate owned       632,658 
Change in equity securities   (373,551)   (3,537,299)
Purchase of premises and equipment   (1,290,131)   (951,104)
Proceeds from the sale of premises and equipment   32,599    14,366 
Net cash used in investing activities   (79,736,643)   (62,219,385)
Cash flows from financing activities          
Net increase (decrease) in          
Time deposits   26,284,576    160,427,035 
Other deposits   62,147,883    (147,021,389)
Short term borrowing advances   955,000,000    992,200,000 
Short term borrowing repayments   (961,530,076)   (911,235,807)
Long term borrowings   131,741    131,740 
Proceeds from stock options exercised   48,931    783,615 
Repurchase of stock through stock repurchase program   (1,556,634)    
Cash dividends paid-common stock   (4,088,324)   (2,703,723)
Net cash provided by financing activities   76,438,097    92,581,471 
           
Net increase in cash and cash equivalents   14,505,524    31,284,533 
           
Cash and cash equivalents at beginning of period   44,500,618    35,174,111 
Cash and cash equivalents at end of period  $59,006,142   $66,458,644 

 

 

 

 

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)

 

 

   Six Months Ended June 30,
   2019  2018
Supplemental Disclosure of Cash Flow Information:      
Cash paid during the period for:      
Interest  $15,638,166   $8,146,398 
Income taxes  $3,500,804   $2,705,000 
Supplemental Disclosure of Non-Cash Flow Operating Activities:          
Loans transferred to other real estate owned  $   $1,041,079 
Loans transferred to available for sale - BYBK acquisition  $   $21,643,292 
Initial recognition of right of use asset  $26,395,472   $ 
Initial recognition of right of use liability  $26,692,114   $ 

 

   2019  2018
Fair value of assets and liabilities from acquisition:          
Fair value of assets acquired  $   $650,194,375 
Other intangible assets acquired       80,828,494 
Fair value of liabilities assumed       (587,403,791)
Total merger consideration  $   $143,619,078 

 

 

 

 

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.

 

As previously announced, on July 23, 2019, Old Line Bancshares and Old Line Bank entered into an Agreement and Plan of Merger with Wesbanco, Inc. ("WesBanco") and Wesbanco Bank, Inc., pursuant to which Old Line Bancshares will merge with and into Wesbanco (the “Merger”) and Old Line Bank will merge into Wesbanco Bank. We expect that the Merger will be consummated during the fourth quarter of 2019 or the first quarter of 2020. Please see Note 12 to our consolidated financial statements, “Subsequent Event,” for more information.

 

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

 

The foregoing consolidated financial statements for the periods ended June 30, 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 elected to apply ASU 2016-02 at 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.

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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.

 

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 third quarter in 2019. 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. Previously, entities generally amortized the premium over the contractual life of the security. The 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 was 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, 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 our consolidated financial statements.

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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.

 

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 

 

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Fair Value of Assets Acquired   
Cash and due from banks  $22,590,994 
Investment securities   51,895,757 
Restricted equity securities, at cost   2,339,700 
Loans, net   546,215,988 
Premises and equipment   3,127,963 
Accrued interest receivable   1,714,054 
Accrued taxes receivable   1,912,807 
Deferred income taxes   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 

 

 

 

 

 

 

 

 

 

 

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3.INVESTMENT SECURITIES

 

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

 

      Gross  Gross   
   Amortized  unrealized  unrealized  Estimated
   cost  gains  losses  fair value
June 30, 2019                    
Available for sale                    
U.S. Treasury  $2,989,772   $2,728   $   $2,992,500 
U.S. government agency   83,339,317    1,295,847    (39,552)   84,595,612 
Corporate bonds   18,612,848    363,129        18,975,977 
Foreign bonds   5,500,000    1,912    (148)   5,501,764 
Municipal securities   77,961,751    853,997    (43,212)   78,772,536 
Mortgage backed securities:                    
FHLMC certificates   17,917,050    13,304    (366,766)   17,563,588 
FNMA certificates   61,732,073    120,612    (1,139,590)   60,713,095 
GNMA certificates   27,183,337    27,258    (356,117)   26,854,478 
Total available for sale securities  $295,236,148   $2,678,787   $(1,945,385)  $295,969,550 
                     
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   18,615,768    227,691    (4,231)   18,839,228 
Foreign bonds   3,500,000    98        3,500,098 
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 June 30, 2019 and December 31, 2018, securities with unrealized losses segregated by length of impairment were as follows:

 

   June 30, 2019
   Less than 12 months  12 Months or More  Total
   Fair  Unrealized  Fair  Unrealized  Fair  Unrealized
   value  losses  value  losses  value  losses
U.S. government agency  $3,004,500   $9,858   $4,099,221   $29,694   $7,103,721   $39,552 
Foreign debt securities           499,853    148    499,853    148 
Municipal securities           8,158,964    43,212    8,158,964    43,212 
Mortgage backed securities                              
FHLMC certificates           15,787,840    366,766    15,787,840    366,766 
FNMA certificates           49,200,276    1,139,590    49,200,276    1,139,590 
GNMA certificates   2,355,121    1,509    16,883,262    354,608    19,238,383    356,117 
Total  $5,359,621   $11,367   $94,629,416   $1,934,018   $99,989,037   $1,945,385 

 

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   December 31, 2018
   Less than 12 months  12 Months or More  Total
   Fair  Unrealized  Fair  Unrealized  Fair  Unrealized
   value  losses  value  losses  value  losses
U.S. Treasury  $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 June 30, 2019 and December 31, 2018, we had 82 and 166 investment securities, respectively, in an unrealized loss position for 12 months or more and 2 and 34 securities, respectively, in an unrealized loss position for less than 12 months.  We consider all unrealized losses on securities as of June 30, 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 June 30, 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.

 

Gain on the sale or call of investment securities for the six months ended June 30, 2019 is the result of one callable agency that was called compared to no sales or calls for the comparable six months last year.

 

Contractual maturities and pledged securities at June 30, 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.

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   Available for Sale
   Amortized  Fair
June 30, 2019  cost  value
       
Maturing          
Within one year  $5,989,772   $5,993,075 
Over one to five years   4,566,320    4,581,001 
Over five to ten years   99,090,605    100,378,135 
Over ten years   185,589,451    185,017,339 
Total  $295,236,148   $295,969,550 
Pledged securities  $135,113,089   $133,860,837 

 

4.LOANS

 

Major classifications of loans held for investment are as follows:

 

   June 30, 2019  December 31, 2018
   Legacy (1)  Acquired  Total  Legacy (1)  Acquired  Total
                   
Commercial Real Estate                              
Owner Occupied  $311,984,259   $132,158,619   $444,142,878   $299,266,275   $140,892,706   $440,158,981 
Investment   614,696,965    182,790,150    797,487,115    592,529,807    195,883,002    788,412,809 
Hospitality   196,356,242    19,069,944    215,426,186    172,189,046    13,134,019    185,323,065 
Land and A&D   70,866,193    7,107,755    77,973,948    71,908,761    21,760,867    93,669,628 
Residential Real Estate                              
First Lien-Investment   120,411,103    43,992,312    164,403,415    104,084,050    48,483,340    152,567,390 
First Lien-Owner Occupied   107,911,628    130,954,430    238,866,058    108,696,078    140,221,589    248,917,667 
Residential Land and A&D   46,826,606    11,146,929    57,973,535    42,639,161    16,828,434    59,467,595 
HELOC and Jr. Liens   22,398,293    36,816,530    59,214,823    20,749,184    41,939,123    62,688,307 
Commercial and Industrial   252,178,329    74,276,267    326,454,596    239,766,662    91,431,724    331,198,386 
Consumer   14,143,513    28,687,040    42,830,553    16,289,147    34,919,111    51,208,258 
Total loans   1,757,773,131    666,999,976    2,424,773,107    1,668,118,171    745,493,915    2,413,612,086 
Allowance for loan losses   (7,417,436)   (472,299)   (7,889,735)   (7,004,839)   (466,184)   (7,471,023)
Deferred loan costs, net   3,553,772        3,553,772    3,086,635        3,086,635 
Net loans  $1,753,909,467   $666,527,677   $2,420,437,144   $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.

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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 $1.53 billion and $1.51 billion, respectively, at June 30, 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%.

 

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

 

At June 30, 2019, we had approximately $215.4 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 $520.5 million and $523.6 million, respectively, at June 30, 2019 and December 31, 2018. 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.

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

 

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

 

Under our loan approval policy, all residential real estate loans approved must comply with federal regulations. Generally, we will make residential mortgage loans in amounts up to the limits established by Fannie Mae and Freddie Mac for secondary market resale purposes. Currently this amount for single-family residential loans varies from $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.

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

 

Concentrations of Credit

 

Most of our lending activity occurs within the state of Maryland within the suburban Washington, D.C. and Baltimore market areas in 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 June 30, 2019 and December 31, 2018.

 

Age Analysis of Past Due Loans

 

   Age Analysis of Past Due Loans
   June 30, 2019  December 31, 2018
   Legacy  Acquired  Total  Legacy  Acquired  Total
Current  $1,749,706,045   $656,854,043   $2,406,560,088   $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   1,705,819    1,299    1,707,118    3,990,558        3,990,558 
Investment   65,577    2,027,487    2,093,064    1,729,404    3,849,944    5,579,348 
Land and A&D                        
Residential Real Estate:                              
First Lien-Investment   177,569    974,947    1,152,516    179,701    896,227    1,075,928 
First Lien-Owner Occupied   92,141    2,215,087    2,307,228    94,178    3,062,084    3,156,262 
Land and A&D   456,850    71,178    528,028    883,460    413,191    1,296,651 
HELOC and Jr. Liens   457,063    497,461    954,524    119,924    790,989    910,913 
Commercial and Industrial   513,877    267,730    781,607    670,318    1,444,347    2,114,665 
Consumer   234,574    660,726    895,300    320,071    1,338,813    1,658,884 
Total 30 - 89 days past due   3,703,470    6,715,915    10,419,385    7,987,614    11,795,595    19,783,209 
90 or more days past due                              
Commercial Real Estate:                              
Owner Occupied   2,687,996         2,687,996             
Investment                   139,247    139,247 
Residential Real Estate:                              
First Lien-Owner Occupied                   103,365    103,365 
Commercial and Industrial   94,207    9,102    103,309             
Consumer                   54    54 
Total 90 or more days past due   2,782,203    9,102    2,791,305        242,666    242,666 
Total accruing past due loans   6,485,673    6,725,017    13,210,690    7,987,614    12,038,261    20,025,875 
Recorded Investment Non-accruing loans:                              
Commercial Real Estate:                              
Owner Occupied       247,624    247,624        182,261    182,261 
Investment   576,671    52,121    628,792        51,070    51,070 
Land and A&D       9,525    9,525        45,000    45,000 
Residential Real Estate:                              
First Lien-Investment   192,501    310,629    503,130    192,501    292,758    485,259 
First Lien-Owner Occupied   249,298    1,734,557    1,983,855    262,194    2,027,974    2,290,168 
Land and A&D   284,179    197,199    481,378    277,704    201,737    479,441 
HELOC and Jr. Liens       674,106    674,106        690,732    690,732 
Commercial and Industrial   241,972    45,319    287,291    191,388    45,269    236,657 
Consumer   36,792    149,836    186,628    15,658    180,846    196,504 
Non-accruing past due loans:   1,581,413    3,420,916    5,002,329    939,445    3,717,647    4,657,092 
Total Loans  $1,757,773,131   $666,999,976   $2,424,773,107   $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 June 30, 2019 and December 31, 2018.

19

 

 

 

   Impaired Loans            
            Three months June 30, 2019  Six months June 30, 2019
   Unpaid        Average  Interest  Average  Interest
   Principal  Recorded  Related  Recorded  Income  Recorded  Income
   Balance  Investment  Allowance  Investment  Recognized  Investment  Recognized
Legacy                     
With no related allowance recorded:                                   
Commercial Real Estate:                                   
Owner Occupied  $1,666,212   $1,666,212   $   $1,496,241   $14,882    1,502,767   $25,281 
Investment   1,711,553    1,711,553        1,894,290    12,408    1,900,804    36,333 
Land and A&D                            
Residential Real Estate:                                   
First Lien-Investment                            
First Lien-Owner Occupied   249,298    249,298        276,661    3,801    278,297    5,930 
Commercial and Industrial   333,399    333,399        336,972    2,967    341,295    5,074 
Consumer   25,767    25,767        26,571    516    27,546    1,105 
With an allowance recorded:                                   
Commercial Real Estate:                                   
Residential Real Estate:                                   
First Lien-Investment   192,501    192,501    39,420    192,501        192,501     
First Lien-Owner Occupied                            
Land and A&D   284,179    284,179    25,000    284,179        283,400     
Commercial and Industrial   241,972    241,972    76,307    242,610        242,610     
Consumer   11,025    11,025    1,328    12,098    324    12,439    770 
Total legacy impaired   4,715,906    4,715,906    142,055    4,762,123    34,898    4,781,659    74,493 
Acquired(1)                                   
With no related allowance recorded:                                   
Commercial Real Estate:                                   
Owner Occupied   267,823    267,823        267,594        267,305     
Investment                            
Land and A&D                            
Residential Real Estate:                                   
First Lien-Owner Occupied   1,838,165    1,824,112        1,961,652    59,476    1,970,060    80,372 
First Lien-Investment                            
Land and A&D   53,739    53,739        60,178    2,156    60,733    3,217 
HELOC and Jr. Lien   441,957    441,957        462,039    8,869    469,406    15,360 
Commercial   65,526    65,526        65,897    838    66,477    1,681 
Consumer   100,194    100,194        120,703    1,070    130,286    3,009 
With an allowance recorded:                                   
Commercial Real Estate:                                   
Investment   72,408    72,408    14,340    163,876        163,876     
Land and A&D   293,376    9,525    9,525    327,682        328,263     
Residential Real Estate:                                   
Land and A&D   154,297    154,297    86,297    161,153        151,153     
First Lien-Investment   315,751    315,751    85,653    323,147        319,485     
First Lien-Owner Occupied   322,513    322,513    136,374    316,734         319,607      
HELOC and Jr. Lien   242,580    242,580    81,435    240,932         244,163      
Commercial and Industrial   48,750    48,750    48,750    48,750        48,750     
Consumer   75,726    75,726    9,925    88,893    991    93,710    3,195 
Total acquired impaired   4,292,805    3,994,901    472,299    4,609,230    73,400    4,633,274    106,834 
Total impaired  $9,008,711   $8,710,807   $614,354   $9,371,353   $108,298    9,414,933   $181,327 

 

 

(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        Average  Interest
   Principal  Recorded  Related  Recorded  Income
   Balance  Investment  Allowance  Investment  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 June 30, 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 or six months ended June 30, 2019. We had no loans that were modified as a TDR that defaulted during the three or six-month periods ended June 30, 2019 or 2018.

 

The following table includes the recorded investment in and number of modifications of TDRs for the three and six months ended June 30, 2019 and 2018. We report the recorded investment in loans prior to a modification and also the recorded investment in the loans after the loans were restructured. Reductions in the recorded investment are primarily due to the partial charge-off of the principal balance prior to the modification. We had no loans that were modified as a TDR that defaulted within three months of the modification date during the three- or six-month periods ended June 30, 2019 and 2018.

 

21

 

   Loans Modified as a TDR for the three months ended
   June 30, 2019  June 30, 2018
      Pre-  Post     Pre-  Post
      Modification  Modification     Modification  Modification
      Outstanding  Outstanding     Outstanding  Outstanding
Troubled Debt Restructurings—  # of  Recorded  Recorded  # of  Recorded  Recorded
(Dollars in thousands)  Contracts  Investment  Investment  Contracts  Investment  Investment
Legacy                  
Residential Real Estate Owner Occupied               1    201,449    28,556 
Total legacy TDRs      $   $        $201,449   $28,556 

 

   Loans Modified as a TDR for the six months ended
   June 30, 2019  June 30, 2018
      Pre-  Post     Pre-  Post
      Modification  Modification     Modification  Modification
      Outstanding  Outstanding     Outstanding  Outstanding
Troubled Debt Restructurings—  # of  Recorded  Recorded  # of  Recorded  Recorded
(Dollars in thousands)  Contracts  Investment  Investment  Contracts  Investment  Investment
Legacy                              
Residential Real Estate Owner Occupied               1    201,449    28,556 
Total legacy TDRs      $   $    1   $201,449   $28,556 

 

Acquired impaired loans

 

The following table documents changes in the accretable (premium) discount on acquired impaired loans during the six months ended June 30, 2019 and 2018, along with the outstanding balances and related carrying amounts for the beginning and end of those respective periods.

 

   June 30, 2019  June 30, 2018
Balance at beginning of period  $124,090   $115,066 
Additions due to BYBK acquisition       50,984 
Accretion of fair value discounts   (975,109)   (404,846)
Reclassification (to)/from non-accretable discount   938,283    414,317 
Balance at end of period  $87,264   $175,521 

 

   Contractually   
   Required Payments   
   Receivable  Carrying Amount
At June 30, 2019  $9,389,589   $8,236,699 
At December 31, 2018   11,146,165    9,396,862 
At June 30, 2018   19,588,843    15,209,609 
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.

22

 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

23

 

 

The following tables outline the class of loans by risk rating at June 30, 2019 and December 31, 2018:

 

   Account Balance
June 30, 2019  Legacy  Acquired  Total
Risk Rating               
Pass(1 - 5)               
Commercial Real Estate:               
Owner Occupied  $305,688,894   $129,248,568   $434,937,462 
Investment   611,979,200    181,415,246    793,394,446 
Hospitality   196,356,242    19,069,944    215,426,186 
Land and A&D   70,866,193    6,907,857    77,774,050 
Residential Real Estate:               
First Lien-Investment   119,614,236    40,798,402    160,412,638 
First Lien-Owner Occupied   107,603,041    126,314,521    233,917,562 
Land and A&D   44,488,764    10,849,838    55,338,602 
HELOC and Jr. Liens   22,398,293    35,016,034    57,414,327 
Commercial   250,352,071    71,250,229    321,602,300 
Consumer   14,106,721    28,383,452    42,490,173 
    1,743,453,655    649,254,091    2,392,707,746 
Special Mention(6)               
Commercial Real Estate:               
Owner Occupied   412,612    1,275,663    1,688,275 
Investment   1,051,553    926,487    1,978,040 
Land and A&D       190,373    190,373 
Residential Real Estate:               
First Lien-Investment   283,799    1,767,409    2,051,208 
First Lien-Owner Occupied   59,289    1,526,553    1,585,842 
Land and A&D   2,053,663    99,892    2,153,555 
HELOC and Jr. Liens       1,037,107    1,037,107 
Commercial   310,389    2,906,667    3,217,056 
Consumer       124,752    124,752 
    4,171,305    9,854,903    14,026,208 
Substandard(7)               
Commercial Real Estate:               
Owner Occupied   5,882,753    1,634,388    7,517,141 
Investment   1,666,212    448,417    2,114,629 
Land and A&D       9,525    9,525 
Residential Real Estate:               
First Lien-Investment   513,068    1,426,501    1,939,569 
First Lien-Owner Occupied   249,298    3,113,356    3,362,654 
Land and A&D   284,179    197,199    481,378 
HELOC and Jr. Liens       763,389    763,389 
Commercial   1,515,869    119,371    1,635,240 
Consumer   36,792    178,836    215,628 
    10,148,171    7,890,982    18,039,153 
Doubtful(8)            
Loss(9)            
Total  $1,757,773,131   $666,999,976   $2,424,773,107 

24

 

   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- and six-month periods ended June 30, 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.

 

   Commercial  Commercial  Residential      
Three Months Ended June 30, 2019  and Industrial  Real Estate  Real Estate  Consumer  Total
Beginning balance  $1,802,347   $4,857,156   $1,079,483   $69,156   $7,808,142 
Provision for loan losses   (136,873)   24,682    160,509    24,265    72,583 
Recoveries   200    417    43,911    11,344    55,872 
Total   1,665,674    4,882,255    1,283,903    104,765    7,936,597 
Loans charged off               (46,862)   (46,862)
Ending Balance  $1,665,674   $4,882,255   $1,283,903   $57,903   $7,889,735 

 

25

 

 

   Commercial  Commercial  Residential      
Six Months Ended June 30, 2019  and Industrial  Real Estate  Real Estate  Consumer  Total
Beginning balance  $1,562,740   $4,728,694   $1,081,394   $98,195   $7,471,023 
Provision for loan losses   96,089    152,727    156,507    81,435    486,758 
Recoveries   10,953    834    47,030    38,896    97,713 
Total   1,669,782    4,882,255    1,284,931    218,526    8,055,494 
Loans charged off   (4,108)       (1,028)   (160,623)   (165,759)
Ending Balance  $1,665,674   $4,882,255   $1,283,903   $57,903   $7,889,735 
Amount allocated to:                         
Legacy Loans:                         
Individually evaluated for impairment  $76,307   $   $64,420   $1,328   $142,055 
Other loans not individually evaluated   1,540,617    4,858,390    829,724    46,650    7,275,381 
Acquired Loans:                         
Individually evaluated for impairment   48,750    23,865    389,759    9,925    472,299 
Ending balance  $1,665,674   $4,882,255   $1,283,903   $57,903   $7,889,735 

 

   Commercial  Commercial  Residential      
Three Months Ended June 30, 2018  and Industrial  Real Estate  Real Estate  Consumer  Total
Beginning balance  $1,211,958   $4,231,433   $776,298   $37,830   $6,257,519 
Provision for loan losses   465,140    (34,959)   (36,923)   138,999    532,257 
Recoveries   3,350    278    12,079    3,208    18,915 
Total   1,680,448    4,196,752    751,454    180,037    6,808,691 
Loans charged off           (1,824)   (102,290)   (104,114)
Ending Balance  $1,680,448   $4,196,752   $749,630   $77,747   $6,704,577 

 

   Commercial  Commercial  Residential      
Six Months Ended June 30, 2018  and Industrial  Real Estate  Real Estate  Consumer  Total
Beginning balance  $1,262,030   $3,783,735   $844,355   $30,466   $5,920,586 
Provision for loan losses   414,768    412,600    (105,012)   204,797    927,153 
Recoveries   3,650    417    12,111    6,853    23,031 
Total   1,680,448    4,196,752    751,454    242,116    6,870,770 
Loans charged off           (1,824)   (164,369)   (166,193)
Ending Balance  $1,680,448   $4,196,752   $749,630   $77,747   $6,704,577 
Amount allocated to:                         
Legacy Loans:                         
Individually evaluated for impairment  $94,666   $   $76,495   $   $171,161 
Other loans not individually evaluated   1,538,766    4,100,361    584,412    49,608    6,273,147 
Acquired Loans:                         
Individually evaluated for impairment   47,016    96,391    88,723    28,139    260,269 
Ending balance  $1,680,448   $4,196,752   $749,630   $77,747   $6,704,577 

 

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Our recorded investment in loans at June 30, 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:

 

   Commercial  Commercial  Residential      
June 30, 2019  and Industrial  Real Estate  Real Estate  Consumer  Total
Legacy loans:                         
Individually evaluated for impairment with specific reserve  $241,972   $   $476,680   $11,025   $729,677 
Individually evaluated for impairment without specific reserve   333,399    3,377,765    249,298    25,767    3,986,229 
Other loans not individually evaluated   251,602,958    1,190,525,894    296,821,652    14,106,721    1,753,057,225 
Acquired loans:                         
Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition)   48,750    81,933    1,035,141    75,726    1,241,550 
Individually evaluated for impairment without specific reserve (ASC 310-20 at acquisition)   65,526    267,823    2,319,808    100,194    2,753,351 
Individually evaluated for impairment without specific reserve (ASC 310-30 at acquisition)   199,982    3,404,876    4,596,366        8,201,224 
Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition)   73,962,009    337,371,836    214,958,886    28,511,120    654,803,851 
Ending balance  $326,454,596   $1,535,030,127   $520,457,831   $42,830,553   $2,424,773,107 

 

   Commercial  Commercial  Residential      
June 30, 2018  and Industrial  Real Estate  Real Estate  Consumer  Total
Legacy loans:                         
Individually evaluated for impairment with specific reserve  $94,666   $   $1,116,563   $   $1,211,229 
Individually evaluated for impairment without specific reserve   368,654    2,696,286    412,496        3,477,436 
Other loans not individually evaluated   204,668,539    1,087,944,518    228,738,227    17,073,514    1,538,424,798 
Acquired loans:                         
Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition)   69,970    199,297    253,437    28,556    551,260 
Individually evaluated for impairment without specific reserve (ASC 310-20 at acquisition)   147,351    725,944    2,071,530    32,926    2,977,751 
Individually evaluated for impairment without specific reserve (ASC 310-30 at acquisition)   657,508    8,737,493    5,794,810    19,798    15,209,609 
Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition)   101,663,343    388,044,140    258,213,244    42,389,405    790,310,132 
Ending balance  $307,670,031   $1,488,347,678   $496,600,307   $59,544,199   $2,352,162,215 

  

5.OTHER REAL ESTATE OWNED

 

The fair value of other real estate owned was $883 thousand at June 30, 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.

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The following outlines the transactions in OREO during the period.

 

Six Months ended June 30, 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 June 30, 2019 and December 31, 2018, residential foreclosures classified as OREO totaled $234 thousand. We had six loans for an aggregate of $711 thousand secured by residential real estate in process of foreclosure at June 30, 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  Six Months Ended
   June 30,  June 30,
   2019  2018  2019  2018
Weighted average number of shares     17,025,725    16,249,625    17,032,649    14,407,182 
Dilutive average number of shares     17,148,958    16,464,580    17,149,715    14,620,030 

  

7.STOCK-BASED COMPENSATION

 

For the three months ended June 30, 2019 and 2018, we recorded stock-based compensation expense of $368,206 and $280,750, respectively.  For the six months ended June 30, 2019 and 2018, we recorded stock-based compensation expense of $659,921 and $569,310, respectively. At June 30, 2019, there was $2.0 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 June 30, 2019, there were 167,213 shares remaining available for future issuance under the 2010 equity incentive plan. The officers exercised 4,370 options during the six-month period ended June 30, 2019 compared to 53,021 options exercised during the six-month period ended June 30, 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 six months ended June 30, 2019, there were no stock options granted compared to 50,000 stock options granted during the six months ended June 30, 2018. The weighted average grant date fair value of the 2018 stock options is $8.90 and was computed using the Black-Scholes option pricing model under similar assumptions.

 

During the six months ended June 30, 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 June 30, 2019.  At June 30, 2019, there was $5.3 million of total unrecognized compensation cost related to restricted stock awards that we expect to realize over the next 2.5 years. There were 667 restricted shares forfeited during the six-month period ended June 30, 2019 and no restricted shares forfeited during the six-month period ended June 30, 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 and six months ended June 30, 2019 or the year ended December 31, 2018.

 

At June 30, 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 June 30, 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 and our foreign debt securities, which fall into Level 3.

 

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

   At June 30, 2019 (In thousands)
      Quoted Prices in  Other  Significant  Total Changes
      Active Markets for  Observable  Unobservable  in Fair Values
      Identical Assets  Inputs  Inputs  Included in
   Carrying Value  (Level 1)  (Level 2)  (Level 3)  Period Earnings
Available-for-sale:               
Treasury securities  $2,993   $2,993   $   $   $ 
U.S. government agency   84,596        84,596         
Corporate bonds   18,976            18,976     
Foreign debt securities   5,502            5,502      
Municipal securities   78,773        78,773         
FHLMC MBS   17,563        17,563         
FNMA MBS   60,713        60,713         
GNMA MBS   26,854        26,854         
Total recurring assets at fair value  $295,970   $2,993   $268,499   $24,478   $ 

 

 

   At December 31, 2018 (In thousands)
      Quoted Prices in  Other  Significant  Total Changes
      Active Markets for  Observable  Unobservable  in Fair Values
      Identical Assets  Inputs  Inputs  Included in
   Carrying Value  (Level 1)  (Level 2)  (Level 3)  Period Earnings
Available-for-sale:               
Treasury securities  $2,993   $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   (361)
Purchases, issuances, sales and settlements   2,500 
Transfers into or out of level 3    
Balance at June 30, 2019  $24,478 

 

30

 

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 June 30, 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 June 30, 2019 (In thousands)
      Quoted Prices in  Other  Significant
      Active Markets for  Observable  Unobservable
      Identical Assets  Inputs  Inputs
   Carrying Value  (Level 1)  (Level 2)  (Level 3)
Impaired Loans                    
Legacy:  $4,574           $4,574 
Acquired:   3,523            3,523 
Total Impaired Loans   8,097            8,097 
                     
Other real estate owned:                    
Legacy:  $           $ 
Acquired:   883            883 
Total other real estate owned:   883            883 
Total  $8,980   $   $   $8,980 

 

   At December 31, 2018 (In thousands)
      Quoted Prices in  Other  Significant
      Active Markets for  Observable  Unobservable
      Identical Assets  Inputs  Inputs
   Carrying Value  (Level 1)  (Level 2)  (Level 3)
Impaired Loans                    
Legacy:  $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 June 30, 2019, and December 31, 2018, we estimated the fair value of impaired assets using Level 3 inputs to be $9.0 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).

 

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 June 30, 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.

 

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   June 30, 2019 (in thousands)
         Quoted Prices  Significant  Significant
      Total  in Active  Other  Other
   Carrying  Estimated  Markets for  Observable  Unobservable
   Amount  Fair  Identical Assets  Inputs  Inputs
   (000’s)  Value  (Level 1)  (Level 2)  (Level 3)
Assets:               
Cash and cash equivalents  $59,006   $59,006   $59,006   $   $ 
Loans receivable, net   2,420,437    2,425,397            2,425,397 
Loans held for sale   15,443    15,443        15,443     
Equity Securities at cost   11,524    11,524        11,524     
Accrued interest receivable   9,132    9,132        2,113    7,019 
Liabilities:                         
Deposits:                         
Non-interest-bearing   620,754    620,754        620,754     
Interest bearing   1,763,727    1,781,250        1,781,250     
Short term borrowings   221,655    282,142        282,142     
Long term borrowings   38,503    38,503        38,503     
Accrued interest payable   3,040    3,040        3,040     

 

   December 31, 2018 (in thousands)
         Quoted Prices  Significant  Significant
      Total  in Active  Other  Other
   Carrying  Estimated  Markets for  Observable  Unobservable
   Amount  Fair  Identical Assets  Inputs  Inputs
   (000’s)  Value  (Level 1)  (Level 2)  (Level 3)
Assets:                         
Cash and cash equivalents  $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 June 30, 2019, we had $195.0 million outstanding in short term FHLB borrowings, compared to $190.0 million at December 31, 2018. At June 30, 2019 and December 31, 2018, we had no unsecured promissory notes and $26.7 million and $38.2 million, respectively, in secured promissory notes.

 

Securities Sold Under Agreements to Repurchase

 

To support the $26.7 million in repurchase agreements at June 30, 2019, we have provided collateral in the form of investment securities. At June 30, 2019 we have pledged $133.9 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 $26.7 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.

 

Also included in long term borrowings are trust preferred subordinated debentures totaling $4.3 million (net of $2.4 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 $1.3 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.

 

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.

 

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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 operating lease costs expense were as follows:   
    
Three months ended June 30, 2019  $722,232 
Six Months ended June 30, 2019  $1,440,775 

 

Supplemental cash flow information related to leases was as follows:   
    
Three months ended June 30,  2019
    
Operating cash flows from operating leases  $642,017 
      
Right-of-use assets obtained in exchange for lease     
Operating leases  $446,921 
      
Six months ended June 30,     
      
Operating cash flows from operating leases  $1,278,219 
      
Right-of-use assets obtained in exchange for lease     
Operating leases  $890,345 

 

Supplemental balance sheet information related to leases was as follows:   
    
Six months ended June 30, 2019  2019
    
Operating lease right-of-use assets  $26,471,124 
      
Lease liabilities  $26,930,322 
      
Weighted Average Remaining Operating Lease Term In Years   12.5 
      
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  $928,789 
One to three years   3,917,563 
Three to five years   4,127,455 
Thereafter   18,403,169 
Total undiscounted cash flows   27,376,976 
Discount of cash flows   (446,654)
Total lease liability  $26,930,322 

 

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12.SUBSEQUENT EVENT

 

On July 23, 2019, Old Line Bancshares, Old Line Bank, Wesbanco, and Wesbanco Bank, Inc. (“WesBanco Bank”), entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which WesBanco will acquire the Company for consideration of approximately $500 million in stock (based on the closing price of WesBanco common stock on July 22, 2019). The Merger Agreement, which has been approved by the Boards of Directors of both companies and both banks, also provides that Old Line Bank will be merged with and into WesBanco Bank immediately following the completion of the Merger.

 

Consummation of the Merger is subject to certain conditions, including, among others, the receipt of required stockholder and regulatory approvals. Please refer to our Current Report on Form 8-K filed on July 24, 2019, for further information and details relating to the Merger Agreement.

 

We expect that the Merger will be consummated during the fourth quarter of 2019 or the first quarter of 2020.

 

 

 

 

 

 

 

 

 

 

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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 (“Bay Bank”). 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.

 

Proposed Merger with WesBanco, Inc.

 

On July 23, 2019, the Company, Old Line Bank, Wesbanco, Inc. (“WesBanco”), and Wesbanco Bank, Inc. (“WesBanco Bank”), entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which WesBanco will acquire the Company for consideration of approximately $500 million in stock (based on the closing price of WesBanco common stock on July 22, 2019). The Merger Agreement, which has been approved by the Boards of Directors of both companies and both banks, also provides that Old Line Bank will be merged with and into WesBanco Bank immediately following the completion of the Merger.

 

Consummation of the Merger is subject to certain conditions, including, among others, the receipt of required stockholder and regulatory approvals. Please refer to our Current Report on Form 8-K filed on July 24, 2019, for further information and details relating to the Merger Agreement.

 

We expect that the Merger will be consummated during the fourth quarter of 2019 or the first quarter of 2020. References to our expectations, goals, and strategies, and similar statements, in this report with respect to periods that would occur after this time should be understood to be applicable only if the Merger is not consummated.

 

Summary of Recent Performance and Other Activities

 

Net income increased $6.2 million, or 226.95%, to $8.9 million for the three months ended June 30, 2019, compared to $2.7 million for the three-month period ended June 30, 2018. Earnings were $0.52 per basic and diluted common share for the three months ended June 30, 2019, compared to $0.17 per basic and diluted common share for the three months ended June 30, 2018. The increase in net income for the second quarter of 2019 as compared to the same 2018 period is primarily the result of a $6.3 million decrease in non-interest expenses. Net income for the 2018 period included $7.1 million ($6.2 million net of taxes) of merger-related expenses (or $0.38 per basic and $0.37 per diluted common share) in connection with the Company’s acquisition of BYBK in April 2018.

 

Net income was $17.4 million for the six months ended June 30, 2019, compared to $8.8 million for the same period last year, an increase of $8.6 million, or 98.11%. Earnings were $1.02 per basic and diluted common share for the six months ended June 30, 2019, compared to $0.61 per basic and $0.60 per diluted common share for the same period last year. The increase in net income is primarily the result of increases of $5.8 million in net interest income and $1.0 million in non-interest income and a decrease of $3.1 million in non-interest expenses. Included in net income for the 2018 period was $7.1 million ($6.2 million net of taxes, or $0.43 per basic and $0.42 per diluted common share) for merger-related expenses associated with the acquisition of BYBK.

 

The following highlights contain additional financial data and events that have occurred during the three- and six-month periods ended June 30, 2019:

 

Average gross loans increased $166.6 million, or 7.37%, and $430.6 million, or 21.61%, respectively, to $2.4 billion for each of the three- and six-month periods ended June 30, 2019, from $2.3 billion and $2.0 billion, respectively, during the three and six months ended June 30, 2018.

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Loans originated and sold in the secondary market were $69.0 million for the six months ended June 30, 2019 compared to $48.0 million for the same six-month period last year, resulting in a $408 thousand increase in income on marketable loans for the six months ended June 30, 2019.

 

Total yield on interest-earning assets increased to 4.69% for the three months ended June 30, 2019, compared to 4.58% for the same period last year. Total yield on interest-earning assets increased to 4.72% for the six months ended June 30, 2019, compared to 4.55% for the same period last year.

 

Return on average assets (“ROAA”) and return on average equity (“ROAE”) were 1.17% and 9.20%, respectively, for the three months ended June 30, 2019, compared to ROAA and ROAE of 0.39% and 3.14%, respectively, for the second quarter of 2018.

 

ROAA and ROAE were 1.16% and 9.09%, respectively, for the six months ended June 30, 2019, compared to ROAA and ROAE of 0.72% and 6.27%, respectively, for the six months ended June 30, 2018.

 

Total assets increased $125.6 million, or 4.26%, during the six months ended June 30, 2019, primarily due to an increase of $76.3 million in our investment securities available for sale and the addition of $26.5 million for an operating lease right of use asset.

 

Total deposits grew by $88.4 million, or 3.85%, since December 31, 2018.

 

We ended the second quarter of 2019 with a book value of $22.90 per common share and a tangible book value of $16.51 per common share compared to $21.77 and $15.39, respectively, at December 31, 2018.

 

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

 

The following summarizes the highlights of our financial performance for the three- and six-month periods ended June 30, 2019 compared to same periods in 2018 (figures in the table may not match those discussed in the balance of this section due to rounding).

 

   Three months ended June 30,
   (Dollars in thousands)
   2019  2018  $ Change  % Change
             
Net income  $8,912   $2,726   $6,186    226.93 
Interest income   31,703    28,169    3,534    12.55 
Interest expense   8,234    4,860    3,374    69.42 
Net interest income before provision for loan losses   23,469    23,308    161    0.69 
Provision for loan losses   73    532    (459)   (86.28)
Non-interest income   3,258    3,188    70    2.20 
Non-interest expense   14,732    21,077    (6,345)   (30.10)
Average total loans   2,428,048    2,261,479    166,569    7.37 
Average interest earning assets   2,743,916    2,499,766    244,150    9.77 
Average total interest bearing deposits   1,750,122    1,522,250    227,872    14.97 
Average non-interest bearing deposits   597,706    615,780    (18,074)   (2.94)
Net interest margin   3.49%   3.80%        (8.16)
Return on average assets   1.17%   0.39%        200.00 
Return on average equity   9.20%   3.14%        192.99 
Basic earnings per common share  $0.52   $0.17   $0.35    205.88 
Diluted earnings per common share   0.52    0.17    0.35    205.88 

 

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   Six months ended June 30,
   (Dollars in thousands)
   2019  2018  $ Change  % Change
             
Net income  $17,416   $8,791   $8,625    98.11 
Interest income   62,613    49,493    13,120    26.51 
Interest expense   15,834    8,502    7,332    86.24 
Net interest income before provision for loan losses   46,779    40,991    5,788    14.12 
Provision for loan losses   487    927    (440)   (47.46)
Non-interest income   6,021    4,983    1,038    20.83 
Non-interest expense   28,980    32,069    (3,089)   (9.63)
Average total loans   2,423,184    1,992,594    430,590    21.61 
Average interest earning assets   2,710,333    2,224,516    485,817    21.84 
Average total interest bearing deposits   1,745,678    1,362,479    383,199    28.13 
Average non-interest bearing deposits   581,484    537,252    44,232    8.23 
Net interest margin   3.54%   3.78%        (6.35)
Return on average assets   1.16%   0.72%        61.11 
Return on average equity   9.09%   6.27%        44.98 
Basic earnings per common share  $1.02   $0.61   $0.41    67.21 
Diluted earnings per common share   1.02    0.60    0.42    70.00 

 

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.

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Should the pending Merger not be consummated, 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.

 

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 future tariffs 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, however, are that the Federal Reserve Board will cut rates at least once during the remainder of 2019. Given the resulting expectation that interest rates will, therefore, remain at historically low levels during the remainder of 2019, we believe that we can continue to grow total loans during the remainder of 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 the remainder of 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 the remainder of 2019, although there can be no guarantee that this will be the case.

 

We also expect to incur merger-related expenses during the remainder of 2019 as a result of the pending Merger with WesBanco. We also expect that salaries and benefits expenses and occupancy and equipment expenses will continue to be higher for 2019 and going forward generally than they were in 2018 as a result of including the expenses related to the 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 six months ended June 30, 2019.

 

Results of Operations for the Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 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 June 30, 2019 increased $160 thousand or 0.69%, to $23.5 million from $23.3 million for the same period of 2018. As outlined in detail in the Rate/Volume Variance Analysis, this increase was a result of an increase in total interest income, primarily due to an increase in loan interest income resulting from increases in both the average balance of and average yield on our loans, offset almost entirely by an increase in interest expense resulting primarily from an increase in the average interest 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 $3.5 million, or 12.55%, to $31.7 million during the three months ended June 30, 2019 compared to $28.2 million during the three months ended June 30, 2018, primarily as a result of a $2.7 million increase in interest and fees on loans. The increase in interest and fees on loans is the result of a $166.6 million increase in the average balance of our loans, resulting from increases in the average balance of our mortgage and commercial loans, partially offset by a decrease in the average balance of our consumer loans, and a 13 basis point increase in the average yield on our loan portfolio due primarily to higher yields on new mortgage loans. The increase in the average balance of our loans is due primarily to 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 June 30, 2019 contributed a 14 basis point increase in interest income, compared to 18 basis points for the three months ended June 30, 2018.

 

In addition, interest income on our securities portfolio increased $858 thousand, or 49.87%, for the three months ended June 30, 2019 compared to the same period last year as a result of increases in the average balance of and, to a lesser extent, the average yield on, our investment securities. The average balance of our investment portfolio increased $85.1 million, or 36.08%, for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to increases in the average balance of our U.S. government agency securities. The average yield on the investment portfolio increased to 3.46% for the three months ended June 30, 2019 from 3.19% during the three months ended June 30, 2018, primarily due to higher yields on our U.S. government agency securities and our MBS.

 

Total interest expense increased $3.4 million, or 69.42%, to $8.2 million during the three months ended June 30, 2019 from $4.9 million for the same period of 2018, primarily as a result of a 54 basis point increase in the average interest rate paid on our interest bearing liabilities, which increased to 1.62% during the three months ended June 30, 2019, from 1.08% during the three months ended June 30, 2018. This increase was due primarily to higher rates paid on our deposits, primarily on our time deposits but also on our money market and NOW accounts. In addition, the average rate paid on our borrowings increased 56 basis points quarter over quarter, primarily as a result of the higher rate paid on our FHLB borrowings. 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 $229.5 million, or 12.67%, 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 June 30, 2019 from $1.8 billion for the three months ended June 30, 2018, as a result of increases of $227.9 million, or 14.97%, in our average interest bearing deposits and $1.6 million, or 0.57%, in our average borrowings quarter over quarter. The increase in our average interest bearing deposits is primarily due to 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 decreased $18.1 million to $597.7 million for the three months ended June 30, 2019, compared to $615.8 million for the three months ended June 30, 2018.

 

Our net interest margin decreased to 3.49% for the three months ended June 30, 2019 from 3.80% for the three months ended June 30, 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 11 basis points from 4.58% for the quarter ended June 30, 2018 to 4.69% for the quarter ended June 30, 2019.

 

The net interest margin during the 2019 period was also affected by the amount of accretion on acquired loans. Accretion decreased due to a lower amount of early payoffs on acquired loans with credit marks during the three months ended June 30, 2019 compared to the same period of 2018. The fair value accretion/amortization is recorded on pay-downs recognized during the period, which contributed 14 basis points for the three months ended June 30, 2019 compared to 18 basis points for the three months ended June 30, 2018.

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During the three months ended June 30, 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 decreased by $214 thousand for the three months ended June 30, 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.

 

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

 

   Three months ended June 30,
   2019  2018
      % Impact on     % Impact on
   Accretion  Net Interest  Accretion  Net Interest
   Dollars  Margin  Dollars  Margin
Commercial loans  $166,941    0.02%  $209,819    0.03%
Mortgage loans   609,568    0.09    752,461    0.12 
Consumer loans   111,600    0.02    126,575    0.02 
Interest bearing deposits   56,762    0.01    70,178    0.01 
Total accretion  $944,871    0.14%  $1,159,033    0.18%

 

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 June 30, 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.

 

 

 

 

 

 

 

 

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   Average Balances, Interest and Yields
   2019  2018
   Average     Yield/  Average     Yield/
Three months ended June 30,  balance  Interest  Rate  balance  Interest  Rate
Assets:                  
Federal funds sold (1)  $973,846   $3,590    1.48%  $770,785   $2,941    1.53%
Interest bearing deposits (1)   1,910,589    1,073    0.23    8,024,219    5     
Investment securities (1)(2)                              
U.S. Treasury   2,977,909    17,169    2.31    3,539,916    17,792    2.02 
U.S. government agency   90,307,514    796,506    3.54    14,563,328    96,756    2.66 
Corporate bonds   18,613,700    259,054    5.58    14,374,586    202,446    5.65 
Foreign bonds   4,730,769    31,391    2.66    3,500,000    18,671    2.14 
Mortgage backed securities   113,346,613    668,022    2.36    108,223,743    551,896    2.05 
Municipal securities   78,435,736    631,436    3.23    79,749,104    642,160    3.23 
Other equity securities   12,527,457    364,630    11.67    11,904,312    348,742    11.75 
Total investment securities   320,939,698    2,768,208    3.46    235,854,989    1,878,463    3.19 
Loans(1)                              
Commercial   347,962,972    4,099,059    4.73    319,387,611    4,166,121    5.23 
Mortgage real estate   2,035,300,606    24,477,113    4.82    1,878,860,130    21,460,994    4.58 
Consumer   44,784,002    762,141    6.83    63,231,591    1,011,206    6.41 
Total loans   2,428,047,580    29,338,313    4.85    2,261,479,332    26,638,321    4.72 
Allowance for loan losses   7,956,074             6,363,239          
Total loans, net of allowance   2,420,091,506    29,338,313    4.86    2,255,116,093    26,638,321    4.74 
Total interest earning assets(1)   2,743,915,639    32,111,184    4.69    2,499,766,086    28,519,730    4.58 
Non-interest bearing cash   49,567,273              47,014,071           
Goodwill and intangibles   109,119,799              100,901,255           
Premises and equipment   68,532,182              43,592,991           
Other assets   95,371,009              98,152,802           
Total assets(1)   3,066,505,902              2,789,427,205           
Liabilities and Stockholders’ Equity:                              
Interest bearing deposits                              
Savings   210,527,070    90,156    0.17    221,361,029    102,733    0.19 
Money market and NOW   660,325,789    1,252,622    0.76    642,883,631    860,698    0.54 
Time deposits   879,269,276    4,761,034    2.17    658,005,220    2,182,805    1.33 
Total interest bearing deposits   1,750,122,135    6,103,812    1.40    1,522,249,880    3,146,236    0.83 
Borrowed funds   290,305,725    2,130,630    2.94    288,666,185    1,714,250    2.38 
Total interest bearing liabilities   2,040,427,860    8,234,442    1.62    1,810,916,065    4,860,486    1.08 
Non-interest bearing deposits   597,706,343              615,780,315           
    2,638,134,203              2,426,696,380           
Other liabilities   39,663,626              14,570,522           
Stockholders’ equity   388,708,073              348,160,303           
Total liabilities and stockholders’ equity  $3,066,505,902             $2,789,427,205           
Net interest spread(1)              3.08              3.50 
Net interest margin(1)        $23,876,742    3.49%       $23,659,244    3.80%

 

 

 

(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 June 30, 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 June 30,
   2019 compared to 2018
   Variance due to:
   Total  Rate  Volume
          
Interest earning assets:               
Federal funds sold(1)  $649   $(307)  $956 
Interest bearing deposits   1,069    1,075    (6)
Investment Securities(1)               
U.S. Treasury   (623)   3,961    (4,584)
U.S. government agency   699,750    141,111    558,639 
Corporate bonds   56,608    (8,686)   65,294 
Foreign bonds   12,720    9,356    3,364 
Mortgage backed securities   116,126    107,944    8,182 
Municipal securities   (10,724)   (580)   (10,144)
Other   15,887    (6,825)   22,712 
Loans:(1)               
Commercial   (67,062)   (660,493)   593,431 
Mortgage   3,016,119    2,165,800    850,319 
Consumer   (249,065)   159,802    (408,867)
Total interest income (1)   3,591,454    1,912,158    1,679,296 
                
Interest bearing liabilities                
Savings   (12,577)   (10,862)   (1,715)
Money market and NOW   391,924    385,667    6,257 
Time deposits   2,578,229    2,276,394    301,835 
Borrowed funds   416,380    413,895    2,485 
Total interest expense   3,373,956    3,065,094    308,862 
                
Net interest income(1)  $217,498   $(1,152,936)  $1,370,434 

 

 

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

 

Provision for Loan Losses. The provision for loan losses for the three months ended June 30, 2019 was $73 thousand, a decrease of $460 thousand, or 86.36%, compared to $532 thousand for the three months ended June 30, 2018. This decrease was due to the fact that existing reserves were generally adequate to cover the increase in the loan portfolio during the quarter, as well as the fact that some loans for which we had a specific loan reserve at December 31, 2018 were paid off during the three months ended June 30, 2019.

 

Management identified additional probable losses in the loan portfolio and recorded $47 thousand in charge-offs during the three-month period ended June 30, 2019, compared to $104 thousand in charge-offs for the three months ended June 30, 2018. We recognized recoveries of $56 thousand during the three months ended June 30, 2019 compared to recoveries of $19 thousand during the same period of 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 157.72% and 160.42%, at June 30, 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 increased $70 thousand, or 2.19%, to $3.3 million for the three months ended June 30, 2019, from the corresponding period of 2018 amount of $3.2 million.

 

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

 

   Three months ended June 30,      
   2019  2018  $ Change  % Change
Service charges on deposit accounts  $307,572   $318,419   $(10,847)   (3.41)%
Wire transfer fees   28,963    35,179    (6,216)   (17.67)
ATM Income   376,088    369,281    6,807    1.84 
POS sponsorship program   636,756    673,502    (36,746)   (5.46)
Gain on sales or calls of investment securities   15,927        15,927    100.00 
Earnings on bank owned life insurance   524,753    461,056    63,697    13.82 
Gain on disposal of assets   32,599        32,599    100.00 
Write down on stock       (60,998)   60,998    100.00 
Rental income   214,033    199,050    14,983    7.53 
Income on marketable loans   841,843    511,879    329,964    64.46 
Other fees and commissions   279,238    680,683    (401,445)   (58.98)
Total non-interest income  $3,257,772   $3,188,051   $69,721    2.19%

 

Non-interest income increased during the 2019 period primarily as a result of increases in income on marketable loans and earnings on bank owned life insurance as well as the absence of a write down on stock during the 2019 period, partially offset by a decrease in other fees and commissions.

 

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 $330 thousand during the three months ended June 30, 2019, compared to the same period last year due to an increase in gains recorded on the sale of residential mortgage loans 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 $41.7 million during the second quarter of 2019 compared to $28.7 million for the same period last year.

 

Earnings on bank owned life insurance (“BOLI”) increased $64 thousand quarter over quarter due to the $16.3 million of BOLI that we acquired in the BYBK acquisition.

Other fees and commissions, decreased $401 thousand during the three months ended June 30, 2019 compared to the same period last year, primarily due to the receipt of a one-time bonus on our annuity plan during the three months ended June 30, 2018, for which we had no corresponding income for the quarter ended June 30, 2019.

 

Non-interest Expense. Non-interest expense decreased $6.3 million, or 30.11%, for the three months ended June 30, 2019 compared to the three months ended June 30, 2018.

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

 

   Three months ended June 30,      
   2019  2018  $ Change  % Change
Salaries and benefits  $7,600,771   $7,201,335   $399,436    5.55%
Occupancy and equipment   2,396,021    2,242,641    153,380    6.84 
Data processing   760,727    702,182    58,545    8.34 
FDIC insurance and State of Maryland assessments   261,367    320,326    (58,959)   (18.41)
Merger related expenses       7,121,802    (7,121,802)   100.00 
Core deposit premium amortization   649,761    540,736    109,025    20.16 
Loss on sale of other real estate owned       41,956    (41,956)   100.00 
OREO expense   41,833    27,995    13,838    49.43 
Director fees   168,850    196,650    (27,800)   (14.14)
Network services   116,315    95,607    20,708    21.66 
Telephone   234,667    252,482    (17,815)   (7.06)
Other operating   2,501,406    2,333,694    167,712    7.19 
Total non-interest expenses  $14,731,718   $21,077,406   $(6,345,688)   (30.11)%

 

Non-interest expenses decreased quarter over quarter primarily as a result of the lack of merger-related expenses during the 2019 period compared to $7.1 million in merger and integration expenses during the three months ended June 30, 2018, partially offset by increases in salaries and benefits, occupancy and equipment, core deposit premium amortization, and other operating expenses for the three months ended June 30, 2019 compared to the same period of 2018.

 

The $399 thousand increase in salaries and benefits is primarily the result of the inclusion of expenses related to the staff that we acquired in the BYBK merger for the full quarter ended June 30, 2019 compared to approximately two and half months of such expenses during the quarter ended June 30, 2018. The $153 thousand increase in occupancy and equipment expenses is primarily the result of the inclusion of expenses related to the branches that we acquired in the BYBK merger for the full quarter during the second quarter of 2019 and a $75 thousand expense during the quarter 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.

 

Core deposit premium amortization increased $109 thousand quarter over quarter as a result of the higher amortization of premiums resulting from the deposits that we acquired in the BYBK acquisition.

 

Other operating expenses (which includes, for example, office supplies, software expense, marketing and advertising expenses) increased $168 thousand quarter over quarter, primarily as a result of the inclusion of expenses related to the branches and staff that we acquired in the BYBK merger for the full quarter ended June 30, 2019 compared to approximately two and half months of such expenses during the quarter ended June 30, 2018.

 

Income Taxes. We had income tax expense of $3.0 million (25.25% of pre-tax income) for the three months ended June 30, 2019 compared to income tax expense of $2.2 million (44.22% of pre-tax income) for the same period of 2018. The effective tax rate decreased for the 2019 period primarily due to the non-deductible merger expenses we incurred in connection with the BYBK merger during the three months ended June 30, 2018, for which there was no corresponding expense for the three months ended June 30, 2019 and, to a lesser extent, an increase in our tax-exempt earnings for the three months ended June 30, 2019 compared to same period last year.

 

Results of Operations for the Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018.

 

Net interest income before provision for loan losses for the six months ended June 30, 2019 increased $5.8 million, or 14.12%, to $46.8 million from $41.0 million for the same period of 2018. As outlined in detail in the Rate/Volume Variance Analysis, this increase was the result of an increase in total interest income, primarily due to an increase in loan interest income resulting from increases in the average balance of and, to a lesser extent, the average yield on, our loans, partially offset by an increase in interest expense resulting from increases in the average rate on and, to a lesser extent, the average balance of, our interest bearing liabilities, all as discussed further below.

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Total interest income increased $13.1 million, or 26.51%, to $62.6 million during the six months ended June 30, 2019 compared to $49.5 million during the six months ended June 30, 2018, primarily as a result of an $11.8 million increase in interest and fees on loans. The increase in interest and fees on loans is primarily the result of a $430.6 million increase in the average balance of our loans during the six months ended June 30, 2019 compared to the same period of 2018, as a result of both organic growth and the loans acquired in the BYBK acquisition. The average yield on the loan portfolio increased to 4.86% for the six months ended June 30, 2019 from 4.71% during the six months ended June 30, 2018 due primarily to higher yields on new mortgage loans. The fair value accretion/amortization on acquired loans affects interest income, primarily due to payoffs on such acquired loans. Payoffs during the six months ended June 30, 2019 contributed a 14 basis point increase in interest income, as compared to 13 basis points for the six months ended June 30, 2018.

 

A $1.3 million increase in interest earned on investment and other securities also contributed to the increase in total interest income. This increase was the result of increases in the average balance of our investment securities, primarily our U.S. government agency securities and corporate bonds, and, to a lesser extent, an increase in the average yield on our investment securities. The average yield on our investment securities increased 28 basis points for six months ended June 30, 2019 compared to the same period of 2018 primarily as a result of increases in the average rate on our MBS and our U.S. government agency securities.

 

Total interest expense increased $7.3 million, or 86.23%, to $15.8 million during the six months ended June 30, 2019 from $8.5 million for the same period of 2018, as a result of increases in the average rate paid on and, to a lesser extent, the average balance of, our interest bearing liabilities. The average interest rate paid on all interest bearing liabilities increased to 1.58% during the six months ended June 30, 2019 from 1.06% during the six months ended June 30, 2018, due primarily to higher interest rates paid on our time deposits, although the average rate increased on all of our interest bearing liabilities period over period. The fair value accretion recorded on acquired deposits also affects interest expense, however, the benefit from accretion on such deposits was one basis point for both six-month periods ended June 30, 2019 and 2018.

 

The average balance of our interest bearing liabilities increased $400.1 million, or 24.62%, to $2.0 billion for the six months ended June 30, 2019 from $1.6 billion for the six months ended June 30, 2018, as a result of increases of $383.2 million, or 28.13%, in our average interest bearing deposits and $16.9 million, or 6.43%, in our average borrowings period over period. The increase in the average balance of our interest bearing deposits is primarily due to the deposits that we acquired in the BYBK acquisition. The increase in the average balance of our borrowings is primarily due to the use of short-term FHLB advances to fund new loan originations.

 

Average non-interest bearing deposits increased $44.2 million to $581.5 million for the six months ended June 30, 2019, compared to $537.3 million for the six months ended June 30, 2018 as a result of the non-interest bearing deposits that we acquired in the BYBK acquisition and the successful efforts of our commercial loan officers and business development officers in working with loan clients to move their commercial deposits to Old Line Bank.

 

Our net interest margin decreased to 3.54% for the six months ended June 30, 2019 from 3.78% for the six months ended June 30, 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 17 basis points from 4.55% for the six months ended June 30, 2018 to 4.72% for the six months ended June 30, 2019, as well as an increase in non-interest bearing deposits as a source of funding. The net interest margin during 2019 was also positively 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 six months ended June 30, 2019 compared to the same period of 2018. The fair value accretion/amortization is recorded on pay-downs recognized during the period, which contributed 14 basis points for the six months ended June 30, 2019 compared to 13 basis points for the six months ended June 30, 2018.

 

During the six months ended June 30, 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 $456 thousand for the six months ended June 30, 2019, as compared to the same period last year. The higher level of accretion on acquired loans was due to a higher level of early payoffs on acquired loans with credit marks and the higher level of acquired loans with accreting marks.

 

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

 

   Accretion  Net Interest  Accretion  Net Interest
   Dollars  Margin  Dollars  Margin
Commercial loans  $211,374    0.01%  $257,524    0.02%
Mortgage loans   1,287,934    0.10    830,649    0.08 
Consumer loans   308,686    0.02    224,119    0.02 
Interest bearing deposits   111,709    0.01    151,064    0.01 
Total accretion  $1,919,703    0.14%  $1,463,356    0.13%

 

 

 

 

 

 

 

 

 

 

 

 

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Average Balances, Yields and Accretion of Fair Value Adjustments Impact. The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the six months ended June 30, 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
   Average     Yield/  Average     Yield/
Six months ended June 30,  balance  Interest  Rate  balance  Interest  Rate
Assets:                  
Federal funds sold (1)  $950,858   $9,016    1.91%  $483,821   $3,642    1.52%
Interest bearing deposits (1)   1,887,193    2,134    0.27    4,934,127    5     
Investment securities (1)(2)                              
U.S. Treasury   2,990,039    34,405    2.32    3,273,427    28,737    1.77 
U.S. government agency   64,022,088    1,108,989    3.49    13,857,750    183,081    2.66 
Corporate bonds   20,296,759    518,018    5.15    14,506,701    402,914    5.60 
Foreign bonds   2,436,464    52,646    4.36    1,750,000    18,671    2.15 
Mortgage backed securities   111,759,234    1,340,040    2.42    108,866,712    1,126,915    2.09 
Municipal securities   78,729,602    1,268,241    3.25    79,885,506    1,286,572    3.25 
Other equity securities   11,852,426    668,101    11.37    10,533,455    615,398    11.78 
Total investment securities   292,086,612    4,990,440    3.45    232,673,551    3,662,288    3.17 
Loans(1)                              
Commercial   350,086,219    8,168,048    4.70    265,882,609    6,429,313    4.88 
Mortgage real estate   2,026,046,774    48,538,616    4.83    1,666,049,832    38,109,696    4.61 
Consumer   47,051,267    1,681,977    7.21    60,661,770    1,990,108    6.62 
Total loans   2,423,184,260    58,388,641    4.86    1,992,594,211    46,529,117    4.71 
Allowance for loan losses   7,775,775             6,169,474          
Total loans, net of allowance   2,415,408,485    58,388,641    4.87    1,986,424,737    46,529,117    4.72 
Total interest earning assets(1)   2,710,333,148    63,390,231    4.72    2,224,516,236    50,195,052    4.55 
Non-interest bearing cash   47,928,057              41,957,263           
Goodwill and intangibles   109,453,962              66,279,404           
Premises and equipment   56,534,498