UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-50345
Old Line Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Maryland |
|
20-0154352 |
(State or other jurisdiction |
|
(I.R.S. Employer |
of incorporation or organization) |
|
Identification No.) |
1525 Pointer Ridge Place |
|
|
Bowie, Maryland |
|
20716 |
(Address of principal executive offices) |
|
(Zip Code) |
Registrants telephone number, including area code: (301) 430-2500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
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Accelerated filer o |
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|
|
Non-accelerated filer o |
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Smaller reporting company x |
(Do not check if a smaller reporting company) |
|
|
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 July 31, 2013, the registrant had 9,820,217 shares of common stock outstanding.
OLD LINE BANCSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
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Page |
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Number |
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Item 1. |
Financial Statements |
|
|
|
|
|
Consolidated Balance Sheets (Unaudited) as of June 30, 2013 and December 31, 2012 |
3 |
|
|
|
|
4 | |
|
|
|
|
5 | |
|
|
|
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6 | |
|
|
|
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Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2013 and 2012 |
7 |
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|
|
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Notes to Consolidated Financial Statements (Unaudited) |
10 |
|
|
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
39 | |
|
|
|
69 | ||
|
|
|
69 | ||
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|
|
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| |
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69 | ||
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70 | ||
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71 | ||
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72 |
Old Line Bancshares, Inc. & Subsidiaries
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June 30, |
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December 31, |
| ||
|
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(Unaudited) |
|
|
| ||
Assets |
|
|
|
|
| ||
Cash and due from banks |
|
$ |
50,689,336 |
|
$ |
28,332,456 |
|
Interest bearing accounts |
|
30,352 |
|
130,192 |
| ||
Federal funds sold |
|
3,017,257 |
|
228,113 |
| ||
Total cash and cash equivalents |
|
53,736,945 |
|
28,690,761 |
| ||
Investment securities available for sale |
|
184,190,791 |
|
171,541,222 |
| ||
Loans Receivable: |
|
|
|
|
| ||
Held for sale, fair value of $4,937,940 and $0 |
|
4,764,595 |
|
|
| ||
Held for investment (net of allowance for loan losses of $4,237,280 and $3,965,347, respectively) |
|
787,172,298 |
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595,144,928 |
| ||
Equity securities at cost |
|
3,709,490 |
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3,615,444 |
| ||
Premises and equipment |
|
35,313,769 |
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25,133,013 |
| ||
Accrued interest receivable |
|
3,623,274 |
|
2,639,483 |
| ||
Prepaid income taxes |
|
621,176 |
|
|
| ||
Deferred income taxes |
|
23,111,238 |
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7,139,545 |
| ||
Bank owned life insurance |
|
30,135,483 |
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16,869,307 |
| ||
Other real estate owned |
|
5,396,654 |
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3,719,449 |
| ||
Goodwill |
|
6,847,424 |
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633,790 |
| ||
Core deposit intangible |
|
5,749,737 |
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3,691,471 |
| ||
Other assets |
|
2,711,768 |
|
3,038,064 |
| ||
Total assets |
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$ |
1,147,084,642 |
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$ |
861,856,477 |
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Liabilities and Stockholders Equity |
|
|
|
|
| ||
Deposits |
|
|
|
|
| ||
Non-interest bearing |
|
$ |
213,570,493 |
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$ |
188,895,263 |
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Interest bearing |
|
781,968,601 |
|
546,562,555 |
| ||
Total deposits |
|
995,539,094 |
|
735,457,818 |
| ||
Short term borrowings |
|
28,818,101 |
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37,905,467 |
| ||
Long term borrowings |
|
6,142,962 |
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6,192,350 |
| ||
Accrued interest payable |
|
259,847 |
|
311,735 |
| ||
Income taxes payable |
|
|
|
235,323 |
| ||
Accrued pension |
|
4,768,470 |
|
4,615,699 |
| ||
Other liabilities |
|
3,825,204 |
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1,884,924 |
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Total liabilities |
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1,039,353,678 |
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786,603,316 |
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Stockholders equity |
|
|
|
|
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Common stock, par value $0.01 per share; authorized 15,000,000 shares; issued and outstanding 9,820,217 in 2013 and 6,845,432 in 2012 |
|
98,202 |
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68,454 |
| ||
Additional paid-in capital |
|
92,145,572 |
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53,792,015 |
| ||
Retained earnings |
|
19,066,587 |
|
18,531,387 |
| ||
Accumulated other comprehensive income (loss) |
|
(3,946,354 |
) |
2,469,758 |
| ||
Total Old Line Bancshares, Inc. stockholders equity |
|
107,364,007 |
|
74,861,614 |
| ||
Non-controlling interest |
|
366,957 |
|
391,547 |
| ||
Total stockholders equity |
|
107,730,964 |
|
75,253,161 |
| ||
Total liabilities and stockholders equity |
|
$ |
1,147,084,642 |
|
$ |
861,856,477 |
|
The accompanying notes are an integral part of these consolidated financial statements
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Income
(Unaudited)
|
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Three Months Ended |
|
Six Months Ended |
| ||||||||
|
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2013 |
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2012 |
|
2013 |
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2012 |
| ||||
Interest revenue |
|
|
|
|
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|
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Loans, including fees |
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$ |
9,327,905 |
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$ |
8,632,296 |
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$ |
17,159,728 |
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$ |
16,585,131 |
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U.S. treasury securities |
|
427 |
|
2,381 |
|
2,181 |
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4,778 |
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U.S. government agency securities |
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135,925 |
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91,163 |
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218,355 |
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192,597 |
| ||||
Mortgage backed securities |
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329,618 |
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592,725 |
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717,874 |
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1,258,741 |
| ||||
Municipal securities |
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447,841 |
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397,103 |
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917,509 |
|
729,827 |
| ||||
Federal funds sold |
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1,783 |
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1,891 |
|
2,384 |
|
2,962 |
| ||||
Other |
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64,105 |
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46,138 |
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106,649 |
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91,947 |
| ||||
Total interest revenue |
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10,307,604 |
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9,763,697 |
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19,124,680 |
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18,865,983 |
| ||||
Interest expense |
|
|
|
|
|
|
|
|
| ||||
Deposits |
|
964,955 |
|
1,087,200 |
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1,822,094 |
|
2,214,698 |
| ||||
Borrowed funds |
|
139,472 |
|
213,111 |
|
251,959 |
|
425,487 |
| ||||
Total interest expense |
|
1,104,427 |
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1,300,311 |
|
2,074,053 |
|
2,640,185 |
| ||||
Net interest income |
|
9,203,177 |
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8,463,386 |
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17,050,627 |
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16,225,798 |
| ||||
Provision for loan losses |
|
200,000 |
|
375,000 |
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400,000 |
|
750,000 |
| ||||
Net interest income after provision for loan losses |
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9,003,177 |
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8,088,386 |
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16,650,627 |
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15,475,798 |
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Non-interest revenue |
|
|
|
|
|
|
|
|
| ||||
Service charges on deposit accounts |
|
367,674 |
|
328,142 |
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668,415 |
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647,469 |
| ||||
Gain on sales or calls of investment securities |
|
9,659 |
|
282,858 |
|
641,088 |
|
560,028 |
| ||||
Earnings on bank owned life insurance |
|
200,641 |
|
138,496 |
|
333,869 |
|
275,201 |
| ||||
Gain (loss) on disposal of assets |
|
(19,078 |
) |
|
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(104,639 |
) |
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| ||||
Gain on sale of loans |
|
146,565 |
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|
|
146,565 |
|
|
| ||||
Other fees and commissions |
|
447,833 |
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215,089 |
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695,516 |
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392,688 |
| ||||
Total non-interest revenue |
|
1,153,294 |
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964,585 |
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2,380,814 |
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1,875,386 |
| ||||
Non-interest expense |
|
|
|
|
|
|
|
|
| ||||
Salaries and benefits |
|
4,126,567 |
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3,024,815 |
|
7,359,244 |
|
5,833,809 |
| ||||
Occupancy and equipment |
|
1,214,947 |
|
914,576 |
|
2,283,815 |
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1,822,447 |
| ||||
Data processing |
|
329,878 |
|
192,232 |
|
568,935 |
|
416,967 |
| ||||
FDIC insurance and State of Maryland assessments |
|
186,996 |
|
148,921 |
|
342,239 |
|
278,645 |
| ||||
Merger and integration |
|
2,786,350 |
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29,166 |
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3,026,835 |
|
58,333 |
| ||||
Core deposit premium amortization |
|
198,875 |
|
177,582 |
|
376,457 |
|
372,257 |
| ||||
Loss (gain) on sales of other real estate owned |
|
770 |
|
(191,201 |
) |
201,224 |
|
(159,213 |
) | ||||
OREO expense |
|
154,908 |
|
428,248 |
|
469,073 |
|
320,895 |
| ||||
Other operating |
|
1,536,377 |
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1,333,628 |
|
2,987,742 |
|
2,831,988 |
| ||||
Total non-interest expense |
|
10,535,668 |
|
6,057,967 |
|
17,615,564 |
|
11,776,128 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income (loss) before income taxes |
|
(379,197 |
) |
2,995,004 |
|
1,415,877 |
|
5,575,056 |
| ||||
Income tax (benefit) expense |
|
(283,417 |
) |
982,759 |
|
238,305 |
|
1,826,764 |
| ||||
Net income (loss) |
|
(95,780 |
) |
2,012,245 |
|
1,177,572 |
|
3,748,292 |
| ||||
Less: Net loss attributable to the non-controlling interest |
|
(11,495 |
) |
(17,067 |
) |
(24,590 |
) |
(37,014 |
) | ||||
Net income (loss) available to common stockholders |
|
$ |
(84,285 |
) |
$ |
2,029,312 |
|
$ |
1,202,162 |
|
$ |
3,785,306 |
|
|
|
|
|
|
|
|
|
|
| ||||
Basic earnings (loss) per common share |
|
$ |
(0.01 |
) |
$ |
0.30 |
|
$ |
0.16 |
|
$ |
0.55 |
|
Diluted earnings (loss) per common share |
|
$ |
(0.01 |
) |
$ |
0.29 |
|
$ |
0.15 |
|
$ |
0.55 |
|
Dividend per common share |
|
$ |
0.04 |
|
$ |
0.04 |
|
$ |
0.08 |
|
$ |
0.08 |
|
The accompanying notes are an integral part of these consolidated financial statements
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Three Months Ended June 30, |
|
2013 |
|
2012 |
| ||
Net income (loss) available to common stockholders |
|
$ |
(84,285 |
) |
$ |
2,029,312 |
|
|
|
|
|
|
| ||
Other comprehensive income (loss) |
|
|
|
|
| ||
Unrealized gain (loss) on securities available for sale |
|
(8,522,816 |
) |
239,212 |
| ||
Reclassification adjustment for realized gain on securities available for sale included in net income |
|
(9,659 |
) |
(282,858 |
) | ||
Income tax relating to securities available for sale |
|
3,365,635 |
|
17,216 |
| ||
Other comprehensive income (loss) |
|
(5,166,840 |
) |
(26,430 |
) | ||
Total comprehensive income (loss) |
|
$ |
(5,251,126 |
) |
$ |
2,002,882 |
|
Six Months Ended June 30, |
|
2013 |
|
2012 |
| ||
Net income available to common stockholders |
|
$ |
1,202,162 |
|
$ |
3,785,306 |
|
|
|
|
|
|
| ||
Other comprehensive income (loss) |
|
|
|
|
| ||
Unrealized gain (loss) on securities available for sale |
|
(9,954,424 |
) |
387,669 |
| ||
Reclassification adjustment for realized gain on securities available for sale included in net income |
|
(641,088 |
) |
(560,028 |
) | ||
Net loss on pension plan assets |
|
|
|
|
| ||
Settlement effect pension plan assets |
|
|
|
|
| ||
Income tax effect |
|
4,179,400 |
|
67,987 |
| ||
Other comprehensive income (loss) |
|
(6,416,112 |
) |
(104,372 |
) | ||
Total comprehensive income (loss) |
|
$ |
(5,213,950 |
) |
$ |
3,680,934 |
|
The accompanying notes are an integral part of these consolidated financial statements
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statement of Changes in Stockholders Equity
(Unaudited)
|
|
Common stock |
|
Additional |
|
Retained |
|
Accumulated |
|
Non-controlling |
|
Total |
| |||||||
|
|
Shares |
|
Par value |
|
capital |
|
earnings |
|
income (loss) |
|
Interest |
|
Equity |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance, December 31, 2012 |
|
6,845,432 |
|
$ |
68,454 |
|
$ |
53,792,015 |
|
$ |
18,531,387 |
|
$ |
2,469,758 |
|
$ |
391,547 |
|
75,253,161 |
|
Net income attributable to Old Line Bancshares, Inc. |
|
|
|
|
|
|
|
1,202,162 |
|
|
|
|
|
1,202,162 |
| |||||
Unrealized loss on securities available for sale, net of income tax benefit of $4,179,400 |
|
|
|
|
|
|
|
|
|
(6,416,112 |
) |
|
|
(6,416,112 |
) | |||||
Net income attributable to non-controlling interest |
|
|
|
|
|
|
|
|
|
|
|
(24,590 |
) |
(24,590 |
) | |||||
Stock options exercised |
|
58,948 |
|
589 |
|
601,806 |
|
|
|
|
|
|
|
602,395 |
| |||||
Acquisition of WSB Holdings, Inc. |
|
2,909,486 |
|
29,095 |
|
37,617,967 |
|
|
|
|
|
|
|
37,647,062 |
| |||||
Stock based compensation awards |
|
|
|
|
|
133,848 |
|
|
|
|
|
|
|
133,848 |
| |||||
Restricted stock issued |
|
8,382 |
|
84 |
|
(84 |
) |
|
|
|
|
|
|
|
| |||||
Forfeiture of shares |
|
(2,031 |
) |
(20 |
) |
20 |
|
|
|
|
|
|
|
|
| |||||
Common stock cash dividend $0.08 per share |
|
|
|
|
|
|
|
(666,962 |
) |
|
|
|
|
(666,962 |
) | |||||
Balance, June 30, 2013 |
|
9,820,217 |
|
$ |
98,202 |
|
$ |
92,145,572 |
|
$ |
19,066,587 |
|
$ |
(3,946,354 |
) |
$ |
366,957 |
|
107,730,964 |
|
The accompanying notes are an integral part of these consolidated financial statements
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, |
|
2013 |
|
2012 |
| ||
|
|
|
|
|
| ||
Cash flows from operating activities |
|
|
|
|
| ||
Interest received |
|
$ |
19,723,475 |
|
$ |
19,180,324 |
|
Fees and commissions received |
|
1,313,802 |
|
1,086,999 |
| ||
Interest paid |
|
(2,372,357 |
) |
(2,678,029 |
) | ||
Cash paid to suppliers and employees |
|
(12,778,413 |
) |
(10,529,498 |
) | ||
Loans originated for sale |
|
(11,081,088 |
) |
|
| ||
Proceeds from sale of loans originated for sale |
|
10,068,872 |
|
|
| ||
Income taxes paid |
|
(1,423,051 |
) |
(2,017,917 |
) | ||
|
|
3,451,240 |
|
5,041,879 |
| ||
Cash flows from investing activities |
|
|
|
|
| ||
Cash and cash equivalents of acquired bank |
|
38,846,599 |
|
|
| ||
Purchase of investment securities available for sale |
|
(26,127,022 |
) |
(52,521,980 |
) | ||
Proceeds from disposal of investment securities |
|
|
|
|
| ||
Available for sale at maturity or call |
|
22,580,651 |
|
28,093,412 |
| ||
Available for sale sold |
|
60,366,304 |
|
17,582,329 |
| ||
Loans made, net of principal collected |
|
(33,268,492 |
) |
(34,708,551 |
) | ||
Proceeds from sale of other real estate owned |
|
2,512,724 |
|
599,539 |
| ||
Improvements to other real estate owned |
|
|
|
(15,525 |
) | ||
Redemption of equity securities |
|
(3,799 |
) |
66,551 |
| ||
Purchase of premises, equipment and software |
|
(780,485 |
) |
(1,129,715 |
) | ||
|
|
64,126,480 |
|
(42,033,940 |
) | ||
Cash flows from financing activities |
|
|
|
|
| ||
Net increase (decrease) in |
|
|
|
|
| ||
Time deposits |
|
1,204,342 |
|
(7,360,669 |
) | ||
Other deposits |
|
42,682,219 |
|
36,189,237 |
| ||
Short term borrowings |
|
(69,337,934 |
) |
3,282,728 |
| ||
Long term borrowings |
|
(49,388 |
) |
(45,350 |
) | ||
Acquisition cash consideration |
|
(16,966,208 |
) |
|
| ||
Stock options exercised |
|
602,395 |
|
|
| ||
Cash dividends paid-common stock |
|
(666,962 |
) |
(546,280 |
) | ||
|
|
(42,531,536 |
) |
31,519,666 |
| ||
|
|
|
|
|
| ||
Net increase (decrease) in cash and cash equivalents |
|
25,046,184 |
|
(5,472,395 |
) | ||
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of period |
|
28,690,761 |
|
43,636,724 |
| ||
Cash and cash equivalents at end of period |
|
$ |
53,736,945 |
|
$ |
38,164,329 |
|
The accompanying notes are an integral part of these consolidated financial statements
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, |
|
2013 |
|
2012 |
| ||
|
|
|
|
|
| ||
Reconciliation of net income to net cash provided by operating activities |
|
|
|
|
| ||
Net income |
|
$ |
1,177,572 |
|
$ |
3,748,292 |
|
|
|
|
|
|
| ||
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
| ||
|
|
|
|
|
| ||
Depreciation and amortization |
|
874,143 |
|
590,734 |
| ||
Provision for loan losses |
|
400,000 |
|
750,000 |
| ||
Change in deferred loan fees net of costs |
|
45,314 |
|
(81,836 |
) | ||
(Gain)/loss on sales or calls of securities |
|
(641,088 |
) |
(560,028 |
) | ||
Amortization of premiums and discounts |
|
650,859 |
|
539,758 |
| ||
Change in loans held for sale |
|
(1,012,216 |
) |
|
| ||
Gain on the sale of loans |
|
(146,565 |
) |
|
| ||
(Gain)/loss on sales of other real estate owned |
|
201,224 |
|
(159,213 |
) | ||
Write down of other real estate owned |
|
66,600 |
|
281,000 |
| ||
(Gain)/loss on sale of fixed assets |
|
104,639 |
|
(9,365 |
) | ||
Amortization of intangible |
|
376,457 |
|
372,257 |
| ||
Deferred income taxes |
|
(328,247 |
) |
(44,099 |
) | ||
Stock based compensation awards |
|
133,848 |
|
85,860 |
| ||
Increase (decrease) in |
|
|
|
|
| ||
Accrued interest payable |
|
(298,304 |
) |
(37,844 |
) | ||
Income tax payable |
|
(235,323 |
) |
(147,054 |
) | ||
Accrued pension |
|
152,771 |
|
137,597 |
| ||
Other liabilities |
|
(1,157,515 |
) |
(80,047 |
) | ||
Decrease (increase) in |
|
|
|
|
| ||
Accrued interest receivable |
|
(97,378 |
) |
(143,581 |
) | ||
Bank owned life insurance |
|
(279,359 |
) |
(228,359 |
) | ||
Prepaid income taxes |
|
(621,176 |
) |
|
| ||
Other assets |
|
4,084,984 |
|
27,806 |
| ||
|
|
$ |
3,451,240 |
|
$ |
5,041,878 |
|
The accompanying notes are an integral part of these consolidated financial statements
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ending June 30, |
|
2013 |
|
2012 |
| ||
|
|
|
|
|
| ||
Fair value of assets and liabilities from acquisition: |
|
|
|
|
| ||
Cash and due from banks |
|
$ |
21,880,391 |
|
$ |
|
|
Investment securities available for sale |
|
80,223,819 |
|
|
| ||
Loans, net of deferred fees and costs |
|
163,043,586 |
|
|
| ||
Premises and equipment |
|
10,379,053 |
|
|
| ||
Accrued interest receivable |
|
886,413 |
|
|
| ||
Deferred income taxes |
|
11,405,258 |
|
|
| ||
Bank owned life insurance |
|
12,986,817 |
|
|
| ||
Other real estate owned |
|
4,224,172 |
|
|
| ||
Core deposit intangible |
|
2,434,723 |
|
|
| ||
Other assets |
|
3,758,688 |
|
|
| ||
Deposits |
|
(216,194,715 |
) |
|
| ||
Long term borrowings |
|
(60,250,568 |
) |
|
| ||
Accrued interest payable |
|
(246,416 |
) |
|
| ||
Other liabilities |
|
(2,979,727 |
) |
|
| ||
Common stock issued in acquisition |
|
(37,765,128 |
) |
|
| ||
Purchase price in excess of net assets acquired (Goodwill) |
|
$ |
(6,213,634 |
) |
$ |
|
|
Supplemental disclosure of noncash activities: |
|
|
|
|
|
|
|
Transfer from loans to other real estate owned |
|
$ |
233,580 |
|
$ |
191,921 |
|
The accompanying notes are an integral part of these consolidated financial statements
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 (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, Calvert, Charles, Prince Georges, and St. Marys counties in Maryland and surrounding areas.
Basis of Presentation and Consolidation-The accompanying consolidated financial statements include the activity of Old Line Bancshares and its wholly owned subsidiary, Old Line Bank, and its majority owned subsidiary Pointer Ridge Office Investments, LLC (Pointer Ridge), a real estate investment company. We have eliminated all significant intercompany transactions and balances.
We report the non-controlling interests in Pointer Ridge separately in the consolidated balance sheet. We report the income of Pointer Ridge attributable to Old Line Bancshares on the consolidated statement of income.
The foregoing consolidated financial statements for the periods ended June 30, 2013 and 2012 are unaudited; however, in the opinion of management we have included all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of the results of the interim period. We derived the balances as of December 31, 2012 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, 2012. The Company adopted one new critical accounting policy during the period ended June 30, 2013 as follows:
Business Combinations and Acquired Loan Accounting. Accounting principles generally accepted in the United States (US GAAP) requires that the acquisition method of accounting, formerly referred to as purchase method, be used for all business combinations and that an acquirer be identified for each business combination. Under US GAAP, the acquirer is the entity that obtains control of one or more businesses in the business combination, and the acquisition date is the date the acquirer achieves control. US GAAP requires that the acquirer recognize the fair value of assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date.
Acquired loans are recorded at fair value at the date of acquisition. The fair values of loans with evidence of credit deterioration (impaired loans) are recorded net of a non-accretable difference and, if appropriate, an accretable yield. The difference between contractually required principal and interest payments at acquisition and the cash flows expected to be collected at acquisition is the non-accretable difference, which is included in the carrying amount of acquired loans. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent significant increases in cash flows result in a reversal of the provision for loan losses to the extent of prior provisions, or a reclassification of the difference from non-accretable to accretable with a positive impact on the accretion of interest income in future periods. Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is reasonable expectation about the amount and timing of such cash flows.
Performing loans acquired are accounted for using the contractual cash flows method of recognizing discount accretion based on the acquired loans contractual cash flows. Purchased performing loans are recorded at fair value. Credit losses on acquired performing loans are estimated based on analysis of the performing portfolio. Such estimated credit losses are recorded as an acquisition fair value adjustment and are accreted as an adjustment to yield over the estimated lives of the loans. Effective October 1, 2009, as a result of the adoption of new accounting guidance, there is no allowance for loan losses established at the acquisition date for purchased performing loans. A provision for loan losses is recorded for any further deterioration in these loans subsequent to the acquisition.
The accounting and reporting policies of Old Line Bancshares conform to accounting principles generally accepted in the United States of America.
Reclassifications-We have made certain reclassifications to the 2012 financial presentation to conform to the 2013 presentation. These reclassifications did not change net income or stockholders equity.
2. POINTER RIDGE OFFICE INVESTMENT, LLC
On November 17, 2008, we purchased Chesapeake Custom Homes, L.L.C.s 12.5% membership interest in Pointer Ridge. The effective date of the purchase was November 1, 2008. As a result of this purchase, we own 62.5% of Pointer Ridge and we have consolidated its results of operations from the date of acquisition.
The following table summarizes the condensed Balance Sheets and Statements of Income information for Pointer Ridge.
Pointer Ridge Office Investment, LLC
|
|
June 30, |
|
December 31, |
| ||
Balance Sheets |
|
2013 |
|
2012 |
| ||
|
|
|
|
|
| ||
Current assets |
|
$ |
287,784 |
|
$ |
313,165 |
|
Non-current assets |
|
6,855,288 |
|
6,938,990 |
| ||
Liabilities |
|
6,164,519 |
|
6,208,029 |
| ||
Equity |
|
978,553 |
|
1,044,126 |
| ||
2. POINTER RIDGE OFFICE INVESTMENT, LLC
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
June 30, |
|
June 30, |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
Statements of Income |
|
|
|
|
|
|
|
|
| ||||
Revenue |
|
$ |
222,022 |
|
$ |
205,518 |
|
$ |
446,390 |
|
$ |
411,254 |
|
Expenses |
|
252,676 |
|
251,030 |
|
511,963 |
|
509,959 |
| ||||
Net loss |
|
$ |
(30,654 |
) |
$ |
(45,512 |
) |
$ |
(65,573 |
) |
$ |
(98,705 |
) |
3. ACQUISITION OF WSB HOLDINGS, INC.
Acquisition of WSB Holdings, Inc.
On May 10, 2013, Old Line Bancshares acquired WSB Holdings, Inc. (WSB Holdings), the parent company of The Washington Savings Bank, F.S.B. (WSB). We converted each share of common stock of WSB Holdings into the right to receive, at the holders election, $6.0743 in cash or 0.557 shares of Old Line Bancshares common stock. We paid cash for any fractional shares of Old Line Bancshares common stock and aggregate cash consideration of $17.0 million. The total merger consideration was $54.7 million.
In connection with the acquisition, WSB was merged with and into Old Line Bank, with Old Line Bank the surviving bank.
Accounting principles generally accepted in the United States (US GAAP) requires that the acquisition method of accounting, formerly referred to as purchase method, be used for all business combinations and that an acquirer be identified for each business combination. Under US GAAP, the acquirer is the entity that obtains control of one or more businesses in the business combination, and the acquisition date is the date the acquirer achieves control. US GAAP requires that the acquirer recognize the fair value of assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date.
Old Line Bancshares acquired the assets and liabilities of WSB Holdings on May 10, 2013. The acquired assets and assumed liabilities of WSB were measured at estimated fair value. Management made significant estimates and exercised significant judgment in accounting for the acquisition of WSB Holdings. 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 values for loans. Other real estate acquired through foreclosure was valued based upon pending sales contracts and appraised values, adjusted for current market conditions. Premises and equipment was valued based on recent appraised values. Management used quoted or current market prices to determine the fair value of investment securities, and long-term borrowings that were assumed from WSB Holdings.
The statement of net assets acquired and the resulting acquisition date goodwill recorded is presented in the following table. As explained in the explanatory notes that accompany the following table, the purchased assets, assumed liabilities and identifiable intangible assets were recorded at the acquisition date fair value.
3. ACQUISITION OF WSB HOLDINGS, INC. (continued)
|
|
|
|
|
|
As Recorded by |
| |||
|
|
As Recorded by |
|
Fair Value |
|
Old Line |
| |||
|
|
WSB Holdings, Inc |
|
Adjustments |
|
Bancshares, Inc. |
| |||
Assets |
|
|
|
|
|
|
| |||
Cash and due from banks |
|
$ |
5,576,699 |
|
$ |
|
|
$ |
5,576,699 |
|
Federal funds sold |
|
33,269,900 |
|
(16,966,208 |
) |
16,303,692 |
| |||
Total cash and cash equivalents |
|
38,846,599 |
|
(16,966,208 |
) |
21,880,391 |
| |||
|
|
|
|
|
|
|
| |||
Investment securities available for sale |
|
80,325,473 |
|
(101,654 |
)(a) |
80,223,819 |
| |||
Loans, net of deferred fees and costs |
|
177,204,282 |
|
(14,160,696 |
)(b) |
163,043,586 |
| |||
Allowance for loan losses |
|
(2,767,274 |
) |
2,767,274 |
(b) |
|
| |||
Premises and equipment |
|
4,705,902 |
|
5,673,151 |
(c) |
10,379,053 |
| |||
Accrued interest receivable |
|
886,413 |
|
|
|
886,413 |
| |||
Deferred income taxes |
|
7,436,616 |
|
3,968,642 |
(d) |
11,405,258 |
| |||
Bank owned life insurance |
|
12,986,817 |
|
|
|
12,986,817 |
| |||
Other real estate owned |
|
5,225,958 |
|
(1,001,786 |
)(e) |
4,224,172 |
| |||
Core deposit intangible |
|
|
|
2,434,723 |
(f) |
2,434,723 |
| |||
Other assets |
|
4,326,538 |
|
(567,850 |
)(g) |
3,758,688 |
| |||
Total assets |
|
$ |
329,177,324 |
|
$ |
(17,954,404 |
) |
$ |
311,222,920 |
|
|
|
|
|
|
|
|
| |||
Liabilities and Stockholders Equity |
|
|
|
|
|
|
| |||
Deposits |
|
|
|
|
|
|
| |||
Non-interest bearing |
|
$ |
10,863,874 |
|
$ |
|
|
$ |
10,863,874 |
|
Interest bearing |
|
204,375,389 |
|
955,452 |
(h) |
205,330,841 |
| |||
Total deposits |
|
215,239,263 |
|
955,452 |
|
216,194,715 |
| |||
Long term borrowings |
|
56,000,000 |
|
4,250,568 |
(i) |
60,250,568 |
| |||
Accrued interest payable |
|
246,416 |
|
|
|
246,416 |
| |||
Other liabilities |
|
2,979,727 |
|
|
|
2,979,727 |
| |||
Total liabilities |
|
$ |
274,465,406 |
|
$ |
5,206,020 |
|
$ |
279,671,426 |
|
|
|
|
|
|
|
|
| |||
Net identifiable assets acquired over (under) liabilities assumed |
|
54,711,918 |
|
(23,160,424 |
) |
31,551,494 |
| |||
Goodwill |
|
|
|
6,213,634 |
|
6,213,634 |
| |||
Net assets acquired over liabilities assumed |
|
54,711,918 |
|
(16,946,790 |
) |
37,765,128 |
| |||
|
|
|
|
|
|
|
| |||
Purchase Price Consideration-Common Stock |
|
|
|
|
|
|
| |||
WSB Holdings shares outstanding exchanged for stock |
|
|
|
5,223,633 |
|
|
| |||
Exchange ratio |
|
|
|
0.557 |
|
|
| |||
Old Line Bancshares shares issued to WSB Holdings stockholders |
|
|
|
2,909,486 |
|
|
| |||
Purchase price per WSB Holdings common share |
|
|
|
$ |
6.0743 |
|
|
| ||
Cash consideration |
|
|
|
$ |
16,966,208 |
|
|
| ||
Purchase price assigned to shares exchanged for stock |
|
|
|
$ |
37,765,128 |
|
|
|
Explanation of fair value adjustments
(a) Adjustment reflects marking the available for sale portfolio to fair value as of the acquisition date.
(b) Adjustment reflects the fair value adjustments based on Old Line Bancshares evaluation of the acquired loan portfolio and excludes the allowance for losses recorded by WSB Holdings.
3. ACQUISITION OF WSB HOLDINGS, INC. (continued)
(c) Adjustment reflects the fair value adjustments based on Old Line Bancshares evaluation of the acquired premises and equipment.
(d) Adjustment to record deferred tax asset related to fair value adjustments at 39.45% income tax rate.
(e) Adjustment reflects the fair value adjustments to other real estate owned based on Old Line Bancshares evaluation of the acquired other real estate owned portfolio.
(f) Adjustment reflects the recording of the core deposits intangible on the acquired deposit accounts.
(g) Adjustment reflects the impairement of certain WSB Holdings prepaid and deferred accounts.
(h) Adjustment arises since the rates on interest-bearing deposits are higher than rates available on similar deposits as of the acquisition date.
(i) Adjustment reflects the fair value of WSB Holdings borrowings acquired on acquisition date and is related to the FHLB penalty incurred subsequent to the acquisition date in connection with the repayment of all of WSBs FHLB advances by Old Line Bancshares.
Pro Forma Results
The following schedule includes consolidated statements of income data for the unaudited pro forma results for the periods ended June 30, 2013 and 2012 as if the WSB Holdings acquisition had occurred as of the beginning of the periods presented.
|
|
Six Months Ended |
| ||||
|
|
2013 |
|
2012 |
| ||
Net interest income |
|
$ |
20,039 |
|
$ |
25,692 |
|
Other non-interest revenue |
|
3,473 |
|
3,889 |
| ||
Total revenue |
|
23,512 |
|
29,581 |
| ||
Provision expense |
|
400 |
|
200 |
| ||
Other non-interest expense |
|
20,148 |
|
21,857 |
| ||
Income before income taxes |
|
2,964 |
|
7,524 |
| ||
Income tax expense |
|
1,140 |
|
4,631 |
| ||
Net income |
|
$ |
1,824 |
|
$ |
2,893 |
|
Basic earnings per share |
|
0.19 |
|
0.48 |
| ||
Diluted earnings per share |
|
0.19 |
|
0.47 |
|
We have not included any provision for loan losses during the periods for loans acquired from WSB. In accordance with accounting for business combinations, we included the credit losses evident in the loans in the determination of the fair value of loans at the date of acquisition and eliminated the allowance for loan losses maintained by WSB at acquisition date.
We have presented the pro forma financial information for illustrative purposes only and it is not necessarily indicative of the financial results of the combined companies if we actually had completed the acquisition at the beginning of the periods presented, nor does it indicate future results for any other interim or full year period. Pro forma basic and diluted earnings per common share were calculated using Old Line Bancshares actual weighted average shares outstanding for the periods presented, plus the incremental shares issued, assuming the acquisition occurred at the beginning of the periods presented.
4. INVESTMENT SECURITIES
Presented below is a summary of the amortized cost and estimated fair value of securities.
|
|
Amortized |
|
Gross |
|
Gross |
|
Estimated |
| ||||
June 30, 2013 |
|
|
|
|
|
|
|
|
| ||||
Available for sale |
|
|
|
|
|
|
|
|
| ||||
U. S. treasury |
|
$ |
1,248,969 |
|
$ |
169 |
|
$ |
|
|
$ |
1,249,138 |
|
U.S. government agency |
|
48,356,613 |
|
13,780 |
|
(2,008,890 |
) |
46,361,503 |
| ||||
Municipal securities |
|
62,124,098 |
|
672,197 |
|
(3,674,068 |
) |
59,122,227 |
| ||||
Mortgage backed securities |
|
79,140,255 |
|
434,632 |
|
(2,116,964 |
) |
77,457,923 |
| ||||
|
|
$ |
190,869,935 |
|
$ |
1,120,778 |
|
$ |
(7,799,922 |
) |
$ |
184,190,791 |
|
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2012 |
|
|
|
|
|
|
|
|
| ||||
Available for sale |
|
|
|
|
|
|
|
|
| ||||
U. S. treasury |
|
$ |
1,249,708 |
|
$ |
1,542 |
|
$ |
|
|
$ |
1,251,250 |
|
U.S. government agency |
|
29,591,994 |
|
110,814 |
|
(27,505 |
) |
29,675,303 |
| ||||
Municipal securities |
|
61,670,324 |
|
2,453,427 |
|
(270,102 |
) |
63,853,649 |
| ||||
Mortgage backed securities |
|
74,963,794 |
|
1,804,783 |
|
(7,557 |
) |
76,761,020 |
| ||||
|
|
$ |
167,475,820 |
|
$ |
4,370,566 |
|
$ |
(305,164 |
) |
$ |
171,541,222 |
|
As of June 30, 2013, securities with unrealized losses segregated by length of impairment were as follows:
|
|
June 30, 2013 |
| ||||||||||||||||
|
|
Less than 12 months |
|
12 Months or More |
|
Total |
| ||||||||||||
(in thousands) |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
| ||||||
Unrealized losses less than 12 months |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. government agency |
|
$ |
42,391,836 |
|
$ |
2,008,890 |
|
$ |
|
|
$ |
|
|
$ |
42,391,836 |
|
$ |
2,008,890 |
|
Municipal securities |
|
40,485,403 |
|
3,662,635 |
|
256,893 |
|
11,433 |
|
40,742,296 |
|
3,674,068 |
| ||||||
Mortgage backed securities |
|
56,450,218 |
|
2,116,964 |
|
|
|
|
|
56,450,218 |
|
2,116,964 |
| ||||||
Total unrealized losses less than 12 months |
|
$ |
139,327,457 |
|
$ |
7,788,489 |
|
$ |
256,893 |
|
$ |
11,433 |
|
$ |
139,584,350 |
|
$ |
7,799,922 |
|
|
|
December 31,2012 |
| ||||||||||||||||
|
|
Less than 12 months |
|
12 Months or More |
|
Total |
| ||||||||||||
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
| ||||||
Unrealized losses less than 12 months |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. government agency |
|
$ |
4,498,200 |
|
$ |
27,505 |
|
$ |
|
|
$ |
|
|
$ |
4,498,200 |
|
$ |
27,505 |
|
Municipal securities |
|
13,470,047 |
|
270,102 |
|
|
|
|
|
13,470,047 |
|
270,102 |
| ||||||
Mortgage backed securities |
|
2,797,011 |
|
7,557 |
|
|
|
|
|
2,797,011 |
|
7,557 |
| ||||||
Total unrealized losses less than 12 months |
|
$ |
20,765,258 |
|
$ |
305,164 |
|
$ |
|
|
$ |
|
|
$ |
20,765,258 |
|
$ |
305,164 |
|
4. INVESTMENT SECURITIES (Continued)
At June 30, 2013 we had 151 securities in an unrealized loss position greater than the 12 months time frame and one security in an unrealized loss position less than the 12 months time frame. At December 31, 2012 we had 35 securities in an unrealized loss position greater than the 12 months time frame and no securities in an unrealized loss position less than the 12 months time frame.
We consider all unrealized losses on securities as of June 30, 2013 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, 2013, 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.
We have recorded gross realized gains for the three month period ending June 30, 2013 of $9,659 compared to $282,858 for the same three month period last year from the sale or call of investment securities. Recorded gross realized gains for the six month period ended June 30, 2013 was $641,088 compared to $560,028 for the same six month period last year. During the six month periods ended June 30, 2013 and 2012, we received $82,946,955 and $45,675,741, respectively, in proceeds from sales, maturities or calls of investment securities.
Contractual maturities and pledged securities at June 30, 2013 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 based on maturity date. However, we receive payments on a monthly basis.
|
|
Available for Sale |
| ||||
June 30, 2013 |
|
Amortized |
|
Fair |
| ||
|
|
|
|
|
| ||
Maturing |
|
|
|
|
| ||
Within one year |
|
$ |
1,248,969 |
|
$ |
1,249,138 |
|
Over one to five years |
|
8,477,600 |
|
8,514,640 |
| ||
Over five to ten years |
|
53,578,460 |
|
51,757,683 |
| ||
Over ten years |
|
127,564,906 |
|
122,669,330 |
| ||
|
|
$ |
190,869,935 |
|
$ |
184,190,791 |
|
Pledged securities |
|
$ |
35,245,738 |
|
$ |
34,839,232 |
|
5. LOANS
Major classifications of loans held for investment are as follows:
|
|
June 30, 2013 |
|
December 31, 2012 |
| ||||||||||||||
Held-for-investment |
|
Legacy (1) |
|
Acquired |
|
Total |
|
Legacy (1) |
|
Acquired |
|
Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial |
|
$ |
290,865,718 |
|
$ |
113,010,469 |
|
$ |
403,876,187 |
|
$ |
279,489,013 |
|
$ |
65,396,469 |
|
$ |
344,885,482 |
|
Construction |
|
60,037,238 |
|
26,363,823 |
|
86,401,061 |
|
48,603,640 |
|
4,174,751 |
|
52,778,391 |
| ||||||
Residential |
|
54,322,852 |
|
121,901,371 |
|
176,224,223 |
|
38,901,489 |
|
52,069,937 |
|
90,971,426 |
| ||||||
Commercial |
|
100,954,682 |
|
11,788,872 |
|
112,743,554 |
|
88,306,302 |
|
10,070,234 |
|
98,376,536 |
| ||||||
Consumer |
|
9,934,591 |
|
1,181,293 |
|
11,115,884 |
|
9,944,466 |
|
1,059,991 |
|
11,004,457 |
| ||||||
|
|
516,115,081 |
|
274,245,828 |
|
790,360,909 |
|
465,244,910 |
|
132,771,382 |
|
598,016,292 |
| ||||||
Allowance for loan losses |
|
(3,845,656 |
) |
(391,624 |
) |
(4,237,280 |
) |
(3,648,723 |
) |
(316,624 |
) |
(3,965,347 |
) | ||||||
Deferred loan costs, net |
|
1,036,040 |
|
12,629 |
|
1,048,669 |
|
1,093,983 |
|
|
|
1,093,983 |
| ||||||
|
|
$ |
513,305,465 |
|
$ |
273,866,833 |
|
$ |
787,172,298 |
|
$ |
462,690,170 |
|
$ |
132,454,758 |
|
$ |
595,144,928 |
|
(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 and of WSB Holdings, we have segmented the portfolio into two components, loans originated by Old Line Bank (legacy) and loans acquired from MB&T and WSB (acquired).
5. LOANS (Continued)
Credit policies and Administration
We have adopted a comprehensive lending policy, which includes stringent underwriting standards for all types of loans. We have designed our underwriting standards to promote a complete banking relationship rather than a transactional relationship. In an effort to manage risk, prior to funding, the loan committee consisting of the Executive Officers and seven members of the Board of Directors must approve by a majority vote all credit decisions in excess of a lending officers lending authority. Management believes that it employs experienced lending officers, secures appropriate collateral and carefully monitors the financial condition of its borrowers and loan concentrations.
In addition to the internal business processes employed in the credit administration area, the 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 firms 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
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 borrowers ability to repay. We attempt to mitigate these risks by carefully underwriting these loans. We also generally require the personal or corporate guarantee(s) of the owners and/or occupant(s) of the property. For loans of this type in excess of $250,000, 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. Many of the loans acquired do not comply with underwriting standards that we maintain. Accordingly, during our due diligence process, we evaluated these loans using our underwriting standards and discounted the book value of these loans. We subsequently incorporated this discounted book value into our initial purchase price.
Management tracks all loans secured by commercial real estate. With the exception of loans to the hospitality industry, the properties secured by commercial real estate are diverse in terms of type. This diversity helps to reduce our exposure to economic events that affect any single market or industry. As a general rule, we avoid financing single purpose properties unless other underwriting factors are present to help mitigate the risk. As previously mentioned, we do have a concentration in the hospitality industry. At June 30, 2013 and December 31, 2012, we had approximately $66.7 million and $61.3 million, respectively, of commercial real estate loans 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.
Real Estate Construction Loans
This segment of our portfolio consists of funds advanced for construction of single family residences, multi-family housing and commercial buildings. These loans generally have short durations, meaning maturities typically of nine 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. All of these loans are concentrated in our primary market area.
Construction lending also entails significant risk. These risks 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 prior to completion of construction. Thus, it is more difficult to accurately evaluate the total loan funds required to complete a project and related loan to value ratios. To mitigate the risks, we generally limit loan amounts to 80% of appraised values and obtain first lien positions on the property. We generally only offer real estate construction financing to experienced builders, commercial entities or individuals who have demonstrated the ability to obtain a permanent loan take-out. 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 borrowers ability to obtain a permanent take-out, the cash flow available to support the debt payments and
5. LOANS (Continued)
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.
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 investment properties. Our residential loan portfolio consists of a diverse client base. Although most of these loans are in our primary 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 borrowers primary or secondary residence with a loan to value not exceeding 85%. Our initial underwriting includes an analysis of the borrowers debt/income ratio which generally may not exceed 40%, collateral value, length of employment and prior credit history. We do not originate any subprime residential real estate loans.
Commercial Business Lending
Our commercial business lending consists of lines of credit, revolving credit facilities, accounts receivable financing, term loans, equipment loans, SBA loans, standby letters of credit and unsecured loans. We originate commercial business 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 generally depend on the success of the business for repayment. 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 borrowers principal owners and monitor the financial condition of the business. For loans in excess of $250,000, monitoring generally includes a review of the borrowers 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. However, these loans are not a focus of our lending activities. As a general guideline, a consumers total debt service should not exceed 40% of his or her gross income. The underwriting standards for consumer loans include a determination of the applicants payment history on other debts and an assessment of his or her ability to meet existing obligations and payments on the proposed loan.
Consumer loans are risky because they 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 borrowers continuing financial stability. If a borrower suffers personal financial difficulties, the consumer may not repay the loan. Also, various federal and state laws, including bankruptcy and insolvency laws, may limit the amount we can recover on such loans.
Concentrations of Credit
Most of our lending activity occurs within the state of Maryland within the suburban Washington D.C. market area in Anne Arundel, Calvert, Charles, Prince Georges and St. Marys counties. The majority of our loan portfolio consists of commercial real estate loans and commercial and industrial loans. As of June 30, 2013 and December 31, 2012, the only industry in which we had a concentration of loans was the hospitality industry, as previously mentioned.
5. LOANS (Continued)
Non-Accrual and Past Due Loans
We consider all 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 acquired non-accrual loans at fair value upon acquisition. We expect to fully collect the carrying value of these loans. Therefore, as provided for under ASC 310-30, we recognize interest income on acquired non-accrual loans through the accretion of the difference between the carrying value of these loans and expected cash flows.
The table below presents an aging analysis of the loan held for investment portfolio at June 30, 2013 and December 31, 2012.
|
|
Age Analysis of Past Due Financing Receivables (Loans) |
| ||||||||||||||||
|
|
June 30, 2013 |
|
December 31, 2012 |
| ||||||||||||||
|
|
Legacy |
|
Acquired |
|
Total |
|
Legacy |
|
Acquired |
|
Total |
| ||||||
Current |
|
$ |
508,473,486 |
|
$ |
255,838,521 |
|
$ |
764,312,007 |
|
$ |
459,073,548 |
|
$ |
127,754,017 |
|
$ |
586,827,565 |
|
Accruing past due loans: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
30-59 days past due |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Real estate |
|
795,019 |
|
2,308,841 |
|
3,103,860 |
|
218,700 |
|
447,399 |
|
666,099 |
| ||||||
Commercial |
|
399,124 |
|
29,736 |
|
428,860 |
|
436,806 |
|
36,923 |
|
473,729 |
| ||||||
Consumer |
|
|
|
13,424 |
|
13,424 |
|
|
|
45,322 |
|
45,322 |
| ||||||
Total 30-59 days past due |
|
1,194,143 |
|
2,352,001 |
|
3,546,144 |
|
655,506 |
|
529,644 |
|
1,185,150 |
| ||||||
60-89 days past due |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Real estate |
|
1,318,722 |
|
1,209,191 |
|
2,527,913 |
|
1,141,779 |
|
62,852 |
|
1,204,631 |
| ||||||
Commercial |
|
101,420 |
|
|
|
101,420 |
|
|
|
|
|
|
| ||||||
Consumer |
|
|
|
12,558 |
|
12,558 |
|
1,453 |
|
9,882 |
|
11,335 |
| ||||||
Total 60-89 days past due |
|
1,420,142 |
|
1,221,749 |
|
2,641,891 |
|
1,143,232 |
|
72,734 |
|
1,215,966 |
| ||||||
90 or more days past due |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Consumer |
|
|
|
8,056 |
|
8,056 |
|
|
|
6,410 |
|
6,410 |
| ||||||
Total 90 or more days past due |
|
|
|
8,056 |
|
8,056 |
|
|
|
6,410 |
|
6,410 |
| ||||||
Total accruing past due loans |
|
2,614,285 |
|
3,581,806 |
|
6,196,091 |
|
1,798,738 |
|
608,788 |
|
2,407,526 |
| ||||||
Recorded Investment Non-accruing past due loans: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial |
|
1,332,636 |
|
6,058,216 |
|
7,390,852 |
|
1,226,011 |
|
1,401,187 |
|
2,627,198 |
| ||||||
Construction |
|
|
|
100,000 |
|
100,000 |
|
|
|
100,000 |
|
100,000 |
| ||||||
Residential |
|
556,082 |
|
8,585,380 |
|
9,141,462 |
|
591,873 |
|
2,555,374 |
|
3,147,247 |
| ||||||
Commercial |
|
|
|
31,886 |
|
31,886 |
|
|
|
35,392 |
|
35,392 |
| ||||||
Total Recorded Investment Non-accruing past due loans: |
|
1,888,718 |
|
14,775,482 |
|
16,664,200 |
|
1,817,884 |
|
4,091,953 |
|
5,909,837 |
| ||||||
Total Financing Receivables (Loans) |
|
$ |
512,976,489 |
|
$ |
274,195,809 |
|
$ |
787,172,298 |
|
$ |
462,690,170 |
|
$ |
132,454,758 |
|
$ |
595,144,928 |
|
5. LOANS (Continued)
We consider all non-performing loans and troubled debt restructurings (TDRs) impaired. We do not recognize interest income on non-performing loans during the time period that the loans are non-performing on either a cash or accrual basis. We only recognize interest income on non-performing 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 June 30, 2013 and December 31, 2012.
|
|
|
|
|
|
|
|
Three months June 30, 2013 |
|
Six months June 30, 2013 |
| |||||||||||
|
|
Unpaid |
|
Recorded |
|
Related |
|
Average |
|
Interest Income |
|
Average |
|
Interest |
| |||||||
Legacy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Commercial |
|
$ |
1,332,636 |
|
$ |
1,332,636 |
|
$ |
|
|
$ |
988,236 |
|
$ |
|
|
$ |
1,025,033 |
|
$ |
|
|
Construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Residential |
|
556,082 |
|
556,082 |
|
|
|
559,513 |
|
17,990 |
|
567,938 |
|
33,737 |
| |||||||
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Commercial |
|
|
|
|
|
|
|
|
|
|
|
117,092 |
|
|
| |||||||
Construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Residential |
|
499,122 |
|
499,122 |
|
25,000 |
|
499,122 |
|
3,700 |
|
499,122 |
|
7,686 |
| |||||||
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total legacy impaired |
|
2,387,840 |
|
2,387,840 |
|
25,000 |
|
2,046,871 |
|
21,690 |
|
2,209,185 |
|
41,423 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Acquired (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Commercial |
|
14,942,590 |
|
5,816,592 |
|
|
|
3,764,965 |
|
136,488 |
|
5,639,151 |
|
136,488 |
| |||||||
Construction |
|
2,518,563 |
|
100,000 |
|
|
|
100,000 |
|
4,545 |
|
683,408 |
|
4,545 |
| |||||||
Residential |
|
27,089,305 |
|
7,822,045 |
|
|
|
5,407,273 |
|
82,027 |
|
6,659,787 |
|
82,044 |
| |||||||
Commercial |
|
404,344 |
|
121,240 |
|
|
|
121,825 |
|
13,361 |
|
167,797 |
|
13,361 |
| |||||||
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Commercial |
|
1,628,156 |
|
241,624 |
|
241,624 |
|
161,714 |
|
763 |
|
201,669 |
|
1,895 |
| |||||||
Construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Residential |
|
1,620,660 |
|
1,361,520 |
|
150,000 |
|
912,908 |
|
8,472 |
|
1,137,214 |
|
15,683 |
| |||||||
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total acquired impaired |
|
48,203,618 |
|
15,463,021 |
|
391,624 |
|
10,468,686 |
|
245,656 |
|
14,489,026 |
|
254,016 |
| |||||||
Total impaired |
|
$ |
50,591,458 |
|
$ |
17,850,861 |
|
$ |
416,624 |
|
$ |
12,515,557 |
|
267,346 |
|
16,698,211 |
|
295,439 |
| |||
(1) Generally accepted accounting principles require that we record acquired loans at fair value which includes a discount for loans with credit impairment. These loans are not performing according to their contractual terms and meet our definition of an impaired loan. The discounts that arise from recording these loans at fair value were due to credit quality. Although we do not accrue interest income at the contractual rate on these loans, we may accrete these discounts to interest income as a result of pre-payments that exceed our cash flow expectations or payment in full of amounts due even though we classify them as non-accrual.
5. LOANS (Continued)
Impaired Loans
Twelve months ended December 31, 2012
|
|
Unpaid |
|
Recorded |
|
Related |
|
Average |
|
Interest |
| |||||
Legacy |
|
|
|
|
|
|
|
|
|
|
| |||||
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
| |||||
Real Estate |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial |
|
$ |
874,735 |
|
$ |
874,735 |
|
$ |
|
|
$ |
686,724 |
|
$ |
|
|
Construction |
|
|
|
|
|
|
|
727,003 |
|
|
| |||||
Residential |
|
591,873 |
|
591,873 |
|
|
|
353,680 |
|
76,309 |
| |||||
Commercial |
|
|
|
|
|
|
|
145,841 |
|
|
| |||||
Consumer |
|
|
|
|
|
|
|
|
|
|
| |||||
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
| |||||
Real Estate |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial |
|
849,462 |
|
849,462 |
|
125,000 |
|
1,769,664 |
|
31,559 |
| |||||
Construction |
|
|
|
|
|
|
|
|
|
|
| |||||
Residential |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial |
|
|
|
|
|
|
|
77,976 |
|
|
| |||||
Consumer |
|
|
|
|
|
|
|
142,671 |
|
|
| |||||
Total legacy impaired |
|
2,316,070 |
|
2,316,070 |
|
125,000 |
|
3,903,559 |
|
107,868 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Acquired (1) |
|
|
|
|
|
|
|
|
|
|
| |||||
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
| |||||
Real Estate |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial |
|
2,180,807 |
|
1,159,563 |
|
|
|
1,664,384 |
|
39,476 |
| |||||
Construction |
|
2,538,565 |
|
100,000 |
|
|
|
683,201 |
|
4,186 |
| |||||
Residential |
|
3,371,582 |
|
1,798,180 |
|
|
|
1,567,514 |
|
34,931 |
| |||||
Commercial |
|
214,697 |
|
126,140 |
|
|
|
172,982 |
|
13,896 |
| |||||
Consumer |
|
|
|
|
|
|
|
51,540 |
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
| |||||
Real Estate |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial |
|
1,628,156 |
|
241,624 |
|
241,624 |
|
657,812 |
|
6,319 |
| |||||
Construction |
|
|
|
|
|
|
|
|
|
|
| |||||
Residential |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial |
|
1,620,660 |
|
1,361,520 |
|
75,000 |
|
543,133 |
|
45,963 |
| |||||
Consumer |
|
|
|
|
|
|
|
|
|
|
| |||||
Total acquired impaired |
|
11,554,467 |
|
4,787,027 |
|
316,624 |
|
5,340,566 |
|
144,771 |
| |||||
Total impaired |
|
$ |
13,870,537 |
|
$ |
7,103,097 |
|
$ |
441,624 |
|
$ |
9,244,125 |
|
$ |
252,639 |
|
(1) Generally accepted accounting principles require that we record acquired loans at fair value which includes a discount for loans with credit impairment. These loans are not performing according to their contractual terms and meet our definition of an impaired loan. The discounts that arise from recording these loans at fair value were due to credit quality. Although we do not accrue interest income at the contractual rate on these loans, we may accrete these discounts to interest income as a result of pre-payments that exceed our cash flow expectations or payment in full of amounts due even though we classify them as non-accrual.
5. LOANS (Continued)
The table below presents the contract amount due and recorded book balance of the non-accrual loans at June 30, 2013 and December 31, 2012.
|
|
Loans on Non-accrual Status |
| ||||||||||||||||||||
|
|
June 30, 2013 |
|
December 31, 2012 |
| ||||||||||||||||||
|
|
# of |
|
Unpaid |
|
Recorded |
|
Interest Not |
|
# of |
|
Unpaid |
|
Recorded |
|
Interest Not |
| ||||||
Legacy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial |
|
2 |
|
$ |
1,332,636 |
|
$ |
1,332,636 |
|
$ |
70,806 |
|
2 |
|
$ |
1,226,011 |
|
$ |
1,226,011 |
|
$ |
103,529 |
|
Residential |
|
2 |
|
556,082 |
|
556,082 |
|
39,703 |
|
2 |
|
591,873 |
|
591,873 |
|
25,449 |
| ||||||
Total non-accrual loans |
|
4 |
|
1,888,718 |
|
1,888,718 |
|
110,509 |
|
4 |
|
1,817,884 |
|
1,817,884 |
|
128,978 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Acquired (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial |
|
21 |
|
16,223,623 |
|
6,058,216 |
|
1,150,545 |
|
8 |
|
3,808,963 |
|
1,401,187 |
|
649,266 |
| ||||||
Construction |
|
4 |
|
2,518,563 |
|
100,000 |
|
678,847 |
|
4 |
|
2,538,565 |
|
100,000 |
|
592,476 |
| ||||||
Residential |
|
76 |
|
17,409,474 |
|
8,585,380 |
|
2,350,853 |
|
10 |
|
4,346,364 |
|
2,555,374 |
|
526,669 |
| ||||||
Commercial |
|
4 |
|
93,110 |
|
31,886 |
|
49,674 |
|
3 |
|
123,949 |
|
35,392 |
|
45,787 |
| ||||||
Total non-accrual loans |
|
105 |
|
36,244,770 |
|
14,775,482 |
|
4,229,919 |
|
25 |
|
10,817,841 |
|
4,091,953 |
|
1,814,198 |
| ||||||
Total all non-accrual loans |
|
109 |
|
$ |
38,133,488 |
|
$ |
16,664,200 |
|
$ |
4,340,428 |
|
29 |
|
$ |
12,635,725 |
|
$ |
5,909,837 |
|
$ |
1,943,176 |
|
(1)Generally accepted accounting principles require that we record acquired loans at fair value which includes a discount for loans with credit impairment. These loans are not performing according to their contractual terms and meet our definition of an impaired loan. The discounts that arise from recording these loans at fair value were due to credit quality. Although we do not accrue interest income at the contractual rate on these loans, we may accrete these discounts to interest income as a result of pre-payments that exceeds our cash flow expectations or payment in full of amounts due even though we classify them as non-accrual.
We consider a loan a troubled debt restructuring 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, 2013 consisted of six loans for $1,186,662 compared to five loans at December 31, 2012 for $1,193,260. TDRs at June 30, 2013 included five loans due to rate reduction and one loan due to extension date.
The following presents, by class, information related to loans modified in a TDR during the three months ending June 30, 2013 and 2012.
|
|
Loans Modified as a TDR for the Three Months Ended |
| ||||||||
|
|
June 30, 2013 |
|
June 30, 2012 |
| ||||||
Troubled Debt Restructurings: |
|
Number of |
|
Recorded Investment |
|
Number of |
|
Recorded Investment |
| ||
(dollars in thousands) |
|
Contracts |
|
(as of period end) |
|
Contracts |
|
(as of period end) |
| ||
Acquired: |
|
|
|
|
|
|
|
|
| ||
Residential Real Estate |
|
1 |
|
$ |
60 |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
| ||
Total TDRs |
|
1 |
|
$ |
60 |
|
|
|
$ |
|
|
5. LOANS (Continued)
The following presents, by class, information related to loans modified in a TDR during the six months ending June 30, 2013 and 2012.
|
|
Loans Modified as a TDR for the Six Months Ended |
| ||||||||
|
|
June 30, 2013 |
|
June 30, 2012 |
| ||||||
Troubled Debt Restructurings: |
|
Number of |
|
Recorded Investment |
|
Number of |
|
Recorded Investment |
| ||
(dollars in thousands) |
|
Contracts |
|
(as of period end) |
|
Contracts |
|
(as of period end) |
| ||
Acquired: |
|
|
|
|
|
|
|
|
| ||
Residential Real Estate |
|
1 |
|
$ |
60 |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
| ||
Total TDRs |
|
1 |
|
$ |
60 |
|
|
|
$ |
|
|
We had no loans modified as a TDR that defaulted within twelve months of the modification date for the three and six month periods ending June 30, 2013.
Acquired impaired loans
Loans acquired in an acquisition are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan and lease losses. In determining the estimated fair value of these loans, we considered a number of factors including the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, and net present value of cash flows we expect to receive, among others. As required, we accounted for these acquired loans in accordance with guidance for certain loans acquired in a transfer (ASC 310-30), when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments. The difference between contractually required payments and cash flows we expect to collect is the non-accretable difference. Subsequent negative differences to the expected cash flows will generally result in an increase in the non-accretable difference which would increase our provision for loan losses and decrease net interest income after provision for loan losses. Subsequent collection of payments on these loans will cause an increase in cash flows that will result in a reduction to the non-accretable difference, which would increase interest revenue. Because we carry these loans at their fair value, subsequent to acquisition, we do not consider these loans impaired unless we categorize them as non-performing (non-accrual) or as a TDR.
MB&T
At June 30, 2013, the contract value of the acquired loans accounted for under ASC 310-30 (including non-accrual loans) was $23,489,121. The fair value adjustments applied to these loans was $10,993,178. The fair value of these loans (recorded book value) was $12,495,943.
At December 31, 2012, the contract value of the acquired impaired loans (including non-accrual loans) was $24,930,742. The fair value adjustments applied to these loans was $11,566,860. The fair value of these loans (recorded book value) was $13,363,882.
WSB
At June 30, 2013, the contract value of the acquired loans accounted for under ASC 310-30 (including non-accrual loans) was $33,687,555. The fair value adjustments applied to these loans was $14,938,028. The fair value of these loans (recorded book value) was $18,749,527.
The following table outlines the contractually required payments receivable, cash flows we expect to receive, non-accretable credit adjustments and the accretable yield for all acquired impaired loans as of the acquisition date.
5. LOANS (Continued)
WSB Acquired Impaired Loans as of May 10, 2013
May 10, 2013 |
|
Contractually |
|
Non-Accretable |
|
Cash Flows |
|
Accretable |
|
Loans |
| |||||
Business loans risk rated 4 at acquisition |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Business loans risk rated 5 at acquisition |
|
33,038 |
|
19,822 |
|
13,216 |
|
21 |
|
13,195 |
| |||||
Business loans risk rated 6 at acquisition |
|
233,880 |
|
140,328 |
|
93,552 |
|
10,765 |
|
82,787 |
| |||||
Total business |
|
266,918 |
|
160,150 |
|
106,768 |
|
10,786 |
|
95,982 |
| |||||
Real estate loans risk rated 4 at acquisition |
|
6,352,445 |
|
2,155,197 |
|
4,197,248 |
|
655,823 |
|
3,541,425 |
| |||||
Real estate loans risk rated 5 at acquisition |
|
7,346,174 |
|
1,938,104 |
|
5,408,070 |
|
643,135 |
|
4,764,935 |
| |||||
Real estate loans risk rated 6 at acquisition |
|
19,385,909 |
|
8,261,491 |
|
11,124,418 |
|
1,394,568 |
|
9,729,850 |
| |||||
Real estate loans risk rated 7 at acquisition |
|
424,784 |
|
157,367 |
|
267,417 |
|
(60,149 |
) |
327,566 |
| |||||
Total real estate |
|
33,509,312 |
|
12,512,159 |
|
20,997,153 |
|
2,633,377 |
|
18,363,776 |
| |||||
Total impaired loans acquired |
|
$ |
33,776,230 |
|
$ |
12,672,309 |
|
$ |
21,103,921 |
|
$ |
2,644,163 |
|
$ |
18,459,758 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Initial Calculation of Non-Accretable Difference |
|
|
|
|
|
|
|
|
|
|
| |||||
Contractually required payments receivable |
|
$ |
33,776,230 |
|
|
|
|
|
|
|
|
| ||||
Less: Cash flows expected to be collected |
|
(21,103,921 |
) |
|
|
|
|
|
|
|
| |||||
Non-accretable difference |
|
$ |
12,672,309 |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Initial Calculation of Accretable Yield |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash flow expected to be collected |
|
$ |
21,103,921 |
|
|
|
|
|
|
|
|
| ||||
Less: initial investment |
|
(18,459,758 |
) |
|
|
|
|
|
|
|
| |||||
Accretable yield |
|
$ |
2,644,163 |
|
|
|
|
|
|
|
|
|
At our acquisition of WSB Holdings, we recorded all loans acquired at the estimated fair value on their purchase date with no carryover of the related allowance for loan and lease losses. On the acquisition date, we segregated the loan portfolio into two loan pools, performing and non-performing.
We had an independent third party determine the net discounted value of cash flows on approximately 450 performing loans totaling $143.5 million. The valuation took into consideration the loans underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan to value ratios, loss exposures, and remaining balances. These performing loans were segregated into pools based on loan and payment type and in some cases, risk grade. The effect of this fair valuation process was a net premium of $3.2 million at acquisition. We then adjusted these values for inherent credit risk within each pool, which resulted in a total non-accretable credit adjustment of $2.5 million.
We also individually evaluated 128 impaired loans totaling $33.7 million to determine the fair value as of the May 10, 2013 measurement date. In determining the fair value for each individually evaluated impaired loan, we considered a number of factors including the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral and net present value of cash flows we expect to receive, among others. As required, we accounted for these acquired loans in accordance with guidance for certain loans acquired in a transfer when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments. The difference between contractually required payments and cash flows we expect to collect is the non-accretable difference. We established a credit risk related non-accretable difference of $12.7 million relating to these impaired loans, reflected in the recorded net fair value. We further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount of $2.6 million on the acquisition date relating to these impaired loans.
5. LOANS (Continued)
The following table outlines the contractually required payments receivable, cash flows we expect to receive, non-accretable credit adjustments and the accretable yield for all acquired impaired loans from MB&T and WSB as of June 30, 2013.
Acquired Loans as of June 30, 2013
June 30, 2013 |
|
Contractually |
|
Non-Accretable |
|
Cash Flows |
|
Accretable |
|
Loans |
| |||||
Business loans risk rated 4 at acquisition |
|
$ |
232,661 |
|
$ |
34,225 |
|
$ |
198,436 |
|
$ |
|
|
$ |
198,436 |
|
Business loans risk rated 5 at acquisition |
|
41,592 |
|
25,558 |
|
16,034 |
|
21 |
|
16,013 |
| |||||
Business loans risk rated 6 at acquisition |
|
299,840 |
|
186,961 |
|
112,879 |
|
10,091 |
|
102,788 |
| |||||
Total business loans |
|
574,093 |
|
246,744 |
|
327,349 |
|
10,112 |
|
317,237 |
| |||||
Real estate loans risk rated 4 at acquisition |
|
10,815,755 |
|
2,790,563 |
|
8,025,192 |
|
645,489 |
|
7,379,703 |
| |||||
Real estate loans risk rated 5 at acquisition |
|
10,315,769 |
|
3,623,378 |
|
6,692,391 |
|
633,851 |
|
6,058,540 |
| |||||
Real estate loans risk rated 6 at acquisition |
|
35,046,950 |
|
16,557,298 |
|
18,489,652 |
|
1,356,369 |
|
17,133,283 |
| |||||
Real estate loans risk rated 7 at acquisition |
|
424,109 |
|
128,164 |
|
295,945 |
|
(60,762 |
) |
356,707 |
| |||||
Total real estate loans |
|
56,602,583 |
|
23,099,403 |
|
33,503,180 |
|
2,574,947 |
|
30,928,233 |
| |||||
Total impaired loans acquired |
|
$ |
57,176,676 |
|
$ |
23,346,147 |
|
$ |
33,830,529 |
|
$ |
2,585,059 |
|
$ |
31,245,470 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Accretable Yield |
|
|
|
|
|
|
|
|
|
|
| |||||
Beginning balance December 31, 2012 |
|
$ |
|
|
|
|
|
|
|
|
|
| ||||
Additions due to WSB acquisition |
|
2,644,163 |
|
|
|
|
|
|
|
|
| |||||
Accreted to income |
|
(632,786 |
) |
|
|
|
|
|
|
|
| |||||
Reclassification from non-accretable (1) |
|
573,682 |
|
|
|
|
|
|
|
|
| |||||
Ending balance June 30, 2013 |
|
$ |
2,585,059 |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Non-Accretable Yield Discount |
|
|
|
|
|
|
|
|
|
|
| |||||
Beginning balance December 31, 2012 |
|
$ |
11,566,860 |
|
|
|
|
|
|
|
|
| ||||
Additions due to WSB acquisition |
|
12,672,309 |
|
|
|
|
|
|
|
|
| |||||
Reclassification to accretable (1) |
|
(573,682 |
) |
|
|
|
|
|
|
|
| |||||
Foreclosure Sales |
|
(129,340 |
) |
|
|
|
|
|
|
|
| |||||
Transferred to OREO |
|
(190,000 |
) |
|
|
|
|
|
|
|
| |||||
Ending balance June 30, 2013 |
|
$ |
23,346,147 |
|
|
|
|
|
|
|
|
|
(1) Represents amounts paid in full on loans, payments on loans with zero balances and an increase in cash flows expected to be collected.
The following table outlines the contractually required payments receivable, cash flows we expect to receive, non-accretable credit adjustments and the accretable yield for all acquired impaired loans as of December 31, 2012.
5. LOANS (Continued)
Acquired Impaired Loans as of December 31, 2012
December 31, 2012 |
|
Contractually |
|
Non-Accretable |
|
Cash Flows |
|
Loans |
| ||||
Business loans risk rated 4 at acquisition |
|
$ |
1,371,081 |
|
$ |
205,662 |
|
$ |
1,165,419 |
|
$ |
1,165,419 |
|
Business loans risk rated 5 at acquisition |
|
50,153 |
|
42,882 |
|
7,271 |
|
7,271 |
| ||||
Business loans risk rated 6 at acquisition |
|
87,422 |
|
52,030 |
|
35,392 |
|
35,392 |
| ||||
Total business loans |
|
1,508,656 |
|
300,574 |
|
1,208,082 |
|
1,208,082 |
| ||||
Real estate loans risk rated 4 at acquisition |
|
3,526,864 |
|
482,256 |
|
3,044,608 |
|
3,044,608 |
| ||||
Real estate loans risk rated 5 at acquisition |
|
3,474,335 |
|
1,706,877 |
|
1,767,458 |
|
1,767,458 |
| ||||
Real estate loans risk rated 6 at acquisition |
|
16,420,887 |
|
9,077,153 |
|
7,343,734 |
|
7,343,734 |
| ||||
Total real estate loans |
|
23,422,086 |
|
11,266,286 |
|
12,155,800 |
|
12,155,800 |
| ||||
Total impaired loans acquired |
|
$ |
24,930,742 |
|
$ |
11,566,860 |
|
$ |
13,363,882 |
|
$ |
13,363,882 |
|
|
|
|
|
|
|
|
|
|
| ||||
Accretable Yield |
|
|
|
|
|
|
|
|
| ||||
Beginning balance December 31, 2011 |
|
$ |
|
|
|
|
|
|
|
| |||
Accreted to income |
|
(3,343,955 |
) |
|
|
|
|
|
| ||||
Reclassification from non-accretable (1) |
|
3,343,955 |
|
|
|
|
|
|
| ||||
Ending balance December 31, 2012 |
|
$ |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| ||||
Non-Accretable Difference |
|
|
|
|
|
|
|
|
| ||||
Beginning balance December 31, 2011 |
|
$ |
15,589,150 |
|
|
|
|
|
|
| |||
Reclassification to accretable (1) |
|
(3,343,955 |
) |
|
|
|
|
|
| ||||
Charge off |
|
(76,648 |
) |
|
|
|
|
|
| ||||
Transferred to OREO |
|
(601,687 |
) |
|
|
|
|
|
| ||||
Ending balance December 31, 2012 |
|
$ |
11,566,860 |
|
|
|
|
|
|
|
(1) Represents amounts paid in full on loans, payments on loans with zero balances and an increase in cash flows expected to be collected.
Credit Quality Indicators
We review the adequacy of the allowance for loan losses at least quarterly. Our review includes evaluation of impaired loans as required by ASC Topic 310-Receivables, and ASC Topic 450 Contingencies. Also, incorporated in determining the adequacy of the allowance is guidance contained in the Securities and Exchange Commissions SAB No. 102, Loan Loss Allowance Methodology and Documentation; the Federal Financial Institutions Examination Councils Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions, and the Interagency Policy Statement on the Allowance for Loan and Lease Losses provided by the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration and Office of Thrift Supervision.
We base the evaluation of the adequacy of the allowance for loan losses upon loan categories. We categorize loans as installment and other consumer loans (other than boat loans), boat loans, real estate loans and commercial loans. We further divide commercial and real estate loans by risk rating and apply loss ratios by risk rating, to determine estimated loss amounts. We evaluate delinquent loans and loans for which management has knowledge about possible credit problems of the borrower or knowledge of problems with collateral separately and assign loss amounts based upon the evaluation.
We determine loss ratios for installment and other consumer loans and real estate loans based upon a review of prior 18 months delinquency trends for the category, the three year loss ratio for the category, peer group loss ratios and industry standards.
5. LOANS (Continued)
With respect to commercial loans, management assigns a risk rating of one through eight as follows:
· Risk rating 1 (Highest Quality) is normally assigned to investment grade risks, meaning that level of risk is associated with entities having access (or capable of access) to the public capital markets and the loan underwriting in question conforms to the standards of institutional credit providers. We also include in this category loans with a perfected security interest in U.S. government securities, investment grade government sponsored entities bonds, investment grade municipal bonds, insured savings accounts, and insured certificates of deposits drawn on high quality financial institutions.
· Risk rating 2 (Good Quality) is normally assigned to a loan with a sound primary and secondary source of repayment. The borrower may have access to alternative sources of financing. This loan carries a normal level of risk, with minimal loss exposure. The borrower has the ability to perform according to the terms of the credit facility. Cash flow coverage is greater than 1.25:1 but may be vulnerable to more rapid deterioration than the higher quality loans. We may also include loans secured by high quality traded stocks, lower grade municipal bonds and uninsured certificates of deposit.
Characteristics of such credits should include: (a) sound primary and secondary repayment sources; (b) strong debt capacity and coverage; and (c) good management in all key positions. A credit secured by a properly margined portfolio of marketable securities, but with some portfolio concentration, also would qualify for this risk rating. Additionally, individuals with significant liquidity, low leverage and a defined source of repayment would fall within this risk rating.
· Risk rating 3 (Acceptable Quality) is normally assigned when the borrower is a reasonable credit risk and demonstrates the ability to repay the debt from normal business operations. Risk factors may include reliability of margins and cash flows, liquidity, dependence on a single product or industry, cyclical trends, depth of management, or limited access to alternative financing sources. Historic financial information may indicate erratic performance, but current trends are positive. Quality of financial information is adequate, but is not as detailed and sophisticated as information found on higher graded loans. If adverse circumstances arise, they may significantly impact the borrower. We classify many small business loans in this category unless deterioration occurs or we believe the loan requires additional monitoring, such as construction loans, asset based (accounts receivable/inventory) loans, and Small Business Administration (SBA) loans.
· Risk rating 4 (Pass/Watch) loans exhibit all the characteristics of a loan graded as a 3 with the exception that there is a greater than normal concern that an external factor may impact the viability of the borrower at some later date; or that the Bank is uncertain if the borrower has adequate financial resources to repay because of the lack of financial information available. We will generally grant this risk rating to credits that require additional monitoring such as construction loans, SBA loans and other loans deemed in need of additional monitoring.
· Risk rating 5 (Special Mention) is assigned to risks in need of close monitoring. These are defined as classified assets. Loans generally in this category may have either inadequate information, lack sufficient cash flow or some other problem that requires close scrutiny. The current worth and debt service capacity of the borrower or of any pledged collateral are insufficient to ensure repayment of the loan. These risk ratings may also apply to an improving credit previously criticized but some risk factors remain. All loans in this classification or below should have an action plan.
· Risk rating 6 (Substandard) is assigned to loans where there is insufficient debt service capacity. These obligations, even if apparently protected by collateral value, have well defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that have clearly jeopardized repayment of principal and interest as originally intended. There is also the possibility that the Bank will sustain some future loss if the weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual loan we may classify as substandard.
· Risk rating 7 (Doubtful) corresponds to the doubtful asset categories defined by regulatory authorities. A loan classified as doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to strengthening of the
asset we have deferred its classification as loss until we may determine a more exact status and estimation of the potential loss.
· Risk rating 8 (Loss) is assigned to charged off loans. We consider assets classified as loss as uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has no recovery value, but that it is not practical to defer writing off the worthless assets, even though partial recoveries may occur in the future. We charge off assets in this category.
The following table outlines the allocation of allowance for loan losses by risk rating.
June 30, 2013 |
|
Account Balance |
|
Allocation of Allowance for Loan Losses |
| ||||||||||||||
Risk Rating |
|
Legacy |
|
Acquired |
|
Total |
|
Legacy |
|
Acquired |
|
Total |
| ||||||
Pass (1-4) |
|
$ |
494,667,447 |
|
$ |
244,784,408 |
|
$ |
739,451,855 |
|
$ |
3,391,731 |
|
$ |
|
|
$ |
3,391,731 |
|
Special Mention (5) |
|
15,987,357 |
|
9,235,133 |
|
25,222,490 |
|
428,925 |
|
|
|
428,925 |
| ||||||
Substandard (6) |
|
5,460,277 |
|
20,195,292 |
|
25,655,569 |
|
25,000 |
|
391,624 |
|
416,624 |
| ||||||
Doubtful (7) |
|
|
|
30,995 |
|
30,995 |
|
|
|
|
|
|
| ||||||
Loss (8) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
|
$ |
516,115,081 |
|
$ |
274,245,828 |
|
$ |
790,360,909 |
|
$ |
3,845,656 |
|
$ |
391,624 |
|
$ |
4,237,280 |
|
December 31, 2012 |
|
Account Balance |
|
Allocation of Allowance for Loan Losses |
| ||||||||||||||
Risk Rating |
|
Legacy |
|
Acquired |
|
Total |
|
Legacy |
|
Acquired |
|
Total |
| ||||||
Pass (1-4) |
|
$ |
445,568,013 |
|
$ |
121,201,919 |
|
$ |
566,769,932 |
|
$ |
3,131,046 |
|
$ |
|
|
$ |
3,131,046 |
|
Special Mention (5) |
|
14,182,357 |
|
3,716,126 |
|
17,898,483 |
|
392,677 |
|
|
|
392,677 |
| ||||||
Substandard (6) |
|
5,494,540 |
|
7,853,337 |
|
13,347,877 |
|
125,000 |
|
316,624 |
|
441,624 |
| ||||||
Doubtful (7) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Loss (8) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
|
$ |
465,244,910 |
|
$ |
132,771,382 |
|
$ |
598,016,292 |
|
$ |
3,648,723 |
|
$ |
316,624 |
|
$ |
3,965,347 |
|
The following table details activity in the allowance for loan losses by portfolio segment for the three and six month periods ended June 30, 2013 and 2012. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
5. LOANS (Continued)
Three Months Ended June 30, 2013 |
|
Real |
|
Commercial |
|
Boats |
|
Other |
|
Total |
| |||||
Beginning balance |
|
$ |
2,887,769 |
|
$ |
784,024 |
|
$ |
240,959 |
|
$ |
140,195 |
|
$ |
4,052,947 |
|
Provision for loan losses |
|
(266,540 |
) |
140,365 |
|
7,579 |
|
(23,028 |
) |
(141,624 |
) | |||||
Provision for loan losses for loans acquired with deteriorated credit quality |
|
341,624 |
|
|
|
|
|
|
|
341,624 |
| |||||
Recoveries |
|
10,303 |
|
7,093 |
|
|
|
13,768 |
|
31,164 |
| |||||
|
|
2,973,156 |
|
931,482 |
|
248,538 |
|
130,935 |
|
4,284,111 |
| |||||
Loans charged off |
|
|
|
(46,785 |
) |
|
|
(46 |
) |
(46,831 |
) | |||||
Ending Balance |
|
$ |
2,973,156 |
|
$ |
884,697 |
|
$ |
248,538 |
|
$ |
130,889 |
|
$ |
4,237,280 |
|
Six Months Ending June 30, 2013 |
|
Real |
|
Commercial |
|
Boats |
|
Other |
|
Total |
| |||||
Beginning balance |
|
$ |
2,826,584 |
|
$ |
755,954 |
|
$ |
248,928 |
|
$ |
133,881 |
|
$ |
3,965,347 |
|
Provision for loan losses |
|
(243,887 |
) |
254,035 |
|
(390 |
) |
(26,382 |
) |
(16,624 |
) | |||||
Provision for loan losses for loans acquired with deteriorated credit quality |
|
416,624 |
|
|
|
|
|
|
|
416,624 |
| |||||
Recoveries |
|
41,686 |
|
24,089 |
|
|
|
36,442 |
|
102,217 |
| |||||
|
|
3,041,007 |
|
1,034,078 |
|
248,538 |
|
143,941 |
|
4,467,564 |
| |||||
Loans charged off |
|
(67,851 |
) |
(149,381 |
) |
|
|
(13,052 |
) |
(230,284 |
) | |||||
Ending Balance |
|
$ |
2,973,156 |
|
$ |
884,697 |
|
$ |
248,538 |
|
$ |
130,889 |
|
$ |
4,237,280 |
|
Amount allocated to: |
|
|
|
|
|
|
|
|
|
|
| |||||
Legacy Loans: |
|
|
|
|
|
|
|
|
|
|
| |||||
Individually evaluated for impairment |
|
$ |
25,000 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
25,000 |
|
Collectively evaluated for impairment |
|
2,556,532 |
|
884,697 |
|
248,538 |
|
130,889 |
|
3,820,656 |
| |||||
Acquired Loans: |
|
|
|
|
|
|
|
|
|
|
| |||||
Individually evaluated for impairment |
|
391,624 |
|
|
|
|
|
|
|
391,624 |
| |||||
Ending balance |
|
$ |
2,973,156 |
|
$ |
884,697 |
|
$ |
248,538 |
|
$ |
130,889 |
|
$ |
4,237,280 |
|
5. LOANS (Continued)
Three Months Ended June 30, 2012 |
|
Real |
|
Commercial |
|
Boats |
|
Other |
|
Total |
| |||||
Beginning balance |
|
$ |
2,606,363 |
|
$ |
736,076 |
|
$ |
308,656 |
|
$ |
136,204 |
|
$ |
3,787,299 |
|
Provision for loan losses |
|
325,567 |
|
63,676 |
|
(14,481 |
) |
238 |
|
375,000 |
| |||||
Provision for loan losses for loans acquired with deteriorated credit quality |
|
|
|
|
|
|
|
|
|
|
| |||||
Recoveries |
|
7,728 |
|
7,831 |
|
|
|
21,982 |
|
37,541 |
| |||||
|
|
2,939,658 |
|
807,583 |
|
294,175 |
|
158,424 |
|
4,199,840 |
| |||||
Loans charged off |
|
(46,511 |
) |
(29,012 |
) |
|
|
(14,856 |
) |
(90,379 |
) | |||||
Ending Balance |
|
$ |
2,893,147 |
|
$ |
778,571 |
|
$ |
294,175 |
|
$ |
143,568 |
|
$ |
4,109,461 |
|
Six Months Ending June 30, 2012 |
|
Real |
|
Commercial |
|
Boats |
|
Other |
|
Total |
| |||||
Beginning balance |
|
$ |
2,123,068 |
|
$ |
922,310 |
|
$ |
565,240 |
|
$ |
130,653 |
|
$ |
3,741,271 |
|
Provision for loan losses |
|
1,081,590 |
|
(87,981 |
) |
(271,065 |
) |
27,456 |
|
750,000 |
| |||||
Provision for loan losses for loans acquired with deteriorated credit quality |
|
|
|
|
|
|
|
|
|
|
| |||||
Recoveries |
|
12,975 |
|
31,933 |
|
|
|
48,667 |
|
93,575 |
| |||||
|
|
3,217,633 |
|
866,262 |
|
294,175 |
|
206,776 |
|
4,584,846 |
| |||||
Loans charged off |
|
(324,486 |
) |
(87,691 |
) |
|
|
(63,208 |
) |
(475,385 |
) | |||||
Ending Balance |
|
$ |
2,893,147 |
|
$ |
778,571 |
|
$ |
294,175 |
|
$ |
143,568 |
|
$ |
4,109,461 |
|
Amount allocated to: |
|
|
|
|
|
|
|
|
|
|
| |||||
Legacy Loans: |
|
|
|
|
|
|
|
|
|
|
| |||||
Individually evaluated for impairment |
|
$ |
615,489 |
|
$ |
110,121 |
|
$ |
|
|
$ |
|
|
$ |
725,610 |
|
Collectively evaluated for impairment |
|
2,277,658 |
|
668,450 |
|
294,175 |
|
143,568 |
|
3,383,851 |
| |||||
Acquired Loans: |
|
|
|
|
|
|
|
|
|
|
| |||||
Individually evaluated for impairment |
|
|
|
|
|
|
|
|
|
|
| |||||
Ending balance |
|
$ |
2,893,147 |
|
$ |
778,571 |
|
$ |
294,175 |
|
$ |
143,568 |
|
$ |
4,109,461 |
|
We individually evaluate all legacy substandard loans risk rated six, certain legacy special mention loans risk rated five and all legacy TDRs for impairment. We individually evaluate all acquired loans that we risk rated substandard six subsequent to the acquisition, certain acquired special mention loans risk rated five and all acquired TDRs for impairment. We also evaluate all loans acquired and recorded at fair value under ASC 310-30 for impairment.
Our recorded investment in loans at June 30, 2013 and 2012 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of our impairment methodology was as follows:
5. LOANS (Continued)
June 30, 2013 |
|
Real |
|
Commercial |
|
Boats |
|
Other |
|
Total |
| |||||
Legacy loans: |
|
|
|
|
|
|
|
|
|
|
| |||||
Individually evaluated for impairment with specific reserve |
|
$ |
499,122 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
499,122 |
|
Individually evaluated for impairment without specific reserve |
|
3,275,454 |
|
1,685,700 |
|
|
|
|
|
4,961,154 |
| |||||
Collectively evaluated for impairment with reserve |
|
401,243,435 |
|
99,268,982 |
|
7,060,527 |
|
2,874,064 |
|
510,447,008 |
| |||||
Acquired loans: |
|
|
|
|
|
|
|
|
|
|
| |||||
Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition) |
|
1,603,144 |
|
|
|
|
|
|
|
1,603,144 |
| |||||
Individually evaluated for impairment without specific reserve (ASC 310-30 at acquisition) |
|
31,153,510 |
|
764,372 |
|
|
|
|
|
31,917,882 |
| |||||
Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition) |
|
228,726,807 |
|
11,024,500 |
|
|
|
1,181,292 |
|
240,932,599 |
| |||||
Ending balance |
|
$ |
666,501,472 |
|
$ |
112,743,554 |
|
$ |
7,060,527 |
|
$ |
4,055,356 |
|
$ |
790,360,909 |
|
June 30, 2012 |
|
Real Estate |
|
Commercial |
|
Boats |
|
Other |
|
Total |
| |||||
Legacy loans: |
|
|
|
|
|
|
|
|
|
|
| |||||
Individually evaluated for impairment with specific reserve |
|
$ |
731,611 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
731,611 |
|
Individually evaluated for impairment without specific reserve |
|
11,932,555 |
|
360,931 |
|
|
|
|
|
12,293,486 |
| |||||
Collectively evaluated for impairment with reserve |
|
320,731,956 |
|
83,722,209 |
|
8,243,260 |
|
3,169,396 |
|
415,866,821 |
| |||||
Acquired loans: |
|
|
|
|
|
|
|
|
|
|
| |||||
Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition) |
|
716,000 |
|
220,243 |
|
|
|
|
|
936,243 |
| |||||
Individually evaluated for impairment without specific reserve (ASC 310-30 at acquisition) |
|
|
|
|
|
|
|
|
|
|
| |||||
Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition) |
|
130,685,885 |
|
14,568,294 |
|
|
|
1,339,726 |
|
146,593,905 |
| |||||
Ending balance |
|
$ |
464,798,007 |
|
$ |
98,871,677 |
|
$ |
8,243,260 |
|
$ |
4,509,122 |
|
$ |
576,422,066 |
|
6. OTHER REAL ESTATE OWNED
At June 30, 2013 and December 31, 2012, the fair value of other real estate owned was $5,396,654 and $3,719,449, respectively. As a result of the acquisitions of Maryland Bankcorp and WSB Holdings, we have segmented the other real estate owned 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 and WSB or obtained as a result of loans originated by MB&T and WSB (acquired).
6. OTHER REAL ESTATE OWNED (continued)
The following outlines the transactions in other real estate owned during the period.
Six months ended June 30, 2013 |
|
Legacy |
|
Acquired |
|
Total |
| |||
Beginning balance |
|
$ |
1,651,229 |
|
$ |
2,068,220 |
|
$ |
3,719,449 |
|
Acquired from WSB Holdings, Inc. |
|
|
|
4,224,172 |
|
4,224,172 |
| |||
Transferred in |
|
|
|
233,580 |
|
233,580 |
| |||
Investment in improvements |
|
|
|
|
|
|
| |||
Write down in value |
|
|
|
(66,600 |
) |
(66,600 |
) | |||
Sales/deposits on sales |
|
(725,484 |
) |
(1,787,239 |
) |
(2,512,723 |
) | |||
Net realized gain (loss) |
|
(200,454 |
) |
(770 |
) |
(201,224 |
) | |||
Total end of period |
|
$ |
725,291 |
|
$ |
4,671,363 |
|
$ |
5,396,654 |
|
7. EARNINGS PER COMMON SHARE
We determine basic earnings per common share by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding giving retroactive effect to stock dividends.
We calculate diluted earnings per common share by including the average dilutive common stock equivalents outstanding during the period. Dilutive common equivalent shares consist of stock options, calculated using the treasury stock method.
|
|
Three Months Ended |
|
Six Months Ended |
| ||||
|
|
June 30, |
|
June 30, |
| ||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
|
Weighted average number of shares |
|
8,505,016 |
|
6,828,452 |
|
7,681,337 |
|
6,824,673 |
|
Dilutive average number of shares |
|
8,609,164 |
|
6,905,041 |
|
7,776,679 |
|
6,871,727 |
|
8. STOCK BASED COMPENSATION
We account for stock options and restricted stock awards under the fair value method of accounting using a Black-Scholes valuation model to measure stock based compensation expense at the date of grant. We recognize compensation expense related to stock based compensation awards in our income statements over the period during which we require an individual to provide service in exchange for such award. For the six months ended June 30, 2013 and 2012, we recorded stock-based compensation expense of $133,848 and $85,860, respectively. For the three months ending June 30, 2013 and 2012, we recorded stock-based compensation expense of $50,186 and $55,631, respectively.
We only recognize tax benefits for options that ordinarily will result in a tax deduction when the grant is exercised (non-qualified options). For the six months ended June 30, 2013 and 2012, we recognized $28,281 and $15,097, respectively, of tax benefits associated with the portion of the expense that was related to the issuance of non-qualified options.
We have two equity incentive plans under which we may issue stock options and restricted stock, the 2010 Equity Incentive Plan, approved at the 2010 Annual Meeting of stockholders and the 2004 Equity Incentive Plan. Our Compensation Committee administers the equity incentive plans. As the plans outline, the Compensation Committee approves stock option and restricted stock grants to directors and employees, determines the number of shares, the type of award, the option or share price, the term (not to exceed 10 years from the date of issuance), the restrictions, and the vesting period of options and restricted stock issued. The Compensation Committee has approved and we have granted options vesting immediately as well as over periods of two, three and five years and restricted stock awards that vest over periods of twelve months to three years. We recognize the compensation expense associated with these grants over their respective vesting periods. At June 30, 2013, there was $284,977 of
8. STOCK BASED COMPENSATION (CONTINUED)
total unrecognized compensation cost related to non-vested stock options and restricted stock awards that we expect to realize over the next 1.5 years. As of June 30, 2013, there were 103,153 shares remaining available for future issuance under the equity incentive plans. Directors and officers exercised 58,948 options during the six month period ended June 30, 2013, as compared to no options exercised during the six month period ended June 30, 2012.
A summary of the stock option activity during the six month periods follows:
|
|
June 30, |
| ||||||||
|
|
2013 |
|
2012 |
| ||||||
|
|
|
|
Weighted |
|
|
|
Weighted |
| ||
|
|
Number |
|
average |
|
Number |
|
average |
| ||
|
|
of shares |
|
exercise price |
|
of shares |
|
exercise price |
| ||
|
|
|
|
|
|
|
|
|
| ||
Outstanding, beginning of period |
|
398,958 |
|
$ |
8.71 |
|
325,331 |
|
$ |
8.65 |
|
Options granted |
|
52,712 |
|
12.04 |
|
79,627 |
|
8.00 |
| ||
Options exercised |
|
(58,948 |
) |
8.65 |
|
|
|
|
| ||
Options forfeited |
|
(14,539 |
) |
9.70 |
|
(2,000 |
) |
8.00 |
| ||
Outstanding, end of period |
|
378,183 |
|
$ |
9.14 |
|
402,958 |
|
$ |
8.52 |
|
Information related to options at June 30, 2013 follows:
|
|
Outstanding options |
|
Exercisable options |
| |||||||||
Exercise |
|
Number of |
|
Weighted |
|
Weighted |
|
Number of |
|
Weighted |
| |||
$6.30-$7.50 |
|
67,764 |
|
5.83 |
|
$ |
6.51 |
|
67,764 |
|
$ |
6.51 |
| |
$7.51-$8.75 |
|
111,472 |
|
7.48 |
|
7.91 |
|
76,134 |
|
7.86 |
| |||
$8.76-$9.95 |
|
33,660 |
|
1.16 |
|
9.74 |
|
33,660 |
|
9.74 |
| |||
$9.96-$12.04 |
|
165,287 |
|
5.31 |
|
10.93 |
|
119,300 |
|
10.64 |
| |||
|
|
378,183 |
|
5.67 |
|
$ |
9.14 |
|
296,858 |
|
$ |
8.88 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Intrinsic value of outstanding options where the market value exceeds the exercise price. |
|
$ |
1,531,404 |
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Intrinsic value of exercisable options where the market value exceeds the exercise price |
|
$ |
1,278,765 |
|
|
|
|
|
|
|
During the six months ended June 30, 2013 and 2012, we granted 8,382 and 10,947 restricted common stock awards, respectively. During the period ended June 30, 2013, 2,031 restricted shares were forfeited and there were no restricted shares forfeited for the six month period ending June 30, 2012. The following table provides a summary of the restricted stock awards during the six month period and their vesting schedule.
8. STOCK BASED COMPENSATION (CONTINUED)
|
|
June 30, |
|
June 30, |
| ||||||||
|
|
2013 |
|
2012 |
| ||||||||
|
|
|
|
Weighted |
|
|
|
Weighted |
| ||||
|
|
|
|
average |
|
|
|
average |
| ||||
|
|
Number |
|
grant date |
|
Number |
|
grant date |
| ||||
|
|
of shares |
|
fair value |
|
of shares |
|
fair value |
| ||||
Nonvested, beginning of period |
|
16,210 |
|
$ |
7.70 |
|
15,691 |
|
$ |
7.41 |
| ||
Restricted stock granted |
|
8,382 |
|
12.04 |
|
10,947 |
|
8.00 |
| ||||
Restricted stock vested |
|
(9,225 |
) |
7.52 |
|
(6,788 |
) |
7.34 |
| ||||
Restricted stock forfeited |
|
(2,031 |
) |
9.44 |
|
(520 |
) |
8.00 |
| ||||
Nonvested, end of period |
|
13,336 |
|
$ |
10.29 |
|
19,330 |
|
$ |
7.75 |
| ||
|
|
|
|
|
|
|
|
|
| ||||
Total fair value of shares vested |
|
$ |
69,347 |
|
|
|
$ |
49,853 |
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||||
Intrinsic value of outstanding restricted stock awards where the market value exceeds the exercise price |
|
|
|
$ |
248,130 |
|
|
|
$ |
112,426 |
| ||
|
|
|
|
|
|
|
|
|
|
|
| ||
Intrinsic value of vested restricted stock awards where the market value exceeds the exercise price |
|
|
|
$ |
72,228 |
|
|
|
$ |
69,713 |
| ||
The following table outlines the vesting schedule of the unvested restricted stock awards.
Vesting Schedule
of
Unvested Restricted Stock
Awards
June 30, 2013
Vesting |
|
# of Restricted |
|
12/31/2013 |
|
3,900 |
|
1/27/2014 |
|
3,725 |
|
1/26/2015 |
|
1,969 |
|
2/27/2016 |
|
3,742 |
|
Total Issued |
|
13,336 |
|
9. FAIR VALUE MEASUREMENTS
On January 1, 2008, we adopted FASB ASC Topic 820 Fair Value Measurements and Disclosures, which defines fair value as 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
9. FAIR VALUE MEASUREMENTS (continued)
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.
We value investment securities classified as available for sale at fair value.
The fair value hierarchy established in FASB ASC Topic 820 defines three input levels for fair value measurement. Level 1 is based on quoted market prices in active markets for identical assets. Level 2 is based on significant observable inputs other than those in Level 1. Level 3 is based on significant unobservable inputs.
We value investment securities classified as available for sale and Sallie Mae (SLMA) equity securities (included in equity securities) at fair value on a recurring basis. We value treasury securities and SLMA equity securities under Level 1, and collateralized mortgage obligations, agency securities, government sponsored entity securities, and some agency securities under Level 2. At June 30, 2013 and December 31, 2012, we established values for available for sale investment securities as follows (000s);
Assets and Liabilities Measured at Fair Value on a Recurring Basis
|
|
At June 30, 2013 (In thousands) |
| |||||||||||||
|
|
|
|
Quoted Prices in |
|
Other |
|
Significant |
|
Total Changes |
| |||||
|
|
|
|
Active Markets for |
|
Observable |
|
Unobservable |
|
in Fair Values |
| |||||
|
|
Carrying Value |
|
Identical Assets |
|
Inputs |
|
Inputs |
|
Included in |
| |||||
|
|
June 30, 2013 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Period Earnings |
| |||||
Available-for-sale, Treasury securities and Sallie Mae |
|
$ |
1,521 |
|
$ |
1,521 |
|
$ |
|
|
$ |
|
|
$ |
|
|
Available-for-sale, all other investment securities |
|
182,670 |
|
|
|
182,670 |
|
|
|
|
| |||||
|
|
$ |
188,956 |
|
$ |
1,521 |
|
$ |
187,435 |
|
$ |
|
|
$ |
|
|
|
|
At December 31, 2012 (In thousands) |
| |||||||||||||
|
|
|
|
Quoted Prices in |
|
Other |
|
Significant |
|
Total Changes |
| |||||
|
|
|
|
Active Markets for |
|
Observable |
|
Unobservable |
|
in Fair Values |
| |||||
|
|
Carrying Value |
|
Identical Assets |
|
Inputs |
|
Inputs |
|
Included in |
| |||||
|
|
December 31, 2012 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Period Earnings |
| |||||
Available-for-sale, Treasury Securities and Sallie Mae |
|
$ |
1,609 |
|
$ |
1,609 |
|
$ |
|
|
$ |
|
|
$ |
|
|
Available-for-sale, all other investment securities |
|
170,290 |
|
|
|
170,290 |
|
|
|
|
| |||||
|
|
$ |
171,899 |
|
$ |
1,609 |
|
$ |
170,290 |
|
$ |
|
|
$ |
|
|
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.
9. FAIR VALUE MEASUREMENTS (continued)
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We may be required from time to time, to measure certain assets at fair value on a non-recurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis at June 30, 2013 are included in the table below.
We also measure certain non-financial assets such as other real estate owned, TDRs, and repossessed or foreclosed property at fair value on a non-recurring basis. Generally, we estimate the fair value of these items using Level 2 inputs based on observable market data or Level 3 inputs based on discounting criteria.
|
|
At June 30, 2013 (In thousands) |
| ||||||||||
|
|
|
|
Quoted Prices in |
|
Other |
|
Significant |
| ||||
|
|
|
|
Active Markets for |
|
Observable |
|
Unobservable |
| ||||
|
|
Carrying Value |
|
Identical Assets |
|
Inputs |
|
Inputs |
| ||||
|
|
June 30, 2013 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| ||||
Impaired Loans |
|
|
|
|
|
|
|
|
| ||||
Legacy: |
|
|
|
|
|
|
|
|
| ||||
Real Estate |
|
|
|
|
|
|
|
|
| ||||
Commercial |
|
$ |
1,333 |
|
$ |
|
|
$ |
|
|
$ |
1,333 |
|
Residential |
|
1,055 |
|
|
|
|
|
1,055 |
| ||||
Acquired: |
|
|
|
|
|
|
|
|
| ||||
Real Estate |
|
|
|
|
|
|
|
|
| ||||
Commercial |
|
5,817 |
|
|
|
|
|
5,817 |
| ||||
Construction |
|
100 |
|
|
|
|
|
100 |
| ||||
Residential |
|
9,183 |
|
|
|
|
|
$ |
9,183 |
| |||
Commercial |
|
363 |
|
|
|
|
|
363 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total Impaired Loans |
|
17,851 |
|
|
|
|
|
17,851 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Real estate acquired in settlement of loans: |
|
|
|
|
|
|
|
|
| ||||
Legacy: |
|
|
|
|
|
|
|
|
| ||||
Real Estate |
|
|
|
|
|
|
|
|
| ||||
Commercial |
|
$ |
725 |
|
$ |
|
|
$ |
|
|
$ |
725 |
|
Acquired: |
|
|
|
|
|
|
|
|
| ||||
Real Estate |
|
|
|
|
|
|
|
|
| ||||
Commercial |
|
$ |
3,340 |
|
$ |
|
|
$ |
|
|
$ |
3,340 |
|
Residential |
|
1,332 |
|
|
|
|
|
1,332 |
| ||||
Total Real estate acquired in settlement of loans: |
|
5,397 |
|
|
|
|
|
5,397 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
$ |
23,248 |
|
$ |
|
|
$ |
|
|
$ |
23,248 |
|
9. FAIR VALUE MEASUREMENTS (continued)
|
|
At December 31, 2012 (In thousands) |
| ||||||||||
|
|
|
|
Quoted Prices in |
|
Other |
|
Significant |
| ||||
|
|
|
|
Active Markets for |
|
Observable |
|
Unobservable |
| ||||
|
|
Carrying Value |
|
Identical Assets |
|
Inputs |
|
Inputs |
| ||||
|
|
June 30, 2013 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| ||||
Impaired Loans |
|
|
|
|
|
|
|
|
| ||||
Legacy: |
|
|
|
|
|
|
|
|
| ||||
Real Estate |
|
|
|
|
|
|
|
|
| ||||
Commercial |
|
$ |
1,724 |
|
$ |
|
|
$ |
|
|
$ |
1,724 |
|
Residential |
|
592 |
|
|
|
|
|
592 |
| ||||
Acquired: |
|
|
|
|
|
|
|
|
| ||||
Real Estate |
|
|
|
|
|
|
|
|
| ||||
Commercial |
|
1,401 |
|
|
|
|
|
1,401 |
| ||||
Construction |
|
100 |
|
|
|
|
|
100 |
| ||||
Residential |
|
1,798 |
|
|
|
|
|
$ |
1,798 |
| |||
Commercial |
|
1,488 |
|
|
|
|
|
1,488 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total Impaired Loans |
|
7,103 |
|
|
|
|
|
7,103 |
| ||||
|
|
|
|
|
|
|
|
. |
| ||||
Real estate acquired in settlement of loans: |
|
|
|
|
|
|
|
|
| ||||
Legacy: |
|
|
|
|
|
|
|
|
| ||||
Real Estate |
|
|
|
|
|
|
|
|
| ||||
Commercial |
|
$ |
1,651 |
|
$ |
|
|
$ |
|
|
$ |
1,651 |
|
Acquired: |
|
|
|
|
|
|
|
|
| ||||
Real Estate |
|
|
|
|
|
|
|
|
| ||||
Commercial |
|
$ |
1,879 |
|
$ |
|
|
$ |
|
|
$ |
1,879 |
|
Residential |
|
189 |
|
|
|
|
|
189 |
| ||||
Total Real estate acquired in settlement of loans: |
|
3,719 |
|
|
|
|
|
3,719 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
$ |
10,822 |
|
$ |
|
|
$ |
|
|
$ |
10,822 |
|
As of June 30, 2013 and December 31, 2012, we estimated the fair value of impaired assets using Level 3 inputs to be $23.2 million and $3.7 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 10%. As a result of the acquisition of Maryland Bankcorp and WSB Holdings, we have segmented the other real estate owned 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 and WSB or obtained as a result of loans originated by MB&T and WSB (acquired). The increase in level 3 is due non-accrual loans, TDRs, and other real estate in the recent acquisition of WSB.
We use the following methodologies for estimating fair values of financial instruments that we do not measure on a recurring basis. The estimated fair values of financial instruments equal the carrying value of the instruments except as noted.
Cash and Cash Equivalents - For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.
Loans-We estimate the fair value of loans by discounting future cash flows using current rates for which we would make similar loans to borrowers with similar credit histories. We then adjust this calculated amount for any credit impairment
9. FAIR VALUE MEASUREMENTS (continued)
Loans held for Sale- Loans held for sale are carried at the lower of cost or market value. The fair values of loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics.
Investment Securities- We base the fair values of investment securities upon quoted market prices or dealer quotes.
Equity Securities- Equity Securities are carried at cost which approximates fair value.
Bank Owned Life Insurance - The carrying amount of Bank Owned Life Insurance (BOLI) purchased on a group of officers is a reasonable estimate of fair value. BOLI is an insurance product that provides an effective way to offset current employee benefit costs.
Accrued Interest Receivable and Payable- The carrying amount of accrued interest and dividends receivable on loans and investments and payable on borrowings and deposits approximate their fair values.
Interest bearing deposits-The fair value of demand deposits and savings accounts is the amount payable on demand. We estimate the fair value of fixed maturity certificates of deposit using the rates currently offered for deposits of similar remaining maturities.
Non-Interest bearing deposits- The fair value of non-interest bearing accounts is the amount payable on demand at the reporting date.
Long and short term borrowings- The fair value of long and short term fixed rate borrowings is estimated by discounting the value of contractual cash flows using rates currently offered for advances with similar terms and remaining maturities.
Loan Commitments, Standby and Commercial Letters of Credit-Lending commitments have variable interest rates and escape clauses if the customers credit quality deteriorates. Therefore, the fair value of these items is insignificant and we have not included these in the following table.
9. FAIR VALUE MEASUREMENTS (continued)
Under ASC Topic 825, entities may choose to measure eligible financial instruments at fair value at specified election dates. The fair value measurement option (i) may be applied instrument by instrument, with certain exceptions, (ii) is generally irrevocable and (iii) is applied only to entire instruments and not to portions of instruments. We must report in earnings unrealized gains and losses on items for which we have elected the fair value measurement option at each subsequent reporting date. We measure certain financial assets and financial liabilities at fair value on a non-recurring basis. These assets and liabilities are subject to fair value adjustments in certain circumstances such as when there is evidence of impairment.
|
|
June 30, 2013 (In thousands) |
|
December 31, 2012 (In thousands) |
| ||||||||||||||||||||
|
|
|
|
Quoted Prices |
|
Significant |
|
Significant |
|
|
|
Quoted Prices |
|
Significant |
|
Significant |
| ||||||||
|
|
|
|
in Active |
|
Other |
|
Other |
|
|
|
in Active |
|
Other |
|
Other |
| ||||||||
|
|
Carrying |
|
Markets for |
|
Observable |
|
Unobservable |
|
Carrying |
|
Markets for |
|
Observable |
|
Unobservable |
| ||||||||
|
|
Amount |
|
Identical Assets |
|
Inputs |
|
Inputs |
|
Amount |
|
Identical Assets |
|
Inputs |
|
Inputs |
| ||||||||
|
|
(000s) |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
(000s) |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents |
|
$ |
53,937 |
|
$ |
53,737 |
|
$ |
|
|
$ |
|
|
$ |
28,691 |
|
$ |
28,691 |
|
$ |
|
|
$ |
|
|
Loans receivable, net |
|
787,172 |
|
|
|
|
|
799,016 |
|
595,145 |
|
|
|
|
|
599,320 |
| ||||||||
Loans held for sale |
|
4,765 |
|
|
|
4,938 |
|
|
|
|
|
|
|
|
|
|
| ||||||||
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Available for sale |
|
184,191 |
|
|
|
184,191 |
|
|
|
169,079 |
|
|
|
169,079 |
|
|
| ||||||||
Equity Securities |
|
3,709 |
|
|
|
3,709 |
|
|
|
3,615 |
|
|
|
3,615 |
|
|
| ||||||||
Bank Owned Life Insurance |
|
30,135 |
|
|
|
30,135 |
|
|
|
16,869 |
|
|
|
16,869 |
|
|
| ||||||||
Accrued interest receivable |
|
1,184 |
|
|
|
1,184 |
|
2,440 |
|
1,031 |
|
|
|
1,031 |
|
1,608 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Non-interest-bearing |
|
213,571 |
|
|
|
213,571 |
|
|
|
188,896 |
|
|
|
188,896 |
|
|
| ||||||||
Interest bearing |
|
781,969 |
|
|
|
784,463 |
|
|
|
546,563 |
|
|
|
554,778 |
|
|
| ||||||||
Short term borrowings |
|
28,818 |
|
|
|
28,818 |
|
|
|
37,905 |
|
|
|
37,905 |
|
|
| ||||||||
Long term borrowings |
|
6,143 |
|
|
|
6,396 |
|
|
|
6,192 |
|
|
|
6,488 |
|
|
| ||||||||
Accrued Interest payable |
|
259 |
|
|
|
259 |
|
|
|
547 |
|
|
|
547 |
|
|
| ||||||||
10. ACCOUNTING STANDARDS UPDATES
ASU 2011-11 Balance Sheet-Disclosures about Offering Assets and Liabilities amends Topic 210 Balance Sheet to require an entity to disclose both gross and net information about financial instruments such as sales and repurchase agreements and reverse sale and repurchase agreement and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU No. 2013-01 Balance Sheet (Topic 210) Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, clarifies that ordinary trade receivables are not within the scope of ASU 2011-11. ASU 2011-11, as amended by ASU 2013-01, was effective for annual and interim periods beginning on January 1, 2013, and it did not have a material impact on our consolidated financial statements or results of operations.
ASU 2012-02 Intangibles-Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment gives entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that an indefinite lived intangible asset is impaired. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that an indefinite lived intangible asset is impaired, then the entity must perform the quantitative impairment test. If, under the quantitative impairment test, the carrying amount of the intangible asset exceeds its fair value, an entity should recognize an impairment loss in the amount of that excess. Permitting an entity to assess qualitative factors when testing indefinite lived intangible assets for impairment results in guidance that is similar to the goodwill impairment testing guidance in ASU 2011-08. ASU 2012-02 was effective January 1, 2013 (early adoption permitted) and it did not have a significant impact on our financial statements or results of operations.
ASU 2013-02 Comprehensive Income, (Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income amends the recent guidance related to the reporting of comprehensive income to enhance the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 was effective January 1, 2013 and it did not have an impact on our financial statements. The required disclosure is included on our Consolidated Statement of Comprehensive Income, which represents unrealized holding gains and losses, net of tax, on our investment securities reported at fair value as determined by quoted market prices. The line item affected in the consolidated statements of income by the reclassified amounts is gain on sales or calls of investment securities.
Item 2. Managements 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.
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.
Our primary business is to own all of the capital stock of Old Line Bank. We also have an approximately $612,000 investment in a real estate investment limited liability company named Pointer Ridge Office Investment, LLC (Pointer Ridge). We own 62.5% of Pointer Ridge. Frank Lucente, one of our directors and a director of Old Line Bank, controls 12.5% of Pointer Ridge and controls the manager of Pointer Ridge. The purpose of Pointer Ridge is to acquire, own, hold for profit, sell, assign, transfer, operate, lease, develop, mortgage, refinance, pledge and otherwise deal with real property located at the intersection of Pointer Ridge Road and Route 301 in Bowie, Maryland. Pointer Ridge owns a commercial office building containing approximately 40,000 square feet and leases this space to tenants. We lease approximately 73% of this building for our main office and operate a branch of Old Line Bank from this address.
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). This acquisition created the fifth largest independent commercial bank based in Maryland, with assets of more than $1.1 billion and with 23 full service branches serving five counties. Since the acquisition, teams from both institutions have worked diligently to join the two organizations.
Summary of Recent Performance and Other Activities
Our net income available to common stockholders decreased $2.1 million for a net loss of $84,285 for the three months ended June 30, 2013, compared to net earnings of $2.0 million for the three months ended June 30, 2012. Loss was $0.01 per basic and diluted common share for the three months ended June 30, 2013 compared to earnings of $0.30 and $0.29, respectively, per basic and diluted common share for the same period in 2012. This decrease is primarily the result of $2.9 million of merger related expenses incurred during the second quarter of 2013. These merger related expenses were primarily related to legal fees, investment banking fees, severance and charges associated with the termination of WSBs core data processing contract in connection with our acquisition of WSB Holdings. Earnings were $1.2 million, or $0.16 and $0.15 per basic and diluted share, for the six months ended June 30, 2013, compared with $3.8 million, or $0.55 per basic and diluted share for the same six month period last year. The decrease is primarily the result of an increase in non-interest expenses which includes the $2.9 million merger and integration expenses.
The following highlights contain additional financial data and events that have occurred during the three and six months ended June 30, 2013:
· The merger with WSB Holdings became effective May 10, 2013, causing total assets to grow to $1.1 billion at June 30, 2013 compared to $861.9 million at December 31, 2012.
· Total loans grew $192.0 million or 32.27% during the six months ended June 30, 2013, to $787.2 million at June 30, 2013 compared to $595.1 million at December 31, 2012, primarily as a result of the acquisition of WSB Holdings.
· Non-interest bearing deposits grew $24.7 million, or 13.07%, and interest bearing deposits grew $235.4 million, or 43.07%, during the six months ended June 30, 2013 compared to their respective balances at December 31, 2012, primarily as a result of the acquisition of WSB Holdings.
· Our asset quality remained strong:
· At June 30, 2013, we had four legacy loans (loans originated by Old Line Bank) on non-accrual status in the amount of $1.9 million.
· At June 30, 2013, we had 105 acquired loans (loans acquired from MB&T and WSB pursuant to the mergers) on non-accrual status totaling $14.8 million.
· At June 30, 2013, we had accruing legacy loans past due between 30 and 89 days in the amount of $2.6 million and $0 accruing legacy loans 90 or more days past due.
· At June 30, 2013, we had accruing acquired loans totaling $3.6 million past due between 30 and 89 days and one accruing acquired loan of $8,056 that is 90 or more days past due.
· We ended the second quarter of 2013 with a book value of $10.93 per common share and a tangible book value of $9.65 per common share.
· We maintained liquidity and by all regulatory measures remained well capitalized.
· We decreased the provision for loan losses by $350,000 during the six month period as compared to the six months ended June 30, 2012.
· We recognized a loss, net of taxes, on our investment in Pointer Ridge of approximately $11,500 and $24,600, respectively, for the three and six month periods ended June 30, 2013.
On May 11, 2013, all five WSB branches were rebranded as Old Line Bank branches. The data processing and accounting systems are scheduled to be consolidated during the fourth quarter of 2013. As discussed below, during the second quarter of 2013, we also substantially completed the assessment and recordation on our financial statements of WSB Holdings assets and liabilities at fair value as required by current accounting guidance. We have retained, and expect to continue to retain, all of WSBs branches, and the branch personnel with severance of employees occurring at WSBs operations, accounting and executive offices. We are pleased to have the remaining WSB personnel as part of the Old Line Bank team and anticipate that they will be a significant contributor to our success.
Pursuant to the merger agreement, the stockholders of WSB Holdings received approximately 2.9 million shares of Old Line Bancshares common stock and aggregate cash consideration of $16.7 million. The total merger consideration was $54.7 million based on recent trading prices of Old Line Bancshares common stock at the time of the merger. Included in Note 3 to the consolidated financial statements is additional discussion about the WSB Holdings acquisition.
On March 29, 2013, we closed our branch located at 12080 Old Line Centre, Waldorf, Maryland. In conjunction with this closure, we disposed of all of the fixed assets that we did not transfer to another location and accelerated the remaining lease payments due under the lease agreement for this location. We transferred the deposits of this branch to one of our other two Waldorf locations. The closure of this facility eliminates approximately $250,000 in annual non-interest expense.
During the first quarter of 2013, we opened a loan production office located at 12501 Prosperity Drive, Suite 215, Silver Spring, in Montgomery County, Maryland. We have hired a Senior Vice President with over 30 years of banking experience to lead this office. This office will allow us to expand our services to the Montgomery County market. We
anticipate that the individuals in this office will generate sufficient interest and non-interest income during 2013 and beyond to more than offset the cost associated with this office.
During the first six months of 2013, we sold eight properties that we obtained through foreclosure. With the sale of these properties, we recorded a $201,224 loss on sales of other real estate owned. We expect that the sale of these properties will reduce future legal and maintenance costs.
In accordance with accounting for business combinations, during the second quarter of 2013, we recorded the acquired assets and liabilities of WSB at their estimated fair value on May 10, 2013, the acquisition date. The determination of the fair value of the loans caused a significant write down in the value of certain loans, which we assigned to an accretable or non-accretable discount. We will recognize the accretable discount as interest income over the remaining term of the loan. The non-accretable discount will be adjusted based on subsequent increases or decreases to the expected cash flows and will result in either an increase to accretion income or provisions for loan losses, respectively. The accretion of the loan marks, along with other fair value adjustments, favorably impacted our net interest income by $26,222 for the six months ended June 30, 2013 compared to the six months ended June 30, 2012.
Our combined total accretion of the loan marks, along with other fair value adjustments, for both MB&T and WSB favorably impacted out net interest income by $300,116 and $540,592 for the three and six months ended June 30, 2013.
The following summarizes the highlights of our financial performance for the three and six month period ended June 30, 2013 compared to same periods in 2012 (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) |
| |||||||||
|
|
2013 |
|
2012 |
|
$ Change |
|
% Change |
| |||
|
|
|
|
|
|
|
|
|
| |||
Net income available to common stockholders |
|
$ |
(84 |
) |
$ |
2,019 |
|
$ |
(2,103 |
) |
(104.16 |
)% |
Interest revenue |
|
10,308 |
|
9,764 |
|
544 |
|
5.57 |
| |||
Interest expense |
|
1,104 |
|
1,300 |
|
(196 |
) |
(15.08 |
) | |||
Net interest income after provision for loan losses |
|
9,003 |
|
8,088 |
|
915 |
|
11.31 |
| |||
Non-interest revenue |
|
1,153 |
|
965 |
|
188 |
|
19.48 |
| |||
Non-interest expense |
|
10,535 |
|
6,068 |
|
4,467 |
|
73.62 |
| |||
Average total loans |
|
721,223 |
|
558,859 |
|
162,364 |
|
29.05 |
| |||
Average interest earning assets |
|
904,597 |
|
729,382 |
|
175,215 |
|
24.02 |
| |||
Average total interest bearing deposits |
|
686,544 |
|
524,539 |
|
162,005 |
|
30.89 |
| |||
Average non-interest bearing deposits |
|
205,050 |
|
181,789 |
|
23,261 |
|
12.80 |
| |||
Net interest margin (1) |
|
4.28 |
% |
4.84 |
% |
|
|
|
| |||
Return on average equity |
|
(0.35 |
)% |
12.27 |
% |
|
|
|
| |||
Basic earnings per common share |
|
$ |
(0.01 |
) |
$ |
0.30 |
|
$ |
(0.31 |
) |
(103.33 |
) |
Diluted earnings per common share |
|
(0.01 |
) |
0.29 |
|
(0.30 |
) |
(103.45 |
) |
|
|
Six months ended June 30, |
| |||||||||
|
|
(Dollars in thousands) |
| |||||||||
|
|
2013 |
|
2012 |
|
$ Change |
|
% Change |
| |||
|
|
|
|
|
|
|
|
|
| |||
Net income available to common stockholders |
|
$ |
1,202 |
|
$ |
3,785 |
|
$ |
(2,583 |
) |
(68.24 |
)% |
Interest revenue |
|
19,125 |
|
18,866 |
|
259 |
|
1.37 |
| |||
Interest expense |
|
2,074 |
|
2,640 |
|
(566 |
) |
(21.44 |
) | |||
Net interest income after provision for loan losses |
|
16,651 |
|
15,476 |
|
1,175 |
|
7.59 |
| |||
Non-interest revenue |
|
2,381 |
|
1,875 |
|
506 |
|
26.99 |
| |||
Non-interest expense |
|
17,616 |
|
11,776 |
|
5,840 |
|
49.59 |
| |||
Average total loans |
|
663,782 |
|
554,227 |
|
109,555 |
|
19.77 |
| |||
Average interest earning assets |
|
838,758 |
|
721,796 |
|
116,962 |
|
16.20 |
| |||
Average total interest bearing deposits |
|
619,967 |
|
523,081 |
|
96,886 |
|
18.52 |
| |||
Average non-interest bearing deposits |
|
196,305 |
|
173,196 |
|
23,109 |
|
13.34 |
| |||
Net interest margin (1) |
|
4.32 |
% |
4.67 |
% |
|
|
|
| |||
Return on average equity |
|
2.89 |
% |
11.59 |
% |
|
|
|
| |||
Basic earnings per common share |
|
$ |
0.16 |
|
$ |
0.55 |
|
$ |
(0.39 |
) |
(70.91 |
)% |
Diluted earnings per common share |
|
0.15 |
|
0.55 |
|
(0.40 |
) |
(72.73 |
) |
(1) See Reconciliation of Non-GAAP Measures
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 collecting payments on non-accrual and past due loans, profitably disposing of other real estate owned, enhancing and maintaining credit quality, maintaining an attractive branch network, expanding fee income, generating extensions of core banking services, and using technology to maximize stockholder value. During the past two years, we have expanded in Prince Georges County and Anne Arundel County, Maryland and, through the acquisition of Maryland Bankcorp, in Charles County and into St. Marys and Calvert Counties, Maryland. The acquisition of WSB Holdings will continue to further enhance our presence in Charles, Prince Georges and Anne Arundel counties.
We use the Internet and technology to augment our growth plans. Currently, we offer our customers image technology, Internet banking with on line account access and bill payer service. We provide selected commercial customers the ability to remotely capture their deposits and electronically transmit them to us. We will continue to evaluate cost effective ways that technology can enhance our management capabilities, products and services.
We may take advantage of strategic opportunities presented to us via mergers occurring in our marketplace. For example, we may purchase branches that other banks close or lease branch space from other banks or hire additional loan officers. We also continually evaluate and consider opportunities with financial services companies or institutions with which we may become a strategic partner, merge or acquire such as we have done with Maryland Bankcorp and WSB Holdings.
Although the current economic climate continues to present significant challenges for our industry, we have worked diligently towards our goal of becoming the premier community bank in the Washington, D.C. market, including through the new branches we acquired in the WSB acquisition and the attendant increased penetration into the Charles, Prince Georges and Anne Arundel County markets. While we are uncertain about the pace of economic growth or the impact of the current political environment, and we believe that high unemployment and growing national debt will continue to dampen the economic climate, 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. We believe that we are well positioned to capitalize on the opportunities that may become available in the current economy as well as a healthier economy.
If the Federal Reserve maintains the federal funds rate at current levels and the economy remains stable, we believe that we can continue to grow total loans and deposits during the remainder of 2013. We also believe that we will be able to
maintain our current level of net interest margins during the remainder of 2013. As a result of this growth and expected continued strength in the net interest margin, we expect that net interest income will continue to increase during the remainder of 2013, although there can be no guarantee that this will be the case.
We also expect that salaries and benefits expenses and other operating expenses will be higher in 2013 than they were in 2012 due to the acquisition of WSB Holdings. 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. Due to the merger with WSB Holdings, until final conversion we anticipate that merger related expenses may cause earnings to be lower than would otherwise be expected. However, merger related costs in connection with the WSB Holdings merger should be substantially lower going forward than those incurred to date and we anticipate that the merger will be accretive to earnings by the first quarter of 2014.
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, 2012, we consider our critical accounting policies to be the allowance for loan losses, other-than-temporary impairment of investment securities, real estate owned, goodwill and other intangible assets, deferred income taxes, business combinations and accounting for acquired loans, and estimation of fair value.
Results of Operations
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 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.
Three months ended June 30, 2013 compared to three months ended June 30, 2012
Net interest income before provision for loan losses for the three months ended June 30, 2013 increased $740 thousand or 8.75% to $9.2 million from $8.5 million for the same period in 2012. As discussed below and outlined in detail in the Rate/Volume Analysis, this increase was the result of an increase in average interest earning assets, partially offset by a decrease in yield on such assets, and a decline in interest paid on interest bearing liabilities. The accretion of the fair value and credit quality negatively impacted net interest income. This decrease is primarily due to a lower dollar value of impaired loans that we acquired from MB&T that was repaid during the three month period ending June 30, 2013 relative to the same three months last year, which caused a lower accretion of fair value adjustments. Although we continued to receive faster than expected repayment of the impaired loans that we acquired from MB&T, the rate of repayment was significantly slower than it was during the second quarter of 2012.
A competitive rate environment and a low prime rate resulted in decreases in both the rate paid on interest bearing liabilities and the yield on interest earning assets during the three months ended June 30, 2013, however, the low market yields on interest bearing assets that resulted in the decrease in interest income had a much greater impact on, and continue to negatively impact, net interest income. We continue to adjust the mix and volume of interest earning assets and liabilities on the balance sheet to maintain a relatively stable net interest margin.
Total interest revenue increased $543,907, or 5.57%, to $10.3 million during the three months ended June 30, 2013 compared to $9.8 million during the three months ended June 30, 2012. As noted above, we offset the effect on interest income and net interest income caused by the low rate environment by growing total average interest earning assets by $175.2 million or 24.03% to $904.6 million for the three months ended June 30, 2013 from $729.4 million for the three months ended June 30, 2012, as well as by changes in the mix of our interest-earning assets. The increase is partially due to the income on the loans and investments acquired in the WSB Holdings transaction.
Total interest expense decreased $195,884, or 15.08%, to $1.1 million during the three months ended June 30, 2013 from $1.3 million for the same period in 2012, as a result of the decrease in the average interest rate paid on interest bearing liabilities partially offset by an increase in the average volume of interest bearing liabilities, primarily interest bearing deposits. The average rate paid on interest bearing liabilities decreased to 0.56% during the three months ended June 30, 2013 compared to 0.83% during the three months ended June 30, 2012, while average interest bearing deposits increased $162.0 million or 30.89% to $686.5 million for the three months ended June 30, 2013 from $524.5 million for the three months ended June 30, 2012.
The growth in average interest earning assets and interest bearing deposits was primarily the result of the acquisition of WSB Holdings, but we also experienced organic growth in both these areas as a result of increased name recognition in our market place, including as a result of the acquisition, and our business development efforts.
Non-interest bearing deposits allow us to fund growth in interest earning assets at minimal cost. As a result of the acquisition of WSB and the growth generated from our branch network and commercial loan officers, our average non-interest bearing deposits increased $23.3 million to $205.1 million from $181.8 million during the three months ended June 30, 2013, compared to the three months ended June 30, 2012.
Our net interest margin was 4.28% for the three months ended June 30, 2013 compared to 4.84% for the three months ended June 30, 2012. The yield on average interest earning assets decreased 79 basis points during the period from 5.56% for the quarter ended June 30, 2012 to 4.77% for the quarter ended June 30, 2013. Forty nine basis points of this decrease was primarily because we had a lower dollar value of impaired loans that we acquired from MB&T that were repaid during the 2013 period relative to the same quarter last year which caused a lower accretion of fair value adjustments. This, coupled with re-pricing in the loan portfolio and slightly lower yields on new loans, caused the average loan yield to decline.
During the three months ended June 30, 2013 and 2012, we continued to successfully collect payments on acquired loans that we had recorded at fair value according to ASC 310-20 and ASC 310-30, albeit at a lower dollar value during the 2013 period than we accomplished during the same period last year. These payments were a direct result of our efforts to negotiate payments, sell notes or foreclose on and sell collateral after the acquisition date. This decrease is primarily due to a lower dollar value of impaired loans that we acquired from MB&T that was repaid during the three month period ending June 30, 2013 relative to the same three months last year, which caused a lower accretion of fair value adjustment.
Total fair value accretion decreased for the three months ending June 30, 2013 as compared to June 30, 2012 primarily due to one real estate loan that was paid off during last year representing approximately $683,000 in accretion. The accretion of the fair value adjustments positively impacted the yield on loans and increased the net interest margin as follows:
|
|
Three months ended June 30, |
| ||||||||
|
|
2013 |
|
2012 |
| ||||||
|
|
Fair Value |
|
% Impact on |
|
Fair Value |
|
% Impact on |
| ||
Commercial loans |
|
$ |
38,933 |
|
0.02 |
% |
$ |
42,718 |
|
0.02 |
% |
Mortgage loans(1) |
|
173,261 |
|
0.07 |
|
1,007,812 |
|
0.56 |
| ||
Consumer loans |
|
2,876 |
|
0.00 |
|
1,899 |
|
0.00 |
| ||
Interest bearing deposits |
|
85,046 |
|
0.05 |
|
57,081 |
|
0.03 |
| ||
Total Fair Value Accretion |
|
$ |
300,116 |
|
0.14 |
% |
$ |
1,109,510 |
|
0.61 |
% |
(1) In 2013, we reclassified mortgage loans totaling $873,918 to commercial loans, the impact of this reclassification was immaterial to prior period net interest income or financial condition. Therefore, we did not adjust prior period information.
The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the three months ended June 30, 2013 and 2012, showing the average distribution of assets, liabilities, stockholders equity and related income, expense and corresponding weighted average yields and rates. The average balances used in this table and other statistical data were calculated using average daily balances.
|
|
Average Balances, Interest and Yields |
| ||||||||||||||
|
|
2013 |
|
2012 |
| ||||||||||||
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
| ||||
Three months ended June 30, |
|
balance |
|
Interest |
|
Yield |
|
balance |
|
Interest |
|
Yield |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal funds sold(1) |
|
$ |
6,778,841 |
|
1,784 |
|
0.11 |
% |
$ |
4,568,009 |
|
$ |
1,892 |
|
0.17 |
| |
Interest bearing deposits |
|
199,541 |
|
61 |
|
0.12 |
|
4,150,881 |
|
2,593 |
|
0.25 |
| ||||
Investment securities(1)(2) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. treasury |
|
1,248,692 |
|
452 |
|
0.15 |
|
1,248,504 |
|
2,518 |
|
0.81 |
| ||||
U.S. government agency |
|
44,930,315 |
|
143,760 |
|
1.28 |
|
24,448,432 |
|
96,418 |
|
1.59 |
| ||||
Mortgage backed securities |
|
67,906,312 |
|
329,618 |
|
1.95 |
|
90,311,537 |
|
592,725 |
|
2.64 |
| ||||
Municipal securities |
|
62,664,327 |
|
722,819 |
|
4.63 |
|
45,842,852 |
|
615,460 |
|
5.40 |
| ||||
Other |
|
3,810,214 |
|
66,256 |
|
6.97 |
|
3,918,725 |
|
44,590 |
|
4.58 |
| ||||
Total investment securities |
|
180,559,860 |
|
1,262,905 |
|
2.81 |
|
165,770,050 |
|
1,351,711 |
|
3.28 |
| ||||
Loans: (1) (3) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Commercial |
|
107,248,011 |
|
1,218,133 |
|
4.56 |
|
98,576,116 |
|
1,248,050 |
|
5.09 |
| ||||
Mortgage |
|
602,442,723 |
|
8,111,491 |
|
5.40 |
|
447,080,254 |
|
7,295,222 |
|
6.56 |
| ||||
Consumer |
|
11,532,159 |
|
167,054 |
|
5.81 |
|
13,203,045 |
|
175,867 |
|
5.36 |
| ||||
Total loans |
|
721,222,893 |
|
9,496,678 |
|
5.28 |
|
558,859,415 |
|
8,719,139 |
|
6.27 |
| ||||
Allowance for loan losses |
|
4,164,025 |
|
|
|
|
|
3,966,131 |
|
|
|
|
| ||||
Total loans, net of allowance |
|
717,058,868 |
|
9,496,678 |
|
5.31 |
|
554,893,284 |
|
8,719,139 |
|
6.32 |
| ||||
Total interest earning assets(1) |
|
904,597,110 |
|
10,761,428 |
|
4.77 |
|
729,382,224 |
|
10,075,335 |
|
5.56 |
| ||||
Non-interest bearing cash |
|
45,762,911 |
|
|
|
|
|
34,172,441 |
|
|
|
|
| ||||
Premises and equipment |
|
31,016,913 |
|
|
|
|
|
23,764,947 |
|
|
|
|
| ||||
Other assets |
|
54,183,237 |
|
|
|
|
|
38,545,122 |
|
|
|
|
| ||||
Total assets |
|
$ |
1,035,560,171 |
|
|
|
|
|
$ |
825,864,734 |
|
|
|
|
| ||
Liabilities and Stockholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Savings |
|
$ |
120,544,161 |
|
34,111 |
|
0.11 |
|
$ |
63,030,500 |
|
52,191 |
|
0.33 |
| ||
Money market and NOW |
|
199,830,570 |
|
150,155 |
|
0.30 |
|
130,191,323 |
|
132,772 |
|
0.41 |
| ||||
Other time deposits |
|
366,169,375 |
|
780,689 |
|
0.86 |
|
331,317,176 |
|
902,237 |
|
1.10 |
| ||||
Total interest bearing deposits |
|
686,544,106 |
|
964,955 |
|
0.56 |
|
524,538,999 |
|
1,087,200 |
|
0.83 |
| ||||
Borrowed funds |
|
41,494,215 |
|
139,472 |
|
1.35 |
|
46,432,730 |
|
213,111 |
|
1.85 |
| ||||
Total interest bearing liabilities |
|
728,038,321 |
|
1,104,427 |
|
0.61 |
|
570,971,729 |
|
1,300,311 |
|
0.92 |
| ||||
Non-interest bearing deposits |
|
205,050,472 |
|
|
|
|
|
181,789,188 |
|
|
|
|
| ||||
|
|
933,088,793 |
|
|
|
|
|
752,760,917 |
|
|
|
|
| ||||
Other liabilities |
|
6,624,502 |
|
|
|
|
|
6,172,023 |
|
|
|
|
| ||||
Non-controlling interest |
|
369,671 |
|
|
|
|
|
423,568 |
|
|
|
|
| ||||
Stockholders equity |
|
95,477,205 |
|
|
|
|
|
66,508,226 |
|
|
|
|
| ||||
Total liabilities and stockholders equity |
|
$ |
1,035,560,171 |
|
|
|
|
|
$ |
825,864,734 |
|
|
|
|
| ||
Net interest spread(1) |
|
|
|
|
|
4.16 |
|
|
|
|
|
4.64 |
| ||||
Net interest income and Net interest margin(1) |
|
|
|
$ |
9,657,001 |
|
4.28 |
% |
|
|
$ |
8,775,024 |
|
4.84 |
| ||
(1) Interest revenue 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.
(3) Average non-accruing loans for the three month periods ended June 30, 2013 and 2012 were $11,595,235 and $6,637,043, respectively. There was no non-accrual interest included in interest income.
The following table describes the impact on our interest revenue and expense resulting from changes in average balances and average rates for the three months ended June 30, 2013 and 2012. We have allocated the change in interest revenue, 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, |
| |||||||
|
|
2013 compared to 2012 |
| |||||||
|
|
Variance due to: |
| |||||||
|
|
Total |
|
Rate |
|
Volume |
| |||
|
|
|
|
|
|
|
| |||
Interest earning assets: |
|
|
|
|
|
|
| |||
Federal funds sold(1) |
|
$ |
(108 |
) |
$ |
(1,457 |
) |
$ |
1,349 |
|
Interest bearing deposits |
|
(2,532 |
) |
(1,729 |
) |
(803 |
) | |||
Investment Securities(1) |
|
|
|
|
|
|
| |||
U.S. treasury |
|
(2,066 |
) |
(2,067 |
) |
1 |
| |||
U.S. government agency |
|
47,342 |
|
(54,749 |
) |
102,091 |
| |||
Mortgage backed securities |
|
(263,107 |
) |
(212,923 |
) |
(50,184 |
) | |||
Municipal securities |
|
107,359 |
|
(210,834 |
) |
318,193 |
| |||
Other |
|
21,666 |
|
23,828 |
|
(2,162 |
) | |||
Loans:(1) |
|
|
|
|
|
|
| |||
Commercial |
|
(29,917 |
) |
(207,005 |
) |
177,088 |
| |||
Mortgage |
|
816,269 |
|
(2,865,906 |
) |
3,682,175 |
| |||
Consumer |
|
(8,813 |
) |
26,087 |
|
(34,900 |
) | |||
Total interest revenue (1) |
|
686,093 |
|
(3,506,755 |
) |
4,192,848 |
| |||
|
|
|
|
|
|
|
| |||
Interest bearing liabilities |
|
|
|
|
|
|
| |||
Savings |
|
(18,079 |
) |
(84,443 |
) |
66,364 |
| |||
Money market and NOW |
|
17,383 |
|
(83,206 |
) |
100,589 |
| |||
Other time deposits |
|
(121,548 |
) |
(278,560 |
) |
157,012 |
| |||
Borrowed funds |
|
(73,639 |
) |
(67,046 |
) |
(6,593 |
) | |||
Total interest expense |
|
(195,883 |
) |
(513,255 |
) |
317,372 |
| |||
|
|
|
|
|
|
|
| |||
Net interest income(1) |
|
$ |
881,976 |
|
$ |
(2,993,500 |
) |
$ |
3,875,476 |
|
Six months ended June 30, 2013 compared to six months ended June 30, 2012
Net interest income before provision for loan losses for the six months ended June 30, 2013 increased $825 thousand or 5.08% to $17.1 million from $16.2 million for the same period in 2012. As discussed below and outlined in detail in the Rate/Volume Analysis, these changes were the result of a decline in interest paid on interest bearing liabilities and growth in average interest earning assets partially offset by the decrease of $1.1 million in the yield on such assets. The accretion of the fair value and credit quality adjustments negatively impacted net interest income as compared to the same period last year
As with the three month period discussed above, a competitive rate environment and a low prime rate resulted in decreases in both the rate paid on interest bearing liabilities and the yield on interest earning assets. Although this caused low market yields that continue to negatively impact net interest income, the relatively stable rate environment has allowed us to continue to adjust the mix and volume of interest earning assets and liabilities on the balance sheet.
Total interest revenue increased $259 thousand, or 1.38%, to $19.1 million during the six months ended June 30, 2013 from $18.9 million during the same period of 2012. We offset the effect of lower loan and investment yields on net interest income caused by the low rate environment primarily by growing total average interest earning assets $117.0 million or 16.21% to $838.8 million for the six months ended June 30, 2013 from $721.8 million for the six months ended June 30, 2012.
Total interest expense decreased $566 thousand, or 21.45%, to $2.0 million during the six months ended June 30, 2013 from $2.6 million during the same period last year, as a result of a decrease in the interest rate paid on interest bearing liabilities partially offset by an increase in the average volume of interest bearing liabilities. Growth in average interest bearing deposits, which increased to $620.0 million for the six months ended June 30, 2013 from $523.1 million for the six months ended
June 30, 2012, was the primary cause of the growth in interest bearing liabilities, while the average rate paid on interest bearing liabilities decreased to 0.63% during the six months ended June 30, 2013 compared to 0.93% during the six months ended June 30, 2012.
The growth in both average interest earning assets and interest bearing deposits was primarily a result of the acquisition of WSB in May 2013, but as with the three month period ending June 30, 2013, we also saw organic growth in both interest earning assets and interest bearing deposits.
Non-interest bearing deposits allow us to fund growth in interest earning assets at minimal cost. As a result of the WSB Holdings acquisition and growth generated from our branch network and lenders, our average non-interest bearing deposits increased $23.1 million to $196.3 million during the six months ended June 30, 2013 from $173.2 million during the same period last year.
Our net interest margin was 4.32% for the six months ended June 30, 2013 compared to 4.67% for the six months ended June 30, 2012. The yield on average interest earning assets decreased 60 basis points during the six month period from 5.41% for the six months ended June 30, 2012 compared to 4.82% for the six months ended June 30, 2013. This decrease is primarily due to a lower dollar value of impaired loans that we acquired from MB&T that was repaid during the six month period ending June 30, 2013 relative to the same six months last year, which caused a lower accretion of fair value adjustments. Re-pricing in the loan portfolio and slightly lower yields on our new loans also caused the average loan yield to decline. The decline in the yield on interest bearing liabilities was the result of a decline in rates paid on money market, NOW and other time deposits. The accretion of fair value adjustments on certificates of deposits acquired from MB&T and WSB also slightly reduced the yield paid on other time deposits.
With the branches acquired in the WSB Holdings acquisition and our increased presence in Anne Arundel, Charles, and Prince Georges counties, we anticipate that we will be able to continue to grow earning assets and deposits during the remainder of 2013. We also believe that we will maintain our current level of net interest margin for the remainder of 2013, although we will not be able to maintain this net interest margin if we fail to collect on a significant portion of impaired acquired loans. As a result of expected growth and maintenance of the net interest margin, we expect that net interest income will continue to increase during the remainder of 2013, although there can be no guarantee that this will be the case.
One of our primary sources of funding loans, investments and interest bearing deposits is non-interest bearing demand deposits. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) depository institutions have been permitted to pay interest on business transaction and other accounts since July 21, 2011. Although we have not yet experienced any impact from this provision of the legislation on our operations, it is possible that interest costs associated with deposits will increase.
During the six months ended June 30, 2013 and 2012, we continued to successfully collect payments on acquired loans that we had recorded at fair value according to ASC 310-20 and ASC 310-30, albeit at a lower dollar value during the 2013 period than we accomplished during the same period last year. These payments were a direct result of our efforts to negotiate payments, sell notes or foreclose on and seek collateral after the acquisition date. This decrease is primarily due to a lower dollar value of impaired loans that we acquired from MB&T that was repaid during the six month period ending June 30, 2013 relative to the same six months last year, which caused a lower accretion of fair value adjustment.
Total fair value accretion decreased for the six months ending June 30, 2013 as compared to June 30, 2012 primarily due to one real estate loan that was paid off during last year representing approximately $683,000 in accretion. The accretion of the fair value adjustments positively impacted the yield on loans and increased the net interest margin as follows:
|
|
Six months ended June 30, |
| ||||||||
|
|
2013 |
|
2012 |
| ||||||
|
|
Fair Value |
|
% Impact on |
|
Fair Value |
|
% Impact on |
| ||
Commercial loans |
|
$ |
248,077 |
|
0.15 |
% |
$ |
84,470 |
|
0.02 |
% |
Mortgage loans(1) |
|
168,761 |
|
0.10 |
|
1,431,087 |
|
0.40 |
| ||
Consumer loans |
|
5,247 |
|
0.00 |
|
3,592 |
|
0.00 |
| ||
Interest bearing deposits |
|
118,507 |
|
0.08 |
|
121,894 |
|
0.03 |
| ||
Total Fair Value Accretion |
|
$ |
540,592 |
|
0.33 |
% |
$ |
1,641,043 |
|
0.45 |
% |
(1) In 2013, we reclassified mortgage loans totaling $873,918 to commercial loans, the impact of this reclassification was immaterial to prior period net interest income or financial condition. Therefore, we did not adjust prior period information.
The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the six months ended June 30, 2013 and 2012, showing the average distribution of assets, liabilities, stockholders equity and related income, expense and corresponding weighted average yields and rates. The average balances used in this table and other statistical data were calculated using average daily balances.
|
|
Average Balances, Interest and Yields |
| ||||||||||||||
|
|
2013 |
|
2012 |
| ||||||||||||
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
| ||||
Six months ended June 30, |
|
balance |
|
Interest |
|
Yield |
|
balance |
|
Interest |
|
Yield |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal funds sold(1) |
|
$ |
4,258,221 |
|
2,387 |
|
0.11 |
% |
$ |
4,105,265 |
|
$ |
2,962 |
|
0.15 |
% | |
Interest bearing deposits |
|
180,539 |
|
161 |
|
0.18 |
|
2,874,236 |
|
996 |
|
0.07 |
| ||||
Investment securities(1)(2) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. treasury |
|
1,311,066 |
|
2,307 |
|
0.35 |
|
1,248,277 |
|
5,052 |
|
0.10 |
| ||||
U.S. government agency |
|
37,122,530 |
|
230,941 |
|
1.25 |
|
25,462,298 |
|
203,699 |
|
1.61 |
| ||||
Mortgage backed securities |
|
69,305,406 |
|
717,874 |
|
2.09 |
|
92,417,068 |
|
1,258,741 |
|
2.74 |
| ||||
Municipal securities |
|
63,246,374 |
|
1,473,849 |
|
4.70 |
|
41,425,062 |
|
1,115,895 |
|
5.42 |
| ||||
Other |
|
3,663,604 |
|
109,557 |
|
6.03 |
|
3,932,129 |
|
92,770 |
|
4.74 |
| ||||
Total investment securities |
|
174,648,980 |
|
2,534,528 |
|
2.93 |
|
164,484,834 |
|
2,676,158 |
|
3.27 |
| ||||
Loans: (1) (3) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Commercial |
|
103,938,826 |
|
2,535,533 |
|
4.92 |
|
101,476,124 |
|
2,565,390 |
|
5.08 |
| ||||
Mortgage |
|
548,519,712 |
|
14,625,572 |
|
5.38 |
|
439,378,230 |
|
13,805,772 |
|
6.32 |
| ||||
Consumer |
|
11,323,023 |
|
331,544 |
|
5.90 |
|
13,372,549 |
|
367,001 |
|
5.52 |
| ||||
Total loans |
|
663,781,561 |
|
17,492,649 |
|
5.31 |
|
554,226,903 |
|
16,738,163 |
|
6.07 |
| ||||
Allowance for loan losses |
|
4,111,710 |
|
|
|
|
|
3,895,660 |
|
|
|
|
| ||||
Total loans, net of allowance |
|
659,669,851 |
|
17,492,649 |
|
5.35 |
|
550,331,243 |
|
16,738,163 |
|
6.12 |
| ||||
Total interest earning assets(1) |
|
838,757,591 |
|
20,029,725 |
|
4.81 |
|
721,795,578 |
|
19,418,279 |
|
5.41 |
| ||||
Non-interest bearing cash |
|
35,553,424 |
|
|
|
|
|
30,964,429 |
|
|
|
|
| ||||
Premises and equipment |
|
28,066,491 |
|
|
|
|
|
23,686,158 |
|
|
|
|
| ||||
Other assets |
|
45,700,419 |
|
|
|
|
|
38,470,209 |
|
|
|
|
| ||||
Total assets |
|
$ |
948,077,925 |
|
|
|
|
|
$ |
814,916,374 |
|
|
|
|
| ||
Liabilities and Stockholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Savings |
|
$ |
93,095,290 |
|
61,741 |
|
0.13 |
|
$ |
62,123,163 |
|
102,914 |
|
0.33 |
| ||
Money market and NOW |
|
188,136,898 |
|
261,315 |
|
0.28 |
|
130,772,681 |
|
269,943 |
|
0.42 |
| ||||
Other time deposits |
|
338,734,580 |
|
1,499,038 |
|
0.89 |
|
330,185,594 |
|
1,841,841 |
|
1.12 |
| ||||
Total interest bearing deposits |
|
619,966,768 |
|
1,822,094 |
|
0.59 |
|
523,081,438 |
|
2,214,698 |
|
0.85 |
| ||||
Borrowed funds |
|
40,918,307 |
|
251,959 |
|
1.24 |
|
46,128,149 |
|
425,487 |
|
1.85 |
| ||||
Total interest bearing liabilities |
|
660,885,075 |
|
2,074,053 |
|
0.63 |
|
569,209,587 |
|
2,640,185 |
|
0.93 |
| ||||
Non-interest bearing deposits |
|
196,304,847 |
|
|
|
|
|
173,195,601 |
|
|
|
|
| ||||
|
|
857,189,922 |
|
|
|
|
|
742,405,188 |
|
|
|
|
| ||||
Other liabilities |
|
6,766,246 |
|
|
|
|
|
6,401,578 |
|
|
|
|
| ||||
Non-controlling interest |
|
378,569 |
|
|
|
|
|
433,722 |
|
|
|
|
| ||||
Stockholders equity |
|
83,743,188 |
|
|
|
|
|
65,675,885 |
|
|
|
|
| ||||
Total liabilities and stockholders equity |
|
$ |
948,077,925 |
|
|
|
|
|
$ |
814,916,374 |
|
|
|
|
| ||
Net interest spread(1) |
|
|
|
|
|
4.18 |
|
|
|
|
|
4.48 |
| ||||
Net interest income and Net interest margin(1) |
|
|
|
$ |
17,955,672 |
|
4.32 |
% |
|
|
$ |
16,778,094 |
|
4.67 |
% | ||
(1) Interest revenue is presented on a fully taxable equivalent (FTE) basis. 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.
The following tables describe the impact on our interest revenue and expense resulting from changes in average balances and average rates for the six months ended June 30, 2013 and 2012. We have allocated the change in interest revenue, interest expense and net interest income due to both volume and rate proportionately to the rate and volume variances.
Rate/Volume Variance Analysis
|
|
Six months ended June 30, |
| |||||||
|
|
2013 compared to 2012 |
| |||||||
|
|
Variance due to: |
| |||||||
|
|
Total |
|
Rate |
|
Volume |
| |||
|
|
|
|
|
|
|
| |||
Interest earning assets: |
|
|
|
|
|
|
| |||
Federal funds sold(1) |
|
$ |
(575 |
) |
$ |
(734 |
) |
$ |
159 |
|
Interest bearing deposits |
|
(835 |
) |
793 |
|
(1,628 |
) | |||
Investment Securities(1) |
|
|
|
|
|
|
| |||
U.S. treasury |
|
(2,746 |
) |
(3,115 |
) |
369 |
| |||
U.S. government agency |
|
27,242 |
|
(78,182 |
) |
105,424 |
| |||
Mortgage backed securities |
|
(540,867 |
) |
(355,274 |
) |
(185,593 |
) | |||
Municipal securities |
|
357,954 |
|
(274,102 |
) |
632,056 |
| |||
Other |
|
16,787 |
|
26,155 |
|
(9,368 |
) | |||
Loans:(1) |
|
|
|
|
|
|
| |||
Commercial |
|
(29,857 |
) |
(112,290 |
) |
82,433 |
| |||
Mortgage |
|
819,800 |
|
(3,296,018 |
) |
4,115,818 |
| |||
Consumer |
|
(35,457 |
) |
36,750 |
|
(72,207 |
) | |||
Total interest revenue (1) |
|
611,446 |
|
(4,056,017 |
) |
4,667,463 |
| |||
|
|
|
|
|
|
|
| |||
Interest bearing liabilities |
|
|
|
|
|
|
| |||
Savings |
|
(41,172 |
) |
(101,557 |
) |
60,385 |
| |||
Money market and NOW |
|
(8,628 |
) |
(146,691 |
) |
138,063 |
| |||
Other time deposits |
|
(342,803 |
) |
(412,040 |
) |
69,237 |
| |||
Borrowed funds |
|
(173,528 |
) |
(148,388 |
) |
(25,140 |
) | |||
Total interest expense |
|
(566,131 |
) |
(808,676 |
) |
242,545 |
| |||
|
|
|
|
|
|
|
| |||
Net interest income(1) |
|
$ |
1,177,577 |
|
$ |
(3,247,341 |
) |
$ |
4,424,918 |
|
(1) Interest revenue is presented on a fully taxable equivalent (FTE) basis. 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
Originating loans involves a degree of risk that credit losses will occur in varying amounts according to, among other factors, the type of loans being made, the credit worthiness of the borrowers over the term of the loans, the quality of the collateral for the loan, if any, as well as general economic conditions. We charge the provision for loan losses to earnings to maintain the total allowance for loan losses at a level considered by management to represent its best estimate of the losses known and inherent in the portfolio that are both probable and reasonable to estimate, based on, among other factors, prior loss experience, volume and type of lending conducted, estimated value of any underlying collateral, economic conditions (particularly as such conditions relate to Old Line Banks market area), regulatory guidance, peer statistics, managements judgment, past due loans in the loan portfolio, loan charge off experience and concentrations of risk (if any). We charge losses on loans against the allowance when we believe that collection of loan principal is unlikely. We add back recoveries on loans previously charged to the allowance.
The provision for loan losses was $200,000 for the three months ended June 30, 2013, compared to $375,000 for the three months ended June 30, 2012, a decrease of $175,000 or 46.67%. The provision for the six month period was $400,000, compared to $750,000 for the six months ended June 30, 2012, a decrease of $350,000 or 46.67%. After completing the analysis outlined below, and as a result of continued improvement in the quality of the loan portfolio, we decreased the provision for loan losses in both periods. We have allocated a specific reserve for those loans where we consider it probable that we will incur a loss. Our non-performing assets remain statistically low at 1.92% of total assets and total past due accruing loans increased $3.8 million from $2.4 million to $6.2 million primarily as a result of the acquisition of WSB.
We review the adequacy of the allowance for loan losses at least quarterly. Our review includes evaluation of impaired loans as required by ASC Topic 310-Receivables, and ASC Topic 450-Contingencies. Also incorporated in determining the adequacy of the allowance is guidance contained in the Securities and Exchange Commissions SAB No. 102, Loan Loss Allowance Methodology and Documentation, the Federal Financial Institutions Examination Councils Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions and the Interagency Policy Statement on the Allowance for Loan and Lease Losses. We also continue to measure the credit impairment at each period end on all loans that have been classified as a TDR using the guidance in ASC 310-10-35.
We base the evaluation of the adequacy of the allowance for loan losses upon loan categories. We categorize loans as installment and other consumer loans (other than boat loans), boat loans, mortgage loans (commercial real estate, residential real estate and real estate construction) and commercial loans. We apply loss ratios to each category of loans other than commercial loans. We further divide commercial loans by risk rating and apply loss ratios 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 loan collateral separately and assign loss amounts based upon the evaluation.
We determine loss ratios for installment and other consumer loans, boat loans and mortgage loans (commercial real estate, residential real estate and real estate construction) based upon a review of prior 18 months delinquency trends for the category, the three year historical loss ratio for the category, peer group loss ratios, probability of loss factors and industry standards.
With respect to commercial loans, management assigns a risk rating of one through eight to each loan at inception, with a risk rating of one having the least amount of risk and a risk rating of eight having the greatest amount of risk. For commercial loans of less than $250,000, we may review the risk rating annually based on, among other things: the borrowers financial condition, cash flow and ongoing financial viability; the collateral securing the loan; the borrowers industry; and payment history. We review the risk rating for all commercial loans in excess of $250,000 at least annually. We evaluate loans with a risk rating of five or greater separately and allocate a portion of the allowance for loan losses based upon the evaluation. For loans with risk ratings between one and four, we determine loss ratios based upon a review of prior 18 months delinquency trends, the three year historical loss ratio, peer group loss ratios, probability of loss factors and industry standards. We have applied the same risk rating methodology to the acquired loans that we apply to legacy loans.
We also identify and make any necessary allocation adjustments for any specific concentrations of credit in a loan category that in managements estimation increase the risk inherent in the category. If necessary, we will also make an adjustment within one or more loan categories for economic considerations in our market area that may impact the quality of the loans in the category. For all periods presented, there were no specific adjustments made for concentrations of credit. We additionally consider qualitative or environmental factors that are likely to cause estimated credit losses associated with our existing portfolio to differ from historical loss experience. These factors include, but are not limited to, changes in lending policies and procedures, changes in the nature and volume of the loan portfolio, changes in the experience, ability
and depth of lending management and the effect of other external factors such as economic factors, competition and legal and regulatory requirements on the level of estimated credit losses in our existing portfolio.
In the event that our review of the adequacy of the allowance results in any unallocated amounts, we reallocate such amounts to our loan categories based on the percentage that each category represents to total gross loans. We have risk management practices designed to ensure timely identification of changes in loan risk profiles. However, undetected losses inherently exist within the portfolio. We believe that the allocation of the unallocated portion of the reserve in the manner described above is appropriate. Although we may allocate specific portions of the allowance for specific credits or other factors, the entire allowance is available for any credit that we should charge off. We will not create a separate valuation allowance unless we consider a loan impaired.
During the six months ended June 30, 2013, we charged $230,284 to the allowance for loan losses for two legacy loans, one acquired mortgage loan from MB&T and five acquired consumer loans from MB&T. The remaining charge offs during the period related primarily to several acquired consumer loans and two acquired residential mortgage loans. The majority of the recoveries recorded to the allowance for loan losses were from acquired loans that were charged to the allowance for loan losses at MB&T prior to the acquisition date of April 1, 2011.
Our policies require a review of assets on a regular basis and we believe that we appropriately classify loans as well as other assets if warranted. We believe that we use the best information available to make a determination with respect to the allowance for loan losses, recognizing that the determination is inherently subjective and that future adjustments may be necessary depending upon, among other factors, a change in economic conditions of specific borrowers or generally in the economy and new information that becomes available to us. However, there are no assurances that the allowance for loan losses will be sufficient to absorb losses on non-performing assets, or that the allowance will be sufficient to cover losses on non-performing assets in the future.
As outlined in Footnote 5 to our financial statements, loans acquired in an acquisition are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan and lease losses.
The allowance for loan losses represented 0.54%, 0.66% and 0.71% of gross loans at June 30, 2013, December 31, 2012 and June 30, 2012, respectively. We have no exposure to foreign countries or foreign borrowers. Based on our analysis and the satisfactory historical performance of the loan portfolio, we believe this allowance appropriately reflects the inherent risk of loss in our portfolio.
The following tables provide an analysis of the allowance for loan losses for the periods indicated:
Allowance for Loan Losses
Six months ended June 30, 2013
|
|
Acquired |
|
Legacy |
|
Total |
| |||
|
|
|
|
|
|
|
| |||
Balance, beginning of period |
|
$ |
316,624 |
|
$ |
3,648,723 |
|
$ |
3,965,347 |
|
Provision for loan losses |
|
70,728 |
|
329,272 |
|
400,000 |
| |||
|
|
|
|
|
|
|
| |||
Chargeoffs: |
|
|
|
|
|
|
| |||
Commercial |
|
|
|
(149,381 |
) |
(149,381 |
) | |||
Mortgage |
|
(67,851 |
) |
|
|
(67,851 |
) | |||
Consumer |
|
(12,989 |
) |
(63 |
) |
(13,052 |
) | |||
Total chargeoffs |
|
(80,840 |
) |
(149,444 |
) |
(230,284 |
) | |||
Recoveries: |
|
|
|
|
|
|
| |||
Commercial |
|
15,270 |
|
8,819 |
|
24,089 |
| |||
Mortgage |
|
34,197 |
|
7,489 |
|
41,686 |
| |||
Consumer |
|
35,645 |
|
797 |
|
36,442 |
| |||
Total recoveries |
|
85,112 |
|
17,105 |
|
102,217 |
| |||
Net (chargeoffs) recoveries |
|
4,272 |
|
(132,339 |
) |
(128,067 |
) | |||
Balance, end of period |
|
$ |
391,624 |
|
$ |
3,845,656 |
|
$ |
4,237,280 |
|
|
|
|
|
|
|
|
| |||
Ratio of allowance for loan losses to: |
|
|
|
|
|
|
| |||
Total gross loans |
|
|
|
|
|
0.54 |
% | |||
Non-accrual loans |
|
|
|
|
|
25.43 |
% | |||
Ratio of net-chargeoffs during period to average total loans during period |
|
|
|
|
|
0.02 |
% |
Allowance for Loan Losses
Six months ended June 30, 2012
|
|
Acquired |
|
Legacy |
|
Total |
| |||
|
|
|
|
|
|
|
| |||
Balance, beginning of period |
|
$ |
|
|
$ |
3,741,271 |
|
$ |
3,741,271 |
|
Provision for loan losses |
|
|
|
750,000 |
|
750,000 |
| |||
|
|
|
|
|
|
|
| |||
Chargeoffs: |
|
|
|
|
|
|
| |||
Commercial |
|
(76,648 |
) |
(11,043 |
) |
(87,691 |
) | |||
Mortgage |
|
|
|
(324,486 |
) |
(324,486 |
) | |||
Consumer |
|
(63,208 |
) |
|
|
(63,208 |
) | |||
Total chargeoffs |
|
(139,856 |
) |
(335,529 |
) |
(475,385 |
) | |||
Recoveries: |
|
|
|
|
|
|
| |||
Commercial |
|
31,933 |
|
|
|
31,933 |
| |||
Mortgage |
|
12,975 |
|
|
|
12,975 |
| |||
Consumer |
|
48,667 |
|
|
|
48,667 |
| |||
Total recoveries |
|
93,575 |
|
|
|
93,575 |
| |||
Net (chargeoffs) recoveries |
|
(46,281 |
) |
(335,529 |
) |
(381,810 |
) | |||
Balance, end of period |
|
$ |
(46,281 |
) |
$ |
4,155,742 |
|
$ |
4,109,461 |
|
|
|
|
|
|
|
|
| |||
Ratio of allowance for loan losses to: |
|
|
|
|
|
|
| |||
Total gross loans |
|
|
|
|
|
0.71 |
% | |||
Non-accrual loans |
|
|
|
|
|
62.00 |
% | |||
Ratio of net-chargeoffs during period to average total loans during period |
|
|
|
|
|
0.07 |
% |
Allowance for Loan Losses
Year ended December 31, 2012
|
|
Acquired |
|
Legacy |
|
Total |
| |||
|
|
|
|
|
|
|
| |||
Balance, beginning of period |
|
$ |
47,635 |
|
$ |
3,693,636 |
|
$ |
3,741,271 |
|
Provision for loan losses |
|
834,183 |
|
690,817 |
|
1,525,000 |
| |||
|
|
|
|
|
|
|
| |||
Chargeoffs: |
|
|
|
|
|
|
| |||
Commercial |
|
(296,890 |
) |
(19,863 |
) |
(316,753 |
) | |||
Mortgage |
|
(381,664 |
) |
(588,671 |
) |
(970,335 |
) | |||
Consumer |
|
(89,282 |
) |
(146,710 |
) |
(235,992 |
) | |||
Total chargeoffs |
|
(767,836 |
) |
(755,244 |
) |
(1,523,080 |
) | |||
Recoveries: |
|
|
|
|
|
|
| |||
Commercial |
|
24,165 |
|
8,471 |
|
32,636 |
| |||
Mortgage |
|
71,217 |
|
11,043 |
|
82,260 |
| |||
Consumer |
|
107,260 |
|
|
|
107,260 |
| |||
Total recoveries |
|
202,642 |
|
19,514 |
|
222,156 |
| |||
Net (chargeoffs) recoveries |
|
(565,194 |
) |
(735,730 |
) |
(1,300,924 |
) | |||
Balance, end of period |
|
$ |
316,624 |
|
$ |
3,648,723 |
|
$ |
3,965,347 |
|
|
|
|
|
|
|
|
| |||
Ratio of allowance for loan losses to: |
|
|
|
|
|
|
| |||
Total gross loans |
|
|
|
|
|
0.66 |
% | |||
Non-accrual loans |
|
|
|
|
|
67.10 |
% | |||
Ratio of net-chargeoffs during period to average total loans during period |
|
|
|
|
|
0.23 |
% |
Generally accepted accounting principles require that we record acquired loans at fair value which includes a discount for loans with credit impairment. These loans are not performing according to their contractual terms and meet our definition of a non-performing loan. The discounts that arise from recording these loans at fair value were due to credit quality. Although we do not accrue interest income at the contractual rate on these loans, we may accrete these discounts to interest income as a result of pre-payments that exceed our expectations or payment in full of amounts due even though we classify them as non-accrual.
In 2011, we recorded the loans acquired from MB&T at fair value and on May 10, 2013, we recorded the loans acquired from WSB at fair value. The fair value of the acquired loans includes expected loan losses, and there was no loan loss allowance recorded for acquired loans at the time of acquisitions. Accordingly, the existence of the acquired loans reduces the ratios of the allowance for loan losses to total gross loans and the allowance for loan losses to non-accrual loans, and this measure is not directly comparable to prior periods. Similarly, net loan charge offs are normally reduced for acquired loans since we recorded these loans net of expected loan losses. Therefore, the ratio of net charge offs during the period to average loans outstanding is reduced as a result of the existence of acquired loans, and the measures are not directly comparable to prior periods. Other institutions may not have acquired loans, and therefore there may be no direct comparability of these ratios between and among other institutions.
The accounting guidance also requires that if we experience a decrease in the expected cash flows subsequent to the acquisition date, that we establish an allowance for loan losses for those acquired loans with decreased cash flows. At June 30, 2013 and December 31, 2012, there was an allowance of $391,624 and $316,624, respectively, as a result of a decrease in the expected cash flows subsequent to the acquisition dates. Other institutions may not have acquired loans or they may not classify these loans as non-accrual and therefore there may be no direct comparability of these ratios between and among other institutions.
The following table provides a breakdown of the allowance for loan losses:
Allocation of Allowance for Loan Losses
|
|
June 30, |
|
December 31, |
| |||||||||||
|
|
2013 |
|
2012 |
|
2012 |
| |||||||||
|
|
Amount |
|
% of Loans |
|
Amount |
|
% of Loans |
|
Amount |
|
% of Loans |
| |||
Other consumer |
|
$ |
130,889 |
|
0.58 |
% |
$ |
143,568 |
|
0.67 |
% |
$ |
133,881 |
|
0.67 |
% |
Boat |
|
248,538 |
|
1.11 |
|
294,175 |
|
1.54 |
|
248,928 |
|
1.17 |
| |||
Mortgage |
|
2,973,156 |
|
80.85 |
|
2,893,147 |
|
80.64 |
|
2,826,584 |
|
81.71 |
| |||
Commercial |
|
884,697 |
|
17.46 |
|
778,571 |
|
17.15 |
|
755,954 |
|
16.45 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total |
|
$ |
4,237,280 |
|
100.00 |
% |
$ |
4,109,461 |
|
100.00 |
% |
$ |
3,965,347 |
|
100.00 |
% |
Non-interest Revenue
Three months ended June 30, 2013 compared to three months ended June 30, 2012
Non-interest revenue totaled $1.2 million for the three months ended June 30, 2013, an increase of $189 thousand, or 19.56%, from the corresponding period of 2012 amount of $965 thousand. Non-interest revenue for the three months ended June 30, 2013 and 2012 included fee income from service charges on deposit accounts, gain on sales or calls of investment securities, earnings on bank owned life insurance, gain on sale of loans, and other fees and commissions including revenues with respect to Pointer Ridge. The three month period ended June 30, 2013 also included a loss on the disposal of assets. The primary cause of the increase in non-interest revenue was increases in gains on sale of loans, other fees and commissions and earnings on bank owned life insurance. The gain on the sale of loans is attributable to the revenues earned on loans sold in the secondary market. This revenue is solely the result of the acquisition of WSBs mortgage origination department. The increase on the earnings on bank owned life insurance is the result of the acquisition of approximately $13.0 million of bank owned life insurance from the acquisition of WSB. Other fees and commissions increased because of increased rental income as the result of the rent received on the building at 4201 Mitchellville Road, Bowie, MD, which we
acquired in the WSB Holdings merger, partially offset by a decrease in Pointer Ridge rent and other revenue as a result of an increase in the vacancy in the building owned by Pointer Ridge; the vacant space has now been occupied by additional Old Line Bank operational staff These increases were partially offset by declines in gain on sale or calls of investment securities and a loss on disposal of assets. The gains on sales or calls of investment securities decreased during the period as we sold approximately $46.3 million of our investment securities at a lower dollar amount to provide liquidity to pay off long term borrowings of $60.3 million (including a pre-payment penalty) acquired in the acquisition of WSB Holdings compared to the sale of $18.8 million of investment securities last year. We incurred a $19,000 loss as a result of the disposal of assets we acquired in the WSB Holdings merger.
The following table outlines the changes in non-interest revenue for the three month periods.
|
|
Three months ended |
|
|
|
|
| |||||
|
|
June 30, |
|
|
|
|
| |||||
|
|
2013 |
|
2012 |
|
$ Change |
|
% Change |
| |||
Service charges on deposit accounts |
|
$ |
367,674 |
|
$ |
328,142 |
|
$ |
39,532 |
|
12.05 |
|
Gain on sales or calls of investment securities |
|
9,659 |
|
282,858 |
|
(273,199 |
) |
(96.59 |
) | |||
Earnings on bank owned life insurance |
|
200,641 |
|
138,496 |
|
62,145 |
|
44.87 |
| |||
Gain/(loss) on disposal of assets |
|
(19,078 |
) |
|
|
(19,078 |
) |
|
| |||
Pointer Ridge rent and other revenue |
|
63,317 |
|
108,585 |
|
(45,268 |
) |
(41.69 |
) | |||
Gain on sale of loans |
|
146,565 |
|
|
|
146,565 |
|
|
| |||
Other fees and commissions |
|
384,516 |
|
106,504 |
|
278,012 |
|
261.03 |
| |||
Total non-interest revenue |
|
$ |
1,153,294 |
|
$ |
964,585 |
|
$ |
188,709 |
|
19.56 |
|
Six months ended June 30, 2013 compared to six months ended June 30, 2012
Non-interest revenue totaled $2.4 million for the six months ended June 30, 2013, an increase of $505 thousand or 26.95% from the corresponding period of 2012 amount of $1.9 million. Non-interest revenue for the six months ended June 30, 2013 and 2012 included fee income from service charges on deposit accounts, gain on sales or calls of investment securities, earnings on bank owned life insurance, losses on sales of other real estate owned, gain on the sale of loans and other fees and commissions including revenues with respect to Pointer Ridge. The six month period ended June 30, 2013 also included a loss on the disposal of assets. The primary cause of the increase in non-interest revenue was increases in gain on the sale of loans, gains on the sale of securities, rental income, and other fees and commissions, offsetting the loss on disposal of assets. The gain on the sale of loans is attributable to the revenues earned on loans sold in the secondary market. This revenue is the result of the acquisition of WSBs mortgage origination department. The increase on the earnings on bank owned life insurance is the result of the acquisition of approximately $13.0 million of bank owned life insurance from the recent WSB merger. The gains on sales or calls of investment securities increased during the period as a higher dollar amount of securities were sold to provide liquidity and to reallocate the securities portfolio to minimize future repayment risk, which resulted in a higher recognized gain. These proceeds were used to repay Federal Home Loan Bank (FHLB) borrowings acquired in the WSB acquisition. Other fees and commissions increased primarily because we issued a higher dollar value of letters of credit which increased letter of credit fees, partially offset by a decrease in Pointer Ridge rent and other revenue as a result of an increase in the vacancy in the building owned by Pointer Ridge. The vacant space has now been occupied by additional Old Line Bank operational staff. Partially offsetting these increases was a $104,639 loss on the disposal of assets as the result of our closing the Old Line Centre branch in March 2013 and the disposal of certain assets in connection with the WSB Holdings merger.
|
|
Six months ended |
|
|
|
|
| |||||
|
|
June 30, |
|
|
|
|
| |||||
|
|
2013 |
|
2012 |
|
$ Change |
|
% Change |
| |||
Service charges on deposit accounts |
|
$ |
668,415 |
|
$ |
647,469 |
|
$ |
20,946 |
|
3.24 |
% |
Gain on sales or calls of investment securities |
|
641,088 |
|
560,028 |
|
81,060 |
|
14.47 |
| |||
Earnings on bank owned life insurance |
|
333,869 |
|
275,201 |
|
58,668 |
|
21.32 |
| |||
Pointer Ridge rent and other revenue |
|
131,645 |
|
155,695 |
|
(24,050 |
) |
(15.45 |
) | |||
Gain (loss) on disposal of assets |
|
(104,639 |
) |
|
|
(104,639 |
) |
|
| |||
Gain on the sale of loans |
|
146,565 |
|
|
|
146,565 |
|
|
| |||
Other fees and commissions |
|
563,871 |
|
236,993 |
|
326,878 |
|
137.93 |
| |||
Total non-interest revenue |
|
$ |
2,380,814 |
|
$ |
1,875,386 |
|
$ |
505,428 |
|
26.95 |
% |
Non-interest Expense
Three months ended June 30, 2013 compared to three months ended June 30, 2012
Non-interest expense increased $4.5 million or 73.63% for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The following chart outlines the changes in non-interest expenses for the period.
|
|
Three months ended |
|
|
|
|
| |||||
|
|
June 30, |
|
|
|
|
| |||||
|
|
2013 |
|
2012 |
|
$ Change |
|
% Change |
| |||
Salaries and benefits |
|
$ |
4,126,567 |
|
$ |
3,024,815 |
|
$ |
1,101,752 |
|
36.42 |
|
Occupancy and equipment |
|
1,214,947 |
|
914,576 |
|
300,371 |
|
32.84 |
| |||
Data processing |
|
329,878 |
|
192,232 |
|
137,646 |
|
71.60 |
| |||
FDIC insurance and State of Maryland assessments |
|
186,996 |
|
148,921 |
|
38,075 |
|
25.57 |
| |||
Merger and integration |
|
2,786,350 |
|
29,166 |
|
2,757,184 |
|
9,453.42 |
| |||
Core deposit premium |
|
198,875 |
|
177,582 |
|
21,293 |
|
11.99 |
| |||
Pointer Ridge other operating |
|
105,050 |
|
101,877 |
|
3,173 |
|
3.11 |
| |||
Loss (gain) on sale of other real estate owned |
|
770 |
|
(191,201 |
) |
191,971 |
|
(100.42 |
) | |||
OREO expense |
|
154,908 |
|
428,208 |
|
(273,300 |
) |
(63.82 |
) | |||
Other operating |
|
1,431,327 |
|
1,231,791 |
|
199,536 |
|
16.20 |
| |||
Total non-interest expenses |
|
$ |
10,535,668 |
|
$ |
6,057,967 |
|
$ |
4,477,701 |
|
73.63 |
|
The growth in non-interest expenses, as compared to the second quarter of 2012, was mainly attributable to increases in merger and integration expenses, salaries and benefits, occupancy and equipment expenses and data processing expenses as well as a loss on sales of other real estate owned. Merger and integration expenses increased $2.8 million, or 9,453.45%, compared to the same period in 2012 as a result of the WSB Holdings merger. These expenses were primarily related to $2.4 million associated with the termination of WSBs core data processing contract, as well as legal fees, investment banking fees and severance payments in connection with the merger. Salaries and benefits increased by $1.1 million or 36.42%, when compared to the second quarter of 2012 primarily as a result of the additional staff acquired as a result of the WSB Holdings merger, and to a lesser extent, the additional staff for the Montgomery County lending team and the Old Line Financial Services group that was effected during the second half of 2012. We anticipate the additional staff of the Montgomery County lending team and the Old Line Financial Service team will generate increased interest and non-interest income that will more than offset the increased cost. The cost of health insurance benefits also increased compared to the second quarter of 2012 as a result of an increase in insurance rates and the increased staff. Occupancy and equipment expenses increased $300 thousand or 32.84% compared to the same period in 2012 primarily due to the additional lease expense associated with the acquisition of WSBs branches. Data processing costs increased $138 thousand, or 71.60%, as a result of the monthly expenses associated with WSBs core banking processor. In addition we incurred a $770 loss on sales of other real estate owned compared to a gain of $191 thousand during the 2012 period as a result of the sale of six properties which result in a net loss compared to the sale of two properties for the same three months last year. Other real estate owned expenses decreased as a result of recoveries of prior expenses related to other real estate owned.
As noted above, merger and integration, salaries and employee benefits, occupancy and equipment, and data processing expenses increased primarily because of increased operating expenses resulting from the acquisition of WSB Holdings. As of June 30, 2013, we have increased our number of employees by 90 and our branch network by five as a result of the acquisition of WSB Holdings. Pointer Ridge other operating expense increased primarily because of the charge off of rents due from a prior tenant.
Six months ended June 30, 2013 compared to three months ended June 30, 2012
Non-interest expense increased $5.8 million or 49.59% for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The following chart outlines the changes in non-interest expenses for the period.
|
|
Six months ended |
|
|
|
|
| |||||
|
|
June 30, |
|
|
|
|
| |||||
|
|
2013 |
|
2012 |
|
$ Change |
|
% Change |
| |||
Salaries and benefits |
|
$ |
7,359,244 |
|
$ |
5,833,809 |
|
$ |
1,525,435 |
|
26.15 |
% |
Occupancy and equipment |
|
2,283,815 |
|
1,822,447 |
|
461,368 |
|
25.32 |
| |||
Data processing |
|
568,935 |
|
416,967 |
|
151,968 |
|
36.45 |
| |||
FDIC insurance and State of Maryland assessments |
|
342,239 |
|
278,645 |
|
63,594 |
|
22.82 |
| |||
Merger and integration |
|
3,026,835 |
|
58,333 |
|
2,968,502 |
|
5,088.89 |
| |||
Core deposit premium |
|
376,457 |
|
372,257 |
|
4,200 |
|
1.13 |
| |||
Pointer Ridge other operating |
|
218,447 |
|
212,333 |
|
6,114 |
|
2.88 |
| |||
Loss (gain) on sale of other real estate owned |
|
201,224 |
|
(159,213 |
) |
360,437 |
|
(226.39 |
) | |||
OREO expenses |
|
469,073 |
|
320,895 |
|
148,178 |
|
46.18 |
| |||
Other operating |
|
2,769,295 |
|
2,619,655 |
|
149,640 |
|
5.71 |
| |||
Total non-interest expenses |
|
$ |
17,615,564 |
|
$ |
11,776,128 |
|
$ |
5,839,436 |
|
49.59 |
% |
The growth in non-interest expenses, as compared to the second quarter of 2012 was mainly attributable to increases in merger and integration expenses, data processing expenses, salaries and benefits, occupancy and equipment expenses and other operating expenses as well as a loss on sales of other real estate owned. Merger and integration expenses increased $3.0 million, or 5,088.89%, compared to the same period in 2012 as a result of the acquisition of WSB Holdings. As with the three month period ending June 30, 2013, these expenses were primarily related to expenses associated with the termination of WSBs core data processing contract and legal fees, investment banking fees and severance payments in connection with the merger. Data processing increased $152 thousand, or 36.45% as a result of additional monthly expenses for WSBs core banking processor. Salaries and benefits increased by $1.5 million, or 26.15%, when compared to the six months ended June 30, 2012 primarily as a result of the addition staff acquired as a result of the WSB Holdings merger, and to a lesser extent, the additional staff for the Montgomery County lending team and the Old Line Financial Services group that was effected during the second half of 2012. Also, during the first quarter of 2013, we also added an Executive Vice President who we expect will enhance our core operational capabilities. The cost of health insurance benefits also increased compared to the first six months of 2012 as a result of an increase in insurance rates and the increased staff. Occupancy and equipment expenses increased $461 thousand or 25.32% compared to the same period in 2012 primarily due to the acceleration of the remaining lease expense for the Old Line Centre branch which we closed on March 29, 2013 as well as the additional lease expense for the acquired WSB branches. Other operating expenses increased $150 thousand primarily as a result of an approximately $111 thousand increase in network services associated with the expansion of our network as a result of the WSB Holdings merger and a $70 thousand increase in internal audit expense as a result of the agreement we signed with a third party to enhance our internal audit function. FDIC insurance and State of Maryland assessments increased as a result of the increase in deposits due to the WSB merger. In addition we incurred a $201 thousand loss on sales of other real estate owned compared to a gain of $159 thousand during the 2012 period as a result of the sale of eight properties that we obtained through foreclosure during the 2013 period that were sold at a loss compared to four properties for the same period last year. The loss recognized during 2013 is primarily due a $224 thousand loss on one property. The gain recognized last year was due to one property for which we recorded a $183 thousand gain. We expect that the sale of these properties, however, will reduce future legal and maintenance costs. These increases were partially offset by a decrease in other real estate owned expenses. Other real estate owned expenses decreased as a result of recoveries of prior expenses related to other real estate owned.
Income Taxes
Three months ended June 30, 2013 compared to three months ended June 30, 2012
We had an income tax benefit of $283,417 (74.74% of pre-tax loss) for the three months ended June 30, 2013 compared to an income tax expense of $982,759 (32.82% of pre-tax income) for the same period in 2012. We received an income tax benefit in the 2013 period because we realized a loss before income taxes.
Six months ended June 30, 2013 compared to six months ended June 30, 2012
Income tax expense was $238,305 (16.83% of pre-tax income) for the six months ended June 30, 2013 compared to $1.8 million (32.77% of pre-tax income) for the same period in 2012. The dollar amount of the taxes was lower because net income was lower than in the six months ended June 30, 2012. The tax rate was lower for the six month period ended June 30, 2013, primarily because interest on tax exempt securities was a higher percentage of income than during the six months ended June 30, 2012.
Net Income (Loss) Available to Common Stockholders
Three months ended June 30, 2013 compared to three months ended June 30, 2012
Net loss available to common stockholders was $84,285 or $0.01 per basic and diluted common share for the three month period ending June 30, 2013 compared to net income available to common stockholders of $2.0 million or $0.30 and $0.29, respectively, per basic and diluted common share for the same period in 2012. The decrease in net income available to common stockholders for the 2013 period was primarily the result of a $4.3 million increase in non-interest expense. This increase was partially offset by a $739,791 increase in net interest income, a $175,000 decrease in the provision for loan losses, and a $1.3 million decrease in taxes.
Six months ended June 30, 2013 compared to six months ended June 30, 2012
Net income available to common stockholders was $1.2 million or $0.16 and $0.15 per basic and diluted common share for the six month period ending June 30, 2013 compared to net income available to common stockholders of $3.8 million or $0.55 per basic and diluted common share for the same period in 2012. The decrease in net income available to common stockholders for the 2013 period was primarily the result of a $5.5 million increase in non-interest expense. This increase was partially offset by an $825 thousand increase in net interest income, a $350 thousand decrease in the provision for loan losses, an increase of $145 thousand in non-interest revenue, and a $1.6 million decrease in taxes.
Analysis of Financial Condition
Investment Securities
Our portfolio consists primarily of time deposits in other banks, investment grade securities including U.S. treasury securities, U.S. government agency securities, U.S. government sponsored entity securities, securities issued by states, counties and municipalities, mortgage backed securities, and certain equity securities, including Federal Reserve Bank stock, Federal Home Loan Bank stock, Maryland Financial Bank stock and Atlantic Central Bankers Bank stock. With the acquisition of MB&T, we acquired approximately $262,000 of Student Loan Marketing Association (SLMA) stock. We have prudently managed our investment portfolio to maintain liquidity and safety. The portfolio provides a source of liquidity, collateral for borrowings as well as a means of diversifying our earning asset portfolio. While we usually intend to hold the investment securities until maturity, currently we classify all of our investment securities as available for sale. This classification provides us the opportunity to divest of securities that may no longer meet our liquidity objectives. We account for investment securities so classified at fair value and report the unrealized appreciation and depreciation as a separate component of stockholders equity, net of income tax effects. We account for investment securities when classified in the held to maturity category at amortized cost. Although we will occasionally sell a security, generally, we invest in securities for the yield they produce and not to profit from trading the securities. As a result of the acquisition of WSB Holdings, we evaluated the investment portfolio to ensure that the securities acquired in the acquisition met our investment criteria and provide adequate liquidity, and that there is adequate diversity in the investment portfolio. We continually evaluate the investment portfolio to ensure the portfolio is adequately diversified, provides sufficient cash flow and does not subject us to undue interest rate risk. There are no trading securities in the portfolio.
The investment securities at June 30, 2013 amounted to $184.2 million, an increase of $12.6 million, or 7.38%, from the December 31, 2012 amount of $171.5 million. As outlined above, at June 30, 2013, all securities are classified as available for sale.
The fair value of available for sale securities included net unrealized losses of $6.7 million at June 30, 2013 (reflected as unrealized losses of $3.9 million in stockholders equity after deferred taxes) as compared to net unrealized gains of $4.1 million ($2.5 million net of taxes) at December 31, 2012. The decrease in fair value is due to the increase in the market rate of interest rates which drives down bond values. We used the proceeds from the sale of these investment securities primarily to help pay off the FHLB borrowings that were acquired in the WSB Holdings merger. We have evaluated securities with unrealized losses for an extended period of time and determined that these losses are temporary because, at this point in time, we expect to hold them until maturity. We have no intent or plan to sell these securities, it is not likely that we will have to sell these securities and we have not identified any portion of the loss that is a result of credit deterioration in the issuer of the security. As the maturity date moves closer and/or interest rates decline, any unrealized losses in the portfolio will decline or dissipate.
Loan Portfolio
Commercial loans and loans secured by real estate comprise the majority of the loan portfolio. Old Line Banks loan customers are generally located in the greater Washington, D.C. metropolitan area.
The following table summarizes the composition of the loan portfolio held for investment by dollar amount and percentages:
|
|
June 30, 2013 |
|
|
|
December 31, 2012 |
|
|
| ||||||||||||||
|
|
Legacy |
|
Acquired |
|
Total |
|
|
|
Legacy |
|
Acquired |
|
Total |
|
|
| ||||||
Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial |
|
$ |
290,865,718 |
|
$ |
113,010,469 |
|
$ |
408,640,782 |
|
51.70 |
% |
$ |
279,489,013 |
|
$ |
65,396,469 |
|
$ |
344,885,482 |
|
57.67 |
% |
Construction |
|
60,037,238 |
|
26,363,823 |
|
86,401,061 |
|
10.93 |
|
48,603,640 |
|
4,174,751 |
|
52,778,391 |
|
8.83 |
| ||||||
Residential |
|
54,322,852 |
|
121,901,371 |
|
171,459,628 |
|
21.69 |
|
38,901,489 |
|
52,069,937 |
|
90,971,426 |
|
15.21 |
| ||||||
Commercial |
|
100,954,682 |
|
11,788,872 |
|
112,743,554 |
|
14.26 |
|
88,306,302 |
|
10,070,234 |
|
98,376,536 |
|
16.45 |
| ||||||
Consumer |
|
9,934,591 |
|
1,181,293 |
|
11,115,884 |
|
1.41 |
|
9,944,466 |
|
1,059,991 |
|
11,004,457 |
|
1.84 |
| ||||||
Gross loans |
|
516,115,081 |
|
274,245,828 |
|
790,360,909 |
|
100.00 |
% |
465,244,910 |
|
132,771,382 |
|
598,016,292 |
|
100.00 |
% | ||||||
Allowance for loan losses |
|
(3,845,656 |
) |
(391,624 |
) |
(4,237,280 |
) |
|
|
(3,648,723 |
) |
(316,624 |
) |
(3,965,347 |
) |
|
| ||||||
Deferred loan costs, net |
|
1,036,040 |
|
12,629 |
|
1,048,669 |
|
|
|
1,093,983 |
|
|
|
1,093,983 |
|
|
| ||||||
Net loans |
|
$ |
513,305,465 |
|
$ |
273,866,833 |
|
$ |
787,172,298 |
|
|
|
$ |
462,690,170 |
|
$ |
132,454,758 |
|
$ |
595,144,928 |
|
|
|
Asset Quality
Management performs reviews of all delinquent loans and directs relationship officers to work with customers to resolve potential credit issues in a timely manner.
As outlined below, we have six legacy loans and 15 acquired construction loans that have an interest reserve included in the commitment amount and where advances on the loan currently pay the interest due. An additional five legacy loans were recorded in the second quarter of this year and the 15 acquired loans were due to the acquisition of WSB.
Loans With Interest Paid From Loan Advances
(Dollars in thousands)
|
|
June 30, 2013 |
|
December 31, 2012 |
| ||||||
|
|
# of |
|
(000s) |
|
# of |
|
(000s) |
| ||
Legacy |
|
6 |
|
$ |
5,528 |
|
1 |
|
$ |
4,806 |
|
Acquired |
|
15 |
|
10,653 |
|
|
|
|
| ||
|
|
21 |
|
$ |
16,181 |
|
1 |
|
$ |
4,806 |
|
Management has identified additional potential problem loans classified as TDRs totaling $1.2 million that are complying with their repayment terms. The $1.2 million consists of $499 thousand in legacy loans and $688 thousand in acquired loans. Management has concerns either about the ability of the borrower to continue to comply with repayment terms because of the borrowers potential operating or financial difficulties or the underlying collateral has experienced a decline in value. These weaknesses have caused management to heighten the attention given to these credits.
Management generally classifies loans as non-accrual when it does not expect collection of full principal and interest under the original terms of the loan or payment of principal or interest has become 90 days past due. Classifying a loan as non-accrual results in our no longer accruing interest on such loan and reversing 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 loans only when received.
Delinquent Legacy Loans
At June 30, 2013, we had four non-accrual legacy loans with a total balance of $1.9 million compared to four legacy loans totaling $1.8 million at December 31, 2012. At June 30, 2013, we also had a total of $2.6 million of legacy loans past due 30-89 days compared to $1.8 million of legacy loans past due 30-89 days at December 31, 2012.
Delinquent Acquired Loans
At June 30, 2013, we had one acquired consumer loan in the amount of $8,056 past due 90 or more days, that we have not classified as non-accrual compared to one consumer loan in the amount of $6,410 at December 31, 2012.
At June 30, 2013, we had 105 non-accrual acquired loans totaling $14.8 million compared to 25 non-accrual acquired loans totaling $4.1 million at December 31, 2012. At June 30, 2013, we also had a total of $3.6 million acquired loans on accrual status 30-89 days past due and one loan on accrual status past due 90 days. These loans were placed on non-accrual by MB&T and WSB because of their slow payment history and/or the industry was significantly impacted by the weaknesses in the economy. Due to the acquisition of WSB, 81 new non-accrued loans are now being reported.
The table below outlines the transfer of loans from and to non-accrual status for the six month period:
|
|
Non-Accrual Loans |
| |||||||
|
|
(Dollars in thousands) |
| |||||||
|
|
Legacy Loans |
|
Acquired Loans |
|
Total |
| |||
|
|
Loan |
|
Loan |
|
Loan |
| |||
|
|
|
|
|
|
|
| |||
Beginning Balance, December 31, 2012 |
|
$ |
1,818 |
|
$ |
4,092 |
|
$ |
5,910 |
|
New additions to non-accrued |
|
528 |
|
11,255 |
|
11,783 |
| |||
Payments received |
|
(308 |
) |
(527 |
) |
(835 |
) | |||
Charged off |
|
(149 |
) |
(45 |
) |
(194 |
) | |||
Transferred to other real estate owned |
|
|
|
|
|
|
| |||
Ending balance, June 30, 2013 |
|
$ |
1,889 |
|
$ |
14,775 |
|
$ |
16,664 |
|
We classify any property acquired as a result of foreclosure on a mortgage loan as other real estate owned and record it at the lower of the unpaid principal balance or fair value at the date of acquisition and subsequently carry the property at the lower of cost or net realizable value. We charge any required write down of the loan to its net realizable value against the allowance for loan losses at the time of foreclosure. We charge to expense any subsequent adjustments to net realizable value. Upon foreclosure, Old Line Bank generally requires an appraisal of the property and, thereafter, appraisals of the property generally on an annual basis and external inspections on at least a quarterly basis.
As required by ASC Topic 310-Receivables and ASC Topic 450-Contingencies, we measure all impaired loans, which consist of all modified loans (trouble debt restructurings) and other loans for which collection of all contractual principal and interest is not probable, based on the present value of expected future cash flows discounted at the loans effective interest rate, or at the loans observable market price or the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, we recognize impairment through a valuation allowance and corresponding provision for loan losses. Old Line Bank considers consumer loans as homogenous loans and thus does not apply the impairment test to these loans. We write off impaired loans when collection of the loan is doubtful.
The table below presents a breakdown of the recorded book balance of non-accruing loans at June 30, 2013 and December 31, 2012.
|
|
Loans on Non-accrual Status |
| ||||||||||||||||||||
|
|
June 30, 2013 |
|
December 31, 2012 |
| ||||||||||||||||||
|
|
# of |
|
Unpaid |
|
Recorded |
|
Interest Not |
|
# of |
|
Unpaid |
|
Recorded |
|
Interest Not |
| ||||||
Legacy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial |
|
2 |
|
$ |
1,332,636 |
|
$ |
1,332,636 |
|
$ |
70,806 |
|
2 |
|
$ |
1,226,011 |
|
$ |
1,226,011 |
|
$ |
103,529 |
|
Residential |
|
2 |
|
556,082 |
|
556,082 |
|
39,703 |
|
2 |
|
591,873 |
|
591,873 |
|
25,449 |
| ||||||
Total non-accrual loans |
|
4 |
|
1,888,718 |
|
1,888,718 |
|
110,509 |
|
4 |
|
1,817,884 |
|
1,817,884 |
|
128,978 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Acquired (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial |
|
21 |
|
16,223,623 |
|
6,058,216 |
|
1,150,545 |
|
8 |
|
3,808,963 |
|
1,401,187 |
|
649,266 |
| ||||||
Construction |
|
4 |
|
2,518,563 |
|
100,000 |
|
678,847 |
|
4 |
|
2,538,565 |
|
100,000 |
|
592,476 |
| ||||||
Residential |
|
76 |
|
17,409,474 |
|
8,585,380 |
|
2,350,853 |
|
10 |
|
4,346,364 |
|
2,555,374 |
|
526,669 |
| ||||||
Commercial |
|
4 |
|
93,110 |
|
31,886 |
|
49,674 |
|
3 |
|
123,949 |
|
35,392 |
|
45,787 |
| ||||||
Total non-accrual loans |
|
105 |
|
36,244,770 |
|
14,775,482 |
|
4,229,919 |
|
25 |
|
10,817,841 |
|
4,091,953 |
|
1,814,198 |
| ||||||
Total all non-accrual loans |
|
109 |
|
$ |
38,133,488 |
|
$ |
16,664,200 |
|
$ |
4,340,428 |
|
29 |
|
$ |
12,635,725 |
|
$ |
5,909,837 |
|
$ |
1,943,176 |
|
(1) Generally accepted accounting principles require that we record acquired loans at fair value which includes a discount for loans with credit impairment. These loans are not performing according to their contractual terms and meet our definition of a non-performing loan. The discounts that arise from recording these loans at fair value were due to credit quality. Although we do not accrue interest income at the contractual rate on these loans, we may accrete these discounts to interest income as a result of pre-payments that exceed our cash flow expectations or payment in full of amounts due even though we classify them as non-accrual.
We do not recognize interest income on non-performing loans during the time period that the loans are non-performing on either a cash or accrual basis. We only recognize interest income on non-performing loans when we receive payment in full for all amounts due of all contractually required principal and interest and the loan is current with its contractual terms.
Bank owned life insurance
We have invested $30.1 million in life insurance policies on our executive officers, other officers of the Bank, and retired officers of MB&T. This represents a $13.3 million increase from December 31, 2012. This increase is primarily due to $13.0 million of bank owned life insurance (BOLI) acquired in the WSB Holdings acquisition. We anticipate the earnings on these policies will contribute to our employee benefit expenses as well as our obligations under our Salary Continuation Agreements and Supplemental Life Insurance Agreements that we entered into with our executive officers in January 2006 as well as that MB&T and WSB had entered into with its executive officers. During the first six months of 2013, the cash surrender value of the bank owned life insurance policies increased by $333,869 as a result of earnings on these policies. There are no post retirement death benefits associated with the BOLI policies owned by Old Line Bank prior to the acquisition of MB&T. We have accrued a $227,304 liability associated with the post retirement death benefits of the BOLI policies acquired from MB&T.
Goodwill
During the second quarter of 2013, we recorded goodwill of $6.2 million associated with the acquisition of WSB Holdings. This amount represented the difference between the estimated fair value of tangible and intangible assets acquired and liabilities assumed at acquisition date.
Core deposit intangible
As a result of the acquisition of Maryland Bankcorp, during the second quarter of 2011, we recorded a core deposit intangible of $5.0 million. This amount represented the premium that we paid to acquire MB&Ts core deposits over the fair value of such deposits. We will amortize the core deposit intangible on an accelerated basis over its estimated useful life of 18 years. At June 30, 2013, the core deposit intangible was $3.4 million.
As a result of the acquisition of WSB Holdings, during the second quarter of 2013, we recorded a core deposit intangible of $2.4 million. This amount represented the premium that we paid to acquire WSBs core deposits over the fair value of such deposits. We will amortize the core deposit intangible on an accelerated basis over its estimated useful life of ten years. At June 30, 2013, the core deposit intangible was $2.4 million.
Deposits
We seek deposits within our market area by paying competitive interest rates, offering high quality customer service and using technology to deliver deposit services effectively.
At June 30, 2013, the deposit portfolio had increased to $995.5 million, a $260.0 million or 35.37% increase over the December 31, 2012 level of $735.5 million primarily due to acquisition of WSB. Non-interest bearing deposits increased $24.7 million during the period to $213.6 million from $188.9 million. Interest-bearing deposits increased $235.4 million to $782.0 million from $546.6 million. The following table outlines the increase in interest bearing deposits:
|
|
June 30, |
|
December 31, |
|
|
|
|
| |||
|
|
2013 |
|
2012 |
|
$ Change |
|
% Change |
| |||
|
|
|
|
(Dollars in thousands) |
|
|
| |||||
Certificates of deposit |
|
$ |
401,290 |
|
$ |
310,772 |
|
$ |
90,518 |
|
29.13 |
% |
Interest bearing checking |
|
222,296 |
|
171,478 |
|
50,818 |
|
29.64 |
| |||
Savings |
|
158,383 |
|
64,313 |
|
94,070 |
|
146.27 |
| |||
Total |
|
$ |
781,969 |
|
$ |
546,563 |
|
$ |
235,406 |
|
43.07 |
% |
We acquire brokered certificates of deposit through the Promontory Interfinancial Network (Promontory). Through this deposit matching network and its certificate of deposit account registry service (CDARS) and money market account service, we have the ability to offer our customers access to FDIC insured deposit products in aggregate amounts exceeding current insurance limits. When we place funds through Promontory on behalf of a customer, we receive matching deposits through the networks reciprocal deposit program. We can also place deposits through this network without receiving matching deposits. At June 30, 2013, we had $50.8 million in CDARS and $74.4 million in money market accounts through Promontorys reciprocal deposit program compared to $39.3 million and $63.9 million, respectively, at December 31, 2012. At both June 30, 2013 and December 31, 2012, we had received $17.7 million in deposits through the Promontory network that were not reciprocal. We had no other brokered certificates of deposit as of June 30, 2013 and December 31, 2012. We expect that we will continue to use brokered deposits as an element of our funding strategy when required to maintain an acceptable loan to deposit ratio.
Borrowings
Short-term borrowings consist of short-term promissory notes issued to Old Line Banks customers. Old Line Bank offers its commercial customers an enhancement to the basic non-interest bearing demand deposit account. This service electronically sweeps excess funds from the customers account into a short term promissory note with Old Line Bank. These obligations are payable on demand, are secured by investments or are unsecured, re-price daily and have maturities of one to 270 days. At December 31, 2012, Old Line Bank had $6.3 million outstanding in these short term unsecured promissory notes with an average interest rate of 0.15% and $24.6 million outstanding in secured promissory notes with an average interest rate of 0.10%. We recorded these secured promissory notes with the acquisition of MB&T. Also, at December 31, 2012, Old Line Bank had one $7.0 million daily rate credit advance which was repaid in the first quarter of 2013. At June 30, 2013, Old Line Bank had $6.7 million outstanding in short term unsecured promissory notes with an average interest rate of 0.15% and $22.1 million in secured promissory notes with an average interest rate of 0.10%.
On December 19, 2007, Old Line Bank borrowed an additional $5.0 million from the FHLB. The interest rate on this borrowing was 3.119% and was payable on the 19th day of each month. On January 22, 2008 or any interest payment date thereafter, the FHLB had the option to convert the interest rate on this advance from a fixed rate to a one month LIBOR based variable rate. We repaid this advance on December 19, 2012. As of June 30, 2013, Old Line Bank did not have any outstanding borrowing with FHLB.
During the quarter ending June 30, 2013, we acquired $56.0 million in FHLB borrowings in the WSB Holdings acquisition. We repaid the borrowings shortly after the merger resulting in a $4.3 million onetime penalty for a total payment of $60.3 million. This penalty was included as an adjustment to goodwill at May 10, 2013.
The following table outlines our borrowings at June 30, 2013 and December 31, 2012.
Borrowings
|
|
June 30, 2013 |
|
December 31, 2012 |
| ||||||||||||
|
|
Amount |
|
Rate |
|
Maximum |
|
Amount |
|
Rate |
|
Maximum |
| ||||
Short term promissory notes |
|
$ |
6,714,731 |
|
0.15 |
% |
$ |
7,547,004 |
|
$ |
6,332,804 |
|
0.15 |
% |
$ |
9,652,162 |
|
Repurchase agreements |
|
22,103,370 |
|
0.10 |
% |
23,974,009 |
|
24,572,663 |
|
0.10 |
% |
28,167,472 |
| ||||
Over night advance |
|
|
|
|
|
29,200,000 |
|
7,000,000 |
|
0.35 |
% |
7,000,000 |
| ||||
FHLB advance due Dec. 2012 |
|
|
|
|
|
|
|
|
|
|
|
5,000,000 |
| ||||
FHLB advance due Dec. 2012 |
|
|
|
|
|
|
|
|
|
|
|
5,000,000 |
| ||||
Total short term borrowings |
|
$ |
28,818,101 |
|
|
|
$ |
60,721,013 |
|
$ |
37,905,467 |
|
|
|
$ |
54,819,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Senior note, fixed at 6.28% |
|
6,142,962 |
|
6.28 |
% |
|
|
6,192,350 |
|
6.28 |
% |
|
| ||||
Total long term borrowings |
|
$ |
6,142,962 |
|
|
|
|
|
$ |
6,192,350 |
|
|
|
|
|
On August 25, 2006, Pointer Ridge entered into an Amended and Restated Promissory Note in the principal amount of $6.6 million. This loan accrues interest at a rate of 6.28% through September 5, 2016. After September 5, 2016, the rate adjusts to the greater of (i) 6.28% plus 200 basis points or (ii) the Treasury Rate (as defined in the Amended Promissory Note) plus 200 basis points. At June 30, 2013 and December 31, 2012, Pointer Ridge had borrowed $6.2 million under the Amended Promissory Note. We have guaranteed to the lender payment of up to 62.50% of the loan payment plus any costs the lender incurs resulting from any omissions or alleged acts or omissions by Pointer Ridge arising out of or relating to misapplication or misappropriation of money, rents received after an event of default, waste or damage to the property, failure to maintain insurance, fraud or material misrepresentation, filing of bankruptcy or Pointer Ridges failure to maintain its status as a single purpose entity.
Interest Rate Sensitivity Analysis and Interest Rate Risk Management
A principal objective of Old Line Banks asset/liability management policy is to minimize exposure to changes in interest rates by an ongoing review of the maturity and re-pricing of interest earning assets and interest bearing liabilities. The Asset and Liability Committee of the Board of Directors oversees this review.
The Asset and Liability Committee establishes policies to control interest rate sensitivity. Interest rate sensitivity is the volatility of a banks earnings resulting from movements in market interest rates. Management monitors rate sensitivity in order to reduce vulnerability to interest rate fluctuations while maintaining adequate capital levels and acceptable levels of liquidity. Monthly financial reports supply management with information to evaluate and manage rate sensitivity and adherence to policy. Old Line Banks asset/liability policys goal is to manage assets and liabilities in a manner that stabilizes net interest income and net economic value within a broad range of interest rate environments. Management makes adjustments to the mix of assets and liabilities periodically in an effort to achieve dependable, steady growth in net interest income regardless of the behavior of interest rates in general.
As part of the interest rate risk sensitivity analysis, the Asset and Liability Committee examines the extent to which Old Line Banks assets and liabilities are interest rate sensitive and monitors the interest rate sensitivity gap. An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market rates. The interest rate sensitivity gap is the difference between interest earning assets and interest
bearing liabilities scheduled to mature or re-price within such time period. A positive gap occurs when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A negative gap occurs when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap tends to adversely affect net interest income, while a positive gap tends to result in an increase in net interest income. During a period of declining interest rates, a negative gap tends to result in an increase in net interest income, while a positive gap tends to adversely affect net interest income. If re-pricing of assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal.
Old Line Bank currently has a positive gap over the short term, which suggests that the net yield on interest earning assets may increase during periods of rising interest rates. However, a simple interest rate gap analysis by itself may not be an accurate indicator of how changes in interest rates will affect net interest income. Changes in interest rates may not uniformly affect income associated with interest earning assets and costs associated with interest bearing liabilities. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. Although certain assets and liabilities may have similar maturities or periods of re-pricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market interest rates, while interest rates on other types may lag behind changes in general market rates. In the event of a change in interest rates, prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the interest rate gap. The ability of many borrowers to service their debts also may decrease in the event of an interest rate increase.
Liquidity
Our overall asset/liability strategy takes into account our need to maintain adequate liquidity to fund asset growth and deposit runoff. Our management monitors the liquidity position daily in conjunction with Federal Reserve guidelines. As outlined in the Borrowings section of this report, we have credit lines, unsecured and secured, available from several correspondent banks totaling $29.5 million. Additionally, we may borrow funds from the FHLB and the Federal Reserve Bank of Richmond. We can use these credit facilities in conjunction with the normal deposit strategies, which include pricing changes, to increase deposits as necessary. We can also sell available for sale investment securities or pledge investment securities as collateral to create additional liquidity. From time to time we may sell or participate out loans to create additional liquidity as required. Additional sources of liquidity include funds held in time deposits and cash from the investment and loan portfolios.
Our immediate sources of liquidity are cash and due from banks, federal funds sold and time deposits in other banks. On June 30, 2013, we had $50.7 million in cash and due from banks, $30,352 in interest bearing accounts, and $3.0 million in federal funds sold. At December 31, 2012, we had $28.3 million in cash and due from banks, $130,192 in interest bearing accounts and $228,113 in federal funds sold.
Old Line Bank has sufficient liquidity to meet its loan commitments as well as fluctuations in deposits. We usually retain maturing certificates of deposit as we offer competitive rates on certificates of deposit. Management is not aware of any demands, trends, commitments, or events that would result in Old Line Banks inability to meet anticipated or unexpected liquidity needs.
During the recent period of turmoil in the financial markets, some institutions experienced large deposit withdrawals that caused liquidity problems. We did not have any significant withdrawals of deposits or any liquidity issues. Although we plan for various liquidity scenarios, if there is turmoil in the financial markets or our depositors lose confidence in us, we could experience liquidity issues.
Old Line Bancshares has available a $5 million unsecured line of credit. In addition, Old Line Bank has available lines of credit, including overnight federal funds and repurchase agreements from its correspondent banks totaling $29.5 million as of June 30, 2013 and December 31, 2012. Old Line Bank has an additional secured line of credit from the FHLB of $258.6 million at June 30, 2013. As a condition of obtaining the line of credit from the FHLB, the FHLB requires that Old Line Bank purchase shares of capital stock in the FHLB. Prior to allowing Old Line Bank to borrow under the line of credit, the FHLB also requires that Old Line Bank provide collateral to support borrowings. Therefore, we have provided collateral to support up to $169.9 million of borrowings. We may increase availability by providing additional collateral.
Capital
Current regulations require subsidiaries of a financial institution to be separately capitalized and require investments in and extensions of credit to any subsidiary engaged in activities not permissible for a bank to be deducted in the computation of the institutions regulatory capital. Regulatory capital and regulatory assets below also reflect increases of $3.9 million and $6.7 million, respectively, which represents unrealized losses (after-tax for capital additions and pre-tax for asset additions, respectively) on MBS and investment securities classified as available for sale. In addition, the risk-based capital reflects an increase of $4.2 million in the general loan loss reserve during the six months ended June 30, 2013. The following table shows regulatory capital ratios required, the actual ratios, and the amount by which the ratios exceed required capital ratios, as of June 30, 2013.
|
|
|
|
|
|
Minimum capital |
|
To be well |
| |||||||
|
|
Actual |
|
adequacy |
|
capitalized |
| |||||||||
June 30, 2013 |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
| |||
|
|
(Dollars in 000s) |
| |||||||||||||
Total capital (to risk weighted assets) |
|
$ |
88,991 |
|
10.78 |
% |
$ |
66,036 |
|
8 |
% |
$ |
82,545 |
|
10 |
% |
Tier 1 capital (to risk weighted assets) |
|
$ |
85,486 |
|
10.36 |
% |
$ |
33,018 |
|
4 |
% |
49,527 |
|
6 |
% | |
Tier 1 capital (to average assets) |
|
$ |
85,486 |
|
8.28 |
% |
$ |
41,312 |
|
4 |
% |
$ |
51,640 |
|
5 |
% |
Our management believes that, under current regulations, and eliminating the assets of Old Line Bancshares, the Bank remains well capitalized and will continue to meet its minimum capital requirements in the foreseeable future. However, events beyond our control, such as a shift in interest rates or a continued downturn or slower recovery in the economy in areas where we extend credit, could adversely affect future earnings and, consequently, our ability to meet minimum capital requirements in the future.
Contractual Obligations, Commitments, Contingent Liabilities, and Off-balance Sheet Arrangements
Old Line Bancshares is a party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments primarily include commitments to extend credit, lines of credit and standby letters of credit. Old Line Bancshares uses these financial instruments to meet the financing needs of its customers. These financial instruments involve, to varying degrees, elements of credit, interest rate, and liquidity risk. These commitments do not represent unusual risks and management does not anticipate any losses which would have a material effect on Old Line Bancshares. Old Line Bancshares also has operating lease obligations.
Outstanding loan commitments and lines and letters of credit at June 30, 2013 and December 31, 2012, are as follows:
|
|
June 30, |
|
December 31, |
| ||
|
|
2013 |
|
2012 |
| ||
|
|
(Dollars in thousands) |
| ||||
Commitments to extend credit and available credit lines: |
|
|
| ||||
Commercial |
|
$ |
57,386 |
|
$ |
47,251 |
|
Real estate-undisbursed development and construction |
|
47,198 |
|
31,815 |
| ||
Consumer |
|
15,000 |
|
14,623 |
| ||
|
|
$ |
119,584 |
|
$ |
93,689 |
|
Standby letters of credit |
|
$ |
16,874 |
|
$ |
11,310 |
|
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Old Line Bancshares generally requires collateral to support financial instruments with credit risk on the same basis as it does for on balance sheet instruments. The collateral is based on managements credit evaluation of the counter party. Commitments generally have interest rates fixed at current market rates, expiration dates or other termination clauses and may require payment of a fee. Available credit lines represent the unused portion of lines of credit previously extended and available to the customer so long as there is no violation of any contractual condition. These lines generally
have variable interest rates. Since many of the commitments are expected to expire without being drawn upon, and since it is unlikely that all customers will draw upon their lines of credit in full at any time, the total commitment amount or line of credit amount does not necessarily represent future cash requirements. We evaluate each customers credit worthiness on a case by case basis. We regularly reevaluate many of our commitments to extend credit. Because we conservatively underwrite these facilities at inception, we generally do not have to withdraw any commitments. We are not aware of any loss that we would incur by funding our commitments or lines of credit.
Commitments for real estate development and construction, which totaled $47.2 million, or 39.47% of the $119.6 million of outstanding commitments at June 30, 2013, are generally short term and turn over rapidly with principal repayment from permanent financing arrangements upon completion of construction or from sales of the properties financed.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Our exposure to credit loss in the event of non-performance by the customer is the contract amount of the commitment. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In general, loan commitments, credit lines and letters of credit are made on the same terms, including with respect to collateral, as outstanding loans. We evaluate each customers credit worthiness and the collateral required on a case by case basis.
Reconciliation of Non-GAAP Measures
Below is a reconciliation of the fully tax equivalent adjustments and the GAAP basis information presented in this report:
Three months ended June 30, 2013
|
|
Net Interest |
|
Yield |
|
Net |
| |
GAAP net interest income |
|
$ |
9,203,177 |
|
4.08 |
% |
3.99 |
% |
Tax equivalent adjustment |
|
|
|
|
|
|
| |
Federal funds sold |
|
1 |
|
|
|
0.01 |
| |
Investment securities |
|
284,510 |
|
0.13 |
|
0.13 |
| |
Loans |
|
168,773 |
|
0.07 |
|
0.07 |
| |
Total tax equivalent adjustment |
|
453,284 |
|
0.20 |
|
0.21 |
| |
Tax equivalent interest yield |
|
$ |
9,656,461 |
|
4.28 |
% |
4.20 |
% |
Three months ended June 30, 2012
|
|
Net Interest |
|
Yield |
|
Net |
| |
GAAP net interest income |
|
$ |
8,463,386 |
|
4.67 |
% |
4.47 |
% |
Tax equivalent adjustment |
|
|
|
|
|
|
| |
Federal funds sold |
|
1 |
|
|
|
|
| |
Investment securities |
|
224,794 |
|
0.12 |
|
0.12 |
| |
Loans |
|
86,843 |
|
0.05 |
|
0.05 |
| |
Total tax equivalent adjustment |
|
311,638 |
|
0.17 |
|
0.17 |
| |
Tax equivalent interest yield |
|
$ |
8,775,024 |
|
4.84 |
% |
4.64 |
% |
Six months ended June 30, 2013
|
|
Net Interest |
|
Yield |
|
Net |
| |
GAAP net interest income |
|
$ |
17,050,627 |
|
4.37 |
% |
4.18 |
% |
Tax equivalent adjustment |
|
|
|
|
|
|
| |
Federal funds sold |
|
3 |
|
|
|
|
| |
Investment securities |
|
572,121 |
|
0.10 |
|
0.09 |
| |
Loans |
|
332,921 |
|
0.04 |
|
0.04 |
| |
Total tax equivalent adjustment |
|
905,045 |
|
0.14 |
|
0.13 |
| |
Tax equivalent interest yield |
|
$ |
17,955,672 |
|
4.51 |
% |
4.31 |
% |
Six months ended June 30, 2012
|
|
Net Interest |
|
Yield |
|
Net |
| |
GAAP net interest income |
|
$ |
16,225,798 |
|
4.52 |
% |
4.32 |
% |
Tax equivalent adjustment |
|
|
|
|
|
|
| |
Federal funds sold |
|
|
|
|
|
|
| |
Investment securities |
|
388,015 |
|
0.11 |
|
0.11 |
| |
Loans |
|
164,281 |
|
0.05 |
|
0.05 |
| |
Total tax equivalent adjustment |
|
552,296 |
|
0.16 |
|
0.16 |
| |
Tax equivalent interest yield |
|
$ |
16,778,094 |
|
4.68 |
% |
4.48 |
% |
Impact of Inflation and Changing Prices
Management has prepared the financial statements and related data presented herein in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.
Unlike industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institutions performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, and may frequently reflect government policy initiatives or economic factors not measured by a price index. As discussed above, we strive to manage our interest sensitive assets and liabilities in order to offset the effects of rate changes and inflation.
Information Regarding Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). We may also include forward-looking statements in other statements that we make. All statements that are not descriptions of historical facts are forward-looking statements. Forward-looking statements often use words such as believe, expect, plan, may, will, should, project, contemplate, anticipate, forecast, intend or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.
The statements presented herein with respect to, among other things, Old Line Bancshares plans, objectives, expectations and intentions, including the anticipated impact on Old Line Bancshares of our recent merger with WSB Holdings, including our expectation that the merger will be accretive to earnings by the first quarter of 2014, that our new loan production office will allow us to expand into Montgomery County, Maryland, and that the staff of the new loan production office and the Old Line Financial Services division will more than offset the costs of operating these offices, impact of recent hires, branch retention and expansion intentions, anticipated changes in non-interest expenses in future periods (including changes as a result of the recently completed merger with WSB Holdings), maintenance of the net
interest margin during the remainder of 2013, continued increases in net interest income, hiring and acquisition possibilities, our belief that we have identified any problem assets and that our borrowers will continue to remain current on their loans, being well positioned to capitalize on potential opportunities in a healthy economy, impact of outstanding off-balance sheet commitments, sources of liquidity and that we have sufficient liquidity, the sufficiency of the allowance for loan losses, expected cash flows on acquired impaired loans, expected loan, deposit, asset, balance sheet and earnings growth, expected losses on and our intentions with respect to our investment securities, the amount of potential problem loans, future earnings on BOLI, continued use of brokered deposits for funding, expectations with respect to the impact of pending legal proceedings, improving earnings per share and stockholder value, and financial and other goals and plans are forward looking. Old Line Bancshares bases these statements on our beliefs, assumptions and on information available to us as of the date of this filing, which involves risks and uncertainties. These risks and uncertainties include, among others: those discussed in this report; the risk that Old Line Bancshares may fail to realize all of the anticipated benefits of the merger with WSB Holdings; the ability of Old Line Bancshares to retain key personnel; the ability of Old Line Bancshares to successfully implement its growth and expansion strategy; risk of loan losses; that the allowance for loan losses may not be sufficient; that changes in interest rates and monetary policy could adversely affect Old Line Bancshares; that changes in regulatory requirements and/or restrictive banking legislation may adversely affect Old Line Bancshares, including regulations adopted pursuant to the Dodd-Frank Act; that the market value of investments could negatively impact stockholders equity; risks associated with Old Line Bancshares lending limit; expenses associated with operating as a public company; potential conflicts of interest associated with the interest in Pointer Ridge; deterioration in general economic conditions, continued slow growth during the recovery or another recession; and changes in competitive, governmental, regulatory, technological and other factors which may affect Old Line Bancshares specifically or the banking industry generally. For a more complete discussion of some of these risks and uncertainties see Risk Factors in Old Line Bancshares Annual Report on Form 10-K for the year ended December 31, 2012.
Old Line Bancshares actual results and the actual outcome of our expectations and strategies could differ materially from those anticipated or estimated because of these risks and uncertainties and you should not put undue reliance on any forward-looking statements. All forward-looking statements speak only as of the date of this filing, and Old Line Bancshares undertakes no obligation to update the forward-looking statements to reflect factual assumptions, circumstances or events that have changed after we have made the forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. Due to the nature of our operations, only interest rate risk is significant to our consolidated results of operations or financial position. For information regarding our Quantitative and Qualitative Disclosure about Market Risk, see Interest Rate Sensitivity Analysis and Interest Rate Risk Management in Part I, Item 2 of this Form 10-Q.
Item 4. Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, Old Line Bancshares Chief Executive Officer and Acting Chief Financial Officer evaluated the effectiveness of Old Line Bancshares disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based upon that evaluation, Old Line Bancshares Chief Executive Officer and Acting Chief Financial Officer concluded that Old Line Bancshares disclosure controls and procedures are effective as of June 30, 2013. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by Old Line Bancshares in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms.
In addition, there were no changes in Old Line Bancshares internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2013, that have materially affected, or are reasonably likely to materially affect, Old Line Bancshares internal control over financial reporting.
Old Line Bank has a collection case pending before the Superior Court for the District of Columbia, which arises from a $1,776,350 commercial loan issued to Ngozika Nwaneri, M.D. by MB&T. That loan was to be secured by deeds of trust against one commercial property and four residential building lots jointly owned by Dr. Nwaneri and his wife, Chinyere
Nwaneri. Dr. Nwaneri executed the deeds of trust on behalf of Mrs. Nwaneri under the authority of two separate powers of attorney executed by Mrs. Nwaneri.
This loan has matured and Dr. Nwaneri has defaulted on his repayment obligations. The outstanding balance on this loan is approximately $1.6 million. In an effort to avoid payment obligations and to avoid foreclosure under the deed of trust, on October 22, 2010 Mrs. Nwaneri initiated a case in the Superior Court of the District of Columbia claiming that she did not sign the powers of attorneys and that the deeds of trust are void. The Bank interpleaded Dr. Nwaneri in the case and asserted claims against him for fraud and breach of contract, among other causes of action. In response, Dr. Nwaneri counter-sued the Bank and has asserted claims of fraud and breach of fiduciary duty. Dr. Nwaneri is seeking $2.5 million in compensatory damages and $2.5 million in punitive damages. On March 12, 2013, mediation proceedings with the borrower failed and a pre-trial hearing is scheduled in August 2013. We believe that Dr. and Mrs. Nwaneris claims are entirely without merit.
On September 27, 2012, Rosalie Jones, both individually and on behalf of a putative class of WSB Holdings stockholders filed a complaint in the Circuit Court for Prince Georges County, Maryland against WSB Holdings and its directors as well as Old Line Bancshares. The complaint, later amended, seeks to enjoin our merger with WSB Holdings and alleges, among other things, that the members of WSB Holdings board of directors breached their fiduciary duties by agreeing to sell WSB Holdings for inadequate and unfair consideration and pursuant to an unfair process. The amended complaint also alleges that WSB Holdings directors agreed to provisions in the merger agreement that constitute onerous and preclusive deal protection devices, and that certain officers and directors of WSB Holdings will receive personal benefits from the merger not shared in by other WSB Holdings stockholders. The complaint further alleges that WSB Holdings and Old Line Bancshares aided and abetted such alleged breaches.
The parties entered into a Stipulation of Settlement (the Settlement) effective June 17, 2013 to resolve all claims asserted on behalf of the putative class of WSB Holdings stockholders. The litigation and all claims asserted in such litigation will be dismissed by the Settlement, subject to final court approval. The proposed settlement requires Old Line Bancshares and WSB Holdings to make certain additional disclosures related to the merger, which disclosures were included in the joint proxy statement/prospectus of Old Line Bancshares and WSB dated February 15, 2013, and sent to their respective stockholders. The Circuit Court for Prince Georges County, Maryland granted preliminary approval of the Settlement on June 18, 2013. Notice of the Settlement was mailed to class members in July 2013. The Settlement does not include any payment to class members. The Court Scheduled an October 1, 2013 final approval hearing. There can be no assurance that the Court will grant final approval of the proposed settlement or that any eventual settlement will be under the same terms as those granted preliminary approval by the Court.
The parties to the Settlement did not reach any agreement with regard to the attorneys fees, costs and expenses, if any, that may be awarded class counsel. Such counsel informed the Court of his intent to file a petition requesting an award of up to $625,000 for attorneys fees and costs. Defendants did not consent to, and reserve the right to oppose, any fee petition. An accrual of $600,000 has been recorded to cover the costs of this lawsuit at June 30, 2013.
We are not involved in any legal proceedings, other than as discussed above, the outcome of which, in managements opinion, would be material to our financial condition or results of operations.
There have been no material changes in the risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None
10.2 |
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Third Amendment to Executive Employment Agreement between Old Line Bank and James W. Cornelsen dated May 9, 2013. |
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10.8 |
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Second Amendment to Restated Executive Employment Agreement between Old Line Bank and Joseph E. Burnett dated May 9, 2013. |
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31.1 |
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Rule 13a-14(a) Certification of Chief Executive Officer |
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31.2 |
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Rule 13a-14(a) Certification of Chief Financial Officer |
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32 |
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Section 1350 Certification of Chief Executive Officer and Chief Financial Officer |
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101 |
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Interactive Data Files pursuant to Rule 405 of Regulation S-T.* |
* Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Old Line Bancshares, Inc. | |
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Date: August 14, 2013 |
By: |
/s/ James W. Cornelsen |
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James W. Cornelsen, |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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Date: August 14, 2013 |
By: |
/s/ Mark A. Semanie |
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Mark A. Semanie, |
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Executive Vice President, Chief Operating Officer and Acting Chief Financial Officer |
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(Principal Accounting and Financial Officer) |
Exhibit 10.2
THIRD AMENDMENT TO
EXECUTIVE EMPLOYMENT AGREEMENT
THIS THIRD AMENDENT TO EXECUTIVE EMPLOYMENT AGREEMENT (this First Amendment) is made effective as of the 1st day of January 2013, by and between OLD LINE BANK, a Maryland-chartered commercial bank (the Bank or Employer) and JAMES W. CORNELSEN (the Employee). This Third Amendment amends in certain respects that certain Executive Employment Agreement dated January 28, 2011, between the Bank and Employee, (the Original Agreement).
1. Capitalized Terms. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Original Agreement.
2. Amendments. The Original Agreement is hereby amended as follows:
a. The following sentence is hereby added to the end of Section 3.1 of the Original Agreement:
As of January 1, 2013, the Board extended the Term for one additional year such that, as of such date, the Term was to expire as of March 30, 2017.
b. Section 4.1(a) of the Original Agreement is hereby amended by deleting said section in its entirety and replacing it with the following:
(a) Base Salary. During the Term the Employee will receive a base salary at the rate of $400,000 per annum, payable in substantially equal installments in accordance with the Banks regular payroll practices (Base Salary). The Employees Base Salary will be reviewed the Board annually, and the Employee will be entitled to receive annually an increase in such amount, if any, as may be determined by the Board.
All of the provisions of the Original Agreement are incorporated herein by reference and shall remain and continue in full force and effect as amended by this First Amendment.
3. Counterparts. The Amendment may be executed in any number of counterparts, each of which shall be considered an original for all purposes but all of which shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this First Amendment, under seal, as of May 9, 2013 effective as of January 1, 2013.
WITNESS/ATTEST: |
OLD LINE BANK | |||
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/s/ Mark A. Semanie |
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By: |
/s/ James F. Dent |
(SEAL) |
Mark A. Semanie, |
Name: James F. Dent | |||
Executive Vice President |
Title: Chairman of Compensation Committee | |||
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WITNESS: |
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/s/ Mark A. Semanie |
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/s/James W. Cornelsen |
(SEAL) | |
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JAMES W. CORNELSEN |
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Exhibit 10.8
SECOND AMENDMENT TO RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
THIS SECOND AMENDENT TO EXECUTIVE EMPLOYMENT AGREEMENT (this Second Amendment) is made effective as of the 1st day of January 2013, by and between OLD LINE BANK, a Maryland-chartered commercial bank (the Bank or Employer) and JOSEPH E. BURNETT (the Employee). This Second Amendment amends in certain respects that certain Executive Employment Agreement dated January 28, 2011, between the Bank and Employee, (the Original Agreement).
1. Capitalized Terms. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Original Agreement.
2. Amendments. The Original Agreement is hereby amended as follows:
a. The following sentence is hereby added to the end of Section 2 of the original agreement:
As of January 1, 2013, the Board extended the Term for one additional year, such that, as of such date, the Term was to expire as of March 31, 2015.
b. The first sentence of Section 3(A) of the Original Agreement is hereby amended by deleting said section in its entirety and replacing it with the following:
The Employees salary under this Agreement shall be $215,180 per annum, payable on a bi-weekly basis.
All of the provisions of the Original Agreement are incorporated herein by reference and shall remain and continue in full force and effect as amended by this Second Amendment.
3. Counterparts. The Amendment may be executed in any number of counterparts, each of which shall be considered an original for all purposes but all of which shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this Second Amendment, under seal, as of May 9, 2013, effective as of January 1, 2013.
WITNESS/ATTEST: |
OLD LINE BANK | |||
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/s/ James W. Cornelsen |
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By: |
/s/ James F. Dent |
(SEAL) |
James W. Cornelsen, |
Name: James F. Dent | |||
President and Chief Executive Officer |
Title: Chairman of Compensation Committee | |||
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WITNESS: |
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/s/ James W. Cornelsen |
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/s/Joseph E. Burnett |
(SEAL) | |
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JOSEPH E. BURNETT |
Exhibit 31.1
I, James W. Cornelsen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Old Line Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: August 14, 2013 |
By: |
/s/ James W. Cornelsen |
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Name: James W. Cornelsen | |
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Title: President and | |
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Chief Executive Officer |
Exhibit 31.2
I, Mark A. Semanie, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Old Line Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: August 14, 2013 |
By: |
/s/ Mark A. Semanie |
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Name: Mark A. Semanie | |
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Title: Executive Vice President, Chief Operating Officer and Acting Chief Financial Officer |
Exhibit 32
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officers of Old Line Bancshares, Inc. (the Company) each certifies to the best of his or her knowledge that the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in that Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ James W. Cornelsen |
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James W. Cornelsen |
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President and Chief Executive Officer |
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August 14, 2013 |
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By: |
/s/ Mark A. Semanie |
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Mark A. Semanie |
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Executive Vice President, Chief Operating Officer |
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and Acting Chief Financial Officer |
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August 14, 2013 |
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This certification is made solely for the purpose of 18 U.S.C. Section 1350, and is not being filed as part of the Form 10-Q or as a separate disclosure document, and may not be disclosed, distributed or used by any person for any reason other than as specifically required by law.
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FAIR VALUE MEASUREMENTS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
FAIR VALUE MEASUREMENTS | 9. FAIR VALUE MEASUREMENTS
On January 1, 2008, we adopted FASB ASC Topic 820 Fair Value Measurements and Disclosures, which defines fair value as 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.
We value investment securities classified as available for sale at fair value.
The fair value hierarchy established in FASB ASC Topic 820 defines three input levels for fair value measurement. Level 1 is based on quoted market prices in active markets for identical assets. Level 2 is based on significant observable inputs other than those in Level 1. Level 3 is based on significant unobservable inputs.
We value investment securities classified as available for sale and Sallie Mae (SLMA) equity securities (included in equity securities) at fair value on a recurring basis. We value treasury securities and SLMA equity securities under Level 1, and collateralized mortgage obligations, agency securities, government sponsored entity securities, and some agency securities under Level 2. At June 30, 2013 and December 31, 2012, we established values for available for sale investment securities as follows (000’s);
Assets and Liabilities Measured at Fair Value on a Recurring Basis
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.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We may be required from time to time, to measure certain assets at fair value on a non-recurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis at June 30, 2013 are included in the table below.
We also measure certain non-financial assets such as other real estate owned, TDRs, and repossessed or foreclosed property at fair value on a non-recurring basis. Generally, we estimate the fair value of these items using Level 2 inputs based on observable market data or Level 3 inputs based on discounting criteria.
As of June 30, 2013 and December 31, 2012, we estimated the fair value of impaired assets using Level 3 inputs to be $23.2 million and $3.7 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 10%. As a result of the acquisition of Maryland Bankcorp and WSB Holdings, we have segmented the other real estate owned 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 and WSB or obtained as a result of loans originated by MB&T and WSB (acquired). The increase in level 3 is due non-accrual loans, TDRs, and other real estate in the recent acquisition of WSB.
We use the following methodologies for estimating fair values of financial instruments that we do not measure on a recurring basis. The estimated fair values of financial instruments equal the carrying value of the instruments except as noted.
Cash and Cash Equivalents - For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.
Loans-We estimate the fair value of loans by discounting future cash flows using current rates for which we would make similar loans to borrowers with similar credit histories. We then adjust this calculated amount for any credit impairment
Loans held for Sale- Loans held for sale are carried at the lower of cost or market value. The fair values of loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics.
Investment Securities- We base the fair values of investment securities upon quoted market prices or dealer quotes.
Equity Securities- Equity Securities are carried at cost which approximates fair value.
Bank Owned Life Insurance - The carrying amount of Bank Owned Life Insurance (“BOLI”) purchased on a group of officers is a reasonable estimate of fair value. BOLI is an insurance product that provides an effective way to offset current employee benefit costs.
Accrued Interest Receivable and Payable- The carrying amount of accrued interest and dividends receivable on loans and investments and payable on borrowings and deposits approximate their fair values.
Interest bearing deposits-The fair value of demand deposits and savings accounts is the amount payable on demand. We estimate the fair value of fixed maturity certificates of deposit using the rates currently offered for deposits of similar remaining maturities.
Non-Interest bearing deposits- The fair value of non-interest bearing accounts is the amount payable on demand at the reporting date.
Long and short term borrowings- The fair value of long and short term fixed rate borrowings is estimated by discounting the value of contractual cash flows using rates currently offered for advances with similar terms and remaining maturities.
Loan Commitments, Standby and Commercial Letters of Credit-Lending commitments have variable interest rates and “escape” clauses if the customer’s credit quality deteriorates. Therefore, the fair value of these items is insignificant and we have not included these in the following table.
Under ASC Topic 825, entities may choose to measure eligible financial instruments at fair value at specified election dates. The fair value measurement option (i) may be applied instrument by instrument, with certain exceptions, (ii) is generally irrevocable and (iii) is applied only to entire instruments and not to portions of instruments. We must report in earnings unrealized gains and losses on items for which we have elected the fair value measurement option at each subsequent reporting date. We measure certain financial assets and financial liabilities at fair value on a non-recurring basis. These assets and liabilities are subject to fair value adjustments in certain circumstances such as when there is evidence of impairment.
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Consolidated Statements of Income (USD $)
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3 Months Ended | 6 Months Ended | ||
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Jun. 30, 2013
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Jun. 30, 2012
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Jun. 30, 2013
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Jun. 30, 2012
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Interest revenue | ||||
Loans, including fees | $ 9,327,905 | $ 8,632,296 | $ 17,159,728 | $ 16,585,131 |
U.S. treasury securities | 427 | 2,381 | 2,181 | 4,778 |
U.S. government agency securities | 135,925 | 91,163 | 218,355 | 192,597 |
Mortgage backed securities | 329,618 | 592,725 | 717,874 | 1,258,741 |
Municipal securities | 447,841 | 397,103 | 917,509 | 729,827 |
Federal funds sold | 1,783 | 1,891 | 2,384 | 2,962 |
Other | 64,105 | 46,138 | 106,649 | 91,947 |
Total interest revenue | 10,307,604 | 9,763,697 | 19,124,680 | 18,865,983 |
Interest expense | ||||
Deposits | 964,955 | 1,087,200 | 1,822,094 | 2,214,698 |
Borrowed funds | 139,472 | 213,111 | 251,959 | 425,487 |
Total interest expense | 1,104,427 | 1,300,311 | 2,074,053 | 2,640,185 |
Net interest income | 9,203,177 | 8,463,386 | 17,050,627 | 16,225,798 |
Provision for loan losses | 200,000 | 375,000 | 400,000 | 750,000 |
Net interest income after provision for loan losses | 9,003,177 | 8,088,386 | 16,650,627 | 15,475,798 |
Non-interest revenue | ||||
Service charges on deposit accounts | 367,674 | 328,142 | 668,415 | 647,469 |
Gain on sales or calls of investment securities | 9,659 | 282,858 | 641,088 | 560,028 |
Earnings on bank owned life insurance | 200,641 | 138,496 | 333,869 | 275,201 |
Gain (loss) on disposal of assets | (19,078) | (104,639) | ||
Gain on sale of loans | 146,565 | 146,565 | ||
Other fees and commissions | 447,833 | 215,089 | 695,516 | 392,688 |
Total non-interest revenue | 1,153,294 | 964,585 | 2,380,814 | 1,875,386 |
Non-interest expense | ||||
Salaries and benefits | 4,126,567 | 3,024,815 | 7,359,244 | 5,833,809 |
Occupancy and equipment | 1,214,947 | 914,576 | 2,283,815 | 1,822,447 |
Data processing | 329,878 | 192,232 | 568,935 | 416,967 |
FDIC insurance and State of Maryland assessments | 186,996 | 148,921 | 342,239 | 278,645 |
Merger and integration | 2,786,350 | 29,166 | 3,026,835 | 58,333 |
Core deposit premium amortization | 198,875 | 177,582 | 376,457 | 372,257 |
Loss (gain) on sales of other real estate owned | 770 | (191,201) | 201,224 | (159,213) |
OREO expense | 154,908 | 428,248 | 469,073 | 320,895 |
Other operating | 1,536,377 | 1,333,628 | 2,987,742 | 2,831,988 |
Total non-interest expense | 10,535,668 | 6,057,967 | 17,615,564 | 11,776,128 |
Income (loss) before income taxes | (379,197) | 2,995,004 | 1,415,877 | 5,575,056 |
Income tax (benefit) expense | (283,417) | 982,759 | 238,305 | 1,826,764 |
Net income (loss) | (95,780) | 2,012,245 | 1,177,572 | 3,748,292 |
Less: Net loss attributable to the non-controlling interest | (11,495) | (17,067) | (24,590) | (37,014) |
Net income (loss) available to common stockholders | $ (84,285) | $ 2,029,312 | $ 1,202,162 | $ 3,785,306 |
Basic earnings (loss) per common share (in dollars per share) | $ (0.01) | $ 0.30 | $ 0.16 | $ 0.55 |
Diluted earnings (loss) per common share (in dollars per share) | $ (0.01) | $ 0.29 | $ 0.15 | $ 0.55 |
Dividend per common share (in dollars per share) | $ 0.04 | $ 0.04 | $ 0.08 | $ 0.08 |
POINTER RIDGE OFFICE INVESTMENT, LLC
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Jun. 30, 2013
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POINTER RIDGE OFFICE INVESTMENT, LLC | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
POINTER RIDGE OFFICE INVESTMENT, LLC | 2. POINTER RIDGE OFFICE INVESTMENT, LLC
On November 17, 2008, we purchased Chesapeake Custom Homes, L.L.C.’s 12.5% membership interest in Pointer Ridge. The effective date of the purchase was November 1, 2008. As a result of this purchase, we own 62.5% of Pointer Ridge and we have consolidated its results of operations from the date of acquisition.
The following table summarizes the condensed Balance Sheets and Statements of Income information for Pointer Ridge.
Pointer Ridge Office Investment, LLC
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OTHER REAL ESTATE OWNED (Tables)
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Jun. 30, 2013
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Schedule of transactions in other real estate owned during the period |
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ACCOUNTING STANDARDS UPDATES
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6 Months Ended |
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Jun. 30, 2013
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ACCOUNTING STANDARDS UPDATES | |
ACCOUNTING STANDARDS UPDATES | 10. ACCOUNTING STANDARDS UPDATES
ASU 2011-11 “Balance Sheet-Disclosures about Offering Assets and Liabilities” amends Topic 210 “Balance Sheet” to require an entity to disclose both gross and net information about financial instruments such as sales and repurchase agreements and reverse sale and repurchase agreement and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU No. 2013-01 “Balance Sheet (Topic 210) Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,” clarifies that ordinary trade receivables are not within the scope of ASU 2011-11. ASU 2011-11, as amended by ASU 2013-01, was effective for annual and interim periods beginning on January 1, 2013, and it did not have a material impact on our consolidated financial statements or results of operations.
ASU 2012-02 “Intangibles-Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment” gives entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that an indefinite lived intangible asset is impaired. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that an indefinite lived intangible asset is impaired, then the entity must perform the quantitative impairment test. If, under the quantitative impairment test, the carrying amount of the intangible asset exceeds its fair value, an entity should recognize an impairment loss in the amount of that excess. Permitting an entity to assess qualitative factors when testing indefinite lived intangible assets for impairment results in guidance that is similar to the goodwill impairment testing guidance in ASU 2011-08. ASU 2012-02 was effective January 1, 2013 (early adoption permitted) and it did not have a significant impact on our financial statements or results of operations.
ASU 2013-02 “Comprehensive Income, (Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” amends the recent guidance related to the reporting of comprehensive income to enhance the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 was effective January 1, 2013 and it did not have an impact on our financial statements. The required disclosure is included on our Consolidated Statement of Comprehensive Income, which represents unrealized holding gains and losses, net of tax, on our investment securities reported at fair value as determined by quoted market prices. The line item affected in the consolidated statements of income by the reclassified amounts is gain on sales or calls of investment securities. |
FAIR VALUE MEASUREMENTS (Details) (USD $)
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Jun. 30, 2013
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Dec. 31, 2012
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Assets and liabilities measured at fair value | ||
Available-for-sale | $ 184,190,791 | $ 171,541,222 |
Other Observable Inputs (Level 2)
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Assets and liabilities measured at fair value | ||
Available-for-sale | 184,191,000 | 169,079,000 |
Carrying Value
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Assets and liabilities measured at fair value | ||
Available-for-sale | 184,191,000 | 169,079,000 |
Recurring basis | Quoted Prices in Active Markets for Identical Assets (Level 1)
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Assets and liabilities measured at fair value | ||
Assets | 1,521,000 | 1,609,000 |
Recurring basis | Quoted Prices in Active Markets for Identical Assets (Level 1) | Available-for-sale, Treasury Securities and Sallie Mae
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Assets and liabilities measured at fair value | ||
Available-for-sale | 1,521,000 | 1,609,000 |
Recurring basis | Other Observable Inputs (Level 2)
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Assets and liabilities measured at fair value | ||
Assets | 187,435,000 | 17,029,000 |
Recurring basis | Other Observable Inputs (Level 2) | Available-for-sale, all other investment securities
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Assets and liabilities measured at fair value | ||
Available-for-sale | 182,670,000 | 170,290,000 |
Recurring basis | Carrying Value
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Assets and liabilities measured at fair value | ||
Assets | 188,956,000 | 171,899,000 |
Recurring basis | Carrying Value | Available-for-sale, Treasury Securities and Sallie Mae
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Assets and liabilities measured at fair value | ||
Available-for-sale | 1,521,000 | 1,609,000 |
Recurring basis | Carrying Value | Available-for-sale, all other investment securities
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Assets and liabilities measured at fair value | ||
Available-for-sale | $ 182,670,000 | $ 170,290,000 |
LOANS (Details 5) (USD $)
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3 Months Ended | 6 Months Ended | |
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Jun. 30, 2013
item
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Jun. 30, 2013
item
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Dec. 31, 2012
item
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Loans Modified as a TDR | |||
Number of Contracts | 6 | 6 | 5 |
Restructured loans | $ 1,186,662 | $ 1,186,662 | $ 1,193,260 |
Number of loans included in TDRs due to rate reduction | 5 | 5 | |
Number of loans included in TDRs due to extension date | 1 | 1 | |
Number of Contracts | 1 | 1 | |
Recorded Investment | 60,000 | 60,000 | |
Acquired | Residential
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Loans Modified as a TDR | |||
Number of Contracts | 1 | 1 | |
Recorded Investment | $ 60,000 | $ 60,000 |
FAIR VALUE MEASUREMENTS (Tables)
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FAIR VALUE MEASUREMENTS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of assets and liabilities measured at fair value on a recurring basis |
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Schedule of assets and liabilities measured at fair value on a nonrecurring basis |
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Schedule of estimated fair value of financial instruments |
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STOCK BASED COMPENSATION (Tables)
|
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
|
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STOCK BASED COMPENSATION | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of the stock option activity |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of information related to options |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of the restricted stock awards |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of the vesting schedule of the unvested restricted stock awards |
Vesting Schedule
|
LOANS (Details 7) (USD $)
|
6 Months Ended | 6 Months Ended | ||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2013
|
Mar. 31, 2013
|
Dec. 31, 2012
|
Jun. 30, 2012
|
Mar. 31, 2012
|
Dec. 31, 2011
|
Jun. 30, 2013
Installment and other consumer loans and real estate loans
|
Jun. 30, 2013
Commercial
|
Mar. 31, 2013
Commercial
|
Dec. 31, 2012
Commercial
|
Jun. 30, 2012
Commercial
|
Mar. 31, 2012
Commercial
|
Dec. 31, 2011
Commercial
|
Jun. 30, 2013
Pass (1-4)
|
Dec. 31, 2012
Pass (1-4)
|
Jun. 30, 2013
Good Quality (2)
Commercial
|
Jun. 30, 2013
Special Mention (5)
|
Dec. 31, 2012
Special Mention (5)
|
Jun. 30, 2013
Substandard (6)
|
Dec. 31, 2012
Substandard (6)
|
Jun. 30, 2013
Doubtful (7)
|
Jun. 30, 2013
Legacy
|
Dec. 31, 2012
Legacy
|
Jun. 30, 2013
Legacy
Commercial
|
Dec. 31, 2012
Legacy
Commercial
|
Jun. 30, 2013
Legacy
Pass (1-4)
|
Dec. 31, 2012
Legacy
Pass (1-4)
|
Jun. 30, 2013
Legacy
Special Mention (5)
|
Dec. 31, 2012
Legacy
Special Mention (5)
|
Jun. 30, 2013
Legacy
Substandard (6)
|
Dec. 31, 2012
Legacy
Substandard (6)
|
Jun. 30, 2013
Acquired
|
Dec. 31, 2012
Acquired
|
Jun. 30, 2013
Acquired
Commercial
|
Dec. 31, 2012
Acquired
Commercial
|
Jun. 30, 2013
Acquired
Pass (1-4)
|
Dec. 31, 2012
Acquired
Pass (1-4)
|
Jun. 30, 2013
Acquired
Special Mention (5)
|
Dec. 31, 2012
Acquired
Special Mention (5)
|
Jun. 30, 2013
Acquired
Substandard (6)
|
Dec. 31, 2012
Acquired
Substandard (6)
|
Jun. 30, 2013
Acquired
Doubtful (7)
|
|
Credit quality indicators | ||||||||||||||||||||||||||||||||||||||||||
Delinquency trend period considered for determining loss ratio | 18 months | |||||||||||||||||||||||||||||||||||||||||
Loss ratio period considered | 3 years | |||||||||||||||||||||||||||||||||||||||||
Minimum cash flow coverage ratio | 1.25 | |||||||||||||||||||||||||||||||||||||||||
Account Balance | $ 790,360,909 | $ 598,016,292 | $ 576,422,066 | $ 112,743,554 | $ 98,376,536 | $ 98,871,677 | $ 739,451,855 | $ 566,769,932 | $ 25,222,490 | $ 17,898,483 | $ 25,655,569 | $ 13,347,877 | $ 30,995 | $ 516,115,081 | $ 465,244,910 | $ 100,954,682 | $ 88,306,302 | $ 494,667,447 | $ 445,568,013 | $ 15,987,357 | $ 14,182,357 | $ 5,460,277 | $ 5,494,540 | $ 274,245,828 | $ 132,771,382 | $ 11,788,872 | $ 10,070,234 | $ 244,784,408 | $ 121,201,919 | $ 9,235,133 | $ 3,716,126 | $ 20,195,292 | $ 7,853,337 | $ 30,995 | ||||||||
Allocation of Allowance for Loan Losses | $ 4,237,280 | $ 4,052,947 | $ 3,965,347 | $ 4,109,461 | $ 3,787,299 | $ 3,741,271 | $ 884,697 | $ 784,024 | $ 755,954 | $ 778,571 | $ 736,076 | $ 922,310 | $ 3,391,731 | $ 3,131,046 | $ 428,925 | $ 392,677 | $ 416,624 | $ 441,624 | $ 3,845,656 | $ 3,648,723 | $ 3,391,731 | $ 3,131,046 | $ 428,925 | $ 392,677 | $ 25,000 | $ 125,000 | $ 391,624 | $ 316,624 | $ 391,624 | $ 316,624 |
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