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, 2014
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 x |
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Non-accelerated filer o |
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Smaller reporting company o |
(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, 2014, the registrant had 10,785,370 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 |
| |||
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| |||
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Consolidated Balance Sheets (Unaudited) as of June 30, 2014 and December 31, 2013 |
1 | |||
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| |||
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2 | ||||
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| |||
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3 | ||||
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4 | ||||
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| |||
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Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2014 and 2013 |
5 | |||
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| |||
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7 | ||||
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| |||
Managements Discussion and Analysis of Financial Condition and Results of Operations |
31 | ||||
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| |||
55 | |||||
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55 | |||||
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55 | |||||
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55 | |||||
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55 | |||||
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55 | |||||
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55 | |||||
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55 | |||||
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56 | |||||
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57 | |||||
Old Line Bancshares, Inc. & Subsidiaries
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June 30, |
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December 31, |
| ||
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(Unaudited) |
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|
| ||
Assets |
| ||||||
Cash and due from banks |
|
$ |
29,887,334 |
|
$ |
28,316,351 |
|
Interest bearing accounts |
|
30,389 |
|
30,375 |
| ||
Federal funds sold |
|
304,246 |
|
711,574 |
| ||
Total cash and cash equivalents |
|
30,221,969 |
|
29,058,300 |
| ||
Investment securities available for sale-at fair value |
|
155,706,684 |
|
172,169,776 |
| ||
Loans held for sale, fair value of $4,237,126 and $2,074,924 |
|
4,074,911 |
|
2,014,711 |
| ||
Loans held for investment (net of allowance for loan losses of $6,324,583 and $4,929,213, respectively) |
|
889,524,786 |
|
847,248,590 |
| ||
Equity securities at cost |
|
4,304,196 |
|
5,669,807 |
| ||
Premises and equipment, net |
|
34,604,271 |
|
35,215,868 |
| ||
Accrued interest receivable |
|
2,978,470 |
|
3,432,924 |
| ||
Deferred income taxes |
|
19,850,224 |
|
21,868,076 |
| ||
Bank owned life insurance |
|
31,000,380 |
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30,577,187 |
| ||
Other real estate owned |
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4,627,465 |
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4,311,342 |
| ||
Goodwill |
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7,793,665 |
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7,793,665 |
| ||
Core deposit intangible |
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4,846,737 |
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5,287,501 |
| ||
Other assets |
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3,732,934 |
|
2,575,377 |
| ||
Total assets |
|
$ |
1,193,266,692 |
|
$ |
1,167,223,124 |
|
Liabilities and Stockholders Equity |
| ||||||
Deposits |
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|
|
|
| ||
Non-interest bearing |
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$ |
237,614,952 |
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$ |
228,733,624 |
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Interest bearing |
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771,801,936 |
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745,625,862 |
| ||
Total deposits |
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1,009,416,888 |
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974,359,486 |
| ||
Short term borrowings |
|
35,769,108 |
|
49,530,125 |
| ||
Long term borrowings |
|
6,043,715 |
|
6,093,074 |
| ||
Accrued pension |
|
5,003,784 |
|
4,921,241 |
| ||
Other liabilities |
|
4,858,483 |
|
5,769,880 |
| ||
Total liabilities |
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1,061,091,978 |
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1,040,673,806 |
| ||
Stockholders equity |
|
|
|
|
| ||
Common stock, par value $0.01 per share; 25,000,000 shares authorized; 10,785,370 and 10,777,113 shares issued and outstanding in 2014 and 2013, respectively |
|
107,854 |
|
107,772 |
| ||
Additional paid-in capital |
|
104,820,171 |
|
104,622,171 |
| ||
Retained earnings |
|
27,621,537 |
|
24,879,275 |
| ||
Accumulated other comprehensive loss |
|
(639,502 |
) |
(3,359,823 |
) | ||
Total Old Line Bancshares, Inc. stockholders equity |
|
131,910,060 |
|
126,249,395 |
| ||
Non-controlling interest |
|
264,654 |
|
299,923 |
| ||
Total stockholders equity |
|
132,174,714 |
|
126,549,318 |
| ||
Total liabilities and stockholders equity |
|
$ |
1,193,266,692 |
|
$ |
1,167,223,124 |
|
The accompanying notes are an integral part of these consolidated financial statements
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Income
(Unaudited)
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
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2014 |
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2013 |
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2014 |
|
2013 |
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Interest Income |
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|
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Loans, including fees |
|
$ |
10,599,999 |
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$ |
9,327,905 |
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$ |
20,933,971 |
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$ |
17,159,728 |
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U.S. treasury securities |
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15,546 |
|
427 |
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16,378 |
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2,181 |
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U.S. government agency securities |
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145,145 |
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135,925 |
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296,100 |
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218,355 |
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Mortgage backed securities |
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360,480 |
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329,618 |
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738,352 |
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717,874 |
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Municipal securities |
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396,191 |
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447,841 |
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831,179 |
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917,509 |
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Federal funds sold |
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1,653 |
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1,783 |
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2,041 |
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2,384 |
| ||||
Other |
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98,024 |
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64,105 |
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170,887 |
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106,649 |
| ||||
Total interest income |
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11,617,038 |
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10,307,604 |
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22,988,908 |
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19,124,680 |
| ||||
Interest expense |
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|
|
|
|
|
|
|
| ||||
Deposits |
|
856,639 |
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964,955 |
|
1,750,942 |
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1,822,094 |
| ||||
Borrowed funds |
|
148,918 |
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139,472 |
|
267,194 |
|
251,959 |
| ||||
Total interest expense |
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1,005,557 |
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1,104,427 |
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2,018,136 |
|
2,074,053 |
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Net interest income |
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10,611,481 |
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9,203,177 |
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20,970,772 |
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17,050,627 |
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Provision for loan losses |
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1,544,280 |
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200,000 |
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1,814,049 |
|
400,000 |
| ||||
Net interest income after provision for loan losses |
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9,067,201 |
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9,003,177 |
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19,156,723 |
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16,650,627 |
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Non-interest income |
|
|
|
|
|
|
|
|
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Service charges on deposit accounts |
|
493,482 |
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367,674 |
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945,078 |
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668,415 |
| ||||
Gain on sales or calls of investment securities |
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129,911 |
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9,659 |
|
129,911 |
|
641,088 |
| ||||
Earnings on bank owned life insurance |
|
246,371 |
|
200,641 |
|
489,978 |
|
333,869 |
| ||||
Gain (loss) on disposal of premises and equipment |
|
17,919 |
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(19,078 |
) |
114,912 |
|
(104,639 |
) | ||||
Rental Income |
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195,407 |
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180,159 |
|
395,944 |
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180,159 |
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Gain on sale of loans |
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195,829 |
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146,565 |
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302,548 |
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146,565 |
| ||||
Other fees and commissions |
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589,215 |
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267,674 |
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881,279 |
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515,357 |
| ||||
Total non-interest income |
|
1,868,134 |
|
1,153,294 |
|
3,259,650 |
|
2,380,814 |
| ||||
Non-interest expense |
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|
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|
|
|
|
|
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Salaries and benefits |
|
4,051,407 |
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4,126,567 |
|
8,925,041 |
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7,359,244 |
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Occupancy and equipment |
|
1,436,564 |
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1,214,947 |
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3,022,735 |
|
2,283,815 |
| ||||
Data processing |
|
312,042 |
|
329,878 |
|
619,202 |
|
568,935 |
| ||||
FDIC insurance and State of Maryland assessments |
|
233,575 |
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186,996 |
|
452,096 |
|
342,239 |
| ||||
Merger and integration |
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|
|
2,786,350 |
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29,167 |
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3,026,835 |
| ||||
Core deposit premium amortization |
|
212,214 |
|
198,875 |
|
440,764 |
|
376,457 |
| ||||
(Gain) loss on sales of other real estate owned |
|
(79,127 |
) |
770 |
|
(282,195 |
) |
201,224 |
| ||||
OREO expense |
|
112,659 |
|
154,908 |
|
195,725 |
|
469,073 |
| ||||
Network services |
|
174,914 |
|
112,816 |
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374,502 |
|
208,892 |
| ||||
Telephone |
|
167,442 |
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119,507 |
|
334,600 |
|
231,453 |
| ||||
Other operating |
|
1,870,216 |
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1,304,054 |
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3,356,203 |
|
2,547,397 |
| ||||
Total non-interest expense |
|
8,491,906 |
|
10,535,668 |
|
17,467,840 |
|
17,615,564 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income (loss) before income taxes |
|
2,443,429 |
|
(379,197 |
) |
4,948,533 |
|
1,415,877 |
| ||||
Income tax expense (benefit) |
|
687,973 |
|
(283,417 |
) |
1,378,711 |
|
238,305 |
| ||||
Net income (loss) |
|
1,755,456 |
|
(95,780 |
) |
3,569,822 |
|
1,177,572 |
| ||||
Less: Net loss attributable to the non-controlling interest |
|
(13,880 |
) |
(11,495 |
) |
(35,269 |
) |
(24,590 |
) | ||||
Net income (loss) available to common stockholders |
|
$ |
1,769,336 |
|
$ |
(84,285 |
) |
$ |
3,605,091 |
|
$ |
1,202,162 |
|
|
|
|
|
|
|
|
|
|
| ||||
Basic earnings (loss) per common share |
|
$ |
0.16 |
|
$ |
(0.01 |
) |
$ |
0.33 |
|
$ |
0.16 |
|
Diluted earnings (loss) per common share |
|
$ |
0.16 |
|
$ |
(0.01 |
) |
$ |
0.33 |
|
$ |
0.15 |
|
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)
|
|
Three Months Ended |
|
Six Months Ended |
| |||||||
|
|
June 30, 2014 |
|
June 30, 2014 |
| |||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| |||
Net income (loss) |
|
$ |
1,755,456 |
|
$ |
(95,780 |
) |
3,569,822 |
|
$ |
1,177,572 |
|
|
|
|
|
|
|
|
|
|
| |||
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
| |||
Unrealized gain (loss) on securities available for sale, net of taxes of $751,001, ($3,361,825), $1,720,750, ($3,926,523), respectively |
|
1,310,253 |
|
(5,160,991 |
) |
2,798,989 |
|
(6,027,901 |
) | |||
Reclassification adjustment for realized gain on securities available for sale included in net income, net of taxes of $51,243, $3,810, $51,243, $252,877, respectively |
|
(78,668 |
) |
(5,849 |
) |
(78,668 |
) |
(388,211 |
) | |||
Other comprehensive income (loss) |
|
1,231,585 |
|
(5,166,840 |
) |
2,720,321 |
|
(6,416,112 |
) | |||
Comprehensive income (loss) |
|
2,987,041 |
|
(5,262,620 |
) |
6,290,143 |
|
(5,238,540 |
) | |||
Less: Comprehensive (loss) attributable to the non-controlling interest |
|
(13,880 |
) |
(11,495 |
) |
(35,269 |
) |
(24,590 |
) | |||
Comprehensive income (loss) available to common stockholders |
|
$ |
3,000,921 |
|
$ |
(5,251,125 |
) |
6,325,412 |
|
$ |
(5,213,950 |
) |
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- |
|
Total |
| ||||||||
|
|
Shares |
|
Par value |
|
capital |
|
earnings |
|
income (loss) |
|
Interest |
|
Equity |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance, December 31, 2013 |
|
10,777,113 |
|
$ |
107,772 |
|
$ |
104,622,171 |
|
$ |
24,879,275 |
|
$ |
(3,359,823 |
) |
$ |
299,923 |
|
$ |
126,549,318 |
|
Net income attributable to Old Line Bancshares, Inc. |
|
|
|
|
|
|
|
3,605,091 |
|
|
|
|
|
3,605,091 |
| ||||||
Unrealized loss on securities available for sale, net of income tax benefit of $1,771,993 |
|
|
|
|
|
|
|
|
|
2,720,321 |
|
|
|
2,720,321 |
| ||||||
Net loss attributable to non-controlling interest |
|
|
|
|
|
|
|
|
|
|
|
(35,269 |
) |
(35,269 |
) | ||||||
Stock based compensation awards |
|
|
|
|
|
198,082 |
|
|
|
|
|
|
|
198,082 |
| ||||||
Restricted stock issued |
|
8,257 |
|
82 |
|
(82 |
) |
|
|
|
|
|
|
|
| ||||||
Common stock cash dividend $0.08 per share |
|
|
|
|
|
|
|
(862,829 |
) |
|
|
|
|
(862,829 |
) | ||||||
Balance, June 30, 2014 |
|
10,785,370 |
|
$ |
107,854 |
|
$ |
104,820,171 |
|
$ |
27,621,537 |
|
$ |
(639,502 |
) |
$ |
264,654 |
|
$ |
132,174,714 |
|
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, |
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Cash flows from operating activities |
|
|
|
|
| ||
Interest received |
|
$ |
23,941,306 |
|
$ |
19,723,475 |
|
Fees and commissions received |
|
2,024,810 |
|
1,313,802 |
| ||
Interest paid |
|
(2,053,004 |
) |
(2,372,357 |
) | ||
Cash paid to suppliers and employees |
|
(17,528,107 |
) |
(12,778,413 |
) | ||
Loans originated for sale |
|
(21,108,421 |
) |
(11,081,088 |
) | ||
Proceeds from sale of loans originated for sale |
|
19,048,221 |
|
10,068,872 |
| ||
Income taxes paid |
|
(1,372,983 |
) |
(1,423,051 |
) | ||
|
|
2,951,822 |
|
3,451,240 |
| ||
Cash flows from investing activities |
|
|
|
|
| ||
Cash and cash equivalents of acquired bank |
|
|
|
38,846,599 |
| ||
Purchase of investment securities available for sale |
|
(13,716,497 |
) |
(26,127,022 |
) | ||
Proceeds from disposal of investment securities |
|
|
|
|
| ||
Available for sale at maturity or call |
|
34,448,100 |
|
22,580,651 |
| ||
Available for sale sold |
|
|
|
60,366,304 |
| ||
Loans made, net of principal collected |
|
(45,134,751 |
) |
(33,268,492 |
) | ||
Proceeds from sale of other real estate owned |
|
1,320,961 |
|
2,512,724 |
| ||
Redemption (purchase) of equity securities |
|
1,273,528 |
|
(3,799 |
) | ||
Purchase of premises and equipment |
|
(345,772 |
) |
(780,485 |
) | ||
Proceeds from the sale of premises and equipment |
|
(17,919 |
) |
|
| ||
|
|
(22,172,350 |
) |
64,126,480 |
| ||
Cash flows from financing activities |
|
|
|
|
| ||
Net increase (decrease) in |
|
|
|
|
| ||
Time deposits |
|
(12,864,657 |
) |
1,204,342 |
| ||
Other deposits |
|
47,922,059 |
|
42,682,219 |
| ||
Short term borrowings |
|
(13,761,017 |
) |
(69,337,934 |
) | ||
Long term borrowings |
|
(49,359 |
) |
(49,388 |
) | ||
Acquisition cash consideration |
|
|
|
(16,966,208 |
) | ||
Stock options exercised |
|
|
|
602,395 |
| ||
Cash dividends paid-common stock |
|
(862,829 |
) |
(666,962 |
) | ||
|
|
20,384,197 |
|
(42,531,536 |
) | ||
|
|
|
|
|
| ||
Net increase in cash and cash equivalents |
|
1,163,669 |
|
25,046,184 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of period |
|
29,058,300 |
|
28,690,761 |
| ||
Cash and cash equivalents at end of period |
|
$ |
30,221,969 |
|
$ |
53,736,945 |
|
The accompanying notes are an integral part of these consolidated financial statements
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, |
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Reconciliation of net income to net cash provided by operating activities |
|
|
|
|
| ||
Net income |
|
$ |
3,569,822 |
|
$ |
1,177,572 |
|
|
|
|
|
|
| ||
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
| ||
|
|
|
|
|
| ||
Depreciation and amortization |
|
1,090,200 |
|
874,143 |
| ||
Provision for loan losses |
|
1,814,049 |
|
400,000 |
| ||
Change in deferred loan fees net of costs |
|
(7,836 |
) |
45,314 |
| ||
(Gain)/loss on sales or calls of securities |
|
(129,911 |
) |
(641,088 |
) | ||
Amortization of premiums and discounts |
|
505,780 |
|
650,859 |
| ||
Change in loans held for sale |
|
(2,362,747 |
) |
(1,158,781 |
) | ||
(Gain)/loss on sales of other real estate owned |
|
(282,195 |
) |
201,224 |
| ||
Gain on the sale of equity securites |
|
(96,993 |
) |
|
| ||
Write down of other real estate owned |
|
|
|
66,600 |
| ||
(Gain)/loss on sale of premises and equipment |
|
(17,919 |
) |
104,639 |
| ||
Amortization of intangible |
|
440,764 |
|
376,457 |
| ||
Deferred income taxes |
|
185,876 |
|
(328,247 |
) | ||
Stock based compensation awards |
|
198,082 |
|
133,848 |
| ||
Increase (decrease) in |
|
|
|
|
| ||
Accrued interest payable |
|
(34,868 |
) |
(298,304 |
) | ||
Income tax payable |
|
(180,148 |
) |
(235,323 |
) | ||
Accrued pension |
|
82,543 |
|
152,771 |
| ||
Other liabilities |
|
(696,381 |
) |
(1,157,515 |
) | ||
Decrease (increase) in |
|
|
|
|
| ||
Accrued interest receivable |
|
454,454 |
|
(97,378 |
) | ||
Bank owned life insurance |
|
(423,193 |
) |
(279,359 |
) | ||
Prepaid income taxes |
|
|
|
(621,176 |
) | ||
Other assets |
|
(1,157,557 |
) |
4,084,984 |
| ||
|
|
$ |
2,951,822 |
|
$ |
3,451,240 |
|
|
|
|
|
|
| ||
Supplemental Disclosure: |
|
|
|
|
| ||
Loans transferred to other real estate owned |
|
$ |
1,354,889 |
|
$ |
|
|
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. 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, Montgomery, Prince Georges, and St. Marys Counties in Maryland and surrounding areas.
Basis of Presentation and Consolidation-The accompanying condensed consolidated financial statements include the activity of Old Line Bancshares and its wholly owned subsidiary, Old Line Bank, and its 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, 2014 and 2013 are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (US GAAP); 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, 2013 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, 2013. We have made no significant changes to Old Line Bancshares accounting policies as disclosed in the Form 10-K.
Use of estimates-The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions may affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses.
Reclassifications-We have made certain reclassifications to the 2013 financial presentation to conform to the 2014 presentation. These reclassifications did not change net income or stockholders equity.
Recent Accounting Pronouncements-In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-04 is not expected to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principal of this ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(continued)
from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This ASU will be effective for us in our first quarter of 2017. Early adoption is not permitted. The ASU allows for either full retrospective or modified retrospective adoption. We are evaluating the transition method that will be elected and the potential effects of the adoption of this ASU on our financial statements.
In June 2014, the FASB issued ASU 2014-12, Compensation Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period. The amendments clarify the proper method of accounting for share-based payments when the terms of an award provide that a performance target could as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized be achieved after the requisite service period. This update requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Management is currently evaluating the impact of adoption on the consolidated financial statements, but does not believe that adoption will have a material impact.
2. POINTER RIDGE OFFICE INVESTMENT, LLC
Old Line Bank has a 62.5% ownership of Pointer Ridge Office Investment, LLC 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 Office Investment, LLC.
|
|
June 30, |
|
December 31, |
| ||
Balance Sheets |
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Current assets |
|
$ |
238,695 |
|
$ |
286,206 |
|
Non-current assets |
|
6,530,945 |
|
6,622,560 |
| ||
Liabilities |
|
6,063,896 |
|
6,108,972 |
| ||
Equity |
|
705,744 |
|
799,794 |
| ||
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
June 30, |
|
June 30, |
| ||||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
Statements of Income |
|
|
|
|
|
|
|
|
| ||||
Revenue |
|
$ |
234,139 |
|
$ |
222,022 |
|
$ |
473,129 |
|
$ |
446,390 |
|
Expenses |
|
271,151 |
|
252,676 |
|
567,180 |
|
511,963 |
| ||||
Net loss |
|
$ |
(37,012 |
) |
$ |
(30,654 |
) |
$ |
(94,051 |
) |
$ |
(65,573 |
) |
3. 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.
3. ACQUISITION OF WSB HOLDINGS, INC. (continued)
In connection with the acquisition, WSB was merged with and into Old Line Bank, with Old Line Bank the surviving bank.
The acquired assets and assumed liabilities of WSB Holdings 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 notes that accompany the following table, the purchased assets, assumed liabilities and identifiable intangible assets were recorded at the acquisition date fair value.
|
|
|
|
|
|
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 |
|
79,476,355 |
|
(101,654 |
)(a) |
79,374,701 |
| |||
Loans, net of deferred fees and costs |
|
177,204,282 |
|
(14,263,180 |
)(b) |
162,941,102 |
| |||
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 |
|
7,396,519 |
|
4,005,790 |
(d) |
11,402,309 |
| |||
Bank owned life insurance |
|
12,986,817 |
|
|
|
12,986,817 |
| |||
Other real estate owned |
|
5,225,958 |
|
(993,476 |
)(e) |
4,232,482 |
| |||
Core deposit intangible |
|
|
|
2,434,723 |
(f) |
2,434,723 |
| |||
Other assets |
|
4,326,538 |
|
(567,850 |
)(g) |
3,758,688 |
| |||
Total assets |
|
$ |
328,288,109 |
|
$ |
(18,011,430 |
) |
$ |
310,276,679 |
|
|
|
|
|
|
|
|
| |||
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 |
|
118,066 |
|
3,097,793 |
| |||
Total liabilities |
|
$ |
274,465,406 |
|
$ |
5,324,086 |
|
$ |
279,789,492 |
|
|
|
|
|
|
|
|
| |||
Net identifiable assets acquired over (under) liabilities assumed |
|
53,822,703 |
|
(23,335,516 |
) |
30,487,187 |
| |||
Goodwill |
|
|
|
7,159,875 |
(j) |
7,159,875 |
| |||
Net assets acquired over liabilities assumed |
|
53,822,703 |
|
(16,175,641 |
) |
37,647,062 |
|
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.
(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.
3. ACQUISITION OF WSB HOLDINGS, INC. (continued)
(g) Adjustment reflects the impairment 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 Federal Home Loan Bank of Atlanta (FHLB) pre-payment penalty incurred subsequent to the acquisition date in the connection with the repayment of all of WSBs FHLB advances by Old Line Bancshares.
(j) Within the measurement period, goodwill was increased $946,241.
We allocated the purchase price for WSB Holdings as follows:
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 |
|
Expenses not accrued for and paid by Old Line Bank |
|
$ |
(118,066 |
) |
Final purchase price for WSB acquisition |
|
$ |
37,647,062 |
|
During the third quarter of 2013, within the measurement period, goodwill was increased $946,241 associated with the acquisition of WSB Holdings. As outlined in our financial statements, this amount represented the difference between the estimated fair value of tangible and intangible assets acquired and liabilities assumed at acquisition date. This increased represents $102,484 fair value adjustment on one of our lot loans, $2,949 in our deferred tax assets and $8,310 credit on one commercial land loan and $849,118 on fair value of our investments classified as available for sale that we identified during the period. There was no goodwill adjustment for the period ended June 30, 2014.
4. INVESTMENT SECURITIES
Presented below is a summary of the amortized cost and estimated fair value of securities.
|
|
Amortized |
|
Gross |
|
Gross |
|
Estimated |
| ||||
June 30, 2014 |
|
|
|
|
|
|
|
|
| ||||
Available for sale |
|
|
|
|
|
|
|
|
| ||||
U. S. treasury |
|
$ |
3,001,044 |
|
$ |
678 |
|
$ |
(72 |
) |
$ |
3,001,650 |
|
U.S. government agency |
|
39,439,130 |
|
8,250 |
|
(1,180,875 |
) |
38,266,505 |
| ||||
Municipal securities |
|
44,252,288 |
|
918,141 |
|
(163,318 |
) |
45,007,111 |
| ||||
Mortgage backed securities: |
|
|
|
|
|
|
|
|
| ||||
FHLMC certificates |
|
15,352,594 |
|
72,455 |
|
(33,609 |
) |
15,391,440 |
| ||||
FNMA certificates |
|
14,013,708 |
|
29,284 |
|
(185,949 |
) |
13,857,043 |
| ||||
GNMA certificates |
|
33,948,149 |
|
133,932 |
|
(430,172 |
) |
33,651,909 |
| ||||
SBA loan pools |
|
6,755,839 |
|
|
|
(224,813 |
) |
6,531,026 |
| ||||
|
|
$ |
156,762,752 |
|
$ |
1,162,740 |
|
$ |
(2,218,808 |
) |
$ |
155,706,684 |
|
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2013 |
|
|
|
|
|
|
|
|
| ||||
Available for sale |
|
|
|
|
|
|
|
|
| ||||
U. S. treasury |
|
$ |
1,249,831 |
|
$ |
156 |
|
$ |
|
|
$ |
1,249,987 |
|
U.S. government agency |
|
42,942,107 |
|
|
|
(2,206,975 |
) |
40,735,132 |
| ||||
Municipal securities |
|
61,190,506 |
|
601,327 |
|
(2,525,198 |
) |
59,266,635 |
| ||||
Mortgage backed securities |
|
|
|
|
|
|
|
|
| ||||
FHLMC certificates |
|
5,214,835 |
|
75,950 |
|
(84,819 |
) |
5,205,966 |
| ||||
FNMA certificates |
|
19,055,521 |
|
161,209 |
|
(513,728 |
) |
18,703,002 |
| ||||
GNMA certificates |
|
40,878,372 |
|
127,750 |
|
(1,084,896 |
) |
39,921,226 |
| ||||
SBA loan pools |
|
7,339,052 |
|
|
|
(251,224 |
) |
7,087,828 |
| ||||
|
|
$ |
177,870,224 |
|
$ |
966,392 |
|
$ |
(6,666,840 |
) |
$ |
172,169,776 |
|
At June 30, 2014 and December 31, 2013, securities with unrealized losses segregated by length of impairment were as follows:
|
|
June 30, 2014 |
| ||||||||||||||||
|
|
Less than 12 months |
|
12 Months or More |
|
Total |
| ||||||||||||
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
| ||||||
Unrealized losses |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Treasury |
|
$ |
1,501,800 |
|
$ |
72 |
|
$ |
|
|
$ |
|
|
$ |
1,501,800 |
|
$ |
72 |
|
U.S. government agency |
|
1,498,200 |
|
843 |
|
33,760,055 |
|
1,180,032 |
|
35,258,255 |
|
1,180,875 |
| ||||||
Municipal securities |
|
1,657,163 |
|
5,557 |
|
7,924,050 |
|
157,761 |
|
9,581,213 |
|
163,318 |
| ||||||
Mortgage backed securities |
|
9,349,092 |
|
27,593 |
|
41,018,377 |
|
622,137 |
|
50,367,469 |
|
649,730 |
| ||||||
SBA loan pools |
|
|
|
|
|
6,531,025 |
|
224,813 |
|
6,531,025 |
|
224,813 |
| ||||||
|
|
$ |
14,006,255 |
|
$ |
34,065 |
|
$ |
89,233,507 |
|
$ |
2,184,743 |
|
$ |
103,239,762 |
|
$ |
2,218,808 |
|
|
|
December 31, 2013 |
| ||||||||||||||||
|
|
Less than 12 months |
|
12 Months or More |
|
Total |
| ||||||||||||
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
| ||||||
Unrealized losses |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. government agency |
|
$ |
39,324,082 |
|
$ |
2,107,099 |
|
$ |
1,411,050 |
|
$ |
99,876 |
|
$ |
40,735,132 |
|
$ |
2,206,975 |
|
Municipal securities |
|
30,367,222 |
|
1,654,439 |
|
9,190,578 |
|
870,759 |
|
39,557,800 |
|
2,525,198 |
| ||||||
Mortgage backed securities |
|
41,518,287 |
|
1,456,886 |
|
4,823,932 |
|
226,557 |
|
46,342,219 |
|
1,683,443 |
| ||||||
SBA loan pools |
|
7,087,828 |
|
251,224 |
|
|
|
|
|
7,087,828 |
|
251,224 |
| ||||||
|
|
$ |
118,297,419 |
|
$ |
5,469,648 |
|
$ |
15,425,560 |
|
$ |
1,197,192 |
|
$ |
133,722,979 |
|
$ |
6,666,840 |
|
4. INVESTMENT SECURITIES (Continued)
At June 30, 2014 and December 31, 2013, we had 70 and 26 investment securities, respectively, in an unrealized loss position greater than the 12 months time frame and 13 and 120 securities, respectively, in an unrealized loss position less than the 12 months time frame. We consider all unrealized losses on securities as of June 30, 2014 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, 2014, 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 from the sale or call of investment securities a net gain of $130 thousand, representing gross realized gains of $599 thousand and gross realized losses of $469 thousand, for the three month period ending June 30, 2014 compared to $10 thousand in gains realized for the same three month period last year. We have recorded from the sale or call of investment securities a net gain of $130 thousand, representing gross realized gains of $599 thousand and gross realized losses of $469 thousand, for the six month period ending June 30, 2014 compared to a net gain of $641 thousand, representing gross realized gains of $857 thousand and gross realized losses of $216 thousand, for the six month period ended June 30, 2013. We received $34.4 million and $82.9 million, in proceeds from sales, maturities or calls and principal pay-downs of investment securities for the six month periods ending June 30, 2014 and 2013, respectively. The mortgage backed securities (MBS) were sold to rebalance the portfolio to enhance performance and mitigate risk. We divested higher premium, poorly structured MBS and lower yielding, longer duration agencies to re-position the portfolio into well structured, better cash flowing, shorter collateral, 15 year agency MBS. In continuing our efforts to re-position the investment portfolio and to reduce interest rate and mark to market risk, we sold $15.9 million of our municipal bonds. The net proceeds of this transaction are being held by Old Line Bank for future loan originations.
Contractual maturities and pledged securities at June 30, 2014 are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. We classify MBS based on maturity date. However, we receive payments on a monthly basis.
|
|
Available for Sale |
| ||||
June 30, 2014 |
|
Amortized |
|
Fair |
| ||
|
|
|
|
|
| ||
Maturing |
|
|
|
|
| ||
Within one year |
|
$ |
4,791,851 |
|
$ |
4,891,618 |
|
Over one to five years |
|
68,497,283 |
|
68,759,945 |
| ||
Over five to ten years |
|
77,624,026 |
|
76,359,017 |
| ||
Over ten years |
|
5,849,592 |
|
5,696,104 |
| ||
|
|
$ |
156,762,752 |
|
$ |
155,706,684 |
|
Pledged securities |
|
$ |
47,349,043 |
|
$ |
46,897,329 |
|
5. LOANS
Major classifications of loans held for investment are as follows:
|
|
June 30, 2014 |
|
December 31, 2013 |
| ||||||||||||||
|
|
Legacy (1) |
|
Acquired |
|
Total |
|
Legacy (1) |
|
Acquired |
|
Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Owner Occupied |
|
$ |
187,124,133 |
|
$ |
29,113,170 |
|
$ |
216,237,303 |
|
$ |
163,105,356 |
|
$ |
30,102,731 |
|
$ |
193,208,087 |
|
Investment |
|
184,191,948 |
|
49,857,024 |
|
234,048,972 |
|
162,188,671 |
|
54,091,676 |
|
216,280,347 |
| ||||||
Hospitality |
|
70,270,167 |
|
8,488,192 |
|
78,758,359 |
|
67,291,387 |
|
8,546,239 |
|
75,837,626 |
| ||||||
Land and A&D |
|
39,372,717 |
|
6,218,974 |
|
45,591,691 |
|
40,595,806 |
|
8,399,178 |
|
48,994,984 |
| ||||||
Residential Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
First Lien-Investment |
|
46,755,367 |
|
25,922,696 |
|
72,678,063 |
|
45,294,434 |
|
28,364,096 |
|
73,658,530 |
| ||||||
First Lien-Owner Occupied |
|
22,724,438 |
|
56,888,860 |
|
79,613,298 |
|
13,909,939 |
|
62,247,502 |
|
76,157,441 |
| ||||||
Residential Land and A&D |
|
21,780,539 |
|
12,936,038 |
|
34,716,577 |
|
19,845,291 |
|
13,724,942 |
|
33,570,233 |
| ||||||
HELOC and Jr. Liens |
|
20,299,270 |
|
3,252,204 |
|
23,551,474 |
|
18,302,560 |
|
3,359,063 |
|
21,661,623 |
| ||||||
Commercial and Industrial |
|
89,550,006 |
|
9,878,095 |
|
99,428,101 |
|
89,629,043 |
|
11,161,347 |
|
100,790,390 |
| ||||||
Consumer |
|
9,550,881 |
|
646,639 |
|
10,197,520 |
|
10,127,525 |
|
870,843 |
|
10,998,368 |
| ||||||
|
|
691,619,466 |
|
203,201,892 |
|
894,821,358 |
|
630,290,012 |
|
220,867,617 |
|
851,157,629 |
| ||||||
Allowance for loan losses |
|
(5,959,162 |
) |
(365,421 |
) |
(6,324,583 |
) |
(4,397,552 |
) |
(531,661 |
) |
(4,929,213 |
) | ||||||
Deferred loan costs, net |
|
1,039,169 |
|
(11,158 |
) |
1,028,011 |
|
1,021,167 |
|
(993 |
) |
1,020,174 |
| ||||||
|
|
$ |
686,699,473 |
|
$ |
202,825,313 |
|
$ |
889,524,786 |
|
$ |
626,913,627 |
|
$ |
220,334,963 |
|
$ |
847,248,590 |
|
(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, the parent company of WSB, in May 2013, we have segmented the portfolio into two components, loans originated by Old Line Bank (legacy) and loans acquired from MB&T and WSB (acquired).
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, Old Line Bank retains an outside independent firm to review the loan portfolio. This firm performs a detailed annual review and an interim update.
We use the results of the 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
We finance commercial real estate for our clients, for owner occupied and investment properties, in addition to hospitality properties and construction. Commercial real estate loans totaled $574.6 million and $534.3 million at June 30, 2014 and December 31, 2013, respectively. This lending has involved loans secured by owner-occupied commercial buildings for office, storage and warehouse space, as well as non-owner occupied commercial buildings. Our underwriting criteria for commercial real estate loans include maximum loan-to-value ratios, debt coverage ratios, secondary sources of repayments, guarantor requirements, net worth requirements and quality of cash flows. Loans secured by commercial real estate may be large in size and may involve a greater degree of risk than one-to-four family residential mortgage loans. Payments on such loans are often dependent of successful operation or management of the properties. We will generally finance owner occupied commercial real estate at a maximum loan to value of 85% and investor real estate at a maximum loan to value of 75%.
5. LOANS-(Continued)
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 monitor the financial condition and operating performance of the borrower through a review of annual tax returns and updated financial statements. In addition, we meet with the borrower and/or perform site visits as required.
At June 30, 2014, we had approximately $78.8 million of commercial real estate loans outstanding to the hospitality industry. An internal review of these loans indicates that they generally have a low loan to value, more than acceptable existing or projected cash flow, are to experienced operators and are generally dispersed throughout the region.
Residential Real Estate Loans
We offer a variety of consumer oriented residential real estate loans. A portion of our portfolio is made up of home equity loans to individuals with a loan to value not exceeding 80%. Our initial underwriting includes an analysis of the borrowers debt/income ratio which generally may not exceed 43%. We also consider the borrowers length of employment and prior credit history in the approval process. We require borrowers to have a credit score of at least 660. We do not have any subprime residential real estate loans.
We obtain detailed loan applications to determine a borrowers ability to repay and verify the more significant items on these applications through credit reports, financial statements and confirmations. We also require appraisals of collateral and title insurance on secured real estate loans. Most borrowers must establish a mortgage escrow account for items such as real estate taxes, governmental charges and hazard and private mortgage insurance premiums.
A portion of this segment of the loan portfolio consists of funds advanced for construction of custom single family residences (where the home buyer is the borrower), financing to builders for the construction of pre-sold homes, and loans for multi-family housing. 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. The vast majority 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 construction costs in excess of loan proceeds, and the value of the collateral. During construction, we advance funds on these loans on a percentage of completion basis. We inspect each project as needed prior to advancing funds during the term of the construction loan.
We also offer fixed rate home improvement loans. Our home equity and home improvement loan portfolio gives us a diverse client base. Although most of these loans are in our primary market area, the diversity of the individual loans in the portfolio reduces our potential risk. Usually, we secure our home equity loans and lines of credit with a security interest in the borrowers primary or secondary residence.
Construction lending 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 these risks, we generally limit loan amounts to 80% or less of appraised values, obtain first lien positions on the property securing the loan, and adhere to established underwriting procedures. In addition, we generally offer real
5. LOANS-(Continued)
estate construction financing only to experienced builders, commercial entities or individuals who have demonstrated the ability to obtain a permanent loan take-out (conversion to a permanent mortgage upon completion of the project). We also perform a complete analysis of the borrower and the project under construction. This analysis includes a review of the cost to construct, the borrowers ability to obtain a permanent take-out, the cash flow available to support the debt payments and construction costs in excess of loan proceeds, and the value of the collateral. During construction, we advance funds on these loans on a percentage of completion basis. We inspect each project as needed prior to advancing funds during the term of the construction loan.
Under our loan approval policy, all residential real estate loans approved must comply with federal regulations. Generally, we will make residential mortgage loans in amounts up to the limits established from time to time by Fannie Mae and Freddie Mac for secondary market resale purposes. This amount for single-family residential loans currently varies from $417,000 up to a maximum of $625,500 for certain high-cost designated areas. We also make residential mortgage loans up to limits established by the Federal Housing Administration, which currently is $625,500. The Washington, D.C. and Baltimore areas are both considered high-cost designated areas. We will, however, make loans in excess of these amounts if we believe that we can sell the loans in the secondary market or that the loans should be held in our portfolio. For loans sold in the secondary market, we require a credit score of at least 640 with some exceptions to 620 for Veterans. Loans sold in the secondary market are sold to investors on a servicing released basis and recorded as loans as held-for-sale. The premium is recorded in gain on sale of loans in non-interest income, net of commissions paid to the loan officers.
Commercial and Industrial Lending
Our commercial and industrial lending consists of lines of credit, revolving credit facilities, accounts receivable financing, term loans, equipment loans, SBA loans, standby letters of credit and unsecured loans. We originate commercial loans for any business purpose including the financing of leasehold improvements and equipment, the carrying of accounts receivable, general working capital and acquisition activities. We have a diverse client base and we do not have a concentration of these types of loans in any specific industry segment. We generally secure commercial business loans with accounts receivable, equipment, deeds of trust and other collateral such as marketable securities, cash value of life insurance, and time deposits at Old Line Bank.
Commercial business loans have a higher degree of risk than residential mortgage loans because the availability of funds for repayment generally depends on the success of the business. They may also involve higher average balances and an increased difficulty monitoring. To help manage these risks, 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 usually 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. This category includes our luxury boat loans, which we made prior to 2008 and that remain in our portfolio. Consumer loans, however, are not a focus of our lending activities. 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. As a general guideline, the borrowers total debt service should not exceed 40% of his or her gross income.
Consumer loans may present greater credit risk than residential mortgage loans because many consumer loans are unsecured or rapidly depreciating assets secure these loans. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance because of the greater likelihood of damage, loss or depreciation. Consumer loan collections depend on the borrowers continuing financial stability. If a borrower suffers personal financial difficulties, the loan may not be repaid. Also, various federal and state laws, including bankruptcy and insolvency laws, may limit the amount we can recover on such loans. However, in our opinion, many of these risks do not apply to the luxury boat portion of the loan portfolio due to the credit quality and liquidity of these borrowers.
5. LOANS-(Continued)
Concentrations of Credit
Most of our lending activity occurs within the state of Maryland within the suburban Washington D.C. market area in Anne Arundel, Calvert, Charles, Montgomery, Prince Georges and St. Marys Counties. The majority of our loan portfolio consists of commercial real estate loans and residential real estate loans.
Non-Accrual and Past Due Loans
We consider 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 purchased, credit-impaired loans at fair value upon acquisition, and an accretable yield is established and recognized as interest income on purchased loans to the extent subsequent cash flows support the estimated accretable yield. Purchased, credit-impaired loans that perform consistent with the accretable yield expectations are not reported as non-accrual or non-performing. However, purchased, credit-impaired loans that do not continue to perform according to accretable yield expectations are considered impaired, and presented as non-accrual and non-performing. Currently, management expects to fully collect the carrying value of acquired, credit-impaired loans.
5. LOANS (Continued)
The table below presents an aging analysis of the loan held for investment portfolio at June 30, 2014 and December 31, 2013.
|
|
Age Analysis of Past Due Loans |
| ||||||||||||||||
|
|
June 30, 2014 |
|
December 31, 2013 |
| ||||||||||||||
|
|
Legacy |
|
Acquired |
|
Total |
|
Legacy |
|
Acquired |
|
Total |
| ||||||
Current |
|
$ |
681,591,488 |
|
$ |
199,859,028 |
|
$ |
881,450,516 |
|
$ |
620,559,847 |
|
$ |
214,086,692 |
|
$ |
834,646,539 |
|
Accruing past due loans: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
30-89 days past due Commercial Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Owner Occupied |
|
|
|
56,117 |
|
56,117 |
|
828,388 |
|
54,035 |
|
882,423 |
| ||||||
Investment |
|
|
|
|
|
|
|
|
|
534,694 |
|
534,694 |
| ||||||
Residential Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
First-Investment |
|
276,081 |
|
|
|
276,081 |
|
521,405 |
|
845,018 |
|
1,366,423 |
| ||||||
First-Owner Occupied |
|
|
|
147,403 |
|
147,403 |
|
|
|
2,584,408 |
|
2,584,408 |
| ||||||
Land and A&D |
|
1,277,061 |
|
|
|
1,277,061 |
|
|
|
35,162 |
|
35,162 |
| ||||||
Commercial |
|
609,000 |
|
1,274,838 |
|
1,883,838 |
|
224,322 |
|
396,215 |
|
620,537 |
| ||||||
Consumer |
|
15,048 |
|
|
|
15,048 |
|
|
|
14,108 |
|
14,108 |
| ||||||
Total 30-89 days past due |
|
2,177,190 |
|
1,478,358 |
|
3,655,548 |
|
1,574,115 |
|
4,463,640 |
|
6,037,755 |
| ||||||
90 or more days past due Commercial Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Owner Occupied |
|
|
|
|
|
|
|
|
|
309,767 |
|
309,767 |
| ||||||
Residential Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
First-Owner Occupied |
|
|
|
1,198,405 |
|
1,198,405 |
|
|
|
429,144 |
|
429,144 |
| ||||||
Land and A&D |
|
|
|
73,087 |
|
73,087 |
|
|
|
915,649 |
|
915,649 |
| ||||||
Commercial |
|
491,569 |
|
|
|
491,569 |
|
|
|
|
|
|
| ||||||
Consumer |
|
182,748 |
|
|
|
182,748 |
|
|
|
|
|
|
| ||||||
Total 90 or more days past due |
|
674,317 |
|
1,271,492 |
|
1,945,809 |
|
|
|
1,654,560 |
|
1,654,560 |
| ||||||
Total accruing past due loans |
|
2,851,507 |
|
2,749,850 |
|
5,601,357 |
|
1,574,115 |
|
6,118,200 |
|
7,692,315 |
| ||||||
Recorded Investment Non-accruing loans: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Owner Occupied |
|
1,849,685 |
|
|
|
1,849,685 |
|
1,849,685 |
|
|
|
1,849,685 |
| ||||||
Investment |
|
|
|
400,375 |
|
400,375 |
|
|
|
376,050 |
|
376,050 |
| ||||||
Hospitality |
|
4,473,345 |
|
|
|
4,473,345 |
|
4,473,345 |
|
|
|
4,473,345 |
| ||||||
Land and A&D |
|
|
|
128,376 |
|
128,376 |
|
|
|
|
|
|
| ||||||
Residential Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
First-Investment |
|
118,674 |
|
|
|
118,674 |
|
123,183 |
|
|
|
123,183 |
| ||||||
First-Owner Occupied |
|
|
|
64,263 |
|
64,263 |
|
925,814 |
|
156,143 |
|
1,081,957 |
| ||||||
Land and A&D |
|
|
|
|
|
|
|
|
|
130,532 |
|
130,532 |
| ||||||
Commercial |
|
734,767 |
|
|
|
734,767 |
|
769,597 |
|
|
|
769,597 |
| ||||||
Consumer |
|
|
|
|
|
|
|
14,426 |
|
|
|
14,426 |
| ||||||
Total Recorded Investment |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Non-accruing past due loans: |
|
7,176,471 |
|
593,014 |
|
7,769,485 |
|
8,156,050 |
|
662,725 |
|
8,818,775 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total Loans |
|
$ |
691,619,466 |
|
$ |
203,201,892 |
|
$ |
894,821,358 |
|
$ |
630,290,012 |
|
$ |
220,867,617 |
|
$ |
851,157,629 |
|
We consider all non-performing loans and troubled debt restructurings (TDRs) to be impaired. We do not recognize interest income on non-performing loans during the time period that the loans are non-performing. 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.
5. LOANS (Continued)
The tables below present our impaired loans at June 30, 2014 and December 31, 2013.
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
| |||||||||||
|
|
|
|
|
|
|
|
June 30, 2014 |
|
June 30, 2014 |
| |||||||||||
Impaired Loans |
|
Unpaid |
|
Recorded |
|
Related |
|
Average |
|
Interest |
|
Average |
|
Interest Income |
| |||||||
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Commercial Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Owner Occupied |
|
$ |
2,115,118 |
|
$ |
2,115,118 |
|
$ |
|
|
$ |
2,115,118 |
|
$ |
|
|
$ |
2,120,422 |
|
$ |
|
|
Investment |
|
1,339,561 |
|
1,339,561 |
|
|
|
1,339,561 |
|
13,952 |
|
1,350,641 |
|
29,360 |
| |||||||
Residential Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
First-Investment |
|
118,674 |
|
118,674 |
|
|
|
118,505 |
|
|
|
120,304 |
|
|
| |||||||
Commercial |
|
734,767 |
|
734,767 |
|
|
|
737,767 |
|
2,426 |
|
757,814 |
|
4,777 |
| |||||||
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Commercial Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Hospitality |
|
4,473,345 |
|
4,473,345 |
|
2,658,345 |
|
4,473,345 |
|
|
|
4,473,345 |
|
|
| |||||||
Commercial |
|
425,670 |
|
425,670 |
|
184,444 |
|
425,670 |
|
3,294 |
|
441,423 |
|
6,919 |
| |||||||
Consumer |
|
182,748 |
|
182,748 |
|
45,687 |
|
182,748 |
|
|
|
183,392 |
|
1,847 |
| |||||||
Total legacy impaired |
|
9,389,883 |
|
9,389,883 |
|
2,888,476 |
|
9,392,714 |
|
19,672 |
|
9,447,341 |
|
42,903 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Acquired (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Residential Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
First-Investment |
|
287,294 |
|
287,294 |
|
|
|
287,294 |
|
|
|
299,338 |
|
|
| |||||||
First-Owner Occupied |
|
1,826,587 |
|
1,794,050 |
|
|
|
1,474,969 |
|
7,996 |
|
1,919,205 |
|
20,924 |
| |||||||
Land and A&D |
|
1,476,850 |
|
721,212 |
|
|
|
1,519,568 |
|
13,345 |
|
1,857,535 |
|
16,216 |
| |||||||
Commercial |
|
85,926 |
|
85,926 |
|
|
|
85,926 |
|
1,086 |
|
86,591 |
|
1,827 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Commercial Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Investment |
|
371,806 |
|
371,806 |
|
281,651 |
|
371,806 |
|
1,086 |
|
371,996 |
|
1,086 |
| |||||||
Residential Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Land and A&D |
|
131,031 |
|
131,031 |
|
83,770 |
|
131,031 |
|
|
|
131,031 |
|
|
| |||||||
Total acquired impaired |
|
4,179,494 |
|
3,391,319 |
|
365,421 |
|
3,870,594 |
|
23,513 |
|
4,665,696 |
|
40,053 |
| |||||||
Total impaired |
|
$ |
13,569,377 |
|
$ |
12,781,202 |
|
$ |
3,253,897 |
|
$ |
13,263,308 |
|
$ |
43,185 |
|
14,113,037 |
|
$ |
82,956 |
| |
(1) Generally accepted accounting principles require that we initially 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 the definition of an acquired, credit-impaired loan. Although we do not accrue interest income at the contractual rate on these loans, we do recognize an accretable yield as interest income to the extent such yield is supported by cash flow analysis of the underlying loans. Acquired, credit-impaired loans where the cash flows do not perform according to initial accretable yield estimates are considered impaired.
5. LOANS (Continued)
Impaired Loans |
| |||||||||||||||
Twelve months ended December 31, 2013 |
| |||||||||||||||
Legacy |
|
Unpaid |
|
Recorded |
|
Related |
|
Average |
|
Interest |
| |||||
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial Real Estate: |
|
|
|
|
|
|
|
|
|
|
| |||||
Owner Occupied |
|
$ |
1,849,685 |
|
$ |
1,849,685 |
|
$ |
|
|
$ |
1,855,418 |
|
$ |
70,711 |
|
Residential Real Estate: |
|
|
|
|
|
|
|
|
|
|
| |||||
First-Investment |
|
123,183 |
|
123,183 |
|
|
|
129,105 |
|
|
| |||||
Commercial |
|
2,136,376 |
|
2,136,376 |
|
|
|
2,235,110 |
|
90,917 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial Real Estate: |
|
|
|
|
|
|
|
|
|
|
| |||||
Owner Occupied |
|
274,516 |
|
274,516 |
|
137,258 |
|
282,630 |
|
18,177 |
| |||||
Investment |
|
1,363,821 |
|
1,363,821 |
|
136,382 |
|
1,385,973 |
|
63,855 |
| |||||
Hospitality |
|
4,473,345 |
|
4,473,345 |
|
1,250,000 |
|
4,491,435 |
|
105,772 |
| |||||
Residential Real Estate: |
|
|
|
|
|
|
|
|
|
|
| |||||
First-Owner Occupied |
|
925,814 |
|
925,814 |
|
167,450 |
|
931,492 |
|
16,664 |
| |||||
Commercial |
|
459,439 |
|
459,439 |
|
191,753 |
|
510,230 |
|
31,018 |
| |||||
Consumer |
|
7,390 |
|
7390 |
|
7,390 |
|
7,426 |
|
32 |
| |||||
Total legacy impaired |
|
11,613,569 |
|
11,613,569 |
|
1,890,233 |
|
11,828,819 |
|
397,146 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Acquired (1) |
|
|
|
|
|
|
|
|
|
|
| |||||
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial Real Estate: |
|
|
|
|
|
|
|
|
|
|
| |||||
Owner Occupied |
|
605,314 |
|
579,583 |
|
|
|
590,677 |
|
24,821 |
| |||||
Residential Real Estate: |
|
|
|
|
|
|
|
|
|
|
| |||||
Land and A&D |
|
1,628,156 |
|
241,624 |
|
|
|
241,624 |
|
|
| |||||
Commercial |
|
87,387 |
|
87,387 |
|
|
|
88,508 |
|
4,533 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial Real Estate: |
|
|
|
|
|
|
|
|
|
|
| |||||
Investment |
|
372,047 |
|
376,050 |
|
279,037 |
|
376,047 |
|
17,509 |
| |||||
Residential Real Estate: |
|
|
|
|
|
|
|
|
|
|
| |||||
First-Owner Occupied |
|
411,891 |
|
412,742 |
|
187,109 |
|
414,020 |
|
11,460 |
| |||||
Land and A&D |
|
131,031 |
|
130,532 |
|
65,515 |
|
130,332 |
|
8,709 |
| |||||
Total acquired impaired |
|
3,235,826 |
|
1,827,918 |
|
531,661 |
|
1,841,208 |
|
67,032 |
| |||||
Total impaired |
|
$ |
14,849,395 |
|
$ |
13,441,487 |
|
$ |
2,421,894 |
|
$ |
13,670,027 |
|
$ |
464,178 |
|
(1) Generally accepted accounting principles require that we record acquired loans at fair value at acquisition date. These loans are not performing according to their contractual terms and meet our definition of an impaired loan. Although we do not accrue interest income at the contractual rate on these loans, we may accrete their fair value 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.
5. LOANS (Continued)
We consider a loan a TDR when we conclude that both of the following conditions exist: the restructuring constitutes a concession and the debtor is experiencing financial difficulties. Restructured loans at June 30, 2014 consisted of four loans for $598 thousand compared to five loans at December 31, 2013 for $667 thousand. We had no loans that were modified as a TDR during the three and six month periods ending June 30, 2014 and one loan in the amount of $60 thousand that was modified as a TDR during the six months ending June 30, 2013. We had no loans that were modified as a TDR that defaulted within twelve months of the modification date during the three and six month periods ending June 30, 2014.
Acquired impaired loans
The following table documents changes in the accretable discount on acquired impaired loans during the six months ended June 30, 2014 and 2013, along with the outstanding balances and related carrying amounts for the beginning and end of those respective periods.
|
|
Six Months Ended June 30, |
| ||||
|
|
2014 |
|
2013 |
| ||
Balance at beginning of period |
|
$ |
40,771 |
|
$ |
|
|
Additions due to WSB acquisition |
|
|
|
2,644,163 |
| ||
Accretion of fair value discounts |
|
(646,861 |
) |
(632,786 |
) | ||
Reclassification from non-accretable |
|
579,301 |
|
573,682 |
| ||
Balance at end of period |
|
$ |
(26,789 |
) |
$ |
2,585,059 |
|
|
|
Contractually |
|
Carrying Amount |
| ||
At June 30, 2014 |
|
$ |
10,853,648 |
|
$ |
7,994,957 |
|
At December 31, 2013 |
|
12,482,792 |
|
8,742,777 |
| ||
At June 30, 2013 |
|
57,176,676 |
|
31,245,470 |
| ||
At December 31, 2012 |
|
24,930,742 |
|
13,363,882 |
| ||
Credit Quality Indicators
We review the adequacy of the allowance for loan losses at least quarterly. We base the evaluation of the adequacy of the allowance for loan losses upon loan categories. We categorize loans as residential real estate loans, commercial real estate loans, commercial loans and consumer loans. We further divide commercial real estate loans by owner occupied, investment, hospitality and land acquisition and development. We also divide residential real estate by owner occupied, investment, land acquisition and development and junior liens. All categories are divided by risk rating and loss factors and weighed by risk rating to determine estimated loss amounts. We evaluate delinquent loans and loans for which management has knowledge about possible credit problems of the borrower or knowledge of problems with collateral separately and assign loss amounts based upon the evaluation.
We determine loss ratios for all loans based upon a review of the three year loss ratio for the category and qualitative factors.
We charge off loans that management has identified as losses. We consider suggestions from our external loan review firm and bank examiners when determining which loans to charge off. We automatically charge off consumer loan accounts based on regulatory requirements.
If a loan that was previously rated a pass performing loan, from our acquisitions, deteriorates subsequent to the acquisition, the subject loan will be assessed for risk and, if necessary, evaluated for impairment. If the risk assessment rating is adversely changed and the loan is determined to not be impaired, the loan will be placed in a migration category and the credit mark established for the loan will be compared to the general reserve allocation that would be applied using the current allowance for loan losses formula for General Reserves. If the credit mark
5. LOANS (Continued)
exceeds the allowance for loan losses formula for General Reserves, there will be no change to the allowance for loan losses. If the credit mark is less than the current allowance for loan losses formula for General Reserves, the allowance for loan losses will be increased by the amount of the shortfall by a provision recorded in the income statement. If the loan is deemed impaired, the loan will be subject to evaluation for loss exposure and a specific reserve. If the estimate of loss exposure exceeds the credit mark, the allowance for loan losses will be increased by the amount of the excess loss exposure through a provision. If the credit mark exceeds the estimate of loss exposure there will be no change to the allowance for loan losses. If a loan from the acquired loan portfolio is carrying a specific credit mark and a current evaluation determines that there has been an increase in loss exposure, the allowance for loan losses will be increased by the amount of the current loss exposure in excess of the credit mark.
The following tables outline the class of loans by risk rating at June 30, 2014 and December 31, 2013:
|
|
Account Balance |
| |||||||
June 30, 2014 |
|
Legacy |
|
Acquired |
|
Total |
| |||
Risk Rating |
|
|
|
|
|
|
| |||
Pass (1-5) |
|
|
|
|
|
|
| |||
Commercial Real Estate: |
|
|
|
|
|
|
| |||
Owner Occupied |
|
$ |
184,161,521 |
|
$ |
26,465,177 |
|
$ |
210,626,698 |
|
Investment |
|
181,429,368 |
|
47,849,499 |
|
229,278,867 |
| |||
Hospitality |
|
65,796,822 |
|
8,488,192 |
|
74,285,014 |
| |||
Land and A&D |
|
36,279,930 |
|
5,982,145 |
|
42,262,075 |
| |||
Residential Real Estate: |
|
|
|
|
|
|
| |||
First-Investment |
|
45,411,599 |
|
25,276,969 |
|
70,688,568 |
| |||
First-Owner Occupied |
|
22,639,531 |
|
55,580,621 |
|
78,220,152 |
| |||
Land and A&D |
|
19,568,029 |
|
11,801,285 |
|
31,369,314 |
| |||
HELOC and Jr. Liens |
|
20,299,269 |
|
3,252,204 |
|
23,551,473 |
| |||
Commercial |
|
85,541,917 |
|
8,195,089 |
|
93,737,006 |
| |||
Consumer |
|
9,368,133 |
|
646,639 |
|
10,014,772 |
| |||
|
|
670,496,119 |
|
193,537,820 |
|
864,033,939 |
| |||
Special Mention (6) |
|
|
|
|
|
|
| |||
Commercial Real Estate: |
|
|
|
|
|
|
| |||
Owner Occupied |
|
1,112,925 |
|
2,072,994 |
|
3,185,919 |
| |||
Investment |
|
1,423,020 |
|
857,150 |
|
2,280,170 |
| |||
Land and A&D |
|
3,092,788 |
|
236,829 |
|
3,329,617 |
| |||
Residential Real Estate: |
|
|
|
|
|
|
| |||
First-Investment |
|
1,225,094 |
|
143,502 |
|
1,368,596 |
| |||
First-Owner Occupied |
|
84,907 |
|
631,017 |
|
715,924 |
| |||
Land and A&D |
|
2,212,511 |
|
370,807 |
|
2,583,318 |
| |||
Commercial |
|
2,847,652 |
|
708,153 |
|
3,555,805 |
| |||
|
|
11,998,897 |
|
5,020,452 |
|
17,019,349 |
| |||
Substandard (7) |
|
|
|
|
|
|
| |||
Commercial Real Estate: |
|
|
|
|
|
|
| |||
Owner Occupied |
|
1,849,685 |
|
575,000 |
|
2,424,685 |
| |||
Investment |
|
1,339,561 |
|
1,150,375 |
|
2,489,936 |
| |||
Hospitality |
|
4,473,345 |
|
|
|
4,473,345 |
| |||
Residential Real Estate: |
|
|
|
|
|
|
| |||
First-Investment |
|
118,674 |
|
502,225 |
|
620,899 |
| |||
First-Owner Occupied |
|
|
|
677,222 |
|
677,222 |
| |||
Land and A&D |
|
|
|
763,945 |
|
763,945 |
| |||
Commercial |
|
1,160,437 |
|
974,853 |
|
2,135,290 |
| |||
Consumer |
|
182,748 |
|
|
|
182,748 |
| |||
|
|
9,124,450 |
|
4,643,620 |
|
13,768,070 |
| |||
Doubtful (8) |
|
|
|
|
|
|
| |||
Loss (9) |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Total |
|
$ |
691,619,466 |
|
$ |
203,201,892 |
|
$ |
894,821,358 |
|
5. LOANS (Continued)
|
|
Account Balance |
| |||||||
December 31, 2013 |
|
Legacy |
|
Acquired |
|
Total |
| |||
Risk Rating |
|
|
|
|
|
|
| |||
Pass (1-5) |
|
|
|
|
|
|
| |||
Commercial Real Estate: |
|
|
|
|
|
|
| |||
Owner Occupied |
|
$ |
159,945,564 |
|
$ |
27,089,317 |
|
$ |
187,034,881 |
|
Investment |
|
159,392,609 |
|
51,664,220 |
|
211,056,829 |
| |||
Hospitality |
|
62,818,042 |
|
8,546,240 |
|
71,364,282 |
| |||
Land and A&D |
|
37,383,344 |
|
8,148,372 |
|
45,531,716 |
| |||
Residential Real Estate: |
|
|
|
|
|
|
| |||
First-Investment |
|
44,064,312 |
|
27,103,460 |
|
71,167,772 |
| |||
First-Owner Occupied |
|
12,896,971 |
|
60,399,843 |
|
73,296,814 |
| |||
Land and A&D |
|
17,778,528 |
|
12,678,761 |
|
30,457,289 |
| |||
HELOC and Jr. Liens |
|
18,302,559 |
|
3,359,063 |
|
21,661,622 |
| |||
Commercial |
|
85,415,692 |
|
9,529,078 |
|
94,944,770 |
| |||
Consumer |
|
10,113,098 |
|
870,843 |
|
10,983,941 |
| |||
|
|
608,110,719 |
|
209,389,197 |
|
817,499,916 |
| |||
Special Mention (6) |
|
|
|
|
|
|
| |||
Commercial Real Estate: |
|
|
|
|
|
|
| |||
Owner Occupied |
|
1,310,107 |
|
2,128,647 |
|
3,438,754 |
| |||
Investment |
|
1,432,243 |
|
835,918 |
|
2,268,161 |
| |||
Hospitality |
|
|
|
|
|
|
| |||
Land and A&D |
|
3,212,463 |
|
250,806 |
|
3,463,269 |
| |||
Residential Real Estate: |
|
|
|
|
|
|
| |||
First-Investment |
|
1,106,938 |
|
733,107 |
|
1,840,045 |
| |||
First-Owner Occupied |
|
87,154 |
|
762,920 |
|
850,074 |
| |||
Land and A&D |
|
2,066,763 |
|
|
|
2,066,763 |
| |||
HELOC and Jr. Liens |
|
|
|
|
|
|
| |||
Commercial |
|
1,841,859 |
|
646,700 |
|
2,488,559 |
| |||
Consumer |
|
|
|
|
|
|
| |||
|
|
11,057,527 |
|
5,358,098 |
|
16,415,625 |
| |||
Substandard (7) |
|
|
|
|
|
|
| |||
Commercial Real Estate: |
|
|
|
|
|
|
| |||
Owner Occupied |
|
1,849,685 |
|
884,767 |
|
2,734,452 |
| |||
Investment |
|
1,363,821 |
|
1,591,538 |
|
2,955,359 |
| |||
Hospitality |
|
4,473,345 |
|
|
|
4,473,345 |
| |||
Land and A&D |
|
|
|
|
|
|
| |||
Residential Real Estate: |
|
|
|
|
|
|
| |||
First-Investment |
|
123,183 |
|
527,528 |
|
650,711 |
| |||
First-Owner Occupied |
|
925,812 |
|
1,084,740 |
|
2,010,552 |
| |||
Land and A&D |
|
|
|
1,046,181 |
|
1,046,181 |
| |||
HELOC and Jr. Liens |
|
|
|
|
|
|
| |||
Commercial |
|
2,371,493 |
|
985,568 |
|
3,357,061 |
| |||
Consumer |
|
14,427 |
|
|
|
14,427 |
| |||
|
|
11,121,766 |
|
6,120,322 |
|
17,242,088 |
| |||
Doubtful (8) |
|
|
|
|
|
|
| |||
Loss (9) |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Total |
|
$ |
630,290,012 |
|
$ |
220,867,617 |
|
$ |
851,157,629 |
|
5. LOANS (Continued)
The following table details activity in the allowance for loan losses by portfolio segment for the three and six month periods ended June 30, 2014 and 2013. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. During the fourth quarter of 2013, the loan segments were changed to align with our new allowance methodology, which resulted in balance transfers from prior loan categories being assigned to each new loan segment.
Three months ending June 30, 2014 |
|
Commercial |
|
Commercial |
|
Residential |
|
Consumer |
|
Total |
| |||||
Beginning balance |
|
$ |
844,243 |
|
$ |
3,311,658 |
|
$ |
696,642 |
|
$ |
29,396 |
|
$ |
4,881,939 |
|
General provision for loan losses |
|
(171,084 |
) |
1,546,938 |
|
207,587 |
|
58,223 |
|
1,641,664 |
| |||||
Provision (credit) for loan losses for loans acquired with deteriorated credit quality |
|
|
|
2,616 |
|
(100,000 |
) |
|
|
(97,384 |
) | |||||
Recoveries |
|
2,216 |
|
20 |
|
28,600 |
|
4,452 |
|
35,288 |
| |||||
|
|
675,375 |
|
4,861,232 |
|
832,829 |
|
92,071 |
|
6,461,507 |
| |||||
Loans charged off |
|
(1,000 |
) |
|
|
(111,641 |
) |
(24,283 |
) |
(136,924 |
) | |||||
Ending Balance |
|
$ |
674,375 |
|
$ |
4,861,232 |
|
$ |
721,188 |
|
$ |
67,788 |
|
$ |
6,324,583 |
|
Six months ending June 30, 2014 |
|
Commercial |
|
Commercial |
|
Residential |
|
Consumer |
|
Total |
| |||||
Beginning balance |
|
$ |
495,051 |
|
$ |
3,569,395 |
|
$ |
841,234 |
|
$ |
23,533 |
|
$ |
4,929,213 |
|
General provision for loan losses |
|
176,613 |
|
1,289,161 |
|
257,077 |
|
70,328 |
|
1,793,179 |
| |||||
Provision (credit) for loan losses for loans acquired with deteriorated credit quality |
|
|
|
2,616 |
|
18,254 |
|
|
|
20,870 |
| |||||
Recoveries |
|
4,711 |
|
60 |
|
36,270 |
|
8,478 |
|
49,519 |
| |||||
|
|
676,375 |
|
4,861,232 |
|
1,152,835 |
|
102,339 |
|
6,792,781 |
| |||||
Loans charged off |
|
(2,000 |
) |
|
|
(431,647 |
) |
(34,551 |
) |
(468,198 |
) | |||||
Ending Balance |
|
$ |
674,375 |
|
$ |
4,861,232 |
|
$ |
721,188 |
|
$ |
67,788 |
|
$ |
6,324,583 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Amount allocated to: |
|
|
|
|
|
|
|
|
|
|
| |||||
Legacy Loans: |
|
|
|
|
|
|
|
|
|
|
| |||||
Individually evaluated for impairment |
|
$ |
184,444 |
|
$ |
2,658,345 |
|
$ |
|
|
$ |
45,687 |
|
$ |
2,888,476 |
|
Other loans not individually evaluated |
|
489,931 |
|
1,921,236 |
|
637,418 |
|
22,101 |
|
3,070,686 |
| |||||
Acquired Loans: |
|
|
|
|
|
|
|
|
|
|
| |||||
Individually evaluated for impairment |
|
|
|
281,651 |
|
83,770 |
|
|
|
365,421 |
| |||||
Ending balance |
|
$ |
674,375 |
|
$ |
4,861,232 |
|
$ |
721,188 |
|
$ |
67,788 |
|
$ |
6,324,583 |
|
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)
Our recorded investment in loans at June 30, 2014 and 2013 related to each balance in the allowance for probable loan losses by portfolio segment and disaggregated on the basis of our impairment methodology was as follows:
June 30, 2014 |
|
Commercial |
|
Commercial |
|
Residential |
|
Consumer |
|
Total |
| |||||
Legacy loans: |
|
|
|
|
|
|
|
|
|
|
| |||||
Individually evaluated for impairment with specific reserve |
|
$ |
425,670 |
|
$ |
4,473,345 |
|
$ |
|
|
$ |
182,748 |
|
$ |
5,081,763 |
|
Individually evaluated for impairment without specific reserve |
|
734,767 |
|
3,454,679 |
|
118,674 |
|
|
|
4,308,120 |
| |||||
Other loans not individually evaluated |
|
88,389,569 |
|
473,030,942 |
|
111,440,939 |
|
9,368,133 |
|
682,229,583 |
| |||||
Acquired loans: |
|
|
|
|
|
|
|
|
|
|
| |||||
Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition) |
|
|
|
371,806 |
|
131,031 |
|
|
|
502,837 |
| |||||
Individually evaluated for impairment without specific reserve (ASC 310-20 at acquisition) |
|
85,926 |
|
|
|
2,802,556 |
|
|
|
2,888,482 |
| |||||
Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition) |
|
9,792,169 |
|
93,305,554 |
|
96,066,211 |
|
646,639 |
|
199,810,573 |
| |||||
Ending balance |
|
$ |
99,428,101 |
|
$ |
574,636,326 |
|
$ |
210,559,411 |
|
$ |
10,197,520 |
|
$ |
894,821,358 |
|
June 30, 2013 |
|
Real Estate |
|
Commerical |
|
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 without 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 |
|
6. OTHER REAL ESTATE OWNED
At June 30, 2014 and December 31, 2013, the fair value of other real estate owned was $4.6 million and $4.3 million, 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, 2014 |
|
Legacy |
|
Acquired |
|
Total |
| |||
Beginning balance |
|
$ |
475,291 |
|
$ |
3,836,051 |
|
$ |
4,311,342 |
|
Real estate acquired through foreclosure of loans |
|
334,000 |
|
1,020,889 |
|
1,354,889 |
| |||
Real estate sold |
|
(7,600 |
) |
(1,313,361 |
) |
(1,320,961 |
) | |||
Net realized gain on sale of real estate owned |
|
|
|
282,195 |
|
282,195 |
| |||
Ending balance |
|
$ |
801,691 |
|
$ |
3,825,774 |
|
$ |
4,627,465 |
|
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, |
| ||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
Weighted average number of shares |
|
10,785,370 |
|
8,505,016 |
|
10,782,770 |
|
7,681,337 |
|
Dilutive average number of shares |
|
10,948,368 |
|
8,609,164 |
|
10,944,982 |
|
7,776,679 |
|
8. STOCK BASED COMPENSATION
For the three months ended June 30, 2014 and 2013, we recorded stock-based compensation expense of $71,280 and $50,186, respectively. For the six month periods ended June 30, 2014 and 2013, we recorded stock-based compensation expense of $198,082 and $133,848, respectively. At June 30, 2014, there was $430,701 of total unrecognized compensation cost related to non-vested stock options and restricted stock awards that we expect to realize over the next 1.25 years. As of June 30, 2014, there were 485,192 shares remaining available for future issuance under the equity incentive plans. The directors and officers did not exercise any options during the six month period ended June 30, 2014 compared to the exercise of 58,948 options during the six month period ended June 30, 2013.
For purposes of determining estimated fair value of stock options and restricted stock awards, we have computed the estimated fair values of all stock-based compensation using the Black-Scholes option pricing model and, for stock options and restricted stock awards granted prior to December 31, 2013, have applied the assumptions set forth in Old Line Bancshares Annual Report on Form 10-K for the year ended December 31, 2013. During the six months ended June 30, 2014 and 2013, we granted 50,739 and 52,712 stock options, respectively. The weighted average grant date fair value of these 2014 stock options is $4.69 and was computed using the Black-Scholes option pricing model under similar assumptions.
During the six months ended June 30, 2014 and 2013, we granted 8,257 and 8,382 restricted common stock awards, respectively. The weighted average grant date fair value of these restricted stock awards issued for the six months ending June 30, 2014 is $16.76. There were no restricted shares forfeited during the six month periods ending June 30, 2014 or 2013.
9. FAIR VALUE MEASUREMENT
The fair value of an asset or liability is the price that participants would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability, or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
The fair value hierarchy established by accounting standards defines three input levels for fair value measurement. The applicable standard describes three levels of inputs that may be used to measure fair value: Level 1 is based on quoted market prices in active markets for identical assets. Level 2 is based on significant observable inputs other than Level 1 prices. Level 3 is based on significant unobservable inputs that reflect a companys own assumptions about the assumption that market participants would use in pricing an asset or liability. We evaluate fair value measurement inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer between levels. For the six months ended June 30, 2014 and the year ended December 31, 2013, there were no transfers between levels.
At June 30, 2014, we hold, as part of our investment portfolio, available for sale securities reported at fair value consisting of municipal securities, U.S. government sponsored entities, mortgage-backed securities. The fair value of the majority of these securities is determined using widely accepted valuation techniques including matrix pricing and broker-quote based applications. Inputs include benchmark yields, reported trades, issuer spreads, prepayments speeds and other relevant items. These are inputs used by a third-party pricing service used by us.
To validate the appropriateness of the valuations provided by the third party, we regularly update the understanding of the inputs used and compare valuations to an additional third party source. We classify all our investment securities available for sale in Level 2 of the fair value hierarchy, with the exception of treasury securities which fall into Level 1.
We value Sallie Mae (SLMA) equity securities (included in equity securities) at fair value on a recurring basis. We value SLMA equity securities under Level 1. During the first quarter of 2014, the SLMA equity security was sold and the realized gain of $96,993 is recorded in gain (loss) on disposal of assets on the consolidated statement of income.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
|
|
At June 30, 2014 (In thousands) |
| |||||||||||||
|
|
|
|
Quoted Prices in |
|
Other |
|
Significant |
|
Total Changes |
| |||||
|
|
|
|
Active Markets for |
|
Observable |
|
Unobservable |
|
in Fair Values |
| |||||
|
|
|
|
Identical Assets |
|
Inputs |
|
Inputs |
|
Included in |
| |||||
|
|
Carrying Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Period Earnings |
| |||||
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
| |||||
Treasury securities |
|
$ |
3,002 |
|
$ |
3,002 |
|
$ |
|
|
$ |
|
|
$ |
|
|
U.S. government agency |
|
38,267 |
|
|
|
38,267 |
|
|
|
|
| |||||
Municipal securities |
|
45,007 |
|
|
|
45,007 |
|
|
|
|
| |||||
FHLMC MBS |
|
15,391 |
|
|
|
15,391 |
|
|
|
|
| |||||
FNMA MBS |
|
13,857 |
|
|
|
13,857 |
|
|
|
|
| |||||
GNMA MBS |
|
33,652 |
|
|
|
33,652 |
|
|
|
|
| |||||
SBA loan pools |
|
6,531 |
|
|
|
6,531 |
|
|
|
|
| |||||
Total recurring assets at fair value |
|
$ |
155,707 |
|
$ |
3,002 |
|
$ |
152,705 |
|
$ |
|
|
$ |
|
|
9. FAIR VALUE MEASUREMENT (continued)
|
|
At December 31, 2013 (In thousands) |
| |||||||||||||
|
|
|
|
Quoted Prices in |
|
Other |
|
Significant |
|
Total Changes |
| |||||
|
|
|
|
Active Markets for |
|
Observable |
|
Unobservable |
|
in Fair Values |
| |||||
|
|
|
|
Identical Assets |
|
Inputs |
|
Inputs |
|
Included in |
| |||||
|
|
Carrying Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Period Earnings |
| |||||
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
| |||||
Treasury securities |
|
$ |
1,250 |
|
$ |
1,250 |
|
$ |
|
|
$ |
|
|
$ |
|
|
U.S. government agency |
|
40,735 |
|
|
|
40,735 |
|
|
|
|
| |||||
Municipal securities |
|
59,267 |
|
|
|
59,267 |
|
|
|
|
| |||||
FHLMC MBS |
|
5,206 |
|
|
|
5,206 |
|
|
|
|
| |||||
FNMA MBS |
|
18,703 |
|
|
|
18,703 |
|
|
|
|
| |||||
GNMA MBS |
|
39,921 |
|
|
|
39,921 |
|
|
|
|
| |||||
SBA loan pools |
|
7,088 |
|
|
|
7,088 |
|
|
|
|
| |||||
Total investment securities available for sale |
|
172,170 |
|
1,250 |
|
170,920 |
|
|
|
|
| |||||
Sallie Mae equity securities |
|
414 |
|
414 |
|
|
|
|
|
|
| |||||
Total recurring assets at fair value |
|
$ |
172,584 |
|
$ |
1,664 |
|
$ |
170,920 |
|
$ |
|
|
$ |
|
|
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, 2014 and December 31, 2013 are included in the tables below.
We also measure certain non-financial assets such as other real estate owned, TDRs, and repossessed or foreclosed property at fair value on a non-recurring basis. Generally, we estimate the fair value of these items using Level 3 inputs based on discounting criteria.
|
|
At June 30, 2014 (In thousands) |
| ||||||||||
|
|
|
|
Quoted Prices in |
|
Other |
|
Significant |
| ||||
|
|
|
|
Active Markets for |
|
Observable |
|
Unobservable |
| ||||
|
|
|
|
Identical Assets |
|
Inputs |
|
Inputs |
| ||||
|
|
Carrying Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| ||||
Impaired Loans |
|
|
|
|
|
|
|
|
| ||||
Legacy: |
|
$ |
6,501 |
|
$ |
|
|
$ |
|
|
$ |
6,777 |
|
Acquired: |
|
3,026 |
|
|
|
|
|
3,110 |
| ||||
Total Impaired Loans |
|
9,527 |
|
|
|
|
|
9,887 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Other real estate owned: |
|
|
|
|
|
|
|
|
| ||||
Legacy: |
|
802 |
|
|
|
|
|
802 |
| ||||
Acquired: |
|
3,825 |
|
|
|
|
|
3,825 |
| ||||
Total other real estate owned: |
|
4,627 |
|
|
|
|
|
4,627 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
$ |
14,154 |
|
$ |
|
|
$ |
|
|
$ |
14,514 |
|
9. FAIR VALUE MEASUREMENT (continued)
|
|
At December 31, 2013 (In thousands) |
| ||||||||||
|
|
|
|
Quoted Prices in |
|
Other |
|
Significant |
| ||||
|
|
|
|
Active Markets for |
|
Observable |
|
Unobservable |
| ||||
|
|
|
|
Identical Assets |
|
Inputs |
|
Inputs |
| ||||
|
|
Carrying Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| ||||
Impaired Loans |
|
|
|
|
|
|
|
|
| ||||
Legacy: |
|
$ |
9,723 |
|
$ |
|
|
$ |
|
|
$ |
9,723 |
|
Acquired: |
|
1,296 |
|
|
|
|
|
1,296 |
| ||||
Total Impaired Loans |
|
11,019 |
|
|
|
|
|
11,019 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Other real estate owned: |
|
|
|
|
|
|
|
|
| ||||
Legacy: |
|
475 |
|
|
|
|
|
475 |
| ||||
Acquired: |
|
3,836 |
|
|
|
|
|
3,836 |
| ||||
Total other real estate owned: |
|
4,311 |
|
|
|
|
|
4,311 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
$ |
15,330 |
|
$ |
|
|
$ |
|
|
$ |
15,330 |
|
At June 30, 2014 and December 31, 2013, we estimated the fair value of impaired assets using Level 3 inputs to be $14.2 million and $15.3 million, respectively. We determined these Level 3 inputs based on appraisal evaluations, offers to purchase and/or appraisals that we obtained from an outside third party during the preceding twelve months less costs to sell. Discounts have predominantly been in the range of 0% to 50%. As a result of the 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).
We use the following methodologies for estimating fair values of financial instruments that we do not measure on a recurring basis. The estimated fair values of financial instruments equal the carrying value of the instruments except as noted.
Cash and Cash Equivalents - For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value because of the short maturities of these instruments.
Loans- We estimate the fair value of loans, segregated by type based on similar financial characteristics, segregated by type based on similar financial characteristics, by discounting future cash flows using current rates for which we would make similar loans to borrowers with similar credit histories. We then adjust this calculated amount for any credit impairment.
Loans held for Sale- Loans held for sale are carried at the lower of cost or market value. The fair values of loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics.
Investment Securities- We base the fair values of investment securities upon quoted market prices or dealer quotes.
Equity Securities- Equity securities are considered restricted stock and are carried at cost 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.
9. FAIR VALUE MEASUREMENT (continued)
Interest bearing deposits-The fair value of demand deposits and savings accounts is the amount payable on demand. We estimate the fair value of fixed maturity certificates of deposit using the rates currently offered for deposits of similar remaining maturities.
Non-Interest bearing deposits- The fair value of non-interest bearing accounts is the amount payable on demand at the reporting date.
Long and short term borrowings- The fair value of long and short term fixed rate borrowings is estimated by discounting the value of contractual cash flows using rates currently offered for advances with similar terms and remaining maturities.
Off-balance Sheet Commitments and Contingencies- Carrying amounts are reasonable estimates of the fair values for such financial instruments. Carrying amounts include unamortized fee income and, in some cases, reserves for any credit losses from those financial instruments. These amounts are not material to our financial position.
Under ASC Topic 825, entities may choose to measure eligible financial instruments at fair value at specified election dates. The fair value measurement option (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, 2014 (In thousands) |
| |||||||||||||
|
|
|
|
|
|
Quoted Prices |
|
Significant |
|
Significant |
| |||||
|
|
|
|
Total |
|
in Active |
|
Other |
|
Other |
| |||||
|
|
Carrying |
|
Estimated |
|
Markets for |
|
Observable |
|
Unobservable |
| |||||
|
|
Amount |
|
Fair |
|
Identical Assets |
|
Inputs |
|
Inputs |
| |||||
|
|
(000s) |
|
Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
|
$ |
30,222 |
|
$ |
30,222 |
|
$ |
30,222 |
|
$ |
|
|
$ |
|
|
Loans receivable, net |
|
889,525 |
|
907,804 |
|
|
|
|
|
907,804 |
| |||||
Loans held for sale |
|
4,075 |
|
4,237 |
|
|
|
4,237 |
|
|
| |||||
Investment securities available for sale |
|
155,707 |
|
155,707 |
|
3,002 |
|
152,705 |
|
|
| |||||
Equity Securities at cost |
|
4,304 |
|
4,304 |
|
|
|
4,304 |
|
|
| |||||
Bank Owned Life Insurance |
|
31,000 |
|
31,000 |
|
|
|
31,000 |
|
|
| |||||
Accrued interest receivable |
|
2,978 |
|
2,978 |
|
|
|
869 |
|
2,109 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Deposits: |
|
|
|
|
|
|
|
|
|
|
| |||||
Non-interest-bearing |
|
237,615 |
|
237,615 |
|
|
|
237,615 |
|
|
| |||||
Interest bearing |
|
771,802 |
|
776,597 |
|
|
|
776,597 |
|
|
| |||||
Short term borrowings |
|
35,769 |
|
35,769 |
|
|
|
35,769 |
|
|
| |||||
Long term borrowings |
|
6,044 |
|
6,044 |
|
|
|
6,044 |
|
|
| |||||
Accrued Interest payable |
|
230 |
|
230 |
|
|
|
230 |
|
|
| |||||
9. FAIR VALUE MEASUREMENT (continued)
|
|
December 31, 2013 (In thousands) |
| |||||||||||||
|
|
|
|
|
|
Quoted Prices |
|
Significant |
|
Significant |
| |||||
|
|
|
|
Total |
|
in Active |
|
Other |
|
Other |
| |||||
|
|
Carrying |
|
Estimated |
|
Markets for |
|
Observable |
|
Unobservable |
| |||||
|
|
Amount |
|
Fair |
|
Identical Assets |
|
Inputs |
|
Inputs |
| |||||
|
|
(000s) |
|
Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
|
$ |
29,058 |
|
$ |
29,058 |
|
$ |
29,058 |
|
$ |
|
|
$ |
|
|
Loans receivable, net |
|
847,249 |
|
860,458 |
|
|
|
|
|
860,458 |
| |||||
Loans held for sale |
|
2,075 |
|
2,075 |
|
|
|
2,075 |
|
|
| |||||
Investment securities available for sale |
|
172,170 |
|
172,170 |
|
1,250 |
|
170,920 |
|
|
| |||||
Equity Securities at cost |
|
5,670 |
|
5,670 |
|
414 |
|
5,256 |
|
|
| |||||
Bank Owned Life Insurance |
|
30,577 |
|
30,577 |
|
|
|
30,577 |
|
|
| |||||
Accrued interest receivable |
|
3,433 |
|
3,433 |
|
|
|
1,088 |
|
2,345 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Deposits: |
|
|
|
|
|
|
|
|
|
|
| |||||
Non-interest-bearing |
|
228,734 |
|
228,734 |
|
|
|
228,734 |
|
|
| |||||
Interest bearing |
|
745,626 |
|
751,703 |
|
|
|
751,703 |
|
|
| |||||
Short term borrowings |
|
49,530 |
|
49,530 |
|
|
|
49,530 |
|
|
| |||||
Long term borrowings |
|
6,093 |
|
6,093 |
|
|
|
6,093 |
|
|
| |||||
Accrued Interest payable |
|
265 |
|
265 |
|
|
|
265 |
|
|
| |||||
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 $441thousand 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) and on May 10, 2013, we acquired WSB Holdings, Inc. (WSB Holdings), the parent company of The Washington Savings Bank, F.S.B. (WSB). The acquisition of WSB created the fourth largest independent commercial bank based in Maryland, with assets of more than $1.1 billion and with 23 full service branches serving five counties.
Summary of Recent Performance and Other Activities
Net loans held for investment increased $42.3 million and deposits increased $35.1 million during the six months ending June 30, 2014. Our net income available to common stockholders increased $1.9 million to $1.8 million for the three months ended June 30, 2014, compared to net loss of $84 thousand for the three months ended June 30, 2013. Earnings were $0.16 per basic and diluted common share for the three months ended June 30, 2014 compared to a loss of $.01 per basic and diluted common share for the same period in 2013. The increase in net income is primarily the result of a $1.4 million increase in net interest income, a $715,000 increase in non-interest income and a decrease of $2.0 million in non-interest expense, partially offset by an increase of $1.3 million in the provision for loan losses. Earnings were $3.6 million for the six months ended June 30, 2014, compared with $1.2 million for the same six month period last year. Earnings were $0.33 per basic and diluted common share compared to $0.16 per basic and $0.15 per diluted common share for the same period last year. The increase in net income during the six month period is primarily the result of increases of $3.9 million in net interest income and $879,000 in non-interest income, partially offset by an increase of $1.4 million in the provision for loan losses.
The following highlights contain additional financial data and events that have occurred during the three and six months ended June 30, 2014:
· The net interest margin was 4.28% for both the quarters ended June 30, 2014 and 2013. The net interest margin was 4.33% for the six months ended June 30, 2014 compared to 4.32% for the same six month period last year. The average interest rate paid on total interest-bearing liabilities decreased to 0.50% for the six months ended June 30, 2014 compared to 0.63% for the six months ended June 30, 2013.
· The second quarter Return on Average Assets (ROAA) and Return on Average Equity (ROAE) were 0.60% and 5.46%, respectively, compared to ROAA and ROAE of (0.03)% and (0.35%), respectively, for the second quarter of 2013.
· For the six months ended June 30, 2014, ROAA and ROAE were 0.62% and 5.70%, respectively, as compared to ROAA and ROAE of 0.26% and 2.89%, respectively, for the six months ended June 30, 2013.
· Total assets at June 30, 2014 increased by $26.0 million from to December 31, 2013.
· Total deposits grew by $35.1 million during the six months ended June 30, 2014.
· Net loans increased $44.3 million, or 5.22%, during the six months ended June 30, 2014, to $893.6 million, compared to $849.3 million at December 31, 2013.
· Our asset quality remained strong:
· Non-performing assets decreased to 1.20% of total assets at June 30, 2014 compared to 1.27% at December 31, 2013, and decreased from 1.96% at June 30, 2013.
· At June 30, 2014, we had four legacy loans (loans originated by Old Line Bank) on non-accrual status in the amount of $7.2 million, compared to eight loans in the amount of $8.2 million at December 31, 2013.
· At June 30, 2014, we had accruing legacy loans past due between 30 and 89 days in the amount of $2.2 million compared to $1.6 million in this category at December 31, 2013. We had accruing legacy loans of $674 thousand that are 90 or more days past due at June 30, 2014, compared to no loans that were past 90 or more at December 31, 2013.
· At June 30, 2014, we had ten acquired loans totaling $593 thousand on non-accrual status compared to seven loans for a total of $663 thousand at December 31, 2013.
· At June 30, 2014, we had accruing acquired loans totaling $1.5 million past due between 30 and 89 days and accruing acquired loans of $1.3 million that are 90 or more days past due, compared to $4.5 million between 30-89 days and $1.7 million 90 or more days past due and accruing at December 31, 2013.
· We provisioned $1.5 million for loan losses during the three month period ended June 30, 2014 compared to $200 thousand for the three months ended June 30, 2013. For the six month period ended June 30, 2014, we recorded a $1.8 million provision compared to $400 thousand for the same six month period last year.We ended the six month period of 2014 with a book value of $12.23 per common share and a tangible book value of $11.06 per common share.
· Old Line Bancshares was recognized for our performance amongst our peers and became part of the Russell 2000 Effective June 27, 2014.
· We maintained strong liquidity and by all regulatory measures remained well capitalized.
The following summarizes the highlights of our financial performance for the three month period ended June 30, 2014 compared to same period in 2013 (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) |
| |||||||||
|
|
2014 |
|
2013 |
|
$ Change |
|
% Change |
| |||
|
|
|
|
|
|
|
|
|
| |||
Net income available to common stockholders |
|
$ |
1,769 |
|
$ |
(84 |
) |
$ |
1,853 |
|
(2,205.95 |
)% |
Interest income |
|
11,617 |
|
10,308 |
|
1,309 |
|
12.70 |
| |||
Interest expense |
|
1,005 |
|
1,104 |
|
(99 |
) |
(8.97 |
) | |||
Net interest income before provision for loan losses |
|
10,612 |
|
9,203 |
|
1,409 |
|
15.31 |
| |||
Provision for loan losses |
|
1,544 |
|
200 |
|
1,344 |
|
672.00 |
| |||
Non-interest income |
|
1,868 |
|
1,153 |
|
715 |
|
62.01 |
| |||
Non-interest expense |
|
8,492 |
|
10,535 |
|
(2,043 |
) |
(19.39 |
) | |||
Average total loans |
|
865,944 |
|
721,223 |
|
144,721 |
|
20.07 |
| |||
Average interest earning assets |
|
1,035,068 |
|
904,597 |
|
130,471 |
|
14.42 |
| |||
Average total interest bearing deposits |
|
768,880 |
|
686,544 |
|
82,336 |
|
11.99 |
| |||
Average non-interest bearing deposits |
|
234,063 |
|
205,050 |
|
29,013 |
|
14.15 |
| |||
Net interest margin |
|
4.28 |
% |
4.28 |
% |
|
|
|
| |||
Return on average equity |
|
5.46 |
% |
(0.35 |
)% |
|
|
|
| |||
Basic earnings per common share |
|
$ |
0.16 |
|
$ |
(0.01 |
) |
$ |
0.17 |
|
(1,700.00 |
) |
Diluted earnings per common share |
|
0.16 |
|
(0.01 |
) |
0.17 |
|
(1,700.00 |
) |
|
|
Six months ended June 30, |
| |||||||||
|
|
(Dollars in thousands) |
| |||||||||
|
|
2014 |
|
2013 |
|
$ Change |
|
% Change |
| |||
|
|
|
|
|
|
|
|
|
| |||
Net income available to common stockholders |
|
$ |
3,605 |
|
$ |
1,202 |
|
$ |
2,403 |
|
199.92 |
% |
Interest income |
|
22,989 |
|
19,125 |
|
3,864 |
|
20.20 |
| |||
Interest expense |
|
2,018 |
|
2,074 |
|
(56 |
) |
(2.70 |
) | |||
Net interest income before provision for loan losses |
|
20,971 |
|
17,051 |
|
3,920 |
|
22.99 |
| |||
Provision for loan losses |
|
1,814 |
|
400 |
|
1,414 |
|
353.50 |
| |||
Non-interest income |
|
3,260 |
|
2,381 |
|
879 |
|
36.92 |
| |||
Non-interest expense |
|
17,468 |
|
17,616 |
|
(148 |
) |
(0.84 |
) | |||
Average total loans |
|
858,553 |
|
663,782 |
|
194,771 |
|
29.34 |
| |||
Average interest earning assets |
|
1,028,605 |
|
838,758 |
|
189,847 |
|
22.63 |
| |||
Average total interest bearing deposits |
|
760,208 |
|
619,967 |
|
140,241 |
|
22.62 |
| |||
Average non-interest bearing deposits |
|
231,603 |
|
196,305 |
|
35,298 |
|
17.98 |
| |||
Net interest margin (1) |
|
4.28 |
% |
4.32 |
% |
|
|
|
| |||
Return on average equity |
|
5.70 |
% |
2.89 |
% |
|
|
|
| |||
Basic earnings per common share |
|
$ |
0.33 |
|
$ |
0.16 |
|
$ |
0.17 |
|
106.25 |
|
Diluted earnings per common share |
|
0.33 |
|
0.15 |
|
0.18 |
|
120.00 |
|
(1) See Reconciliation of Non-GAAP Measures
Strategic Plan
We have based our strategic plan on the objective of enhancing stockholder value and growth through branching and operating profits. Our short term goals include continuing the growth of the loan and deposit portfolios, collecting payments on non-accrual and past due loans, profitably disposing of certain acquired loans and 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
organically in Montgomery County, and through acquisition in Charles County, Prince Georges County and Anne Arundel County, Maryland. We have also entered into the residential mortgage business through the WSB merger.
We use the Internet and technology to augment our growth plans. Currently, we offer our customers image technology, Internet and mobile banking with online 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 the weak job market 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 2014. We also believe that we will be able to maintain our current level of net interest margins during the remainder of 2014. 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 2014, 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 continue to be higher in 2014 than they were in 2013 due to the acquisition of WSB Holdings in May 2013. We believe with our existing branches, our lending staff, our corporate infrastructure and our solid balance sheet and strong capital position, we can continue to focus our efforts on improving earnings per share and enhancing stockholder value.
Critical Accounting Policies
Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. As discussed in Old Line Bancshares Form 10-K for the fiscal year ended December 31, 2013, we consider our critical accounting policies to be the allowance for loan losses, other-than-temporary impairment of investment securities, goodwill and other intangible assets, income taxes, business combination and accounting for acquired loans. There has been no material changes in our critical accounting policies during the six months ended June 30, 2014.
Results of Operations for the Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013.
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.
Net interest income before provision for loan losses for the three months ended June 30, 2014 increased $1.4 million or 15.3% to $10.6 million from $9.2 million for the same period in 2013. As outlined in detail in the Rate/Volume Analysis, this increase was the result of an increase in total interest income resulting from an increase in average interest earning assets, partially offset by a decrease in yield on such assets and a slight increase in interest paid on interest bearing liabilities. Average interest earning assets increased primarily due to organic loan growth and the acquisition of WSB, compared to the same three month period last year. 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, 2014
compared to the same period last year, however, the lower market yields on interest bearing assets had a much greater impact on, and continue to negatively impact, net interest income after adjusting for accretion on acquired assets. 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 income increased $1.3 million, or 12.70%, to $11.6 million during the three months ended June 30, 2014 compared to $10.3 million during the three months ended June 30, 2013. 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 $130.5 million or 14.43% to $1.0 billion for the three months ended June 30, 2014 from $904.6 million for the three months ended June 30, 2013, as well as by changes in the mix of our interest-earning assets. The increase in total interest earning assets is due to strong organic loan growth as well as the loans and investments acquired in the WSB Holdings transaction in May 2013.
Total interest expense decreased $99 thousand, or 8.97%, to $1.0 million during the three months ended June 30, 2014 from $1.1 million for the same period in 2013, as a result of the decrease in the average interest rate paid on interest bearing liabilities, primarily time deposits, partially offset by an increase in average interest bearing liabilities. The average rate paid on time deposits decreased to 0.70% during the three months ended June 30, 2014 from 0.86% during the same period last year, while the average interest rate paid on all interest bearing liabilities decreased to 0.50% during the three months ended June 30, 2014 compared to 0.61% during the three months ended June 30, 2013. Average interest bearing liabilities increased $81.9 million or 11.26% to $810.0 million for the three months ended June 30, 2014 from $728.0 million for the three months ended June 30, 2013, primarily as a result of an $82.3 million or 12.0% increase in average interest bearing deposits.
The growth in average interest bearing deposits was primarily the result of the acquisition of WSB, but we also experienced organic growth as a result of increased name recognition in our market place, derived from the WSB 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 growth generated primarily from our branch network and commercial loan officers, our average non-interest bearing deposits increased $29.0 million to $234.1 million for the three months ended June 30, 2014, compared to $205.1 million for the three months ended June 30, 2013.
Our net interest margin was 4.28% for both the three months ended June 30, 2014 and 2013. The yield on average interest earning assets decreased ten basis points during the period from 4.77% for the quarter ended June 30, 2013 to 4.67% for the quarter ended June 30, 2014. 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, 2014 and 2013, 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, which contributed to the $510 thousand of total accretion recorded during the three months ended June 30, 2014 as compared to $300 thousand recorded during the same period last year. The payments received were a direct result of our efforts to negotiate payments, sell notes or foreclose on and sell collateral after the acquisition date. The accretion increase on the loans is primarily due to higher repayments on impaired loans that we acquired from MB&T and WSB during the three month period ending June 30, 2014 relative to the same three months last year in addition to higher fair value accretion on interest bearing deposits from the WSB acquisition.
Total accretion increased for the three months ending June 30, 2014 as compared to June 30, 2013 primarily due to one real estate loan that was paid off during the quarter ending June 30, 2014 representing approximately $360 thousand in accretion. The accretion positively impacted the yield on loans and increased the net interest margin during these periods as follows:
|
|
Three months ended June 30, |
| ||||||||
|
|
2014 |
|
2013 |
| ||||||
|
|
Accretion |
|
% Impact on |
|
Accretion |
|
% Impact on |
| ||
Commercial loans |
|
$ |
(3,509 |
) |
|
% |
$ |
38,933 |
|
0.02 |
% |
Mortgage loans |
|
344,403 |
|
0.13 |
|
173,261 |
|
0.07 |
| ||
Consumer loans |
|
6,338 |
|
|
|
2,876 |
|
|
| ||
Interest bearing deposits |
|
162,452 |
|
0.06 |
|
85,046 |
|
0.05 |
| ||
Total accretion |
|
$ |
509,684 |
|
0.19 |
% |
$ |
300,116 |
|
0.14 |
% |
Average Balances, Yields and Accretion of Fair Value Adjustments Impact. The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the three months ended June 30, 2014 and 2013, showing the average distribution of assets, liabilities, stockholders equity and related income, expense and corresponding weighted average yields and rates. Non-accrual loans are included in total loan balances lowering the effective yield for the portfolio in the aggregate. The average balances used in this table and other statistical data were calculated using average daily balances.
|
|
Average Balances, Interest and Yields |
| ||||||||||||||
|
|
2014 |
|
2013 |
| ||||||||||||
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
| ||||
Three Months Ended June 30, |
|
balance |
|
Interest |
|
Yield |
|
balance |
|
Interest |
|
Yield |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal funds sold (1) |
|
$ |
3,993,880 |
|
$ |
1,653 |
|
0.17 |
% |
$ |
6,778,841 |
|
$ |
1,784 |
|
0.11 |
% |
Interest bearing deposits |
|
30,385 |
|
6 |
|
0.08 |
|
199,541 |
|
61 |
|
0.12 |
| ||||
Investment securities (1)(2) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Treasury |
|
2,869,373 |
|
15,709 |
|
2.20 |
|
1,248,692 |
|
452 |
|
0.15 |
| ||||
U.S. government agency |
|
38,424,633 |
|
153,512 |
|
1.60 |
|
44,930,315 |
|
143,760 |
|
1.28 |
| ||||
Mortgage backed securities |
|
69,099,635 |
|
360,480 |
|
2.09 |
|
67,906,312 |
|
329,618 |
|
1.95 |
| ||||
Municipal securities |
|
55,691,795 |
|
643,187 |
|
4.63 |
|
62,664,327 |
|
722,279 |
|
4.63 |
| ||||
Other equity securities |
|
4,304,196 |
|
101,472 |
|
9.46 |
|
3,810,214 |
|
66,256 |
|
6.97 |
| ||||
Total investment securities |
|
170,389,632 |
|
1,274,360 |
|
3.00 |
|
180,559,860 |
|
1,262,365 |
|
2.81 |
| ||||
Loans(1) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Commercial |
|
126,568,823 |
|
1,315,555 |
|
4.17 |
|
107,248,011 |
|
1,218,133 |
|
4.56 |
| ||||
Mortgage real estate |
|
728,664,683 |
|
9,301,557 |
|
5.12 |
|
602,442,723 |
|
8,111,491 |
|
5.40 |
| ||||
Consumer |
|
10,710,532 |
|
159,495 |
|
5.97 |
|
11,532,159 |
|
167,054 |
|
5.81 |
| ||||
Total loans |
|
865,944,038 |
|
10,776,607 |
|
4.99 |
|
721,222,893 |
|
9,496,678 |
|
5.28 |
| ||||
Allowance for loan losses |
|
5,290,130 |
|
|
|
|
|
4,164,025 |
|
|
|
|
| ||||
Total loans, net of allowance |
|
860,653,908 |
|
10,776,607 |
|
5.03 |
|
717,058,868 |
|
9,496,678 |
|
5.31 |
| ||||
Total interest earning assets(1) |
|
1,035,067,805 |
|
12,052,626 |
|
4.67 |
|
904,597,110 |
|
10,760,888 |
|
4.77 |
| ||||
Non-interest bearing cash |
|
39,297,001 |
|
|
|
|
|
45,762,911 |
|
|
|
|
| ||||
Premises and equipment |
|
34,679,042 |
|
|
|
|
|
31,016,913 |
|
|
|
|
| ||||
Other assets |
|
74,785,186 |
|
|
|
|
|
54,183,237 |
|
|
|
|
| ||||
Total assets(1) |
|
1,183,829,034 |
|
|
|
|
|
1,035,560,171 |
|
|
|
|
| ||||
Liabilities and Stockholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Savings |
|
90,253,020 |
|
38,038 |
|
0.17 |
|
120,544,161 |
|
34,111 |
|
0.11 |
| ||||
Money market and NOW |
|
321,216,303 |
|
193,064 |
|
0.24 |
|
199,830,570 |
|
150,155 |
|
0.30 |
| ||||
Other time deposits |
|
357,410,354 |
|
625,537 |
|
0.70 |
|
366,169,375 |
|
780,689 |
|
0.86 |
| ||||
Total interest bearing deposits |
|
768,879,677 |
|
856,639 |
|
0.45 |
|
686,544,106 |
|
964,955 |
|
0.56 |
| ||||
Borrowed funds |
|
41,102,469 |
|
148,918 |
|
1.45 |
|
41,494,215 |
|
139,472 |
|
1.35 |
| ||||
Total interest bearing liabilities |
|
809,982,146 |
|
1,005,557 |
|
0.50 |
|
728,038,321 |
|
1,104,427 |
|
0.61 |
| ||||
Non-interest bearing deposits |
|
234,063,213 |
|
|
|
|
|
205,050,472 |
|
|
|
|
| ||||
|
|
1,044,045,359 |
|
|
|
|
|
933,088,793 |
|
|
|
|
| ||||
Other liabilities |
|
9,603,037 |
|
|
|
|
|
6,624,502 |
|
|
|
|
| ||||
Non-controlling interest |
|
270,521 |
|
|
|
|
|
369,671 |
|
|
|
|
| ||||
Stockholders equity |
|
129,910,117 |
|
|
|
|
|
95,477,205 |
|
|
|
|
| ||||
Total liabilities and stockholders equity |
|
$ |
1,183,829,034 |
|
|
|
|
|
$ |
1,035,560,171 |
|
|
|
|
| ||
Net interest spread(1) |
|
|
|
|
|
4.17 |
|
|
|
|
|
4.16 |
| ||||
Net interest margin(1) |
|
|
|
$ |
11,047,069 |
|
4.28 |
% |
|
|
$ |
9,656,461 |
|
4.28 |
% |
(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.
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, 2014 and 2013. We have allocated the change in interest income, interest expense and net interest income due to both volume and rate proportionately to the rate and volume variances.
Rate/Volume Variance Analysis
|
|
Three months ended June 30, |
| |||||||
|
|
2014 compared to 2013 |
| |||||||
|
|
Variance due to: |
| |||||||
|
|
Total |
|
Rate |
|
Volume |
| |||
|
|
|
|
|
|
|
| |||
Interest earning assets: |
|
|
|
|
|
|
| |||
Federal funds sold(1) |
|
$ |
(131 |
) |
$ |
1,132 |
|
$ |
(1,263 |
) |
Interest bearing deposits |
|
(55 |
) |
(34 |
) |
(21 |
) | |||
Investment Securities(1) |
|
|
|
|
|
|
| |||
U.S. treasury |
|
15,257 |
|
14,915 |
|
342 |
| |||
U.S. government agency |
|
9,752 |
|
44,869 |
|
(35,117 |
) | |||
Mortgage backed securities |
|
30,862 |
|
29,153 |
|
1,709 |
| |||
Municipal securities |
|
(79,092 |
) |
5,453 |
|
(84,545 |
) | |||
Other |
|
35,216 |
|
32,283 |
|
2,933 |
| |||
Loans:(1) |
|
|
|
|
|
|
| |||
Commercial |
|
97,422 |
|
(223,311 |
) |
320,733 |
| |||
Mortgage |
|
1,190,066 |
|
(1,101,160 |
) |
2,291,226 |
| |||
Consumer |
|
(7,559 |
) |
9,938 |
|
(17,497 |
) | |||
Total interest revenue (1) |
|
1,291,738 |
|
(1,186,762 |
) |
2,478,500 |
| |||
|
|
|
|
|
|
|
| |||
Interest bearing liabilities |
|
|
|
|
|
|
| |||
Savings |
|
3,926 |
|
18,678 |
|
(14,752 |
) | |||
Money market and NOW |
|
42,909 |
|
(79,414 |
) |
122,323 |
| |||
Other time deposits |
|
(155,151 |
) |
(150,152 |
) |
(4,999 |
) | |||
Borrowed funds |
|
9,446 |
|
11,725 |
|
(2,279 |
) | |||
Total interest expense |
|
(98,870 |
) |
(199,163 |
) |
100,293 |
| |||
|
|
|
|
|
|
|
| |||
Net interest income(1) |
|
$ |
1,390,608 |
|
$ |
(987,599 |
) |
$ |
2,378,207 |
|
(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.
Provision for Loan Losses. The provision for loan losses for the three months ended June 30, 2014 was $1.5 million, an increase of $1.3 million, compared to $200,000 for the three months ended June 30, 2013. The increase in our provision for loan losses during the three months ended June 30, 2014 is primarily due to one commercial/hotel loan that was placed on nonaccrual status during the first quarter of 2014. After receiving an estimated value and exploring various disposition alternatives management determined that an additional provision of $1.4 million was needed to reserve for probable loss on the property. The property was sold at foreclosure, subject to ratification and closing, in July 2014. We are also seeking performance from guarantors on the loan.
Management identified probable losses in the loan portfolio and recorded charge-offs of $137 thousand for the three months ended June 30, 2014, compared to $47 thousand for the three months ended June 30, 2013. Recoveries of $35 thousand were recognized for the three months ending June 30, 2014 compared to $31 thousand for the same three month period in 2013.
The allowance for loan losses to gross loans held-for-investment was 0.71% and 0.54%, and the allowance for loan losses to non-accrual loans was 81.40% and 25.43%, at June 30, 2014 and 2013, respectively.
Non-interest Income. Non-interest income totaled $1.9 million for the three months ended June 30, 2014, an increase of $715 thousand, or 61.98%, from the corresponding period of 2013 amount of $1.2 million.
The following table outlines the changes in non-interest income for the three month periods.
|
|
Three months ended |
|
|
|
|
| |||||
|
|
June 30, |
|
|
|
|
| |||||
|
|
2014 |
|
2013 |
|
$ Change |
|
% Change |
| |||
Service charges on deposit accounts |
|
$ |
493,482 |
|
$ |
367,674 |
|
$ |
125,808 |
|
34.22 |
|
Gain on sales or calls of investment securities |
|
129,911 |
|
9,659 |
|
120,252 |
|
1,244.97 |
| |||
Earnings on bank owned life insurance |
|
246,371 |
|
200,641 |
|
45,730 |
|
22.79 |
| |||
Gain/(loss) on disposal of assets |
|
17,919 |
|
(19,078 |
) |
36,997 |
|
(193.92 |
) | |||
Pointer Ridge rent and other revenue |
|
72,644 |
|
63,317 |
|
9,327 |
|
14.73 |
| |||
Rental income |
|
195,407 |
|
180,159 |
|
15,248 |
|
8.46 |
| |||
Gain on sale of loans |
|
195,829 |
|
146,565 |
|
49,264 |
|
33.61 |
| |||
Other fees and commissions |
|
516,571 |
|
204,357 |
|
312,214 |
|
152.78 |
| |||
Total non-interest revenue |
|
$ |
1,868,134 |
|
$ |
1,153,294 |
|
$ |
714,840 |
|
61.98 |
|
Non-interest income increased primarily as a result of increases in gains on sales or calls of investment securities, service charges on deposit accounts, other fees and commissions, earnings on bank owned life insurance, and gains on sale of loans. The increase in service charges on deposit accounts is due to the increase in our deposits primarily as a result of the WSB acquisition. The increase in earnings on bank owned life insurance is the result of the addition of approximately $13.0 million of bank owned life insurance from the acquisition of WSB Holdings in May 2013. The gain on the sale of loans is attributable to the revenues earned on loans sold in the secondary market, which we did not engage in until our acquisition of WSB in May 2013. Other fees and commissions increased primarily due to letter of credit fees, fees associated with loans sold in the secondary market and recoveries on acquired loans that were previously charged-off prior to the mergers with WSB and MB&T. The gains on sales or calls of investment securities increased during the period as we sold $27 million in investment securities during the three month period ending June 30, 2014. During the quarter, we divested higher premium MBS and lower yielding, longer duration agencies to re-position the portfolio into well structured, better cash flowing, shorter collateral, 15 year agency MBS and also sold $15.9 million of our municipal bonds to reduce interest rate and mark to market risk. We used the proceeds from the sale of the municipal bonds to fund loan growth. Gain on the sale of investment securities for the three month period ending June 30, 2014, was $130 thousand pretax, $79 thousand net of tax, compared to $10 thousand in gains during the same three month period last year. Gain on the sale of these investment securities is the result of Old Line Bank selling approximately $27 million in securities during the 2014 period.
Non-interest Expense. Non-interest expense decreased $2.0 million or 19.40% for the three months ended June 30, 2014 compared to the three months ended June 30, 2013.
The following chart outlines the changes in non-interest expenses for the period.
|
|
Three months ended |
|
|
|
|
| |||||
|
|
June 30, |
|
|
|
|
| |||||
|
|
2014 |
|
2013 |
|
$ Change |
|
% Change |
| |||
Salaries and benefits |
|
$ |
4,051,407 |
|
$ |
4,126,567 |
|
$ |
(75,160 |
) |
(1.82 |
) |
Occupancy and equipment |
|
1,436,564 |
|
1,214,947 |
|
221,617 |
|
18.24 |
| |||
Data processing |
|
312,042 |
|
329,878 |
|
(17,836 |
) |
(5.41 |
) | |||
FDIC insurance and State of Maryland assessments |
|
233,575 |
|
186,996 |
|
46,579 |
|
24.91 |
| |||
Merger and integration |
|
|
|
2,786,350 |
|
(2,786,350 |
) |
(100.00 |
) | |||
Core deposit premium |
|
212,214 |
|
198,875 |
|
13,339 |
|
6.71 |
| |||
Pointer Ridge other operating |
|
50,233 |
|
105,050 |
|
(54,817 |
) |
(52.18 |
) | |||
(Gain) loss on sale of other real estate owned |
|
(79,127 |
) |
770 |
|
(79,897 |
) |
(10,376.23 |
) | |||
OREO expense |
|
112,659 |
|
154,908 |
|
(42,249 |
) |
(27.27 |
) | |||
Network services |
|
174,914 |
|
112,816 |
|
62,098 |
|
55.04 |
| |||
Telephone |
|
167,442 |
|
119,587 |
|
47,855 |
|
40.02 |
| |||
Other operating |
|
1,819,983 |
|
1,198,924 |
|
621,059 |
|
51.80 |
| |||
Total non-interest expenses |
|
$ |
8,491,906 |
|
$ |
10,535,668 |
|
$ |
(2,043,762 |
) |
(19.40 |
) |
The decrease in non-interest expenses, as compared to the same period of 2013, was mainly attributable to decreases in merger expenses, while a gain on sale of other real estate owned and a decrease in salaries and benefits also contributed to the decrease. These items were partially offset by increases in other operating, network services, telephone and occupancy and equipment expenses. Merger expenses decreased $2.8 million for the three months ended June 30, 2014 compared to the same period of the prior year as a result of expenses that we incurred during the second quarter of 2013 in connection with the acquisition of WSB Holdings in May 2013, primarily related to legal fees, investment banker fees and termination and de-conversion charges associated with the termination of WSBs core data processing contract. Gain on the sale of other real estate owned was $80 thousand compared to a loss of $1 thousand during the 2013 period as a result of the sale of three properties that resulted in a net gain compared to the sale of two legacy properties for a net loss during the same three months last year. Salaries and benefits decreased by $75 thousand, or 1.82%, when compared to the same period of 2013 primarily as a result of reductions in staffing levels that were previously inflated by the consummation of the WSB Holdings merger during the second quarter of 2013. Occupancy and equipment expenses increased $222 thousand or 18.24% compared to the same period in 2013 primarily due to the additional lease expense associated with the acquisition of WSBs branches. Other operating expenses increased $621 thousand during the quarter ended June 30, 2014 compared to the same period last year, primarily as a result of increased internal audit fees, legal expenses and foreclosure expenses. Network services increased $62 thousand and telephone expenses increased $48 thousand during the 2014 period, also associated with the WSB acquisition.
Income Taxes. We had an income tax expense of $688 thousand (28.16% of pre-tax income) for the three months ended June 30, 2014 compared to an income tax benefit of $283 thousand (74.74% of pre-tax income) for the same period in 2013. The effective tax changed due to a significant shift in the portion of tax-exempt income to pretax income or loss. This shift occurred as a result of the per-tax loss in the 2013 period.
Net Income Available to Common Stockholders. Net income available to common stockholders was $1.8 million or $0.16 per basic and diluted common share for the three month period ending June 30, 2014 compared to net loss available to common stockholders of $86 thousand, or $0.01 per basic and diluted common share, for the same period in 2013. The increase in net income available to common stockholders for the 2014 period was primarily the result of the $1.4 million increase in net interest income, the $715,000 increase in non-interest income and the $2.0 million increase in non-interest expenses, offsetting the increase of $1.3 million in the provision for loan losses as compared to the 2013 period.
Results of Operations for the six months ended June 30, 2014 compared to six months ended June 30, 2013.
Net Interest Income. Net interest income before provision for loan losses for the six months ended June 30, 2014 increased $3.9 million or 23.0% to $21.0 million from $17.1 million for the same period in 2013. As outlined in detail in the Rate/Volume Analysis, this increase was the result of an increase in total interest income resulting from an increase in average interest earning assets, partially offset by a decrease in yield on such assets. Average interest earning assets increased primarily due to the acquisition of WSB and organic loan growth, compared to the same six month period last year. 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 six months ended June 30, 2014, however, the lower market yields on interest bearing assets had a much greater impact on, and continue to negatively impact, net interest income after adjusting for accretion on acquired loans. 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 income increased $3.9 million, or 20.21%, to $23.0 million during the six months ended June 30, 2014 compared to $19.1 million during the six months ended June 30, 2013. 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 $189.9 million or 22.7% to $1.0 billion for the six months ended June 30, 2014 from $838.8 million for the six months ended June 30, 2013, as well as by changes in the mix of our interest-earning assets. The increase in total interest earning assets is due to strong organic loan growth as well as the loans and investments acquired in the WSB Holdings transaction.
Total interest expense decreased $56 thousand, or 2.70%, to $2.0 million during the six months ended June 30, 2014 from $2.1 million for the same period in 2013, as a result of the decrease in the average interest rate paid on interest bearing liabilities, primarily time deposits. The average rate paid on time deposits decreased to 0.74% during the six months ended June 30, 2014 from 0.89% during the same period last year, while the average interest rate paid on all interest bearing liabilities decreased to 0.50% during the six months ended June 30, 2014 compared to 0.63% during the six months ended June 30, 2013. Average interest bearing liabilities increased $145.7 million or 22.05% to $806.6 million for the six months ended June 30, 2014 from $660.9 million for the six months ended June 30, 2013, primarily as a result of a $140.2 million or 22.7% increase in average interest bearing deposits.
The growth in average interest bearing deposits was primarily the result of the acquisition of WSB, but we also experienced organic growth as a result of increased name recognition in our market place, including as a result of the acquisition, and our business development efforts. Deposit growth during the six month period was comprised of $44.3 million in organic growth offset by intentional decline of $9.2 million in high cost interest bearing deposits acquired in the May 2013 merger with WSB.
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 $35.3 million to $231.6 million for the six months ended June 30, 2014, compared to $196.3 million for the six months ended June 30, 2013.
Our net interest margin was 4.33% for the six months ended June 30, 2014 compared to 4.32% for the six months ended June 30, 2013. The yield on average interest earning assets decreased 13 basis points during the period from 4.81% for the six months ended June 30, 2013 to 4.68% for the six months ended June 30, 2014. Re-pricing in the loan portfolio and slightly lower yields on new loans caused the average loan yield to decline.
During the six months ended June 30, 2014 and 2013, 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, which contributed to the $939 thousand of total accretion recorded during the six months ended June 30, 2014 as compared to $541 thousand recorded during the same period last year. The payments received were a direct result of our efforts to negotiate payments, sell notes or foreclose on and sell collateral after the acquisition date. The accretion increase is primarily due to higher repayments on impaired loans that we acquired from MB&T and WSB during the six month period ending June 30, 2014 relative to the same six months last year in addition to higher fair value accretion on interest bearing deposits from the WSB acquisition.
Total accretion increased for the six months ending June 30, 2014 as compared to the six months ending June 30, 2013 primarily due to one real estate loan that was paid off during the six months ending June 30, 2014 representing approximately $470 thousand in accretion. The accretion positively impacted the yield on loans and increased the net interest margin during these periods as follows:
|
|
Six months ended June 30, |
| ||||||||
|
|
2014 |
|
2013 |
| ||||||
|
|
Accretion |
|
% Impact on |
|
Accretion |
|
% Impact on |
| ||
Commercial loans |
|
$ |
3,959 |
|
|
% |
$ |
248,077 |
|
0.15 |
% |
Mortgage loans |
|
631,929 |
|
0.12 |
|
168,761 |
|
0.10 |
| ||
Consumer loans |
|
10,973 |
|
|
|
5,247 |
|
|
| ||
Interest bearing deposits |
|
291,779 |
|
0.06 |
|
118,507 |
|
0.08 |
| ||
Total accretion |
|
$ |
938,640 |
|
0.18 |
% |
$ |
540,592 |
|
0.33 |
% |
The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the six months ended June 30, 2014 and 2013, showing the average distribution of assets, liabilities, stockholders equity and related income, expense and corresponding weighted average yields and rates. Non-accrual loans are included in total loan balances lowering the effective yield for the portfolio in the aggregate. The average balances used in this table and other statistical data were calculated using average daily balances.
|
|
Average Balances, Interest and Yields |
| ||||||||||||||
|
|
2014 |
|
2013 |
| ||||||||||||
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
| ||||
Six Months Ended June 30, |
|
balance |
|
Interest |
|
Yield |
|
balance |
|
Interest |
|
Yield |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal funds sold (1) |
|
$ |
2,666,737 |
|
$ |
2,041 |
|
0.15 |
% |
$ |
4,258,221 |
|
$ |
2,387 |
|
0.11 |
% |
Interest bearing deposits |
|
29,028 |
|
14 |
|
0.10 |
|
180,539 |
|
161 |
|
0.18 |
| ||||
Investment securities (1)(2) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Treasury |
|
2,139,399 |
|
16,599 |
|
1.56 |
|
1,311,066 |
|
2,307 |
|
0.35 |
| ||||
U.S. government agency |
|
37,371,962 |
|
313,168 |
|
1.69 |
|
37,122,530 |
|
230,941 |
|
1.25 |
| ||||
Mortgage backed securities |
|
69,819,027 |
|
738,352 |
|
2.13 |
|
69,305,406 |
|
717,874 |
|
2.09 |
| ||||
Municipal securities |
|
58,406,996 |
|
1,347,252 |
|
4.65 |
|
63,246,374 |
|
1,473,849 |
|
4.70 |
| ||||
Other equity securities |
|
4,765,028 |
|
177,867 |
|
7.53 |
|
3,663,604 |
|
109,557 |
|
6.03 |
| ||||
Total investment securities |
|
172,502,412 |
|
2,593,238 |
|
3.03 |
|
174,648,980 |
|
2,534,528 |
|
2.93 |
| ||||
Loans(1) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Commercial |
|
126,478,497 |
|
2,625,542 |
|
4.19 |
|
103,938,826 |
|
2,535,533 |
|
4.92 |
| ||||
Mortgage real estate |
|
721,126,902 |
|
18,332,025 |
|
5.13 |
|
548,519,712 |
|
14,625,572 |
|
5.38 |
| ||||
Consumer |
|
10,947,682 |
|
321,513 |
|
5.92 |
|
11,323,023 |
|
331,544 |
|
5.90 |
| ||||
Total loans |
|
858,553,081 |
|
21,279,080 |
|
5.00 |
|
663,781,561 |
|
17,492,649 |
|
5.31 |
| ||||
Allowance for loan losses |
|
5,146,488 |
|
|
|
|
|
4,111,710 |
|
|
|
|
| ||||
Total loans, net of allowance |
|
853,406,593 |
|
21,279,080 |
|
5.03 |
|
659,669,851 |
|
17,492,649 |
|
5.35 |
| ||||
Total interest earning assets(1) |
|
1,028,604,770 |
|
23,874,373 |
|
4.68 |
|
838,757,591 |
|
20,029,725 |
|
4.81 |
| ||||
Non-interest bearing cash |
|
37,729,348 |
|
|
|
|
|
35,553,424 |
|
|
|
|
| ||||
Premises and equipment |
|
34,789,733 |
|
|
|
|
|
28,066,491 |
|
|
|
|
| ||||
Other assets |
|
75,059,170 |
|
|
|
|
|
45,700,419 |
|
|
|
|
| ||||
Total assets(1) |
|
1,176,183,021 |
|
|
|
|
|
948,077,925 |
|
|
|
|
| ||||
Liabilities and Stockholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Savings |
|
88,580,625 |
|
74,304 |
|
0.17 |
|
93,095,290 |
|
61,741 |
|
0.13 |
| ||||
Money market and NOW |
|
309,926,453 |
|
354,983 |
|
0.23 |
|
188,136,898 |
|
261,315 |
|
0.28 |
| ||||
Other time deposits |
|
361,700,679 |
|
1,321,654 |
|
0.74 |
|
338,734,580 |
|
1,499,038 |
|
0.89 |
| ||||
Total interest bearing deposits |
|
760,207,757 |
|
1,750,941 |
|
0.46 |
|
619,966,768 |
|
1,822,094 |
|
0.59 |
| ||||
Borrowed funds |
|
46,353,031 |
|
267,194 |
|
1.16 |
|
40,918,307 |
|
251,959 |
|
1.24 |
| ||||
Total interest bearing liabilities |
|
806,560,788 |
|
2,018,135 |
|
0.50 |
|
660,885,075 |
|
2,074,053 |
|
0.63 |
| ||||
Non-interest bearing deposits |
|
231,603,191 |
|
|
|
|
|
196,304,847 |
|
|
|
|
| ||||
|
|
1,038,163,979 |
|
|
|
|
|
857,189,922 |
|
|
|
|
| ||||
Other liabilities |
|
10,205,059 |
|
|
|
|
|
6,766,246 |
|
|
|
|
| ||||
Non-controlling interest |
|
277,938 |
|
|
|
|
|
378,569 |
|
|
|
|
| ||||
Stockholders equity |
|
127,536,045 |
|
|
|
|
|
83,743,188 |
|
|
|
|
| ||||
Total liabilities and stockholders equity |
|
$ |
1,176,183,021 |
|
|
|
|
|
$ |
948,077,925 |
|
|
|
|
| ||
Net interest spread(1) |
|
|
|
|
|
4.18 |
|
|
|
|
|
4.18 |
| ||||
Net interest margin(1) |
|
|
|
$ |
21,856,238 |
|
4.33 |
% |
|
|
$ |
17,955,672 |
|
4.32 |
% |
(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.
The following table describes the impact on our interest revenue and expense resulting from changes in average balances and average rates for the six months ended June 30, 2014 and 2013. We have allocated the change in interest income, interest expense and net interest income due to both volume and rate proportionately to the rate and volume variances.
Rate/Volume Variance Analysis
|
|
Six months ended June 30, |
| |||||||
|
|
2014 compared to 2013 |
| |||||||
|
|
Variance due to: |
| |||||||
|
|
Total |
|
Rate |
|
Volume |
| |||
|
|
|
|
|
|
|
| |||
Interest earning assets: |
|
|
|
|
|
|
| |||
Federal funds sold(1) |
|
$ |
(346 |
) |
$ |
954 |
|
$ |
(1,300 |
) |
Interest bearing deposits |
|
(147 |
) |
(77 |
) |
(70 |
) | |||
Investment Securities(1) |
|
|
|
|
|
|
| |||
U.S. treasury |
|
14,292 |
|
13,089 |
|
1,203 |
| |||
U.S. government agency |
|
82,227 |
|
81,445 |
|
782 |
| |||
Mortgage backed securities |
|
20,478 |
|
17,423 |
|
3,055 |
| |||
Municipal securities |
|
(126,597 |
) |
(26,731 |
) |
(99,866 |
) | |||
Other |
|
68,310 |
|
42,679 |
|
25,631 |
| |||
Loans:(1) |
|
|
|
|
|
|
| |||
Commercial |
|
90,009 |
|
(586,496 |
) |
676,505 |
| |||
Mortgage |
|
3,706,454 |
|
(1,264,228 |
) |
4,970,682 |
| |||
Consumer |
|
(10,031 |
) |
1,840 |
|
(11,871 |
) | |||
Total interest revenue (1) |
|
3,844,649 |
|
(1,720,102 |
) |
5,564,751 |
| |||
|
|
|
|
|
|
|
| |||
Interest bearing liabilities |
|
|
|
|
|
|
| |||
Savings |
|
12,562 |
|
17,006 |
|
(4,444 |
) | |||
Money market and NOW |
|
93,668 |
|
(86,436 |
) |
180,104 |
| |||
Other time deposits |
|
(177,382 |
) |
(319,104 |
) |
141,722 |
| |||
Borrowed funds |
|
15,235 |
|
(25,450 |
) |
40,685 |
| |||
Total interest expense |
|
(55,917 |
) |
(413,984 |
) |
358,067 |
| |||
|
|
|
|
|
|
|
| |||
Net interest income(1) |
|
$ |
3,900,566 |
|
$ |
(1,306,118 |
) |
$ |
5,206,684 |
|
(2) 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.
Provision for Loan Losses. The provision for loan losses for the six months ended June 30, 2014 was $1.8 million, an increase of $1.4 million compared to $400,000 for the six months ended June 30, 2013. Management identified probable losses in the loan portfolio and recorded charge-offs of $468 thousand for the six months ended June 30, 2014, compared to $230 thousand for the six months ended June 30, 2013.
As with the three month period ending June 30, 2014 as discussed above, the increase in our provision for loan losses during the six months ended June 30, 2014 is primarily due to one commercial/hotel loan that was placed on nonaccrual status during the first quarter of 2014.
The allowance for loan losses to gross loans held-for-investment was 0.71% and 0.54%, and the allowance for loan losses to non-accrual loans was 81.40% and 25.43%, at June 30, 2014 and 2013, respectively. Additionally, we revised our allowance for loan losses methodology during the fourth quarter of 2013, which resulted in a lower indicated general reserve.
Non-interest income. Non-interest income totaled $3.3 million for the six months ended June 30, 2014, an increase of $879 thousand, or 36.91%, from the corresponding period of 2013 amount of $2.4 million.
The following table outlines the changes in non-interest income for the six month periods.
|
|
Six months ended |
|
|
|
|
| |||||
|
|
June 30, |
|
|
|
|
| |||||
|
|
2014 |
|
2013 |
|
$ Change |
|
% Change |
| |||
Service charges on deposit accounts |
|
$ |
945,078 |
|
$ |
668,415 |
|
$ |
276,663 |
|
41.39 |
|
Gain on sales or calls of investment securities |
|
129,911 |
|
641,088 |
|
(511,177 |
) |
(79.74 |
) | |||
Earnings on bank owned life insurance |
|
489,978 |
|
333,869 |
|
156,109 |
|
46.76 |
| |||
Gain/(loss) on disposal of assets |
|
114,912 |
|
(104,639 |
) |
219,551 |
|
209.82 |
| |||
Pointer Ridge rent and other revenue |
|
157,004 |
|
131,645 |
|
25,359 |
|
19.26 |
| |||
Rental income |
|
395,944 |
|
180,159 |
|
215,785 |
|
119.77 |
| |||
Gain on sale of loans |
|
302,548 |
|
146,565 |
|
155,983 |
|
106.43 |
| |||
Other fees and commissions |
|
724,275 |
|
383,712 |
|
340,563 |
|
88.75 |
| |||
Total non-interest revenue |
|
$ |
3,259,650 |
|
$ |
2,380,814 |
|
$ |
878,836 |
|
36.91 |
|
Non-interest income increased primarily as a result of increases in gain on sale of disposal of assets, rental income, gain on the sale of loans, other fees and commissions, service charges on deposit accounts and earnings on bank owned life insurance, offsetting a decrease on gain on sales or calls of investment securities. The increase in the gain on the disposal of assets was due to the sale of our SLMA equity security and sale of one of our company vehicles during the 2014 period. Rental income increased as the result of the rent received on the building at 4201 Mitchellville Road, Bowie, Maryland, which we acquired in the WSB Holdings merger. The increase in service charges on deposit accounts is due to the increase in our deposits primarily as a result of the WSB acquisition. The increase in earnings on bank owned life insurance is the result of the addition of approximately $13.0 million of bank owned life insurance from the acquisition of WSB. The increase in the gain on the sale of loans is attributable to the revenues earned on loans sold in the secondary market. Other fees and commissions increased primarily due to letter of credit fees, fees associated with loans sold in the secondary market and recoveries on acquired loans that were previously charged-off prior to the mergers with WSB and MB&T. These increases were partially offset by a decline in gain on sales or calls of investment securities. The gain on sales or calls of investment securities decreased during the 2014 period as we sold approximately $27 million of our investment securities for a gain of $130 thousand during the six month period ending June 30, 2014 compared to a gain of $641 thousand on the sale of $82.9 million of investment securities during the same six month period last year.
Non-Interest Expense. Non-interest expense decreased $148 thousand or 0.84% for the six months ended June 30, 2014 compared to the six months ended June 30, 2013.
The following chart outlines the changes in non-interest expenses for the period.
|
|
Six months ended |
|
|
|
|
| |||||
|
|
June 30, |
|
|
|
|
| |||||
|
|
2014 |
|
2013 |
|
$ Change |
|
% Change |
| |||
Salaries and benefits |
|
$ |
8,925,041 |
|
$ |
7,359,244 |
|
$ |
1,565,797 |
|
21.28 |
|
Occupancy and equipment |
|
3,022,735 |
|
2,283,815 |
|
738,920 |
|
32.35 |
| |||
Data processing |
|
619,202 |
|
568,935 |
|
50,267 |
|
8.84 |
| |||
FDIC insurance and State of Maryland assessments |
|
452,096 |
|
342,239 |
|
109,857 |
|
32.10 |
| |||
Merger and integration |
|
29,167 |
|
3,026,835 |
|
(2,997,668 |
) |
(99.04 |
) | |||
Core deposit premium |
|
440,764 |
|
376,457 |
|
64,307 |
|
17.08 |
| |||
Pointer Ridge other operating |
|
102,254 |
|
218,447 |
|
(116,193 |
) |
(53.19 |
) | |||
(Gain) loss on sale of other real estate owned |
|
(282,195 |
) |
201,224 |
|
(483,419 |
) |
(240.24 |
) | |||
OREO expense |
|
195,725 |
|
469,073 |
|
(273,348 |
) |
(58.27 |
) | |||
Network Services |
|
374,502 |
|
208,892 |
|
165,610 |
|
79.28 |
| |||
Telephone |
|
334,600 |
|
231,453 |
|
103,147 |
|
44.56 |
| |||
Other operating |
|
3,253,949 |
|
2,328,950 |
|
924,999 |
|
39.72 |
| |||
Total non-interest expenses |
|
$ |
17,467,840 |
|
$ |
17,615,564 |
|
$ |
(147,724 |
) |
(0.84 |
) |
Non-interest expenses remained stable during the six months ended June 30, 2014 as compared to the same six months of 2013, primarily as a result of increases in network services, telephone, salaries and benefits and other operating expenses being offset by a decrease in merger and integration expenses when comparing the 2014 period to the 2013 period. Overall, increases occurred in other operating expenses, network services, telephone, occupancy and equipment, salaries and benefits and FDIC insurance, offset by decreases in merger and integration expenses, and other real estate owned (OREO) expenses and by a gain on the sale of other real estate owned. Other operating expenses increased $925 thousand, or 39.7%, when compared to the same period last year, primarily due to increased internal audit expenses, legal expenses, and director fees primarily as a result of additional services needed due to the WSB merger. Network services increased $166 thousand and telephone increased $103 thousand, primarily as a result of the WSB merger. Salaries and benefits increased by $1.6 million, or 21.28%, when compared to the same period of 2013 primarily as a result of severance payments associated with the WSB merger. The cost of health insurance benefits also increased compared to the same six month period of 2013 as a result of an increase in insurance rates and the increased staff from the WSB merger. Occupancy and equipment expenses increased $739 thousand or 32.35% compared to the same period in 2013 primarily due to the additional lease expense associated with the acquisition of WSBs branches. These increases were offset primarily by a decrease in merger and acquisition expenses, which decreased $3.0 million as compared to the same six month last year as a result of expenses that we incurred during the second quarter of 2013 in connection with the acquisition of WSB Holdings, primarily related to legal fees, investment banker fees and termination and de-conversion charges associated with the termination of WSBs core data processing contract. In addition, we recognized a $282 thousand gain on sales of other real estate owned compared to a loss of $201 thousand during the 2013 period as a result of the sale of five properties during the six months ended June 30, 2014, which resulted in a net gain, compared to the sale of eight properties for a net loss during the same six months last year. Costs associated with other real estate owned include taxes and insurance related to other real estate owned.
Income Taxes. We had an income tax expense of $1.4 million (27.87% of pre-tax income) for the six months ended June 30, 2014 compared to an income tax expense of $238 thousand (16.83% of pre-tax income) for the same period in 2013. Taxes were higher during the 2014 period primarily because income increased and the percentage of income related to tax-exempt securities was lower as compared to the same six months last year.
Net income available to common stockholders. Net income available to common stockholders was $3.6 million or $0.33 per basic and diluted common share for the six month period ending June 30, 2014 compared to net income available to common stockholders of $1.2 million, or $0.16 per basic and $0.15 per diluted common share, for the same period in 2013. The increase in net income available to common stockholders for the 2014 period was primarily the result of the increases of $2.5 million increase in net interest income and $879 thousand in non-interest income, partially offset by the $1.4 million increase in the provision for loan losses. Basic and diluted earnings per common share increased as a result of the increase in net income.
Analysis of Financial Condition
Investment Securities. Our portfolio consists primarily of investment grade securities including U.S. treasury securities, U.S. government agency securities, U.S. government sponsored entity securities, securities issued by states, counties and municipalities, mortgage backed securities, and certain equity securities, including Federal Reserve Bank stock, Federal Home Loan Bank (FHLB) stock, Maryland Financial Bank stock and Atlantic Central Bankers Bank stock. With the acquisition of MB&T, we acquired approximately $262,000 of SLMA stock, which we sold in the first quarter of 2014 at a net gain of $97 thousand. During the second quarter of 2014, we also repositioned our investment portfolio and sold investments that had lower yields and extended life durations. As a result of this repositioning, we sold $11.0 million in our MBS and agency callable portfolio and reinvested $11.0 million in seasoned agency 15 year MBS and recorded a gain of $108 thousand. We also sold $15.9 million of our municipal bonds and recorded a gain of $18 thousand. The funds received in the sale of the municipal bonds were used for new loan originations during the second quarter. 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 these securities 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. 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, 2014 amounted to $155.7 million, a decrease of $16.5 million, or 9.6%, from the December 31, 2013 amount of $172.2 million. As outlined above, at June 30, 2014, all securities are classified as available for sale.
The fair value of available for sale securities included net unrealized losses of $1.1 million at June 30, 2014 (reflected as unrealized losses of $640 thousand in stockholders equity after deferred taxes) as compared to net unrealized loss of $5.7 million ($3.4 million net of taxes) at December 31, 2013. The increase in fair value is due to the decrease in the market interest rates which improved bond values. 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. Net of allowance, unearned fees and origination costs, loans held for investment increased $42.3 million or 5.00% to $889.5 million at June 30, 2014 from $847.2 million at December 31, 2013. Commercial real estate loans increased by $40.3 million, residential real estate loans increased by $5.5 million, commercial and industrial loans decreased by $1.4 million and consumer loans decreased $801 thousand from their respective balances at December 31, 2013. The loan growth during the period was primarily due to the new commercial real estate originations resulting from our enhanced presence in our market area. The decreases are the result of loan pay-downs during the quarter.
Most of our lending activity occurs within the state of Maryland within the suburban Washington, D.C. market area in Anne Arundel, Calvert, Charles, Montgomery, Prince Georges and St. Marys Counties. The majority of our loan portfolio consists of commercial real estate loans and commercial and industrial loans.
The following table summarizes the composition of the loan portfolio held for investment by dollar amount and percentages at the dates indicated:
|
|
June 30, 2014 |
|
December 31, 2013 |
| ||||||||||||||
|
|
Legacy (1) |
|
Acquired |
|
Total |
|
Legacy (1) |
|
Acquired |
|
Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Owner Occupied |
|
$ |
187,124,133 |
|
$ |
29,113,170 |
|
$ |
216,237,303 |
|
$ |
163,105,356 |
|
$ |
30,102,731 |
|
$ |
193,208,087 |
|
Investment |
|
184,191,948 |
|
49,857,024 |
|
234,048,972 |
|
162,188,671 |
|
54,091,676 |
|
216,280,347 |
| ||||||
Hospitality |
|
70,270,167 |
|
8,488,192 |
|
78,758,359 |
|
67,291,387 |
|
8,546,239 |
|
75,837,626 |
| ||||||
Land and A&D |
|
39,372,717 |
|
6,218,974 |
|
45,591,691 |
|
40,595,806 |
|
8,399,178 |
|
48,994,984 |
| ||||||
Residential Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
First Lien-Investment |
|
46,755,367 |
|
25,922,696 |
|
72,678,063 |
|
45,294,434 |
|
28,364,096 |
|
73,658,530 |
| ||||||
First Lien-Owner Occupied |
|
22,724,438 |
|
56,888,860 |
|
79,613,298 |
|
13,909,939 |
|
62,247,502 |
|
76,157,441 |
| ||||||
Residential Land and A&D |
|
21,780,539 |
|
12,936,038 |
|
34,716,577 |
|
19,845,291 |
|
13,724,942 |
|
33,570,233 |
| ||||||
HELOC and Jr. Liens |
|
20,299,270 |
|
3,252,204 |
|
23,551,474 |
|
18,302,560 |
|
3,359,063 |
|
21,661,623 |
| ||||||
Commercial and Industrial |
|
89,550,006 |
|
9,878,095 |
|
99,428,101 |
|
89,629,043 |
|
11,161,347 |
|
100,790,390 |
| ||||||
Consumer |
|
9,550,881 |
|
646,639 |
|
10,197,520 |
|
10,127,525 |
|
870,843 |
|
10,998,368 |
| ||||||
|
|
691,619,466 |
|
203,201,892 |
|
894,821,358 |
|
630,290,012 |
|
220,867,617 |
|
851,157,629 |
| ||||||
Allowance for loan losses |
|
(5,959,162 |
) |
(365,421 |
) |
(6,324,583 |
) |
(4,397,552 |
) |
(531,661 |
) |
(4,929,213 |
) | ||||||
Deferred loan costs, net |
|
1,039,169 |
|
(11,158 |
) |
1,028,011 |
|
1,021,167 |
|
(993 |
) |
1,020,174 |
| ||||||
|
|
$ |
686,699,473 |
|
$ |
202,825,313 |
|
$ |
889,524,786 |
|
$ |
626,913,627 |
|
$ |
220,334,963 |
|
$ |
847,248,590 |
|
(1) As a result of the acquisitions of Maryland Bankcorp, the parent company of MB&T, in April 2011 and of WSB Holdings, the parent company of WSB, in May 2013, we have segmented the portfolio into two components, loans originated by Old Line Bank (legacy) and loans acquired from MB&T and WSB (acquired).
Bank owned life insurance. At June 30, 2014, we have invested $31.0 million in life insurance policies on our executive officers, other officers of Old Line Bank, retired officers of MB&T and former officers of WSB. This represents a $423 thousand increase from December 31, 2013 as a result of interest earned on these policies.
Deposits. At June 30, 2014, the deposit portfolio had increased to $1.0 billion, a $35.1 million or 3.60% increase over the December 31, 2013 level of $974.4 million. Deposit growth during the six month period was comprised of $8.9 million, or 3.89%, in non-interest bearing deposits and $26.2 million, or 3.51%, in interest bearing deposits. Non-interest bearing deposits increased to $237.6 million from $228.7 million and interest bearing deposits increased to $771.8 million
from $745.6 million. During the six month period deposit growth was comprised of $44.3 million in organic growth, which was partially offset by an intentional decline of interest bearing acquired deposits of $9.2 million (which we had previously anticipated) due to the high cost of these deposits. The growth in our deposit base is due to our enhanced presence in the surrounding areas. We used some of these funds acquired from increased deposits to reduce our short term borrowings and expect to use the remainder to fund loan originations in the near future.
The following table outlines the increase in interest bearing deposits:
|
|
June 30, |
|
December 31, |
|
|
|
|
| |||
|
|
2014 |
|
2013 |
|
$ Change |
|
% Change |
| |||
|
|
(Dollars in thousands) |
| |||||||||
Certificates of deposit |
|
$ |
353,571 |
|
$ |
366,433 |
|
$ |
(12,862 |
) |
(3.51 |
)% |
Interest bearing checking |
|
327,538 |
|
294,050 |
|
33,488 |
|
11.39 |
| |||
Savings |
|
90,693 |
|
85,143 |
|
5,550 |
|
6.52 |
| |||
Total |
|
$ |
771,802 |
|
$ |
745,626 |
|
$ |
26,176 |
|
3.51 |
% |
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, 2014, we had $30.4 million in CDARS and $104.5 million in money market accounts through Promontorys reciprocal deposit program compared to $27.4 million and $74.8 million, respectively, at December 31, 2013. During 2013, we acquired $18.0 million in brokered certificates of deposit in the WSB acquisition. 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 daily rate credit, short-term borrowings with the FHLB and short-term promissory notes issued to Old Line Banks commercial customers as 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, 2013 we had $12.0 million of FHLB borrowings, which was repaid during the first quarter of 2014. At June 30, 2014, we had no outstanding FHLB borrowings. At June 30, 2014, we had $6.6 million in unsecured promissory notes and $29.2 million in secured promissory notes. At December 31, 2013, such promissory notes were $7.8 million and $29.8 million, respectively.
Long-term borrowings consist of a promissory note related to Pointer Ridge for which 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 by Pointer Ridge. The outstanding balance on such promissory note was $6.0 million at both June 30, 2014 and December 31, 2013.
Liquidity and Capital Resources. Our overall asset/liability strategy takes into account our need to maintain adequate liquidity to fund asset growth and deposit runoff. Our management monitors the liquidity position daily in conjunction with Federal Reserve guidelines. As further discussed below, 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, 2014, we had $29.9 million in cash and due from banks, $30 thousand in interest bearing accounts, and $304 thousand in federal funds sold. As of December 31, 2013, we had $28.3 million in cash and due from banks, $30 thousand in interest bearing accounts, and $712 thousand in federal funds sold.
Old Line Bank has sufficient liquidity to meet its loan commitments as well as fluctuations in deposits. We usually retain maturing certificates of deposit as we offer competitive rates on certificates of deposit. Management is not aware of
any demands, trends, commitments, or events that would result in Old Line 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 turmoil in the financial markets occurs and our depositors lose confidence in us, we could experience liquidity issues.
Old Line Bancshares has available a $5.0 million unsecured line of credit. In addition, Old Line Bank has available lines of credit, including overnight federal funds and repurchase agreements from its correspondent banks, totaling $24.5 million at June 30, 2014. Old Line Bank has an additional secured line of credit from the FHLB of $355.7 million at June 30, 2014. 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 $138.7 million of borrowings. We may increase availability by providing additional collateral. Additionally, we have overnight repurchase agreements sold to Old Line Banks customers and have provided collateral in the form of investment securities to support the $31.6 million in repurchase agreements.
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 $640 thousand and $1.1 million, respectively, which represents unrealized losses (after-tax for capital additions and pre-tax for asset additions, respectively) on mortgage-backed securities and investment securities classified as available for sale. In addition, the risk-based capital reflects an increase of $6.3 million for the general loan loss reserve during the six months ended June 30, 2014. The following table shows Old Line Banks regulatory capital ratios and the minimum capital ratios currently required by its banking regulator to be well capitalized at June 30, 2014.
|
|
|
|
|
|
Minimum capital |
|
To be well |
| |||||||
|
|
Actual |
|
adequacy |
|
capitalized |
| |||||||||
June 30, 2014 |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
| |||
|
|
(Dollars in 000s) |
| |||||||||||||
Total capital (to risk weighted assets) |
|
$ |
112,149 |
|
12.18 |
% |
$ |
73,679 |
|
8 |
% |
$ |
92,099 |
|
10 |
% |
Tier 1 capital (to risk weighted assets) |
|
$ |
106,047 |
|
11.51 |
% |
$ |
36,840 |
|
4 |
% |
$ |
55,259 |
|
6 |
% |
Tier 1 capital (to average assets) |
|
$ |
106,047 |
|
9.15 |
% |
$ |
46,367 |
|
4 |
% |
$ |
57,959 |
|
5 |
% |
Our management believes that, under current regulations, and eliminating the assets of Old Line Bancshares, Old Line Bank remains well capitalized and will continue to meet its minimum capital requirements in the foreseeable future. However, events beyond our control, such as a shift in interest rates or an economic downturn in areas where we extend credit, could adversely affect future earnings and, consequently, our ability to meet minimum capital requirements in the future.
Asset Quality
Overview. Management performs reviews of all delinquent loans and foreclosed assets and directs relationship officers to work with customers to resolve potential credit issues in a timely manner. Management reports to the Loan Committee for their approval and recommendation to the Board of Directors on a monthly basis. The reports presented include information on delinquent loans and foreclosed real estate. We have formal action plans on criticized assets and provide status reports on OREO on a quarterly basis. These action plans include our actions and plans to cure the delinquent status of the loans and to dispose of the foreclosed properties. The Loan Committee consists of three inside and four outside directors.
We classify any property acquired as a result of foreclosure on a mortgage loan as other real estate owned and record it at the lower of the unpaid principal balance or fair value at the date of acquisition and subsequently carry the property at the lower of cost or net realizable value. We charge any required write down of the loan to its net realizable value against the allowance for loan losses at the time of foreclosure. We charge to expense any subsequent adjustments to net realizable value. Upon foreclosure, Old Line Bank generally requires an appraisal of the property and, thereafter, appraisals of the property generally on an annual basis and external inspections on at least a quarterly basis.
As required by ASC Topic 310-Receivables and ASC Topic 450-Contingencies, we measure all impaired loans, which consist of all modified loans (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.
We have identified additional potential problem loans classified as trouble debt restructurings (TDRs) totaling $598 thousand at June 30, 2014 that are complying with their repayment terms. This balance consists of three residential loans and one commercial acquired loan. With respect to each of such 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 loans.
Acquired Loans. Loans acquired in acquisition mergers are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan losses. Generally accepted accounting principles require that we record acquired loans at fair value, which includes a discount for loans with credit impairment. These loans are not performing according to their contractual terms and meet our definition of a 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. Purchased, credit-impaired loans that perform consistent with the accretable yield expectations are not reported as non-accrual or non-performing.
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 as a result there was no allowance for loan losses recorded for acquired loans at the time of acquisition. Accordingly, the existence of the acquired loans reduces the ratios of the allowance for loan losses to total gross loans and the allowance for loan losses to non-accrual loans, and this measure is not directly comparable to prior periods. Similarly, net loan charge-offs are normally lower for acquired loans since we recorded these loans net of expected loan losses. Therefore, the ratio of net charge-offs during the period to average loans outstanding is reduced as a result of the existence of acquired loans, and the measures are not directly comparable to prior periods. Other institutions may not have acquired loans, and therefore there may be no direct comparability of these ratios between and among other institutions when compared in total.
The accounting guidance also requires that if we experience a decrease in the expected cash flows subsequent to the acquisition date, we establish an allowance for loan losses for those acquired loans with decreased cash flows. At June 30, 2014 and December 31, 2013, there was an allowance for loan losses on acquired loans of $425 thousand and $532 thousand, respectively, as a result of a decrease in the expected cash flows subsequent to the acquisition dates.
Nonperforming Assets. As of June 30, 2014, our nonperforming assets totaled $14.3 million and consisted of $7.8 million of nonaccrual loans, $1.9 million of loans 90 days or more past due and still accruing and other real estate owned of $4.6 million.
The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.
|
|
Nonperforming Assets |
| ||||||||||||||||
|
|
June 30, 2014 |
|
December 31, 2013 |
| ||||||||||||||
|
|
Legacy |
|
Acquired |
|
Total |
|
Legacy |
|
Acquired |
|
Total |
| ||||||
Accruing loans 90 or more days past due |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Owner Occupied |
|
$ |
|
|
$ |
|
|
|
|
$ |
|
|
$ |
309,767 |
|
309,767 |
| ||
Residential Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
First-Owner Occupied |
|
|
|
1,198,405 |
|
1,198,405 |
|
|
|
429,144 |
|
429,144 |
| ||||||
Land and A&D |
|
|
|
73,087 |
|
73,087 |
|
|
|
915,649 |
|
915,649 |
| ||||||
Commercial |
|
491,569 |
|
|
|
491,569 |
|
|
|
|
|
|
| ||||||
Consumer |
|
182,748 |
|
|
|
182,748 |
|
|
|
|
|
|
| ||||||
Total accruing loans 90 or more days past due |
|
674,317 |
|
1,271,492 |
|
1,945,809 |
|
|
|
1,654,560 |
|
1,654,560 |
| ||||||
Non-accruing loans: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Owner Occupied |
|
$ |
1,849,685 |
|
$ |
|
|
$ |
1,849,685 |
|
$ |
1,849,685 |
|
$ |
|
|
$ |
1,849,685 |
|
Investment |
|
|
|
|
|
|
|
|
|
376,050 |
|
376,050 |
| ||||||
Hospitality |
|
4,473,345 |
|
|
|
4,473,345 |
|
4,473,345 |
|
|
|
4,473,345 |
| ||||||
Land and A&D |
|
|
|
128,376 |
|
128,376 |
|
|
|
|
|
|
| ||||||
Residential Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
First-Investment |
|
118,674 |
|
|
|
118,674 |
|
123,183 |
|
|
|
123,183 |
| ||||||
First-Owner Occupied |
|
|
|
64,292 |
|
64,292 |
|
925,814 |
|
156,143 |
|
1,081,957 |
| ||||||
Land and A&D |
|
|
|
|
|
|
|
|
|
130,532 |
|
130,532 |
| ||||||
Commercial |
|
734,767 |
|
400,375 |
|
1,135,142 |
|
769,597 |
|
|
|
769,597 |
| ||||||
Consumer |
|
|
|
|
|
|
|
14,426 |
|
|
|
14,426 |
| ||||||
Total Non-accruing past due loans: |
|
7,176,471 |
|
593,043 |
|
7,769,514 |
|
8,156,050 |
|
662,725 |
|
8,818,775 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other real estate owned (OREO) |
|
801,690 |
|
3,825,775 |
|
4,627,465 |
|
475,291 |
|
3,836,051 |
|
4,311,342 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total non performing assets |
|
$ |
8,652,478 |
|
$ |
5,690,310 |
|
$ |
14,342,788 |
|
$ |
8,631,341 |
|
$ |
6,153,336 |
|
$ |
14,784,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Accruing Troubled Debt Restructurings |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Residential Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
First-Owner Occupied |
|
$ |
|
|
$ |
512,490 |
|
$ |
512,490 |
|
$ |
|
|
$ |
579,583 |
|
$ |
579,583 |
|
Commercial |
|
|
|
85,315 |
|
85,315 |
|
|
|
87,387 |
|
87,387 |
| ||||||
Total Accruing Troubled Debt Restructurings |
|
$ |
|
|
$ |
597,805 |
|
$ |
597,805 |
|
$ |
|
|
$ |
666,970 |
|
$ |
666,970 |
|
The table below reflects our ratios of our non-performing assets at June 30, 2014 and December 31, 2013.
|
|
June 30, |
|
December 31, |
|
|
|
2014 |
|
2013 |
|
Ratios, Excluding Acquired Assets |
|
|
|
|
|
Total nonperforming assets as a percentage of total loans held for investment and OREO |
|
0.96 |
% |
1.01 |
% |
Total nonperforming assets as a percentage of total assets |
|
0.73 |
% |
0.74 |
% |
Total nonperforming assets as a percentage of total loans held for investment |
|
0.97 |
% |
1.01 |
% |
|
|
|
|
|
|
Ratios, Including Acquired Assets |
|
|
|
|
|
Total nonperforming assets as a percentage of total loans held for investment and OREO |
|
1.59 |
% |
1.73 |
% |
Total nonperforming assets as a percentage of total assets |
|
1.20 |
% |
1.27 |
% |
Total nonperforming assets as a percentage of total loans held for investment |
|
1.60 |
% |
1.73 |
% |
The table below presents a breakdown of the recorded book balance of non-accruing loans at June 30, 2014 and December 31, 2013.
|
|
June 30, 2014 |
|
December 31, 2013 |
| ||||||||||||||||||
|
|
# of |
|
Unpaid |
|
Recorded |
|
Interest |
|
# of |
|
Unpaid |
|
Recorded |
|
Interest Not |
| ||||||
Legacy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Owner Occupied |
|
1 |
|
$ |
1,849,685 |
|
$ |
1,849,685 |
|
$ |
152,223 |
|
1 |
|
$ |
1,849,685 |
|
$ |
1,849,685 |
|
$ |
82,474 |
|
Hospitality |
|
1 |
|
4,473,345 |
|
4,473,345 |
|
136,227 |
|
1 |
|
4,473,345 |
|
4,473,345 |
|
57,958 |
| ||||||
Residential Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
First-Investment |
|
1 |
|
118,674 |
|
118,674 |
|
13,390 |
|
1 |
|
123,183 |
|
123,183 |
|
10,362 |
| ||||||
First-Owner Occupied |
|
|
|
|
|
|
|
|
|
2 |
|
925,814 |
|
925,814 |
|
51,453 |
| ||||||
Commercial |
|
1 |
|
734,767 |
|
734,767 |
|
108,223 |
|
1 |
|
769,597 |
|
769,597 |
|
89,257 |
| ||||||
Consumer |
|
|
|
|
|
|
|
|
|
2 |
|
14,426 |
|
14,426 |
|
147 |
| ||||||
Total non-accrual loans |
|
4 |
|
7,176,471 |
|
7,176,471 |
|
410,063 |
|
8 |
|
8,156,050 |
|
8,156,050 |
|
291,651 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Acquired (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Investment |
|
2 |
|
370,721 |
|
400,375 |
|
22,788 |
|
2 |
|
372,047 |
|
376,050 |
|
10,853 |
| ||||||
Land and A & D |
|
5 |
|
1,535,384 |
|
128,376 |
|
280,286 |
|
|
|
|
|
|
|
|
| ||||||
Residential Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
First-Investment |
|
1 |
|
287,294 |
|
|
|
123,117 |
|
|
|
|
|
|
|
|
| ||||||
First-Owner Occupied |
|
2 |
|
130,205 |
|
64,263 |
|
82,942 |
|
2 |
|
154,884 |
|
156,143 |
|
4,697 |
| ||||||
Land and A & D |
|
|
|
|
|
|
|
|
|
3 |
|
131,031 |
|
130,532 |
|
2,638 |
| ||||||
Total non-accrual loans |
|
10 |
|
$ |
2,323,604 |
|
$ |
593,014 |
|
$ |
509,133 |
|
7 |
|
$ |
657,962 |
|
$ |
662,725 |
|
$ |
18,188 |
|
Total all non-accrual loans |
|
14 |
|
$ |
9,500,075 |
|
$ |
7,769,485 |
|
$ |
919,196 |
|
15 |
|
$ |
8,814,012 |
|
$ |
8,818,775 |
|
$ |
309,839 |
|
(1) Generally accepted accounting principles require that we record acquired loans at fair value which includes a discount for loans with credit impairment. These loans are not performing according to their contractual terms and meet our definition of a non-performing loan. The discounts that arise from recording these loans at fair value were due to credit quality. Although we do not accrue interest income at the contractual rate on these loans, we may accrete these discounts to interest income as a result of pre-payments that exceed our cash flow expectations or payment in full of amounts due even though we classify them as 90 or more days past due.
Non-performing legacy loans decreased $980 thousand from December 31, 2013 primarily due to two residential real estate relationships that were removed from nonaccrual status. One residential loan totaling $499 thousand was transferred to OREO and the related charge-off of $165 thousand was recorded against the allowance for loan losses. The balance in OREO for this property is $334 thousand. The other residential real estate loan was paid off during the first quarter.
Non-performing acquired loans decreased $65 thousand from December 31, 2013 primarily due to reduction of two commercial real estate loans and one residential real estate loan, offsetting the increase in one commercial land and acquisition and development loan and two commercial loans.
At June 30, 2014, legacy OREO increased by $327 thousand from December 31, 2013 as a result of the foreclosure discussed above. We are currently receiving rental income on the OREO property stated above which has reduced the OREO balance to $327 thousand. At June 30, 2014, legacy OREO consisted of two properties, an increase from December 31, 2013 when we had one property.
At June 30, 2014, acquired OREO decreased by $10 thousand from December 31, 2013. The decrease in OREO was driven by the sale of five properties for $1.8 million, offset by $1.4 million transferred in to OREO. We recorded net gains of $282 thousand during the six month period ended June 30, 2014 compared to a net loss of $200 thousand for the six month period ended June 30, 2013.
Allowance for Loan Losses. We review the adequacy of the allowance for loan losses at least quarterly. Our review includes evaluation of impaired loans as required by ASC Topic 310-Receivables, and ASC Topic 450-Contingencies. Also incorporated in determining the adequacy of the allowance is guidance contained in the Securities and Exchange 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 have risk management practices designed to ensure timely identification of changes in loan risk profiles. However, undetected losses inherently exist within the portfolio. Although we may allocate specific portions of the allowance for specific loans or other factors, the entire allowance is available for any loans that we should charge off. We will not create a separate valuation allowance unless we consider a loan impaired.
The following tables provide an analysis of the allowance for loan losses for the periods indicated:
Six months ending June 30, 2014 |
|
Commercial |
|
Commercial |
|
Residential |
|
Consumer |
|
Total |
| |||||
Beginning balance |
|
$ |
495,051 |
|
$ |
3,569,395 |
|
$ |
841,234 |
|
$ |
23,533 |
|
$ |
4,929,213 |
|
General provision for loan losses |
|
176,613 |
|
1,289,161 |
|
257,077 |
|
70,328 |
|
1,793,179 |
| |||||
Provision (credit) for loan losses for loans acquired with deteriorated credit quality |
|
|
|
2,616 |
|
18,254 |
|
|
|
20,870 |
| |||||
Recoveries |
|
4,711 |
|
60 |
|
36,270 |
|
8,478 |
|
49,519 |
| |||||
|
|
676,375 |
|
4,861,232 |
|
1,152,835 |
|
102,339 |
|
6,792,781 |
| |||||
Loans charged off |
|
(2,000 |
) |
|
|
(431,647 |
) |
(34,551 |
) |
(468,198 |
) | |||||
Ending Balance |
|
$ |
674,375 |
|
$ |
4,861,232 |
|
$ |
721,188 |
|
$ |
67,788 |
|
$ |
6,324,583 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Amount allocated to: |
|
|
|
|
|
|
|
|
|
|
| |||||
Legacy Loans: |
|
|
|
|
|
|
|
|
|
|
| |||||
Individually evaluated for impairment |
|
$ |
184,444 |
|
$ |
2,658,345 |
|
$ |
|
|
$ |
45,687 |
|
$ |
2,888,476 |
|
Other loans not individually evaluated |
|
489,931 |
|
1,921,236 |
|
637,418 |
|
22,101 |
|
3,070,686 |
| |||||
Acquired Loans: |
|
|
|
|
|
|
|
|
|
|
| |||||
Individually evaluated for impairment |
|
|
|
281,651 |
|
83,770 |
|
|
|
365,421 |
| |||||
Ending balance |
|
$ |
674,375 |
|
$ |
4,861,232 |
|
$ |
721,188 |
|
$ |
67,788 |
|
$ |
6,324,583 |
|
December 31, 2013 |
|
Commercial |
|
Commercial |
|
Residential |
|
Other |
|
Total |
| |||||
Beginning balance |
|
|
|
|
|
|
|
|
|
3,965,347 |
| |||||
General provision for loan losses |
|
|
|
|
|
|
|
|
|
1,289,153 |
| |||||
Provision balance transferred |
|
$ |
597,739 |
|
$ |
3,359,989 |
|
$ |
1,260,579 |
|
$ |
36,193 |
|
$ |
5,254,500 |
|
Provision for loan losses for loans acquired with deteriorated credit quality |
|
|
|
279,037 |
|
(64,000 |
) |
|
|
215,037 |
| |||||
Recoveries |
|
141 |
|
32,964 |
|
169,469 |
|
77,066 |
|
279,640 |
| |||||
|
|
597,880 |
|
3,671,990 |
|
1,366,048 |
|
113,259 |
|
5,749,177 |
| |||||
Loans charged off |
|
(102,829 |
) |
(102,595 |
) |
(524,814 |
) |
(89,726 |
) |
(819,964 |
) | |||||
Ending Balance |
|
$ |
495,051 |
|
$ |
3,569,395 |
|
$ |
841,234 |
|
$ |
23,533 |
|
$ |
4,929,213 |
|
Amount allocated to: |
|
|
|
|
|
|
|
|
|
|
| |||||
Legacy Loans: |
|
|
|
|
|
|
|
|
|
|
| |||||
Individually evaluated for impairment |
|
$ |
191,753 |
|
$ |
1,523,640 |
|
$ |
167,450 |
|
$ |
7,390 |
|
$ |
1,890,233 |
|
Other loans not individually evaluated |
|
303,298 |
|
1,766,718 |
|
421,160 |
|
16,143 |
|
2,507,319 |
| |||||
Acquired Loans: |
|
|
|
|
|
|
|
|
|
|
| |||||
Individually evaluated for impairment |
|
|
|
279,037 |
|
252,624 |
|
|
|
531,661 |
| |||||
Ending balance |
|
$ |
495,051 |
|
$ |
3,569,395 |
|
$ |
841,234 |
|
$ |
23,533 |
|
$ |
4,929,213 |
|
The ratios of the allowance for loan losses are as follows:
|
|
June 30, 2014 |
|
December 31, 2013 |
|
|
|
|
|
|
|
Total gross loans held for investment |
|
0.71 |
% |
0.58 |
% |
Non-accrual loans |
|
81.40 |
% |
60.71 |
% |
Net charge-offs to average loans |
|
0.04 |
% |
0.07 |
% |
During the six months ended June 30, 2014, we charged $469 thousand to the allowance for loan losses for two legacy loans, nine acquired loans from MB&T and one acquired loan from WSB. The legacy loans consisted of one residential real estate mortgage loan and one consumer loan. The acquired loans consisted of two residential mortgage real estate loans and seven consumer 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.
The allowance for loan losses represented 0.71% and 0.58% of gross loans held for investment at June 30, 2014 and December 31, 2013, respectively and 0.92% and 0.52% of legacy loans at June 30, 2014 and December 31, 2013 respectively. We have no exposure to foreign countries or foreign borrowers. Based on our analysis and the satisfactory historical performance of the loan portfolio, we believe this allowance appropriately reflects the inherent risk of loss in our portfolio.
Overall, we continue to believe that the loan portfolio remains manageable in terms of charge-offs and nonperforming assets as a percentage of total loans. We remain diligent and aware of our credit costs and the impact that these can have on our financial institution, and we have taken proactive measures to identify problem loans, including in-house and independent review of larger transactions. Our policy for evaluating problem loans includes obtaining new certified real estate appraisals as needed. We continue to monitor and review frequently the overall asset quality within the loan portfolio.
Contractual Obligations, Commitments, Contingent Liabilities, and Off-balance Sheet Arrangements
Old Line Bancshares is a party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments primarily include commitments to extend credit, lines of credit and standby letters of credit. Old Line Bancshares uses these financial instruments to meet the financing needs of its customers. These financial instruments involve, to varying degrees, elements of credit, interest rate, and liquidity risk. These commitments do not represent unusual risks and management does not anticipate any losses that would have a material effect on Old Line Bancshares. Old Line Bancshares also has operating lease obligations.
Outstanding loan commitments and lines and letters of credit at June 30, 2014 and December 31, 2013, are as follows:
|
|
June 30, |
|
December 31, |
| ||
|
|
2014 |
|
2013 |
| ||
|
|
(Dollars in thousands) |
| ||||
|
|
|
|
|
| ||
Commitments to extend credit and available credit lines: |
|
|
|
|
| ||
Commercial |
|
$ |
67,176 |
|
$ |
62,249 |
|
Real estate-undisbursed development and construction |
|
73,736 |
|
69,074 |
| ||
Consumer |
|
17,189 |
|
15,873 |
| ||
|
|
$ |
158,101 |
|
$ |
147,196 |
|
Standby letters of credit |
|
$ |
16,056 |
|
$ |
17,306 |
|
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 $73.7 million, or 49.17% of the $158.1 million of outstanding commitments at June 30, 2014, 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, 2014
|
|
Net Interest |
|
Yield |
|
Net |
| |
GAAP net interest income |
|
$ |
10,611,481 |
|
4.11 |
% |
4.00 |
% |
Tax equivalent adjustment |
|
|
|
|
|
|
| |
Federal funds sold |
|
|
|
|
|
|
| |
Investment securities |
|
258,980 |
|
0.10 |
|
0.10 |
| |
Loans |
|
176,608 |
|
0.07 |
|
0.07 |
| |
Total tax equivalent adjustment |
|
435,588 |
|
0.17 |
|
0.17 |
| |
Tax equivalent interest yield |
|
$ |
11,047,069 |
|
4.28 |
% |
4.17 |
% |
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 |
% |
Six months ended June 30, 2014
|
|
Net Interest |
|
Yield |
|
Net |
| |
GAAP net interest income |
|
$ |
20,970,772 |
|
4.11 |
% |
4.02 |
% |
Tax equivalent adjustment |
|
|
|
|
|
|
| |
Federal funds sold |
|
|
|
|
|
|
| |
Investment securities |
|
540,357 |
|
0.10 |
|
0.10 |
| |
Loans |
|
345,109 |
|
0.07 |
|
0.07 |
| |
Total tax equivalent adjustment |
|
885,466 |
|
0.17 |
|
0.16 |
| |
Tax equivalent interest yield |
|
$ |
21,856,238 |
|
4.28 |
% |
4.18 |
% |
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 |
% |
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 (the Securities Act) 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 expected impact of recent accounting pronouncements, maintenance of the net interest margin during the remainder of 2014, continued increases in net interest income, continued increases in salaries and benefit expenses and other operating expenses during 2014, hiring and acquisition possibilities, our belief that we have identified any problem assets and that our borrowers will 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 collections on acquired credit-impaired loans, expected loan, deposit, balance sheet and earnings growth, expected losses on and our intentions with respect to our investment securities, the amount of potential problem loans, continuing to meet regulatory capital requirements, 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 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, 2013.
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. We have no material changes in our quantitative and qualitative disclosures about market risk as of June 30, 2014 from that presented in our Annual Report on Form 10-K for the year ended December 31, 2013.
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 Chief Financial Officer concluded that Old Line Bancshares disclosure controls and procedures are effective as of June 30, 2014. 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, 2014, that have materially affected, or are reasonably likely to materially affect, Old Line Bancshares internal control over financial reporting.
From time to time, we may be involved in litigation relating to claims arising out of our normal course of business. Currently, we are not involved in any legal proceedings the outcome of which, in 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, 2013.
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
None
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101 Interactive Data Files pursuant to Rule 405 of Regulation S-T.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
Old Line Bancshares, Inc. | |
|
|
|
|
|
|
Date: August 8, 2014 |
By: |
/s/ James W. Cornelsen |
|
|
James W. Cornelsen, |
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
Date: August 8, 2014 |
By: |
/s/ Elise M. Hubbard |
|
|
Elise M. Hubbard, |
|
|
(Principal Accounting and Financial Officer) |
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 8, 2014 |
By: |
/s/ James W. Cornelsen |
|
Name: James W. Cornelsen | |
|
Title: President and | |
|
Chief Executive Officer |
Exhibit 31.2
I, Elise M. Hubbard, 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 8, 2014 |
By: |
/s/ Elise M. Hubbard |
|
Name: Elise M. Hubbard | |
|
Title: Senior Vice President and 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, 2014 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.
By: |
/s/ James W. Cornelsen |
|
James W. Cornelsen |
| |
President and Chief Executive Officer |
| |
August 8, 2014 |
| |
|
| |
By: |
/s/ Elise M. Hubbard |
|
Elise M. Hubbard |
| |
Senior Vice President and Chief Financial Officer |
| |
August 8, 2014 |
|
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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