UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2017 | |
| or | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-50345
Old Line Bancshares, Inc.
(Exact name of registrant as specified in its charter)
| Maryland State or other jurisdiction of incorporation or organization |
20-0154352 (I.R.S. Employer Identification No.) |
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1525 Pointer Ridge Place |
20716 (Zip Code) |
Registrant’s telephone number, including area code: (301) 430-2500
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Name of each exchange on which registered | |
| Common Stock, par value $0.01 per share | The Nasdaq Stock Market LLC |
- -
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically 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 ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☒ |
| Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Smaller reporting company ☐ |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
The aggregate market value of the common equity held by non-affiliates was $282.6 million as of June 30, 2017 based on a sales price of $28.83 per share of Common Stock, which is the sales price at which the Common Stock was last traded on June 30, 2017 as reported by the Nasdaq Stock Market LLC.
The number of shares outstanding of the issuer’s Common Stock was 12,566,696 as of March 1, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2018 Annual Meeting of Stockholders of Old Line Bancshares, Inc., to be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year, are incorporated by reference in Part III of this Annual Report on Form 10-K.
OLD LINE BANCSHARES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017
PART I
Cautionary Note About Forward Looking Statements
Some of the matters discussed in this annual report including under the captions “Business of Old Line Bancshares, Inc.,” “Business of Old Line Bank,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this annual report constitute forward looking statements. These forward-looking statements include: (a) our objectives, expectations and intentions, including (i) market expansion and growth in particular geographic areas, (ii) statements regarding anticipated increases in certain non-interest expenses and that net interest income will increase during 2018, (iii) maintenance of the net interest margin, (iv) our belief that we have identified any problem assets and that our borrowers will continue to remain current on their loans, (v) expected losses on and our intentions with respect to our investment securities, (vi) earnings on bank owned life insurance, (vii) our expectation that we will have to further increase the rates we pay on deposits, and (viii) the anticipated timing and impact of our pending acquisition of Bay Bancorp, Inc. (“BYBK”); (b) sources of and sufficiency of liquidity; (c) the adequacy of the allowance for loan losses; (d) expected loan, deposit, balance sheet and earnings growth; (e) that the recent acquisition of DCB Bancshares, Inc. will continue to generate increased earnings and stockholder returns; (f) expectations with respect to the impact of pending legal proceedings; (g) improving earnings per share and stockholder value; (h) realization of the deferred tax asset; and (i) financial and other goals and plans.
Old Line Bancshares bases these statements on our beliefs, assumptions and on information available to us as of the date of this filing, which involves risks and uncertainties. These risks and uncertainties include, among others: our ability to retain key personnel; our ability to successfully implement our growth and expansion strategy; risk of loan losses; that the allowance for loan losses may not be sufficient; that changes in interest rates and monetary policy could adversely affect Old Line Bancshares; that changes in regulatory requirements and/or restrictive banking legislation may adversely affect Old Line Bancshares; that the market value of our investments could negatively impact stockholders’ equity; risks associated with our lending limit; expenses associated with operating as a public company; potential conflicts of interest associated with the interest in Pointer Ridge; deterioration in general economic conditions or a return to recessionary conditions; and changes in competitive, governmental, regulatory, technological and other factors which may affect us specifically or the banking industry generally; and other risks otherwise discussed in this report, including under “Item 1A. Risk Factors.”
In addition, our statements with respect to the timing and anticipated effects of the BYBK acquisition are subject to the following additional risks and uncertainties: BYBK’s business may not be integrated successfully with ours or such integration may be more difficult, time consuming or costly than expected; expected revenue synergies and cost savings from the merger may not be fully realized or realized within the expected timeframe; revenues following the merger may be lower than expected; customer and employee relationships and business operations may be disrupted by the merger, the announcement of the merger or the pendency of the merger; the ability to obtain required regulatory and stockholder approvals; and the ability to complete the merger in the expected timeframe may be more difficult, time consuming or costly than expected, or the merger may not be completed at all.
Our 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 we undertake 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.
Business
Old Line Bancshares, Inc. 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, Inc. is to own all of the capital stock of Old Line Bank.
We also have an investment in a real estate investment limited liability company named Pointer Ridge Office Investment, LLC (“Pointer Ridge”). We currently own 100% of Pointer Ridge and we have consolidated its results of operations from the date of acquisition. In August 2016, Old Line Bank purchased the aggregate 37.5% minority interest in Pointer Ridge not held by Old Line Bancshares and on September 2, 2016, we paid off the entire $5.8 million principal amount of a promissory note previously issued by Pointer Ridge. On September 28, 2017, Old Line Bancshares transferred and assigned its ownership interest in Pointer Ridge to Old Line Bank, and as a result Old Line Bank acquired all rights, title and interest in Pointer Ridge. Pointer Ridge owns our headquarters building located at 1525 Pointer Ridge Place, Bowie, Maryland, containing approximately 40,000 square feet. We occupy 98% of this building for our main office and operate a branch of Old Line Bank from this address.
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Old Line Bank is a Maryland-chartered trust company d. Old Line Bank was originally chartered in 1989 as a national bank under the name “Old Line National Bank.” In June 2002, Old Line Bank converted to a Maryland-chartered trust company exercising the powers of a commercial bank and received a Certificate of Authority to do business from the Maryland Commissioner of Financial Regulation (the “Commissioner”).
Old Line Bank is a Maryland-chartered trust company (with all of the powers of a commercial bank). Old Line Bank does not exercise trust powers and its regulatory structure is the same as a Maryland-chartered commercial bank. Old Line Bank’s primary regulator is the Federal Deposit Insurance Corporation (“FDIC”) and it is subject to regulation, supervision and regular examination by the Commissioner and the FDIC. Old Line Bank’s deposits are insured to the maximum legal limits by the FDIC.
We are headquartered in Bowie, Maryland, approximately 10 miles east of Andrews Air Force Base and 20 miles east of Washington, D.C. We operate a general commercial banking business, making various types of loans and accepting deposits. We market our financial services to small to medium sized businesses, entrepreneurs, professionals, consumers and high net worth clients.
Our principal source of revenue is interest income and fees generated by lending and investing funds on deposit. We typically balance the loan and investment portfolio towards loans. Generally speaking, loans earn more attractive returns than investments and are a key source of product cross sales and customer referrals. Our loan and investment strategies balance the need to maintain adequate liquidity via excess cash or federal funds sold with opportunities to leverage our capital appropriately.
In June 2012, we established Old Line Financial Services as a division of Old Line Bank and hired an individual with over 25 years of experience to manage this division. Old Line Financial Services allows us to expand the services we provide our customers to include retirement planning and products. Additionally, this division offers investment services including investment management, estate and succession planning and allows our customers to directly purchase individual stocks, bonds and mutual funds. Through this division customers may also purchase life insurance, long term care insurance and key man/woman insurance.
Completed Mergers and Acquisitions
DCB Bancshares, Inc. On July 28, 2017, Old Line Bancshares acquired DCB Bancshares, Inc. (“DCB”), the parent company of Damascus Community Bank (“Damascus”). Immediately thereafter Damascus was merged with and into Old Line Bank, with Old Line Bank the surviving bank. At July 28, 2017, DCB had consolidated assets of approximately $311 million. As a result of this merger we acquired six banking locations located in Montgomery, Frederick and Carroll Counties in Maryland.
Regal Bancorp, Inc. On December 4, 2015, Old Line Bancshares completed its acquisition of Regal Bancorp, Inc. (“Regal Bancorp”), the parent company of Regal Bank & Trust (“Regal Bank”). Immediately thereafter Regal Bank was merged with and into Old Line Bank, with Old Line Bank the surviving bank. We acquired Regal Bank’s three branches in the merger, facilitating Old Line Bank’s entry into the Baltimore County and Carroll County, Maryland markets. The merger strengthened Old Line Bank’s status as the third largest independent commercial bank based in Maryland, with assets of more than $1.5 billion at closing and 23 full service branches serving eight Maryland counties.
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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”). In connection with the acquisition, WSB was merged with and into Old Line Bank, with Old Line Bank the surviving bank. We acquired five WSB branches, its headquarters building and its established mortgage origination group in this acquisition. The mortgage origination group originates residential real estate loans for our portfolio and loans classified as held for sale to be sold in the secondary market. We closed two of the acquired branches on December 31, 2014 and an additional two branches on September 30, 2016. This acquisition increased Old Line Bancshares’ total assets by more than $310 million immediately after closing.
Maryland Bankcorp, Inc. On April 1, 2011, Old Line Bancshares acquired Maryland Bankcorp, Inc. (“Maryland Bankcorp”), the parent company of Maryland Bank & Trust Company, N.A. (“MB&T”). In connection with the acquisition, MB&T was merged with and into Old Line Bank, with Old Line Bank the surviving bank. The acquisition of MB&T’s ten full-service branches expanded our market presence in Calvert and St. Mary’s Counties. The acquisition increased Old Line Bancshares’ total assets by more than $345 million immediately after closing to approximately $750 million. We closed two of the acquired branches on December 31, 2014.
For more information regarding our mergers and acquisitions, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Mergers and Acquisitions” and Note 2—Acquisition of Regal Bancorp, Inc. in the Notes to our Consolidated Financial Statements.
Pending Acquisition
Bay Bancorp, Inc. On September 27, 2017, Old Line Bancshares entered into an Agreement and Plan of Merger with BYBK, the parent company of Bay Bank, FSB (“Bay Bank”). Pursuant to the terms of the Agreement and Plan of Merger, upon the consummation of the merger, all outstanding shares of BYBK common stock will be exchanged for shares of common stock of Old Line Bancshares. Consummation of the merger is contingent upon the approval of Old Line Bancshares’ and BYBK’s stockholders as well as receipt of all necessary regulatory and third party approvals and consents. We expect the merger to close during the second quarter of 2018. At September 30, 2017, BYBK had consolidated assets of approximately $652 million. Bay Bank has 11 banking locations located in its primary market areas of Baltimore City and Baltimore, Anne Arundel, Howard and Harford Counties in Maryland.
Location and Market Area
We consider our current market area to consist of the suburban Maryland counties of Anne Arundel, Calvert, Charles, Prince George’s, Montgomery, Frederick and St. Mary’s (Washington, D.C. suburbs) and Baltimore and Carroll (Baltimore City suburbs). The economy in our current market area has focused on real estate development, high technology, retail and the government sector.
Our headquarters and a branch are located at 1525 Pointer Ridge Place, Bowie, Prince George’s County, Maryland. A critical component of our strategic plan and future growth is a focus on Prince George’s and Montgomery Counties. Prince George’s County wraps around the eastern boundary of Washington, D.C. and offers urban, suburban and rural settings for employers and residents. There are several national and international airports less than an hour away, as is Baltimore City. We currently have six branch locations in Prince George’s County. As a result of the acquisition of WSB, we acquired the building located at 4201 Mitchellville Road, Bowie, Maryland, which houses our mortgage group. This loan production office primarily originates loans sold in the secondary market.
We opened a loan production office in Silver Spring, in Montgomery County, Maryland in 2013. We opened our first branch in Rockville, Maryland, in Montgomery County on November 10, 2015 and a second location, located in the Rockville Town Center, in June 2016. As a result of the DCB acquisition, we acquired three more locations in Montgomery County. These branches are located in Damascus, Clarksburg and Gaithersburg. Montgomery County is located just to the north of Washington, D.C., and is adjacent to Frederick, Howard and Prince George’s Counties in Maryland and Loudoun and Fairfax Counties in Virginia. Montgomery County is an important business and research center and is the third largest biotechnology cluster in the United States. The U.S. Department of Health and Human Services, the U.S. Department of Defense, and the U.S. Department of Commerce are among the top county employers. Several large firms are also based in the county, including Marriott International, Lockheed Martin, GEICO, Discovery Communications and the Travel Channel. Montgomery County has the 11th highest median household income in the U.S., and the third highest in the state of Maryland. 1
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1 As reported by Wikipedia according to the 2012 American Community Survey prepared by the U.S. Census Bureau.
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We currently have four branch offices and a loan production office located in Charles County, Maryland. Just 15 miles south of the Washington Capital Beltway, Charles County is the gateway to Southern Maryland. The northern part of Charles County is the “development district” where the commercial, residential and business growth is focused. Waldorf, White Plains and the planned community of St. Charles are located here. Charles County has the 15th highest median household income in the U.S., and the fifth highest in the state of Maryland.
Three of our branch offices, one of which includes a loan production office, are located in Anne Arundel County, Maryland. Anne Arundel County borders the Chesapeake Bay and is situated in the high tech corridor between Baltimore and Washington, D.C. With over 534 miles of shoreline, it provides waterfront living for many residential communities. Annapolis, the State Capital and home to the United States Naval Academy, and Baltimore/Washington International Thurgood Marshal Airport (BWI) are located in Anne Arundel County. Anne Arundel County has one of the strongest economies in the State of Maryland and its unemployment rate is consistently below the national average.
We have two branches and a loan production office in St. Mary’s County and one branch and loan production office in Calvert County. On January 23, 2017, we celebrated the opening of our newest branch located in Leonardtown, Maryland. The town of Leonardtown is centrally located in St. Mary’s County. Leonardtown is home to the county courthouse, hospital, community college and governmental center. This office replaced the previous branch located in Callaway, Maryland. The unemployment rates in Calvert and St. Mary’s Counties are among the lowest in the state of Maryland and also consistently rank below the national average. Calvert County, located approximately 25 miles southeast of Washington, D.C., is one of several Maryland counties that comprise the Washington Metropolitan Area and is adjacent to Anne Arundel, Prince George’s, St. Mary’s and Charles Counties. Major employers in Calvert County include municipal and government agencies and Constellation Energy. St. Mary’s County is located approximately 35 miles southeast of Washington, D.C. It is adjacent to Charles and Calvert Counties and is home to the Patuxent River Naval Air Station, a major naval air testing facility on the east coast of the United States. Calvert and St. Mary’s Counties have the 19th and 21nd highest median household income in the U.S., respectively.
We have two branches in Baltimore County and two branches in Carroll County that we acquired in the Regal Bancorp acquisition. The market area with respect to these three branches consists of the Baltimore metropolitan statistical area, which comprises Baltimore City and Baltimore, Carroll, Howard, Harford, Anne Arundel, and Queen Anne Counties. The economy of the Baltimore metropolitan area constitutes a diverse cross-section of employment sectors, with a mix of services, manufacturing, wholesale/retail trade, federal and local government, health care facilities and finance related employment. The largest employers in the Baltimore area include University System of Maryland, Johns Hopkins Hospital and Fort Meade. The Baltimore region is the 20th most populous area in the United States.
We currently have two branches in Frederick County that we acquired in the Damascus acquisition. Frederick County is located in the northern part of Maryland. Frederick County has experienced a rapid population increase in recent years. The county is sometimes associated with Western Maryland, depending on the definition used. It borders the southern border of Pennsylvania and the northeastern border of Virginia. Frederick County is ranked 8th in medium household income in the state of Maryland.
The pending acquisition of Bay Bank will expand our presence into Baltimore City, Baltimore County, Howard County and Harford County, Maryland. Bay Bank has 11 branch locations - three locations in Baltimore City and one each in Glen Burnie, Cockeysville, Lutherville, Perry Hall, Bel Air, Columbia, Arbutis and Pikesville, Maryland.
Lending Activities
General. Our primary market focus is on making loans to small and medium size businesses, entrepreneurs, professionals, consumers and high net worth clients in our market area. Our lending activities consist generally of short to medium term commercial business loans, commercial real estate loans, real estate construction loans, home equity loans and consumer installment loans, both secured and unsecured. We also originate residential loans for sale in the secondary market in addition to originating residential loans we maintain in our portfolio.
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Credit Policies and Administration. We have adopted a comprehensive lending policy, which includes stringent underwriting standards for all types of loans. Our lending staff follows pricing guidelines established periodically by our management team. In an effort to manage risk, prior to funding, the loan committee consists of four non-employee members of the board of directors and four executive officers. Approval by a majority vote of the loan committee is required for all credit decisions in excess of a lending officer’s lending authority. Management believes that we employ experienced lending officers, secure appropriate collateral and carefully monitor the financial condition of our borrowers and the concentrations of loans in the portfolio.
In addition to the normal repayment risks, all loans in the portfolio are subject to risks stemming from the state of the economy and the related effects on the borrower and/or the real estate market. With the exception of loans provided to finance luxury boats, which we originated prior to 2008, generally longer term loans have periodic interest rate adjustments and/or call provisions. Senior management monitors the loan portfolio closely to ensure that we minimize past due loans and that we swiftly deal with potential problem loans.
Old Line Bank also engages an outside, independent firm to review the loan portfolio. This firm performs a detailed annual review and an interim update at least once a year. We use the results of the firm’s report to validate our internal loan ratings and we review their commentary on specific loans and on our loan administration activities in order to improve our operations.
Commercial and Industrial Lending. Our commercial and industrial lending consists of lines of credit, revolving credit facilities, accounts receivable financing, term loans, equipment loans, Small Business Administration (“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, increased difficulty monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business. To help manage this risk, we typically limit these loans to proven businesses and we generally obtain appropriate collateral and personal guarantees from the borrower’s principal owners and monitor the financial condition of the business. For loans in excess of $250,000, monitoring usually includes a review of the borrower’s annual tax returns and updated financial statements.
Commercial Real Estate Lending. We finance commercial real estate for our clients, usually for owner occupied properties. We generally will finance owner occupied commercial real estate at a loan to value that does not exceed 80%. Our underwriting policies and processes focus on the clients’ ability to repay the loan as well as an assessment of the underlying real estate. We originate commercial real estate loans on a fixed rate or adjustable rate basis. Usually, these rates adjust during a three, five or seven year time period based on the then current treasury or prime rate index. Repayment terms generally include amortization schedules ranging from three years to 25 years with principal and interest payments due monthly and with all remaining principal due at maturity. We also make commercial real estate construction loans, primarily for owner-occupied properties.
Commercial real estate lending entails significant additional risks as compared with residential mortgage lending. Risks inherent in managing a commercial real estate portfolio relate to sudden or gradual drops in property values as well as changes in the economic climate that may detrimentally impact the borrower’s ability to repay. We attempt to mitigate these risks by carefully underwriting these loans. Our underwriting generally includes an analysis of the borrower’s capacity to repay, the current collateral value, a cash flow analysis and review of the character of the borrower and current and prospective conditions in the market. We generally limit loans in this category to 75% - 80% of the value of the property and require personal and/or corporate guarantees. For loans of this type in excess of $250,000, we monitor the financial condition and operating performance of the borrower through a review of annual tax returns and updated financial statements. In addition, we will meet with the borrower and/or perform site visits as required.
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Hospitality loans are segregated into a separate category under commercial real estate. An individual review of these loans indicate 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 our market area.
Residential Real Estate Lending. 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%. We also offer fixed rate home improvement loans. Our home equity and home improvement loan portfolio gives us a diverse client base. Although most of these loans are in our market area, the diversity of the individual loans in the portfolio reduces our potential risk. Usually, we secure our home equity loans and lines of credit with a security interest in the borrower’s primary or secondary residence. Our initial underwriting includes an analysis of the borrower’s debt/income ratio which generally may not exceed 43%. We also consider the borrower’s length of employment and prior credit history in the approval process. Typically, we require borrowers to have a credit score of at least 640, except for loans originated for sale in the secondary market, as discussed below, and Veteran Administration loans, for which we require a credit score of at least 620. We do not originate subprime residential real estate loans.
We obtain detailed loan applications to determine a borrower’s ability to repay and verify the more significant items on these applications through credit reports, financial statements and verifications. We also require appraisals of collateral and title insurance on secured real estate loans.
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 12 months or less. Residential houses, multi-family dwellings and commercial buildings under construction and the underlying land for which the loan was obtained secure the construction loans. The vast majority of these loans are concentrated in our market area.
Construction lending entails significant risk. These risks generally involve larger loan balances concentrated with single borrowers with funds advanced upon the security of the land or the project under construction. An appraisal of the property estimates the value of the project “as is” and “as if completed.” Thus, initial funds are advanced based on the current value of the property, with the remaining construction funds advanced under a budget sufficient to successfully complete the project within the “as completed” loan to value. To further mitigate 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 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 prior to construction. This analysis includes a review of the cost to construct, the borrower’s ability to obtain a permanent “take-out,” the cash flow available to support the debt payments and construction costs in excess of loan proceeds, and the value of the collateral. During construction, we advance funds on these loans on a percentage of completion basis. We inspect each project as needed prior to advancing funds during the term of the construction loan. We may provide permanent financing on the same projects for which we have provided the construction financing.
Under our loan approval policy, all residential real estate loans approved must comply with federal regulations. Generally, we will make residential mortgage loans in amounts up to the limits established by Fannie Mae and Freddie Mac for secondary market resale purposes. Currently this amount for single-family residential loans currently varies from $453,100 up to a maximum of $679,650 for certain high-cost designated areas. We also make residential mortgage loans up to limits established by the Federal Housing Administration, which currently is $679,650. The Washington, D.C. and Baltimore areas are both considered high-cost designated areas. We will, however, make loans in excess of these amounts if we believe that we can sell the loans in the secondary market or that the loans should be held in our portfolio. For loans we originate for sale in the secondary market, we typically require a credit score of 620 or higher, with some exceptions provided we receive an approval recommendation from FannieMae, FreddieMac or FHA’s automated underwriting approval system. Loans sold in the secondary market are sold to investors on a servicing released basis and recorded as loans as held for sale. The premium is recorded in income on marketable loans in non-interest income, net of commissions paid to the loan officers.
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Land Acquisition and Development Lending. These loans are usually used to fund the acquisition and development of unimproved properties to be used for residential or non-residential construction. We may provide permanent financing on the same projects for which we have provided the construction financing.
Land acquisition and development lending, while providing higher yields, may also have greater risks of loss than long-term residential mortgage loans on improved, owner-occupied properties.
Old Line Bank generally makes land acquisition loans with terms of up to three years and loan to value ratios of up to 65%, and land development loans with terms of up to two years and loan-to-value ratios of up to 75%.
The primary loan-specific risks in land and land development lending are increases in local unemployment that decrease the demand for housing, deterioration of the business and/or collateral values, deterioration of the financial condition of the borrowers and/or guarantors that creates a risk of default, and that an appraisal on the collateral is not reflective of the true property value. Portfolio risks include the condition of the economy, changing demand for these types of loans, large concentration of these types of loans, and geographic concentrations of these types of loans.
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 applicant’s payment history on other debts and an assessment of his or her ability to meet existing obligations and payments on the proposed loan. As a general guideline, the borrower’s total debt service should not exceed 40% of his or her gross income.
Our consumer loan portfolio, includes indirect loans, which consists primarily of auto and RV loans. These loans are financed through dealers and the dealers receive a percentage of the finance charge, which varies depending on the terms of each loan. We use the same underwriting standards in originating these indirect loans as we do for consumer loans.
Consumer loans may present greater credit risk than residential mortgage loans because many consumer loans are either unsecured or secured by rapidly depreciating assets. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance because of the greater likelihood of damage, loss or depreciation. Consumer loan collections depend on the borrower’s continuing financial stability. If a borrower suffers personal financial difficulties, the 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.
Lending Limit. As of December 31, 2017, our legal lending limit for loans to one borrower was approximately $31.9 million. As part of our risk management strategy, we may attempt to participate a portion of larger loans to other financial institutions. This strategy allows Old Line Bank to maintain customer relationships yet reduce its credit exposure. However, this strategy may not always be available.
Investments and Funding
We balance our liquidity needs based on loan and deposit growth via the investment portfolio, purchased funds, and short term borrowings. It is our goal to provide adequate liquidity to support our loan growth. In the event we have excess liquidity, we use investments to generate positive earnings. In the event deposit growth does not fully support our loan growth, we can use a combination of investment sales, federal funds, other purchased funds and short term borrowings to augment our funding position.
We actively monitor our investment portfolio and we usually classify investments in the portfolio as “available for sale.” In general, under such a classification, we may sell investment instruments as management deems appropriate. On a monthly basis, we “mark to market” the investment portfolio through an adjustment to stockholders’ equity net of taxes. Additionally, we use the investment portfolio to balance our asset and liability position. We invest in fixed rate or floating rate instruments as necessary to reduce our interest rate risk exposure.
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Other Banking Products
We offer our customers safe deposit boxes, wire transfer services, debit cards, prepaid cards, automated teller machines at all of our branch locations, investment services and credit cards through a third party processor. Additionally, we provide Internet and mobile banking capabilities to our customers. With our Internet banking service, our customers may view their accounts online and electronically remit bill payments. Our commercial account services include direct deposit of payroll for our commercial clients’ employees, an overnight sweep service, lockbox services and remote deposit capture service. We also provide our customers investment services including investment management, estate and succession planning and brokerage services.
Deposit Activities
Deposits are the major source of our funding. We offer a broad array of deposit products that include demand, NOW, money market and savings accounts as well as certificates of deposit. We believe that we pay competitive rates on our interest bearing deposits. As a relationship-oriented organization, we generally seek to obtain deposit relationships with our loan clients.
As our overall balance sheet position dictates, we may become more or less competitive in our interest rate structure. We do use brokered deposits as a funding mechanism. Our primary source of brokered deposits is the Promontory Interfinancial Network (Promontory). Through this deposit matching network and its certificate of deposit account and money market registry services, 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 network. At December 31, 2017, we do not have any brokered deposits as the balance of $4.0 million that was acquired in the WSB acquisition matured in 2017. We did not purchase brokered deposits during 2017.
Competition
We face intense competition both in making loans and attracting deposits. We compete with other commercial banks, savings associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating in our market area and elsewhere, including Internet-based financial providers.
We believe that we have effectively leveraged our talents, contacts and location to achieve a strong financial position. However, our market area is highly competitive and heavily branched. Competition in our market area for loans to small and medium sized businesses, entrepreneurs, professionals and high net worth clients is intense, and pricing is important. Many of our competitors have substantially greater resources and lending limits than we do and offer extensive and established branch networks and other services that we do not offer. Moreover, larger institutions operating in our market area have access to borrowed funds at a lower rate than is available to us. Deposit competition also is strong among institutions in our market area. As a result, it is possible that to remain competitive we may need to pay above market rates for deposits.
Employees
As of December 31, 2017, we had 259 full time and 12 part time employees. No collective bargaining unit represents any of our employees and we believe that relations with our employees are good.
Supervision and Regulation
Old Line Bancshares, Inc. and Old Line Bank are subject to extensive regulation under state and federal banking laws and regulations. These laws and regulations impose specific requirements and restrictions on virtually all aspects of operations and generally are intended to protect depositors, not stockholders. The following summary sets forth certain material elements of the regulatory framework applicable to Old Line Bancshares, Inc. and Old Line Bank. It does not describe all of the provisions of the statutes, regulations and policies that are identified. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by express reference to each of the particular statutory and regulatory provisions. A change in applicable statutes, regulations or regulatory policy may have a material effect on our business.
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Old Line Bancshares, Inc.
Old Line Bancshares, Inc. is a Maryland corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). We are subject to regulation by the Board of Governors of the Federal Reserve Board (the “Federal Reserve Board”) and the Commissioner, and are required to file periodic reports and any additional information that the Federal Reserve Board and Commissioner may require. The Federal Reserve Board regularly examines the operations and condition of Old Line Bancshares. In addition, the Federal Reserve Board has enforcement authority over Old Line Bancshares, which includes the power to remove officers and directors and the authority to issue cease and desist orders to prevent Old Line Bancshares from engaging in unsafe or unsound practices or violating laws or regulations governing its business. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.
Under the Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. Under this requirement, Old Line Bancshares in the future could be required to provide financial assistance to Old Line Bank should Old Line Bank experience financial distress. In addition, in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board regulations or both. This doctrine is commonly known as the “source of strength” doctrine. The Federal Reserve Board may require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary (other than a non-bank subsidiary of a bank) upon the Federal Reserve Board’s determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or non-bank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.
The Federal Reserve Board must approve, among other things, the acquisition by a bank holding company of control of more than 5% of the voting shares, or substantially all the assets, of any bank or bank holding company or the merger or consolidation by a bank holding company with another bank holding company. In general, the Bank Holding Company Act limits the business of bank holding companies to banking, managing or controlling banks, furnishing services for its authorized subsidiaries, and engaging in activities that the Federal Reserve Board has determined, by order or regulation, to be so closely related to banking and/or managing or controlling banks as to be properly incident thereto. Some of the activities that the Federal Reserve Board has determined by regulation to be closely related to banking include servicing loans, performing certain data processing services, acting as a fiduciary, investment or financial advisor, and making investments in corporations or projects designed primarily to promote community welfare.
The Change in Bank Control Act and the related regulations of the Federal Reserve Board require any person, or persons acting in concert, to file a written notice with the Federal Reserve Board before the person or persons acquire direct or indirect “control” of a bank or bank holding company. As a general matter, a party is deemed to control a bank or bank holding company if the party owns or controls 25% or more of any class of voting stock. Subject to rebuttal, a party may be presumed to control a bank or bank holding company if the investor owns or controls 10% or more of any class of voting stock and (i) the institution has registered securities under Section 12 of the Securities Exchange Act of 1934 and (ii) no other person owns, controls or has the power to vote a greater percentage of that class of voting stock. Ownership by affiliated parties, or parties acting in concert, is typically aggregated for these purposes. If a party’s ownership of Old Line Bancshares, Inc. were to exceed the above thresholds, the investor could be deemed to “control” Old Line Bancshares, Inc. for regulatory purposes. This could subject the investor to regulatory filings or other regulatory consequences.
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The Federal Reserve Board has adopted guidelines regarding the capital adequacy of bank holding companies, which require bank holding companies to maintain specified minimum ratios of capital to total assets and capital to risk-weighted assets. See “—Capital Adequacy Guidelines.” The Federal Reserve Board has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality, and overall financial condition.
The status of Old Line Bancshares as a registered bank holding company under the Bank Holding Company Act does not exempt it from certain federal and state laws and regulations applicable to Maryland corporations generally, including, without limitation, certain provisions of the federal securities laws.
Old Line Bank
Old Line Bank is a Maryland-chartered trust company (with all of the powers of a commercial bank). Its primary federal regulator is the FDIC and it is subject to regulation, supervision and regular examination by the Commissioner and by the FDIC. The regulations of these agencies govern most aspects of Old Line Bank’s business, including required reserves against deposits, lending, investments, mergers and acquisitions, borrowing, dividends and location and number of branch offices. In addition, Old Line Bank is subject to numerous federal, state and local laws and regulations that set forth specific requirements with respect to extensions of credit, credit practices, disclosure of credit terms, and discrimination in credit transactions.
The FDIC and the Commissioner regularly examine the operations and condition of Old Line Bank, including, but not limited to, its capital adequacy, reserves, loans, investments, and management practices. These examinations are for the protection of Old Line Bank’s depositors and the Deposit Insurance Fund. In addition, Old Line Bank is required to furnish quarterly and annual reports to the FDIC. The enforcement authority of the FDIC and Commissioner include the power to remove officers and directors and the authority to issue cease-and-desist orders to prevent a bank from engaging in unsafe or unsound practices or violating laws or regulations governing its business. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.
The FDIC has adopted regulations regarding capital adequacy, which require member banks to maintain specified minimum ratios of capital to total assets and capital to risk-weighted assets. See “—Capital Adequacy Guidelines.” FDIC regulations and state law limit the amount of dividends that Old Line Bank may pay to Old Line Bancshares, Inc. See “—Dividends.”
Capital Adequacy Guidelines
Federal regulations require FDIC-insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd Frank Act”).
There are two main categories of capital under the capital adequacy guidelines. Tier 1 capital generally consists of the sum of common stockholders’ equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stock) and, in certain circumstances and subject to certain limitations, minority investments in certain subsidiaries, less goodwill and other non-qualifying intangible assets, and certain other deductions. Tier 2 capital consists of perpetual preferred stock that is not otherwise eligible to be included as Tier 1 capital, hybrid capital instruments, term subordinated debt and intermediate-term preferred stock and, subject to limitations, general allowances for credit losses. Tier 2 capital is limited to the amount of Tier 1 capital. We have elected to permanently opt out of the inclusion of accumulated other comprehensive income in our capital calculations, as permitted by the regulations. This opt-out will reduce the impact of market volatility on our regulatory capital levels.
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In addition, subject to a transition schedule, the regulations limit a banking organization’s ability to make capital distributions, engage in share repurchases and pay certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. Implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will increase ratably each subsequent January 1, until it reaches 2.5% on January 1, 2019.
Under federal prompt corrective action regulations, the bank regulatory agencies are authorized and, under certain circumstances, required, to take various “prompt corrective actions” to resolve the problems of any bank subject to their jurisdiction that is not adequately capitalized, as set forth in the next sentence. Pursuant to the Federal Deposit Insurance Corporation Improvement Act the agencies have established five capital tiers for depository institutions: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under the prompt corrective action regulations, a bank is considered “well capitalized” if it (i) has a total risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 8.0% or greater; (iii) a common equity Tier 1 risk-based capital ratio of 6.5% or greater; (iv), a Tier 1 leverage capital ratio of 5.0% or greater; and (v) is not subject to any written order, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. Under certain circumstances, a bank regulatory agency may reclassify a well capitalized institution as adequately capitalized, and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the bank regulatory agency may not reclassify a significantly undercapitalized institution as critically undercapitalized). As of December 31, 2017, Old Line Bank was “well capitalized” for this purpose and its capital exceeded all applicable requirements.
As an additional means to identify problems in the financial management of depository institutions, the Federal Deposit Insurance Act (“FDIA”) requires federal bank regulatory agencies to establish certain non-capital safety and soundness standards for institutions for which they are the primary federal regulator. The standards relate generally to operations and management, asset quality, interest rate exposure and executive compensation. The agencies are authorized to take action against institutions that fail to meet such standards.
Deposit Insurance Assessments
Old Line Bank’s deposits are insured by the FDIC generally up to a maximum of $250,000. The FDIC assesses deposit insurance premiums on all insured depository institutions. Under the FDIC’s risk-based assessment system, insured institutions are assigned to risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by FDIC regulations, with institutions deemed less risky to the deposit insurance fund paying lower rates. Assessment rates (inclusive of possible adjustments) currently range from 1.5 to 30 basis points of each institution’s total assets less tangible capital. The FDIC may increase or decrease the range of assessments uniformly, except that no adjustment can deviate more than two basis points from the base assessment rate without notice and comment rulemaking. The FDIC’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s aggregate deposits. Under the FDIA, the FDIC may terminate insurance of deposits upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Maryland Regulatory Assessment
The Commissioner assesses state chartered banks to cover the expense of regulating banking institutions. Old Line Bank’s asset size determines the amount of the assessment. In 2017, we paid $159 thousand to the Commissioner.
Transactions with Affiliates and Insiders
Federal and Maryland law impose restrictions on certain transactions between Maryland commercial banks and their insiders and affiliates. Generally, under Maryland law, a director, officer or employee of a commercial bank may not borrow, directly or indirectly, any money from the bank, unless the loan has been approved by a resolution adopted by and recorded in the minutes of the board of directors of the bank or the executive committee of the bank, if that committee is authorized to make loans. If the executive committee approves such a loan, the loan approval must be reported to the board of directors at its next meeting. Certain commercial loans made to directors of a bank and certain consumer loans made to non-officer employees of the bank are exempt from the law’s coverage. Under federal law, section 22(h) of the Federal Reserve Act and the Federal Reserve Board’s Regulation O govern extensions of credit made by a bank to its directors, executive officers, and principal stockholders (“insiders”). Among other things, these provisions require that extensions of credit to insiders be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features. Further, such extensions may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank’s capital. Extensions of credit in excess of certain limits must be also be approved by the board of directors. All of Old Line Bank’s loans to its and Old Line Bancshares’ executive officers, directors and greater than 10% stockholders, and affiliated interests of such persons, comply with the requirements of Regulation O.
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Section 23A of the Federal Reserve Act and the Federal Reserve Board’s Regulation W limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such bank’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such bank’s capital stock and surplus. An affiliate of a bank is generally any company or entity that controls, is controlled by, or is under common control with the bank. In a holding company context, the parent bank holding company and any companies which are controlled by such parent holding company are affiliates of the bank. The term “covered transaction” includes the making of loans, purchase of assets, issuance of guarantees, and other similar transactions. In addition, loans or other extensions of credit by a bank to an affiliate are required to be collateralized in accordance with regulatory requirements and the bank’s transactions with affiliates must be consistent with safe and sound banking practices and may not involve the purchase by the bank of any low-quality asset from an affiliate. Section 23B of the Federal Reserve Act applies to covered transactions as well as certain other transactions between a bank and its affiliates and Section 23B and Regulation W require that all such transactions be on terms substantially the same, or at least as favorable, to the bank as those provided to non-affiliates. Regulation W generally excludes a bank subsidiary from treatment as an affiliate unless the subsidiary is a depository institution, a financial subsidiary, directly controlled by an affiliate or controlling shareholder of the bank, or unless the Federal Reserve Board or other appropriate federal regulator determines by regulation or order to treat the subsidiary as a bank affiliate. All of Old Line Bank’s transactions with its affiliates comply with the applicable provisions of Sections 23A and 23B and Regulation W.
We have entered into banking transactions with our directors and executive officers and the business and professional organizations in which they are associated in the ordinary course of business. We make such loans and loan commitments in accordance with all applicable laws.
Loans to One Borrower
Old Line Bank is subject to statutory and regulatory limits on the amount that it may lend to a single borrower or group of related borrowers. Generally, the maximum amount of total outstanding loans that Old Line Bank may have to any one borrower at any one time is 15% of Old Line Bank’s unimpaired capital and unimpaired surplus. Old Line Bank may lend an additional amount, equal to 10% of its unimpaired capital and surplus, if such loan is secured by readily marketable collateral, which is defined to include certain securities and bullion but generally does not include real estate.
Liquidity
Old Line Bank is subject to the reserve requirements imposed by the State of Maryland. A Maryland commercial bank is required to have at all times a reserve equaled to at least 15% of its demand deposits. Old Line Bank is also subject to the reserve requirements of Federal Reserve Board’s Regulation D, which applies to all depository institutions. During 2017, amounts in transaction accounts above $16.0 million and up to $122.3 million were required to have reserves held against them in the ratio of 3% of such amounts. Amounts above $122.3 million required reserves of 10% of the amount in excess of $122.3 million. The Federal Reserve Board changes its reserve requirements on an annual basis and Old Line Bank is subject to new requirements for 2018. Old Line Bank was in compliance with its reserve requirements at December 31, 2017 and is in compliance with its current reserve requirements.
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Dividends
Old Line Bancshares, Inc. is a legal entity separate and distinct from Old Line Bank. Virtually all of Old Line Bancshares, Inc.’s revenue available for the payment of dividends on its common stock results from dividends paid to Old Line Bancshares, Inc. by Old Line Bank. Under Maryland law, Old Line Bank may declare a cash dividend, after providing for due or accrued expenses, losses, interest, and taxes, from its undivided profits or, with the prior approval of the Maryland Commissioner of Financial Regulation, from its surplus in excess of 100% of its required capital stock. Also, if Old Line Bank’s surplus is less than 100% of its required capital stock, then, until its surplus is 100% of its capital stock, Old Line Bank must transfer to its surplus annually at least 10% of its net earnings and may not declare or pay any cash dividends that exceed 90% of its net earnings. In addition to these specific restrictions, the FDIC have the ability to prohibit or limit proposed dividends if such regulatory agencies determine the payment of such dividends would result in Old Line Bank being in an unsafe and unsound condition.
Community Reinvestment Act
Old Line Bank is required to comply with the Community Reinvestment Act (“CRA”) regardless of its capital condition. The CRA requires that, in connection with its examinations of Old Line Bank, the FDIC evaluates the record of Old Line Bank in meeting the credit needs of its local community, including low and moderate income neighborhoods, consistent with the safe and sound operation of the institution. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. These factors are considered in, among other things, evaluating mergers, acquisitions and applications to open a branch or facility. The CRA also requires all institutions to make public disclosure of their CRA ratings. Old Line Bank received a “Satisfactory” rating in its latest CRA examination.
Standards for Safety and Soundness
Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.
Anti-Money Laundering and OFAC
Under federal law, financial institutions must maintain anti-money laundering programs that include established internal policies, procedures and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification in their dealings with foreign financial institutions and foreign customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and law enforcement authorities have been granted increased access to financial information maintained by financial institutions. Bank regulators routinely examine institutions for compliance with these obligations, and they must consider an institution’s compliance in connection with the regulatory review of applications, including applications for banking mergers and acquisitions. The regulatory authorities have imposed “cease and desist” orders and civil money penalty sanctions against institutions found to be violating these obligations.
The Office of Foreign Assets Control, or OFAC, is responsible for helping to ensure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC sends bank regulatory agencies lists of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. If Old Line Bancshares or Old Line Bank finds a name on any transaction, account, or wire transfer that is on an OFAC list, they must freeze such account, file a suspicious activity report, and notify the appropriate authorities.
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Consumer Protection Laws
Old Line Bank is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy. These laws include the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, the Fair and Accurate Credit Transactions Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, and the Real Estate Settlement Procedures Act, and various state law counterparts. Further, the Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”), which has the responsibility for making rules and regulations under the federal consumer protection laws relating to financial products and services. The CFPB also has a broad mandate to prohibit unfair, deceptive or abusive acts and practices and is specifically empowered to require certain disclosures to consumers and draft model disclosure forms. Failure to comply with consumer protection laws and regulations can subject financial institutions to enforcement actions, fines and other penalties. The FDIC will examine Old Line Bank for compliance with CFPB rules and will enforce CFPB rules with respect to Old Line Bank.
In addition, federal law currently contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. These provisions also provide that, except for certain limited exceptions, a financial institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. Further, under the “Interagency Guidelines Establishing Information Security Standards,” banks must implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer information. Federal law makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. We have prepared policies, procedures and systems designed to ensure compliance with the Sarbanes-Oxley Act and related regulations.
You should consider carefully the following risks, along with other information contained in this Form 10-K. The risks and uncertainties described below are not the only ones that may affect us. Additional risks and uncertainties also may adversely affect our business and operations including those discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Any of the following events, should they actually occur, could materially and adversely affect our business and financial results.
Risk Factors Related to the Pending Merger with Bay Bancorp, Inc.
We may fail to realize all of the anticipated benefits of the merger. The success of the pending merger with BYBK, as discussed above under “Item 1 – Business,” will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining our business with BYBK’s. To realize these anticipated benefits and cost savings, however, we must successfully combine the businesses of Old Line Bancshares and BYBK. If we are unable to do so, the anticipated benefits and cost savings of the merger may not be realized fully or at all or may take longer to realize than expected.
Old Line Bancshares and BYBK have operated and, until the completion of the merger, will continue to operate, independently. It is possible that the integration process could result in the loss of key employees, the loss of key depositors or other bank customers and the disruption of our and BKBY’s ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect our and BKBY’s ability to maintain their relationships with their respective clients, customers, depositors and employees, which could have a negative impact on our ability to achieve the anticipated benefits of the merger. Integration efforts between the two companies may, to some extent, also divert management’s attention and resources. These integration matters could have an adverse effect on each of Old Line Bancshares and BYBK during such transition period.
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The market price of our common stock may decline as a result of the merger. The market price of our common stock may decline as a result of the merger if we do not achieve the perceived benefits of the merger or the effect of the merger on our financial results is not consistent with the expectations of financial or industry analysts. In addition, upon completion of the merger, Old Line Bancshares and BYBK stockholders will own interests in a combined company operating an expanded business with a different mix of assets, risks and liabilities. Existing Old Line Bancshares and BYBK stockholders may not wish to continue to invest in the combined company, or for other reasons may wish to dispose of some or all of their shares of the combined company. The disposition of a large number of shares of our common stock after the merger, or the expectation that such sales may occur, could negatively affect the market price of our common stock.
The market price of our common stock after the merger may be affected by factors different from those affecting our shares currently. The businesses of Old Line Bancshares and BYBK differ and, accordingly, the results of operations of the combined company and the market price of the combined company’s shares of common stock may be affected by factors different from those currently affecting the independent results of operations and market prices of our common stock.
We are subject to business uncertainties while the merger is pending. Uncertainty about the effect of the merger on employees, customers, suppliers and vendors may have an adverse effect on the business, financial condition and results of operations of Old Line Bancshares and BYBK. These uncertainties may impair Old Line Bancshares’ and BYBK’s ability to attract, retain and motivate key personnel, depositors and borrowers pending the consummation of the merger, as such personnel, depositors and borrowers may experience uncertainty about their future roles following the consummation of the merger. Additionally, these uncertainties could cause customers (including depositors and borrowers), suppliers, vendors and others who deal with us or BYBK to seek to change existing business relationships with us or BYBK or fail to extend an existing relationship. In addition, competitors may target each company’s existing customers by highlighting potential uncertainties and integration difficulties that may result from the merger.
Further, the pursuit of the merger and the preparation for the integration in connection therewith may place a burden on each of Old Line Bancshares’ and BYBK management and internal resources. Any significant diversion of management attention away from ongoing business concerns and any difficulties encountered in the transition and integration process could have a material adverse effect on our business, financial condition and results of operations both before and after consummation of the merger.
If the merger is not completed, we will have incurred substantial expenses without realizing the expected benefits. We have incurred substantial expenses in connection with the execution of the merger agreement and the merger. The completion of the merger depends on the satisfaction of specified conditions, including the receipt of required regulatory approvals and the requisite approval of the stockholders of Old Line Bancshares and BYBK. There is no guarantee that these conditions will be met. If the merger is not completed, these expenses could have a material adverse impact on our financial condition because we would not have realized the expected benefits for which these expenses were incurred.
Regulatory approvals may not be received, may take longer than expected or impose conditions that are not presently anticipated. Before the merger may be completed, we must obtain various regulatory approvals. The required regulatory approvals may not be received at all, may not be received in a timely fashion, and may contain conditions on the completion of the merger or require changes to the terms of the merger that are not anticipated or that have a material adverse effect. Although we do not currently expect that any such conditions or changes would be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying completion of the merger or imposing additional costs on or limiting our revenues following the merger, any of which might have a material adverse effect on us following the merger. If the consummation of the merger is delayed, including by a delay in receipt of necessary regulatory approvals, our business, financial condition and results of operations may also be materially adversely affected.
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Failure to complete the merger could negatively impact our stock price, business and financial results. If the merger is not completed, our business be adversely affected and we will be subject to several risks, including the following:
| • | We may be required, under certain circumstances, to pay BYBK a termination fee of $5,076,000 under the merger agreement; |
| • | We will be required to pay certain costs relating to the merger, whether or not the merger is completed, such as legal, accounting, financial advisor and printing fees; and |
| • | Matters relating to the merger may require substantial commitments of management time and resources that could otherwise have been devoted to other opportunities that may have been beneficial to Old Line Bancshares as an independent company. |
In addition, if the merger is not completed, we may experience negative reactions from the financial markets and from our stockholders, customers and employees. We also could be subject to litigation related to any failure to complete the merger or to enforcement proceedings commenced against us to perform our obligations under the merger agreement.
If the merger is not completed, we cannot assure our stockholders that the risks described above will not materialize and will not materially affect our business, financial results and stock price.
Pending litigation related to the merger may delay or prevent the merger and could us to incur significant costs and expenses. Adam Franchi, both individually and on behalf of a putative class of BYBK’s stockholders, filed a complaint in the United States District Court for the District of Maryland against BYBK and its directors as well as Old Line Bancshares. The complaint asks the Court, among other things, to enjoin the parties from proceeding with the merger based, primarily, on allegations that the version of the joint proxy statement/prospectus that was filed with the SEC on November 22, 2017 omitted certain material information in violation of Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 14a-9 promulgated thereunder. If the merger is consummated prior to the time these claims are adjudicated, then the plaintiff has asked the Court to rescind the merger and set it aside or award rescissory damages. This litigation could delay or even prevent the merger and has caused Old Line Bancshares and BYBK to incur, and will likely cause Old Line Bancshares and BYBK to incur additional, significant legal fees and other costs to defend the claims, which could adversely impact the financial condition and results of operations of BYBK and Old Line Bancshares, both before and after the merger. No assurance can be given that Old Line Bancshares, BYBK or the directors of BYBK will be successful in the defense of these claims.
BYBK’s loan portfolio is concentrated in commercial and real estate and in certain geographic areas. BYBK’s commercial loans, including commercial real estate loans and commercial and industrial loans, totaled $312 million as of September 30, 2017, or 59% of its loan portfolio, while its residential real estate loans totaled $145 million, or 28% of its loan portfolio. Additionally, its construction loans totaled $29 million as of September 30, 2017, or 6% of its loan portfolio. Approximately 98% of BYBK’s loans were originated in Maryland. Commercial lending generally carries a higher degree of credit risk than do residential mortgage loans because of several factors including larger loan balances, dependence on the successful operation of a business or a project for repayment, or loan terms with a balloon payment rather than full amortization over the loan term. Further, any weakness in the real estate market could adversely affect Bay Bank’s customers, which in turn could adversely impact its loan portfolio.
An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for loan losses and an increase in charge-offs, all of which could have a material adverse effect on the financial condition and results of operations of BYBK and, upon consummation of the merger, of Old Line Bancshares.
Risk Factors Related to Old Line Bancshares’ Business
System failure or cybersecurity breaches of our network security could subject us to increased operating costs as well as litigation and other potential losses. We are subject to certain operational risks including, but not limited to, data processing system failures and errors, inadequate or failed internal processes, customer or employee fraud, cybersecurity breaches, and catastrophic failures resulting from terrorist acts or natural disasters. We rely heavily on data processing, software, communications and information systems on a variety of computing platforms and networks and over the Internet to conduct our business. Despite instituted safeguards, we cannot be certain that that all of our systems and our network infrastructure are entirely free from vulnerability to attack or other technological difficulties or failures.
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Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations. In addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure we use, including our Internet banking activities, against damage from physical break-ins, cybersecurity breaches and other disruptive problems caused by Internet problems, other users or unrelated third parties. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us, subject us to additional regulatory scrutiny, damage our reputation, result in a loss of customers, and inhibit current and potential customers from using our Internet banking services, any or all of which could have a material adverse effect on our results of operations and financial condition. Information security risks have increased significantly due to the use of online, telephone and mobile banking channels by clients and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties. Cyber threats are rapidly evolving and we may not be able to anticipate or prevent all such attacks. While we do not believe we have experienced a material cyber-security breach, we experience periodic threats to our data, systems and networks, including cyber-attacks, malware and computer virus attacks, malicious code, phishing attacks, attempted unauthorized access of accounts and attempts to disrupt our systems. Our clients’ devices, from which they may access our Internet banking services [or mobile apps], are also subject to the same threats. Such threats are likely to continue, and may result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our clients’ confidential, proprietary and other information, the theft of client assets through fraudulent transactions or disruption of our or our clients’ or other third parties’ business operations. We may incur increasing costs in an effort to minimize these risks, and could be held liable for, lose business and suffer reputational damage as a result of any security breach or loss. We periodically review our security protocols and, as necessary, add additional security measures to our computer systems and network infrastructure to mitigate the possibility of cybersecurity breaches, including firewalls and penetration testing. These precautions may not, however, be effective in preventing such breaches, damage or failures. We continue to monitor developments in this area and consider whether additional protective measures are necessary or appropriate, and we have obtained insurance protection intended to cover losses due to network security breaches; there is no guarantee, however, that such insurance would cover all costs associated with any breach, damage or failure of our computer systems and network infrastructure.
We have a comprehensive policy related to cybersecurity risks, and cybersecurity incidents are reported quarterly to our risk committee, which consists of members of both management and our board of directors. In the event of a material breach, damage or failure of our computer system or network, we will issue the appropriate disclosures. Any system failure could have a material adverse effect on our financial condition and results of operations.
We rely on certain external vendors. Our business is dependent on the use of outside service providers that support our day-to-day operations including data processing and electronic communications. Our operations are exposed to the risk that a service provider may not perform in accordance with established performance standards required in our agreements for any number of reasons including equipment or network failure, a change in their senior management, their financial condition, their product line or mix and how they support existing customers, or a simple change in their strategic focus. While we have comprehensive policies and procedures in place to mitigate risk at all phases of service provider management from selection to performance monitoring and renewals, the failure of a service provider to perform in accordance with contractual agreements could be disruptive to our business, which could have a material adverse effect on our financial conditions and results of our operations.
Adverse changes in economic conditions could adversely affect our business, results of operations and financial condition. Our business and earnings are affected by general business conditions in the United States as well as in our local market area. Changes in prevailing economic conditions, including declining real estate values, changes in interest rates that may cause a decrease in interest rate spreads, adverse employment conditions, the monetary and fiscal policies of the federal government and other significant external events may adversely affect our financial results. We continue to operate in a challenging and uncertain economic environment. Since the recession ended almost nine years ago, economic growth has been slow by historic standards and uneven. Further, the current expansion is already the third longest in U.S. history, and many economists believe that the risk of a recession in the medium-term (2019-2020) is increasing. A return to recessionary conditions or prolonged stagnant or deteriorating economic conditions could significantly affect the markets in which we do business, the demand for our products and services, the value of our loans and investments, and our ongoing operations, costs and profitability. In any case, we expect that the business environment in the State of Maryland and the entire United States will continue to present challenges for the foreseeable future. Economic uncertainties even outside a recession, including concerns about U.S. debt levels and related governmental actions, tariffs on imports into the United States, Congress’ inability to pass yearly budgets, and cuts in government spending, may negatively impact economic conditions going forward. A return to elevated levels of unemployment, declines in the values of real estate, or other events that negatively affect household and/or corporate incomes may result in higher than expected loan delinquencies, increases in our nonperforming and criticized classified assets and a decline in demand for our products and services. Any of these events may cause us to incur losses and may adversely affect our financial condition and results of operations.
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Although the adverse economic climate during the past several years has not severely impacted us due to our strict underwriting standards, any adverse changes in the economy going forward, including decreases in current real estate values, increased unemployment or the economy moving back into a recession, could have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings.
A worsening of credit markets and economic conditions could adversely affect our liquidity. Old Line Bank must maintain sufficient liquidity to ensure cash flow is available to satisfy current and future financial obligations including demand for loans and deposit withdrawals, funding of operating costs and other corporate purposes. We obtain funding through deposits and various short term and long term wholesale borrowings, including federal funds purchased, unsecured borrowings, brokered certificates of deposits and borrowings from the Federal Home Loan Bank of Atlanta (the “FHLB”) and others. Economic uncertainty and disruptions in the financial system may adversely affect our liquidity. Dramatic declines in the housing market and falling real estate prices coupled with increased foreclosures and unemployment, resulted in significant asset value write downs by financial institutions during and after the last U.S. recession, including government sponsored entities and investment banks. These investment write downs caused financial institutions to seek additional capital. Should we experience a substantial deterioration in our financial condition or should disruptions in the financial markets restrict our funding, it would negatively impact our liquidity. To mitigate this risk, we closely monitor our liquidity and maintain a line of credit with the FHLB and have received approval to borrow from the Federal Reserve Bank of Richmond.
Our concentrations of loans in various categories may also increase the risk of credit losses. We currently invest more than 25% of our capital in various loan types and industry segments, including commercial real estate loans and loans to the hospitality industry (hotels/motels). While declines in the local commercial real estate market following the last recession have not caused the collateral securing our loans to exceed acceptable loan to value ratios, a deterioration in the commercial real estate market could cause deterioration in the collateral securing these loans and/or a decline in our customers’ earning capacity. This could negatively impact us. Although we have made a large portion of our hospitality loans to long-term, well-established operators in strategic locations, a decline in the occupancy rate in these facilities could negatively impact their earnings. This could adversely impact the operators’ ability to repay their loans, which would adversely impact our net income.
Our need to comply with extensive and complex governmental regulation could have an adverse effect on our business and growth strategy, and we may be adversely affected by changes in laws and regulations. The banking industry is subject to extensive regulation by state and federal banking authorities. Many of these regulations are intended to protect depositors, the public or the FDIC insurance funds, not stockholders. Regulatory requirements affect our lending practices, capital structure, investment practices, dividend policy, ability to attract and retain personnel and many other aspects of our business. These requirements may constrain our rate of growth and changes in regulations could adversely affect us. The cost of compliance with regulatory requirements could adversely affect our ability to operate profitably. Further, if we are not in compliance with such requirements, we could be subject to fines or other regulatory action that could restrict our ability to operate or otherwise have a material adverse effect on our business and financial condition. Although we believe we are in material compliance with all applicable regulations, it is possible there are violations of which we are unaware that could be discovered by our regulators in the course of an examination or otherwise, which could trigger such fines or other adverse consequences.
In addition, because regulation of financial institutions changes regularly and is the subject of constant legislative debate, we cannot forecast how federal or state regulation of financial institutions may change in the future and impact our operations. In light of the performance of and government intervention in the financial sector, there may be significant changes to the banking and financial institutions’ regulatory agencies in the future. Changes in regulation and oversight, including in the form of changes to statutes, regulations or regulatory policies or changes in interpretation or implementation of statutes, regulations or policies, could affect the services and products we offer, increase our operating expenses, increase compliance challenges and otherwise adversely impact our financial performance and condition. In addition, the burden imposed by these federal and state regulations may place banks in general, and Old Line Bank specifically, at a competitive disadvantage compared to less regulated competitors.
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Non-Compliance with the USA PATRIOT Act, the Bank Secrecy Act or other laws and regulations could result in fines or sanctions. Financial institutions are required under the USA PATRIOT and Bank Secrecy Acts to develop programs to prevent financial institutions from being used for money-laundering and terrorist activities. Financial institutions are also obligated to file suspicious activity reports with the U.S. Treasury Department’s Office of Financial Crimes Enforcement Network if such activities are detected. These rules also require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure or the inability to comply with these regulations could result in fines or penalties, curtailment of expansion opportunities, intervention or sanctions by regulators and costly litigation or expensive additional controls and systems. During the last few years, several banking institutions have received large fines for non-compliance with these laws and regulations. In addition, the U.S. Government has previously imposed laws and regulations relating to residential and consumer lending activities that create significant new compliance burdens and financial risks. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, we cannot assure you that these policies and procedures will be effective in preventing violations of these laws and regulations
Requirements to hold more capital could have a material adverse impact on us. The impact of the revised capital rules on our financial condition and operations is uncertain but could be materially adverse. In July 2013, the Federal Reserve Board adopted a final rule for the Basel III capital framework. These rules substantially amended the regulatory risk-based capital rules applicable to us and increased the minimum levels of capital we are required to hold, as discussed in “Item 1. Business – Supervision and Regulation – Capital Adequacy Guidelines.” The rules apply to Old Line Bancshares as well as to the Bank. These rules include a capital conservation buffer that phases in over a period of years that began in 2016 and will become fully effective in 2019. Failure to satisfy the additional capital requirements of the capital conservation buffer will result in limits on paying dividends, engaging in share repurchases and paying discretionary bonuses. The rules establish a maximum percentage of eligible retained income that may be utilized for such actions if the capital requirements of the buffer are not fully satisfied. Beginning January 1, 2018, our capital requirements with the applicable capital conservation buffer are (i) a common equity Tier 1 risk-based capital ratio of 6.375%, (ii) a Tier 1 risk-based capital (common Tier 1 capital plus Additional Tier 1 capital) ratio of 7.875% and (iii) a total risk-based capital ratio of 9.875%. The capital conservation buffer does not apply to our leverage ratio requirement, which will remain at 4.0%. Once the capital conservation buffer is fully phased in on January 1, 2019, the resulting requirements will be a common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total risk-based capital ratio of 10.5%. These increased capital requirements may have a material adverse impact on our liquidity and results of operations, or the failure to satisfy such requirements may result in our inability to pay dividends on or repurchase shares of our common stock, which could also negatively impact the market price for our stock, and may negatively impact our ability to retain personnel if our ability to pay retention bonuses is compromised.
Our internal controls and procedures may fail or be circumvented. Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well-designed and operated, is based in part on certain assumptions and can provide only reasonable assurances that the objectives of the system are met. Any (a) failure or circumvention of our controls and procedures, (b) failure to adequately address any internal control deficiencies, or (c) failure to comply with regulations related to controls and procedures could have a material effect on our business, consolidated financial condition and results of operations.
Our business may be adversely affected by increasing prevalence of fraud and other financial crimes. As a financial institution, we are subject to risk of loss due to fraud and other financial crimes. Nationally, reported incidents of fraud and other financial crimes have increased. We believe we have controls in place to detect and prevent such losses, but in some cases multi-party collusion or other sophisticated methods of hiding fraud may not be readily detected or detectable, and could result in losses that affect our financial condition and results of operations.
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Financial crime is not limited to the financial services industry. Our customers could experience fraud in their businesses, which could materially impact their ability to repay their loans, and deposit customers in all financial institutions are constantly and unwittingly solicited by others in fraud schemes that vary from easily detectable and obvious attempts to high-level and very complex international schemes that could drain an account of millions of dollars and require detailed financial forensics to unravel. While we have controls in place, contractual agreements with our customers partitioning liability, and insurance to help mitigate the risk, none of these are guarantees that we will not experience a loss, potentially a loss that could have a material adverse effect on our financial condition, reputation and results of operations.
The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny. The FDIC, the Federal Reserve Board and the Office of the Comptroller of the Currency have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under this guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors (i) total reported loans for construction, land development and other land represent 100% or more of total capital, or (ii) total reported loans secured by multi-family and non-farm non-residential properties, loans for construction, land development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. The particular focus of the guidance is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. We have concluded that we have a concentration in commercial real estate lending under the foregoing standards because our balance in commercial real estate loans at December 31, 2017 represents more than 300% of total capital. While we believe we have implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us.
We depend on the accuracy and completeness of information about our clients and counterparties and our financial condition could be adversely affected if we rely on misleading information. In deciding whether to extend credit or to enter into other transactions with clients and counterparties, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information, which we do not independently verify as a matter of course. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to customers, we may assume that a customer’s audited financial statements conform with Accounting principles generally accepted in the United States (“U.S. GAAP”) and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. Our financial condition and results of operations could be negatively impacted to the extent we rely on financial statements that do not comply with U.S. GAAP or are materially misleading.
We may be adversely affected by the soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by Old Line Bank cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to Old Line Bank. Any such losses could have a material adverse effect on our financial condition and results of operations.
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Because we serve a limited market area in Maryland, we are susceptible to economic downturns in our market area. Our lending and deposit operations are concentrated in the suburban Maryland counties of Anne Arundel, Baltimore, Calvert, Carroll, Charles, Montgomery, Prince George’s, St. Mary’s and Frederick. If the pending merger with BYBK is consummated this market area will expand into Baltimore City and Baltimore, Harford and Howard Counties, Maryland, and we may expand into contiguous counties at some point in the future. Broad geographic diversification, however, is not currently part of our community bank focus. As a result, our success depends in part on economic conditions in our market area. Adverse changes in economic conditions in our primary market area could reduce our deposit base and demand for our services and products and negatively impact growth in our loans and deposits, impair our ability to collect on our outstanding loans, increase credit losses, problem loans and charge-offs, and otherwise negatively affect our performance and financial condition. Declines in real estate values could cause some of our residential and commercial real estate loans to be inadequately collateralized, which would expose us to a greater risk of loss in the event that the recovery on amounts due on defaulted loans is resolved by selling the real estate collateral. In addition, adverse changes in economic conditions in and around our market area may more severely impact our business and financial condition than our larger, more geographically diverse competitors. In particular, due to the proximity of our market area to Washington, D.C., decreases in spending by the Federal government or threatened cuts to Federal government employment could impact us to a greater degree than banking companies that serve a larger or a different geographical area. Our larger competitors, for example, serve more geographically diverse market areas, parts of which may not be affected by the same economic conditions that may exist in our market area. Further, unexpected changes in the national and local economy may adversely affect our ability to attract deposits and to make loans. Such risks are beyond our control and may have a material adverse effect on our financial condition and results of operations and, in turn, the value of our securities.
We originate and retain in our portfolio residential mortgage loans. A downturn in the local real estate market and economy could adversely affect our earnings. Our loan portfolio includes residential mortgage loans that we originate. Although the local real estate market and economy in our market areas have performed better than many other markets during the past few years, a downturn could cause higher unemployment; and more delinquencies, and could adversely affect the value of properties securing our loans. In addition, the real estate market may take longer to recover or not recover to previous levels. These risks increase the probability of an adverse impact on our financial results as fewer borrowers would be eligible to borrow and property values could be below necessary levels required for adequate coverage on the requested loan.
Changes in tax laws may negatively impact our financial performance. Changes in tax laws contained in the Tax Cuts and Jobs Act (“TCJA”), which was enacted in December 2017, contain a number of provisions that could have an impact on the banking industry, borrowers and the market for single family residential and multifamily residential real estate. Among the changes are: lower limits on the deductibility of mortgage interest on single family residential mortgages; limitations on deductibility of business interest expense; and limitations on the deductibility of property taxes and state and local income taxes. Such changes may have an adverse effect on the market for and valuation of single family residential properties and multifamily residential properties, as well as on the demand for such loans in the future. If home ownership or multifamily residential property ownership become less attractive, demand for mortgage loans would decrease, which could have a material adverse effect on our residential mortgage originations and loan resales and as a result our revenues, net income, operating results and financial condition. In addition, the value of the properties securing loans in our portfolio may be adversely impacted as a result of the changing economics of home ownership and multifamily residential ownership, which could require an increase in our provision for credit losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations. Additionally, certain borrowers could become less able to service their debts as a result of higher tax obligations. These changes could adversely affect our business, financial condition and results of operations.
We are subject to liquidity risks. Market conditions could negatively affect the level or cost of available liquidity, which would affect our ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, and fund asset growth and new business transactions at a reasonable cost, in a timely manner, and without adverse consequences. Deposits are our primary source of funding, but this is supplemented by FHLB advances and other borrowings. A significant decrease in our deposits, an inability to renew FHLB advances or access other borrowings, an inability to obtain alternative funding to deposits or our other traditional sources of funds, or a substantial, unexpected, or prolonged change in the level or cost of liquidity could have a negative effect on our business, financial condition and results of operations.
We depend on the services of key personnel. The loss of any of these personnel could disrupt our operations and our business could suffer. Our success depends substantially on the skills and abilities of our executive management team, including James W. Cornelsen, President and Chief Executive Officer, Jack Welborn, Executive Vice President and Chief Lending Officer, John Miller, Executive Vice President and Chief Credit Officer, Mark A. Semanie, Executive Vice President, Chief Operating Officer and Elise M. Hubbard, Executive Vice President and Chief Financial Officer. Although we have entered into employment agreement with Messrs. Cornelsen, Miller and Semanie, the existence of such agreements does not assure that we will retain their services. These executives provide valuable services to us and would be difficult to replace.
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Also, our growth and success and our anticipated future growth and success, in a large part, is due and will continue to be due to the relationships maintained by our banking executives with our customers. The loss of services of one or more of these executives or of other key employees could have a material adverse effect on our operations and our business could suffer. The experienced commercial lenders that we have hired are not a party to any employment agreement with us and they could terminate their employment with us at any time and for any reason.
Our growth and expansion strategy may not be successful. Our ability to grow depends upon our ability to attract new deposits, identify loan and investment opportunities and maintain adequate capital levels. We may also grow through acquisitions of existing financial institutions or branches thereof, as we are doing with the pending merger with BYBK. There are no guarantees that our expansion strategies will be successful. Also, in order to effectively manage our anticipated and/or actual loan growth we have made and may continue to make additional investments in equipment and personnel, which could increase our non-interest expense. If we grow too quickly and are not able to control costs and maintain asset quality, such growth could materially and adversely affect our financial performance.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease. We maintain an allowance for loan losses that we believe is adequate for absorbing any potential losses in our loan portfolio. Our management, through a periodic review and consideration of the loan portfolio, determines the amount of the allowance for loan losses. Although we believe the allowance for loan losses is adequate to absorb probable losses in our loan portfolio, we cannot predict such losses with certainty. Management makes various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb future losses, our earnings will suffer.
As of December 31, 2017, commercial and industrial and commercial real estate mortgage loans comprise approximately 78.21% of our loan portfolio. It is more difficult to estimate loan losses for these types of loans as compared to, for example, residential mortgage loans. Further, these types of loans are generally viewed as having more risk of default than residential real estate or consumer loans and typically have larger balances than residential real estate loans and consumer loans. A deterioration of one or a few of these loans could cause a significant increase in non-performing loans. Such an increase could result in a net loss of earnings from these loans, an increase in the provision for loan losses and an increase in loan charge-offs, all of which could have a material adverse effect on our financial condition and results of operations.
The Financial Accounting Standards Board has adopted a new accounting standard that will become effective for us on January 1, 2020. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses. This will change the current method of providing allowances for credit losses that are probable, which would likely require us to increase our allowance for credit losses, and to greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit losses.
We have relatively limited experience with the performance of loans acquired in our recent acquisitions of DCB and Regal Bancorp, and will have no experience with the performance of the loans we acquire in the BYBK merger. Certain of our estimates related to accounting for acquired loans may differ from actual results. We acquired DCB in July 2017 and Regal Bancorp in December 2015, and expect to complete our acquisition of BYBK during the second quarter of 2018. It is difficult to assess the future performance of loans recently added to our portfolio as part of these recent acquisitions, and will be difficult to assess the future performance of loans that will be added to our portfolio in the BYBK acquisition, because our relatively limited experience with such loans does not and will not provide us with a significant history from which to judge future collectability. These loans may experience higher delinquency or charge-off levels than our historical loan portfolio experience, which could adversely affect our future performance.
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In addition, under generally accepted principles for business combinations, there is no loan loss allowance initially recorded for acquired loans, which are recorded at net fair value on the acquisition date. This net fair value generally includes embedded loss estimates for acquired loans with deteriorated credit quality. These estimates are based on projections of expected cash flows for these problem loans, which in many cases rely on estimates deriving from the liquidation of collateral.
If the estimates we make and have made regarding the performance of loans we have acquired are inadequate, the fair value estimates may exceed the actual collectability of the balances, and this may result in the related loans being considered by us as impaired, which would result in a reduction in interest income. The tangible book value we measure is based in part on these estimates, and if fair value estimates differ from actual collectability, then subsequent earnings may also differ from original estimates. Measures of tangible book value and earnings impact of business combinations are frequently used in evaluating the merits and value of business combinations. Numerous assumptions and estimates are integral to purchased loan accounting, and actual results could be different from prior estimates.
Our profitability depends on interest rates and changes in monetary policy may impact us. Our results of operations depends to a large extent on our “net interest income,” which is the difference between the interest income received from our interest earning assets, such as loans and investment securities, and the interest expense incurred in connection with our interest bearing liabilities, such as interest on deposit accounts. Interest rates, because they are influenced by, among other things, expectations about future events, including the level of economic activity, federal monetary and fiscal policy, and geopolitical stability, are not predictable or controllable. Additionally, competitive factors heavily influence the interest rates we can earn on our loan and investment portfolios and the interest rates we pay on our deposits. Community banks are often at a competitive disadvantage in managing their cost of funds compared to the large regional, super-regional or national banks that have access to the national and international capital markets. These factors influence our ability to maintain a stable net interest margin.
We seek to maintain a neutral position in terms of the volume of assets and liabilities that mature or reprice during any period so that we may reasonably predict our net interest margin. Interest rate fluctuations, loan prepayments, loan production and deposit flows, however, are constantly changing and influence our ability to maintain this neutral position. Generally speaking, our earnings are more sensitive to fluctuations in interest rates the greater the variance in the volume of assets and liabilities that mature and reprice in any period. The extent and duration of the sensitivity will depend on the cumulative variance over time, the velocity and direction of interest rates, and whether we are more asset than liability sensitive. Accordingly, we may not be successful in maintaining this neutral position and, as a result, our net interest margin may suffer.
Furthermore, the Federal Reserve Board, in an attempt to help the overall economy, has among other things kept interest rates low through its targeted federal funds rate and the purchase of U.S. Treasury and mortgage-backed securities. If the Federal Reserve Board continues to increase the federal funds rate in the near term, as is expected, overall interest rates will likely rise, which may negatively impact the housing markets and the U.S. economic growth. In addition, an increase in interest rates may, among other things, reduce loan demand and our ability to originate loans (which would also decrease our ability to generate noninterest income through the sale of loans into the secondary market), and make it more difficult for borrowers to repay adjustable-rate loans or otherwise decrease loan repayment rates. Further, as market interest rates rise, we may experience competitive pressures to increase the rates we pay on deposits. Because interest rates we pay on our deposits could be expected to increase more quickly than the increase in the yields we earn on our interest-earning assets, our net interest income would be adversely affected. In addition, deflationary pressures, while possibly lowering our operating costs, could have a negative impact on our borrowers, especially our business borrowers, and the values of collateral securing our loans, which could negatively affect our financial performance.
We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the interest rates on existing loans and securities.
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We face substantial competition that could adversely affect our growth and operating results. We operate in a competitive market for financial services and face intense competition from other financial institutions both in making loans and in attracting deposits. Many of these financial institutions have been in business for many years, are significantly larger, and have established customer bases and greater financial resources and lending limits than we do, and are able to offer certain products and services that we are not able to offer. There are also a number of smaller community-based banks that pursue operating strategies similar to ours.
We expect competitive pressures to continue to build as a result of legislative, regulatory and technological changes and as the financial services industry continues to consolidate. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks; we expect competition to increase in this regard as additional non-bank investment and financial services options for consumers become available and consumers become increasingly comfortable using such alternatives. Competition for deposits and the origination of loans could limit our ability to successfully implement our business plan, and if we cannot attract deposits and make loans at a sufficient level, our operating results will suffer, as will our opportunities for growth.
Furthermore, competition in the banking and financial services industry is coming not only from traditional competitors but from technology-oriented financial services (“FinTech”) companies, which are subject to limited regulation. They offer user friendly front-end, quick turnaround times for loans and other benefits. While we are considering the possibility of developing relationships with FinTech companies for efficiency in processing and/or as a source of loans and other, we cannot limit the possibility that our customers or future prospects will work directly with a FinTech company instead. This could impact our growth and profitability going forward.
Consumers may decide not to use banks to complete their financial transactions. Technology and other changes are allowing consumers to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can now maintain funds that they have historically held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, which may increase as consumers become more comfortable with these new technologies and offerings, could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.
We continually encounter technological change. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology driven by new or modified products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on our business and, in turn, our financial condition and results of operations.
Our investment securities portfolio is subject to credit risk, market risk, and liquidity risk. Our investment securities portfolio is subject to risks beyond our control that may significantly influence its fair value. These include, but are not limited to, rating agency downgrades of the securities, defaults of the issuers of the securities, lack of market pricing of the securities, and instability in the credit markets. Lack of market activity with respect to some securities has, in certain circumstances, required us to base their fair market valuation on unobservable inputs. Any changes in these risk factors, in current accounting principles or interpretations of these principles could impact our assessment of fair value and thus the determination of other-than-temporary impairment of the securities in the investment securities portfolio. Investment securities that previously were determined to be other-than-temporarily impaired could require further write-downs due to continued erosion of the creditworthiness of the issuer. Write-downs of investment securities would negatively affect our earnings and regulatory capital ratios.
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Further, we have designated all of our investment securities portfolio (or 10.4% of total assets) at December 31, 2017 as available for sale. We “mark to market” temporary unrealized gains and losses in the estimated value of the available for sale portfolio and reflect this adjustment as a separate item in stockholders’ equity, net of taxes. As of December 31, 2017, we had temporary unrealized losses in our available for sale portfolio of $2.3 million (net of taxes). If the market value of the investment portfolio declines, this could cause a corresponding decline in stockholders’ equity. Further, adverse changes in economic conditions could cause municipalities to report budget deficits and companies continue to report lower earnings, as happened in the last recession. Any such budget deficits and lower earnings could cause temporary and other than temporary impairment charges in our investment securities portfolio and cause us to report lower net income and a decline in stockholders’ equity.
Impairment in the carrying value of goodwill could negatively impact our earnings. At December 31, 2017, goodwill totaled $25.0 million. We expect to recognized approximately $54.7 million in additional goodwill in connection with the pending acquisition of BYBK. Goodwill represents the excess purchase price paid over the fair value of the net assets acquired in a business combination. The estimated fair values of the acquired assets and assumed liabilities may be subject to refinement as additional information relative to closing date fair values becomes available and may result in adjustments to goodwill within the first 12 months following the closing date of the relevant acquisition. Goodwill is reviewed for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. There could be a requirement to evaluate the recoverability of goodwill prior to the normal annual assessment if there is a disruption in our business, unexpected significant declines in operating results, or sustained market capitalization declines. These types of events and the resulting analyses could result in goodwill impairment charges in the future, which would adversely affect the results of operations. A goodwill impairment charge does not adversely affect regulatory capital ratios or tangible capital. Based on an analysis, we determined that the fair value of our reporting units exceeded the carrying value of their assets and liabilities and, therefore, goodwill was not considered impaired at December 31, 2017.
Risks Related to our Common Stock
We may issue shares of common stock in the future in connection with acquisitions or otherwise, and any such issuances could be at varying prices and dilute your ownership of Old Line Bancshares. We may use our common stock to acquire other companies or to make investments in banks and other complementary businesses in the future. We may also issue common stock, or securities convertible into common stock, through public or private offerings, in order to raise additional capital in connection with future acquisitions, to satisfy regulatory capital requirements or for general corporate purposes. We have an effective shelf registration statement on Form S-3 on file with the U.S. Securities and Exchange Commission (“SEC”) pursuant to which we may, from time to time, sell up to an aggregate of $100 million of our common stock, preferred stock, warrants, units and debt securities. The existence of such shelf registration statement allows us to sell securities quickly from time to time as market conditions warrant. Any such common stock issuances, or issuance of other securities under which shares of common stock may be issued, could be dilutive to our other stockholders.
Our future acquisitions, if any, may cause us to become more susceptible to adverse economic events. While we currently have no agreements to acquire additional financial institutions, other than BYBK, we may do so in the future if an attractive acquisition opportunity arises that is consistent with our business plan. Any future business acquisitions could be material to us, and the degree of success achieved in acquiring and integrating these businesses into Old Line Bancshares could have a material effect on the value of our common stock. In addition, any acquisition could require us to use substantial cash or other liquid assets or to incur debt. In those events, we could become more susceptible to future economic downturns and competitive pressures.
We face limits on our ability to lend. The amount of our capital limits the amount that we can loan to a single borrower. Generally, under current law, we may lend up to 15% of our unimpaired capital and surplus to any one borrower. As of December 31, 2017, we were able to lend approximately $31.9 million to any one borrower. This amount is significantly less than that of many of our larger competitors and may discourage potential borrowers who have credit needs in excess of our legal lending limit from doing business with us. We generally try to accommodate larger loans by selling participations in those loans to other financial institutions, but this strategy is not always available. We may not be able to attract or maintain customers seeking larger loans and we may not be able to sell participations in such loans on terms we consider favorable.
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Additional capital may not be available when needed or required by regulatory authorities. Federal and state regulatory authorities require us to maintain adequate levels of capital to support our operations. In addition, we may elect to raise additional capital to support our business or to finance future acquisitions, if any, or we may otherwise elect or our regulators may require that we raise additional capital. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control. Conditions in the capital markets may be such that traditional sources of capital may not be available to us on reasonable terms if we needed to raise additional capital. Accordingly, we may not be able to raise additional capital if needed or on terms that are favorable or otherwise not dilutive to existing stockholders. If we cannot raise additional capital when needed, or on desirable terms, it may have a material adverse effect on our financial condition, results of operations and prospects.
We may not have adequately assessed the fair value of acquired assets and liabilities. Current accounting guidance requires that we record assets and liabilities at their estimated fair values on the purchase date. The determination of fair value requires that we consider a number of factors including the remaining life of the acquired loans and deposits, estimated prepayments or withdrawals, estimated loss ratios, estimated value of the underlying collateral, and the net present value of expected cash flows. Actual deviations from these predicted cash flows, maturities or repayments or the underlying value of the collateral may mean that our present value determination is inaccurate. This may cause fluctuations in interest income, non-interest income, provision expense, interest expense and non-interest expense and negatively impact our results of operations.
The market price of our common stock can be volatile. Stock price volatility may make it more difficult for an investor to resell our common stock when desired and at attractive prices. The market price of our common stock can fluctuate significantly in response to a variety of factors including, among other things:
| • | actual or anticipated variations in our operating results; |
| • | changes in expectations as to our future financial performance, including financial estimates or recommendations by securities analysts or others in the industry; |
| • | changes in the regulatory or legal environment in which we operate; |
| • | news reports or other publicity relating to Old Line Bancshares or our competitors or relating to trends in our industry; |
| • | perceptions in the marketplace regarding Old Line Bancshares and/or its competitors; |
| • | future sales of common stock; |
| • | the announcement of a significant acquisition or business combination, strategic partnership, joint venture or capital commitment by or involving Old Line Bancshares or its competitors; and |
| • | geopolitical conditions such as acts or threats of terrorism or military conflicts. |
General market fluctuations, industry factors and general economic and political conditions and events in the U.S. or globally, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results.
Shares of our common stock are equity interests and therefore subordinate to our existing and future indebtedness and preferred stock we may issue in the future. Shares of our common stock are equity interests in Old Line Bancshares and do not constitute indebtedness. As such, shares of our common stock rank junior to all indebtedness and other non-equity claims on us with respect to assets available to satisfy claims, including upon its liquidation. Holders of our common stock are also subject to the prior dividend and liquidation rights of any holders of its preferred stock that we may issue in the future.
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In addition, our right to participate in any distribution of assets of any of our subsidiaries, including Old Line Bank, upon the subsidiary’s liquidation or otherwise, and thus our stockholders’ ability to benefit indirectly from such distribution, will be subject to the prior claims of creditors of that subsidiary, except to the extent that any of our claims as a creditor of such subsidiary may be recognized. As a result, shares of our common stock are effectively subordinated to all existing and future liabilities and obligations of our subsidiaries.
Our ability to declare and pay dividends is limited by law, and we may be unable to pay future dividends. Old Line Bancshares are a separate and distinct legal entity from Old Line Bank, and it receives substantially all of its revenue from dividends from Old Line Bank. These dividends are the principal source of funds to pay dividends on our common stock and interest and principal on debt. Various federal and/or state laws and regulations limit the amount of dividends that Old Line Bank may pay to Old Line Bancshares. In the event Old Line Bank is unable to pay dividends to Old Line Bancshares, Old Line Bancshares may not be able to service debt, pay obligations or pay dividends on our common stock. The inability to receive dividends from Old Line Bank could have a material adverse effect on Old Line Bancshares’ business, financial condition and results of operations.
We may need to raise additional capital in the future. If we are unable to obtain such capital on favorable terms or at all, we may not be able to execute on our business plans and our business, financial condition and results of operations may be adversely affected. We may need to raise additional capital in the future to fund our growth and acquisition activities. Any sale of additional equity or debt securities may result in dilution to our stockholders. Public or private financing may not be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain additional financing, we may be required to delay, reduce the scope of, or eliminate our growth and acquisition activities, which could adversely affect our business, financial condition and operating results.
Anti-takeover provisions could adversely affect our stockholders. Federal and Maryland banking laws, including regulatory approval requirements, and provisions contained in our articles of incorporation and bylaws, could make it difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. For example, our articles of incorporation authorizes our board of directors to determine the designation, preferences, limitations and relative rights of unissued preferred stock, without any vote or action by stockholders. As a result, our board of directors could authorize and issue shares of preferred stock with voting or conversion rights that could adversely affect the voting or other rights of holders of our common stock or with other terms that could impede the completion of a merger, tender offer or other takeover attempt. In addition, certain provisions of Maryland law, including a provision that restricts certain business combinations between a Maryland corporation and certain interested stockholders, may delay, discourage or prevent an attempted acquisition or change in control of Old Line Bancshares that some or all of our stockholders might consider to be desirable. The combination of these provisions effectively inhibits a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of our common stock. These provisions could also discourage proxy contests and make it more difficult and expensive for holders of our common stock to elect directors other than the candidates nominated by our board of directors or otherwise remove existing directors and management, even if current management is not performing adequately. As a result, efforts by our stockholders to change our direction or management may be unsuccessful.
Item 1B. Unresolved Staff Comments
None.
As of December 31, 2017, we operate a total of 28 branch locations and nine loan production offices. Our headquarters, as discussed above, is located at 1525 Pointer Ridge Place, Bowie, Maryland in Prince George’s County. We also own the property and building located at 4201 Mitchellville Road, Bowie, Maryland, which we acquired in our acquisition of WSB Holdings.
On January 23, 2017, we opened our branch, located in Leonardtown, Maryland, and subsequently closed the branch located in Callaway, Maryland. Additionally, in June 2017, we expanded our presence in Prince George’s County with the opening of a branch in Riverdale, Maryland.
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In February 2018, we opened a new loan origination office in Towson, Maryland. Also, in February 2018, we closed our College Park, Maryland location and merged the office with the loan origination department located at our Bowie headquarters.
The following table sets forth information about the properties we own or lease at December 31, 2017.
| Legacy Properties | |||||||||||||
| Location | Address | Opened Date |
Square Feet |
Monthly Lease Amount |
Term | Renewal Option | |||||||
| Annapolis Suite 100 |
2530 Riva Road, Annapolis, Maryland |
9/2011 | 3,899 | $ | 13,182 | 10yrs 7mos | (2) 5 years | ||||||
| Annapolis Suite 404 |
2530 Riva Road, Annapolis, Maryland |
6/2015 | 2,394 | $ | 6,017 | 6yrs 1mos | n/a | ||||||
| Bowie | 1525 Pointer Ridge Place Bowie, Maryland |
6/2006 | 38,631 | Owned | |||||||||
| Clinton | 7801 Old Branch Avenue Clinton, Maryland |
9/2002 | 2,550 | $ | 3,024 | 10 years | (3) 5 years | ||||||
College Park(1) Suite 101 |
9658 Baltimore Avenue College Park, Maryland |
3/2008 | 1,916 | $ | 6,524 | 10 years | (2) 5 years | ||||||
College Park(1) Suite 450 |
9685 Baltimore Avenue College Park, Maryland |
7/2005 | 2,230 | $ | 5,427 | 10 years | (2) 5 years | ||||||
| Waldorf - Crain Highway | 2995 Crain Highway Waldorf, Maryland |
6/1999 | 8,044 | Owned | |||||||||
| Crofton | 1641 Maryland Route 3 N, Suite 109 Crofton, Maryland |
7/2009 | 2,420 | $ | 8,304 | 10 years | (3) 5 years | ||||||
| Fairwood | 12100 Annapolis Road, Suite 1 Glen Dale, Maryland |
10/2009 | 2,863 | Owned | |||||||||
| Greenbelt | 6421 Ivy Lane Greenbelt, Maryland |
9/2009 | 33,000 | $ | 10,137 | 30 years | (2) 10 years | ||||||
| Leonardtown | 23152 Newtowne Neck Road Leonardtown, Maryland |
1/2017 | 2,505 | Owned | |||||||||
| Riverdale |
6611 Baltimore Avenue, Suite 3C Riverdale Park, Maryland |
6/2017 | 2,860 | $ | 11,917 | 10 years | (2) 5 years | ||||||
| Rockville Pike |
1801 Rockville Pike, Suite 100 Rockville, Maryland |
11/2015 | 3,251 | $ | 10,060 | 5 years | (3) 5 years | ||||||
| Rockville Town Center | 196A East Montgomery Avenue Rockville, Maryland |
6/2016 | 2,142 | $ | 9,469 | 10 years | (2) 5 years | ||||||
| Silver Spring |
12501 Prosperity Drive, Suite 215 Silver Spring, Maryland |
3/2013 | 2,131 | $ | 4,399 | 3 years 2 mos | (1) 3 years | ||||||
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| Properties Acquired April 1, 2011 | |||||||||||||
| Location | Address | Opened Date |
Square Feet |
Monthly Lease Amount |
Term | Renewal Option | |||||||
| Bryans Road | 7175 Indian Head Highway Bryans Road, Maryland |
5/1964 | 3,711 | Owned | |||||||||
| California | 22741 Three Notch Road California, Maryland |
4/1985 | 3,366 | $ | 6,751 | 5 years | (2) 5 years | ||||||
| Fort Washington | 12740 Old Fort Road Fort Washington, Maryland |
2/1973 | 2,800 | $ | 6,300 | 5 years | (1) 5 years | ||||||
| La Plata | 101 Charles Street, Suite 102 La Plata, Maryland |
4/1974 | 2,910 | $ | 9,507 | 15 years | (3) 10 years | ||||||
| Waldorf - Leonardtown Road | 3135 Leonardtown Road Waldorf, Maryland |
6/1963 | 7,076 | Owned | |||||||||
| Prince Frederick | 691 Prince Frederick Boulevard Prince Frederick, Maryland |
8/1999 | 3,400 | $ | 10,895 | 20 years | N/A | ||||||
| Waldorf Operations | 3220 Old Washington Road Waldorf, Maryland |
12/1988 | 21,064 | Owned | |||||||||
| Properties Acquired May 10, 2013 | |||||||||||||
| Location | Address | Opened Date |
Square Feet |
Monthly Lease Amount |
Term | Renewal Option | |||||||
| Bowie | 4201 Mitchellville Road Bowie, Maryland |
4/1997 | 43,600 | Owned | |||||||||
| Millersville | 676 Old Mill Road Millersville, Maryland |
8/2005 | 1,795 | $ | 7,500 | 5 years | (2) 5 years | ||||||
| Properties Acquired December 4, 2015 | |||||||||||||
| Location | Address | Opened Date |
Square Feet |
Monthly Lease Amount |
Term | Renewal Option | |||||||
| Hunt Valley | 10620 York Road Hunt Valley, Maryland |
6/2005 | 6,160 | $ | 14,419 | 20 years | (4) 5 years | ||||||
| Owings Mills |
25 Crossroads Drive, Suite 10 Owings Mills, Maryland |
8/2011 | 1,500 | $ | 4,478 | 5 years | (3) 5 years | ||||||
| Westminster | 1046 Baltimore Boulevard Westminster, Maryland |
12/2001 | 3,391 | $ | 7,436 | 20 years | (1) 10 years | ||||||
| Properties Acquired July 29, 2017 | |||||||||||||
| Location | Address | Opened Date |
Square Feet |
Monthly Lease Amount |
Term | Renewal Option | |||||||
| Airpark | 7601 - I Airpark Road Gaithersburg, Maryland |
2/2016 | 1,440 | $ | 2,522 | 5 years | (3) 5 years | ||||||
| Clarksburg | 23400 Frederick Road Clarksburg, Maryland |
2/2000 | 2,892 | Owned | |||||||||
| Damascus | 26500 Ridge Road Damascus, Maryland |
7/1988 | 18,016 | Owned | |||||||||
| Damascus Mortgage | 26437 Ridge Road, Suite 3 Damascus, Maryland |
10/2015 | 2,500 | $ | 4,356 | 5 years | (1) 5 years | ||||||
| Frederick | 5010 Buckeystown Pike, Suite 112 Frederick, Maryland |
1/2017 | 1,401 | $ | 3,607 | 5 years | (1) 5 years | ||||||
| Green Valley | 11801 Fingerboard Road, Suite Monrovia, Maryland |
11/2004 | 1,200 | $ | 1,480 | 3 years | (2) 3 years | ||||||
| Mount Airy | 201 East Ridgeville Boulevard Mount Airy, Maryland |
8/2009 | 2,178 | Owned | |||||||||
(1) Location closed effective February 2018
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As discussed in “Item 1A. Risk Factors” above, on December 14, 2017, Adam Franchi, both individually and on behalf of a putative class of BYBK’s stockholders, filed a complaint in the United States District Court for the District of Maryland against BYBK and its directors as well as Old Line Bancshares. The complaint asks the Court, among other things, to enjoin the parties from proceeding with the merger based, primarily, on allegations that the version of the joint proxy statement/prospectus that was filed with the SEC on November 22, 2017 omitted certain material information in violation of Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. If the merger is consummated prior to the time these claims are adjudicated, then the plaintiff has asked the Court to rescind the merger and set it aside or award rescissory damages.
In addition, 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, other than as discussed above, the outcome of which, in management’s opinion, would be material to our financial condition or results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Prices
Our common stock trades on the Nasdaq Capital Market under the trading symbol “OLBK.” The table below shows the high and low sales prices of our common stock. The quotations reflect interdealer prices, without retail mark up, mark down, or commission, and may not represent actual transactions.
| Sale Price Range | ||||||||
| 2017 | High | Low | ||||||
| First Quarter | $ | 29.26 | $ | 23.65 | ||||
| Second Quarter | 29.90 | 26.49 | ||||||
| Third Quarter | 29.47 | 26.01 | ||||||
| Fourth Quarter | 30.94 | 26.98 | ||||||
| 2016 | ||||||||
| First Quarter | $ | 18.98 | $ | 16.75 | ||||
| Second Quarter | 19.64 | 17.11 | ||||||
| Third Quarter | 20.09 | 17.75 | ||||||
| Fourth Quarter | 25.99 | 18.91 | ||||||
At December 31, 2017, there were 12,508,332 shares of our common stock issued and outstanding held by approximately 1,719 stockholders of record. There were 327,574 shares of common stock issuable on the exercise of outstanding stock options, 286,555 of which were issuable pursuant to options currently exercisable. The remaining shares are issuable pursuant to options that are exercisable as follows:
| Date Exercisable | # of Shares | |||
| 2/24/2018 | 14,043 | |||
| 2/25/2018 | 11,266 | |||
| 10/22/2018 | 1,667 | |||
| 2/24/2019 | 14,043 | |||
| Total | 41,019 | |||
Dividends
We have paid the following dividends on our common stock during the years indicated:
| 2017 | 2016 | |||||||
| March | $ | 0.08 | $ | 0.06 | ||||
| June | 0.08 | 0.06 | ||||||
| September | 0.08 | 0.06 | ||||||
| December | 0.08 | 0.06 | ||||||
| Total | $ | 0.32 | $ | 0.24 | ||||
Our ability to pay dividends in the future will depend on the ability of Old Line Bank to pay dividends to us. Old Line Bank’s ability to continue paying dividends will depend on Old Line Bank’s compliance with certain dividend regulations imposed upon us by bank regulatory authorities.
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In addition, we will consider a number of other factors, including our income and financial condition, tax considerations, and general business conditions before deciding to pay additional dividends in the future. We can provide no assurance that we will continue to pay dividends to our stockholders.
Issuer Purchases of Equity Securities
As reflected in the following table there were no share repurchases by Old Line Bancshares during the quarter ended December 31, 2017:
| Shares Purchased during the period: | Total number of shares repurchased | Average Price paid per share | Total number of share purchased as part of publicly announced program(1) | Maximum number of shares that may yet be purchased under the program (1) | ||||||||||||
| October 1 - December 31, 2017 | — | — | 339,237 | 160,763 | ||||||||||||
________________________
| (1) | On February 25, 2015, Old Line Bancshares’ board of directors approved the repurchase of up to 500,000 shares of our outstanding common stock. As of December 31, 2017, 339,237 shares had been repurchased at an average price of $15.77 per share or a total cost of approximately $5.3 million. |
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Item 6. Selected Financial Data
The following table summarizes Old Line Bancshares, Inc.’s selected financial information and other financial data. The selected balance sheet and statement of income data are derived from our audited financial statements. You should read this information together with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Mergers and Acquisitions” and our financial statements and the related notes included elsewhere in this report. Results for past periods are not necessarily indicative of results that may be expected for any future period.
| December 31, | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| (Dollars in thousands except per share data) | ||||||||||||||||||||
| Earnings and dividends: | ||||||||||||||||||||
| Interest income | $ | 73,613 | $ | 60,465 | $ | 51,453 | $ | 45,603 | $ | 44,263 | ||||||||||
| Interest expense | 11,499 | 7,525 | 4,864 | 3,900 | 4,202 | |||||||||||||||
| Net interest income | 62,114 | 52,940 | 46,589 | 41,703 | 40,061 | |||||||||||||||
| Provision for loan losses | 955 | 1,585 | 1,311 | 2,827 | 1,504 | |||||||||||||||
| Non-interest income | 7,801 | 8,256 | 6,845 | 5,957 | 8,870 | |||||||||||||||
| Non-interest expense | 44,843 | 39,643 | 36,276 | 35,046 | 36,077 | |||||||||||||||
| Income taxes | 8,153 | 6,813 | 5,382 | 2,694 | 3,602 | |||||||||||||||
| Net income | 15,964 | 13,155 | 10,464 | 7,093 | 7,747 | |||||||||||||||
| Less: Net loss attributable to the non-controlling interest | — | — | (4 | ) | (37 | ) | (92 | ) | ||||||||||||
| Net income available to common stockholders | 15,964 | 13,155 | 10,468 | 7,130 | 7,839 | |||||||||||||||
| Per common share data: | ||||||||||||||||||||
| Basic earnings | $ | 1.38 | $ | 1.21 | $ | 0.98 | $ | 0.66 | $ | 0.87 | ||||||||||
| Diluted earnings | 1.35 | 1.20 | 0.97 | 0.65 | 0.86 | |||||||||||||||
| Dividends paid | 0.32 | 0.24 | 0.21 | 0.18 | 0.16 | |||||||||||||||
| Common stockholders book value, period end | 16.61 | 13.81 | 13.31 | 12.51 | 11.71 | |||||||||||||||
| Common stockholders tangible book value, period end | 14.10 | 12.59 | 12.00 | 11.38 | 10.50 | |||||||||||||||
| Average common shares outstanding | ||||||||||||||||||||
| Basic | 11,588,045 | 10,837,939 | 10,647,986 | 10,786,017 | 9,044,844 | |||||||||||||||
| Diluted | 11,799,184 | 10,997,485 | 10,784,323 | 10,935,182 | 9,149,200 | |||||||||||||||
| Common shares outstanding, period end | 12,508,332 | 10,910,915 | 10,802,560 | 10,810,930 | 10,777,113 | |||||||||||||||
| Balance Sheet Data: | ||||||||||||||||||||
| Total assets | $ | 2,105,613 | $ | 1,709,020 | $ | 1,510,089 | $ | 1,227,519 | $ | 1,167,223 | ||||||||||
| Total loans, less allowance for loan losses | 1,700,765 | 1,369,594 | 1,155,147 | 931,121 | 849,263 | |||||||||||||||
| Total investment securities | 218,353 | 199,505 | 194,706 | 161,680 | 172,170 | |||||||||||||||
| Total deposits | 1,652,903 | 1,325,881 | 1,235,880 | 1,015,739 | 974,359 | |||||||||||||||
| Stockholders’ equity | 207,727 | 150,667 | 143,989 | 135,264 | 126,249 | |||||||||||||||
| Performance Ratios: | ||||||||||||||||||||
| Return on average assets | 0.84 | % | 0.83 | % | 0.79 | % | 0.60 | % | 0.74 | % | ||||||||||
| Return on average stockholders’ equity | 8.53 | % | 8.83 | % | 7.54 | % | 5.45 | % | 7.80 | % | ||||||||||
| Total ending equity to total ending assets | 9.87 | % | 8.82 | % | 9.54 | % | 11.02 | % | 10.82 | % | ||||||||||
| Average equity to average total assets | 9.86 | % | 9.37 | % | 10.49 | % | 10.95 | % | 9.50 | % | ||||||||||
| Net interest margin(1) | 3.69 | % | 3.79 | % | 4.08 | % | 4.15 | % | 4.53 | % | ||||||||||
| Dividend payout ratio for period | 23.50 | % | 19.79 | % | 21.47 | % | 27.23 | % | 19.02 | % | ||||||||||
| Asset Quality Ratios: | ||||||||||||||||||||
| Allowance to period-end loans | 0.35 | % | 0.45 | % | 0.43 | % | 0.46 | % | 0.58 | % | ||||||||||
| Non-performing assets to total assets | 0.18 | % | 0.59 | % | 0.56 | % | 0.65 | % | 1.27 | % | ||||||||||
| Non-performing loans to allowance for loan losses | 31.76 | % | 103.04 | % | 120.04 | % | 121.61 | % | 178.91 | % | ||||||||||
| Capital Ratios: | ||||||||||||||||||||
| Tier 1 risk-based capital | 9.6 | % | 9.5 | % | 10.7 | % | 12.3 | % | 12.0 | % | ||||||||||
| Total risk-based capital | 11.8 | % | 12.3 | % | 11.1 | % | 12.7 | % | 12.5 | % | ||||||||||
| Leverage capital ratio | 8.8 | % | 8.6 | % | 9.1 | % | 9.9 | % | 9.3 | % | ||||||||||
| Common Equity Tier 1 | 9.4 | % | 9.2 | % | 10.7 | |||||||||||||||
________________________
| (1) | See “Management’s Discussion and Analysis of Financial Condition and Results of Operating—Reconciliation of Non-GAAP Measures.” |
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We operate a general commercial banking business, accepting deposits and making loans and investments.
The following highlights contain financial data and events that have occurred during 2017:
| • | The merger with DCB became effective on July 28, 2017, resulting in total assets of $2.1 billion. | |
| • | Net income available to common stockholders increased $2.8 million or 21.35% to $16.0 million, or $1.38 per basic and $1.35 per diluted share, for the twelve month period ended December 31, 2017, from $13.2 million, or $1.21 per basic and $1.20 per diluted share, for the twelve months ended December 31, 2016. | |
| • | Net loans held for investment increased $335.2 million, or 24.62%, during the twelve months ended December 31, 2017, bringing the balance to $1.7 billion at December 31, 2017 compared to $1.4 billion at December 31, 2016. This increase is the result of the acquisition of DCB and, to a lesser extent, organic growth. Excluding the DCB acquisition, net loans held for investment during 2017 grew $118.1 million. | |
| • | Average gross loans increased $277.9 million, or 22.28%, during the twelve month period ended December 31, 2017, to $1.5 billion from $1.2 billion for the twelve months ended December 31, 2016. This increase is the result of the acquisition of DCB and, to a lesser extent, organic growth. | |
| • | Total assets increased $396.6 million, or 23.21%, since December 31, 2016, with the majority of the increase resulting from the DCB acquisition. | |
| • | Return on average assets (“ROAA”) and return on average equity (“ROAE”) were 0.84% and 8.53%, respectively, for the twelve months ended December 31, 2017, compared to ROAA and ROAE of 0.83% and 8.83%, respectively, for the twelve months ending December 31, 2016. | |
| • | Total yield on interest earning assets increased to 4.35% for the twelve months ended December 31, 2017, compared to 4.31% for 2016. | |
| • | Total deposits grew by $327.0 million, or 24.66%, since December 31, 2016. The DCB acquisition provided approximately $278.0 million in deposits while new organic deposits were approximately $49.0 million for the twelve months ending December 31, 2017. | |
| • | We ended 2017 with a book value of $16.61 per common share and a tangible book value of $14.10 per common share compared to $13.81 and $12.59, respectively, at December 31, 2016. | |
| • | We maintained appropriate levels of liquidity and by all regulatory measures remained “well capitalized.” | |
| • | On September 27, 2017, Old Line Bancshares entered into an Agreement and Plan of Merger with BYBK, the parent company of Bay Bank, FSB. |
Strategic Plan
We have based our strategic plan on the premise of enhancing stockholder value and growth through branching and operating profits. Our short term goals include continuing our strong pattern of organic loan and deposit growth, enhancing and maintaining credit quality, collecting payments on non-accrual and past due loans, profitably disposing of certain acquired loans and other real estate owned, maintaining an attractive branch network, expanding fee income, generating extensions of core banking services, and using technology to maximize stockholder value. During the past few years, we have expanded organically in Montgomery County, Prince George’s County and Anne Arundel County, Maryland and, pursuant to the Regal Bancorp merger, by acquisition into Baltimore and Carroll Counties, Maryland. In addition, through the DCB merger, we have further expanded our presence in Montgomery and Carroll Counties and entered the Frederick County market. The pending acquisition with BYBK will expand our presence into Baltimore City and Baltimore, Howard and Harford Counties.
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We use the Internet and technology to augment our growth plans. Currently, we offer our customers image technology, Internet banking with online account access and bill pay service and mobile banking. We provide selected commercial customers the ability to remotely capture their deposits and electronically transmit them to us. We will continue to evaluate cost effective ways that technology can enhance our management capabilities, products and services.
We may continue to take advantage of strategic opportunities presented to us via mergers occurring in our marketplace. For example, we may purchase branches that other banks close or lease branch space from other banks or hire additional loan officers. We also continually evaluate and consider opportunities with financial services companies or institutions with which we may become a strategic partner, merge or acquire such as we have done with Maryland Bankcorp, WSB Holdings, Regal and DCB. We believe the recent DCB acquisition will continue to generate increased earnings and increased returns for our stockholders.
Although the current interest rate continues to present challenges for our industry, we have worked diligently towards our goal of becoming the premier community bank in Maryland. While we are uncertain about the continued pace of economic growth or the impact of the current political environment and the growing national debt, we remain cautiously optimistic that we have identified any problem assets, that our remaining borrowers will stay current on their loans and that we can continue to grow our balance sheet and earnings.
Although the Federal Reserve Board has been slowly increasing the federal funds rate since December 2015, interest rates are still at historically low levels, and if the economy remains stable, we believe that we can continue to grow total loans during 2018 even with the additional expected incremental increases in the federal funds rate, which will increase market interest rates, and that we can continue to grow total deposits during 2018 even with interest rates that are, and are expected to remain during 2018, low by historical levels. As a result of this expected growth, we expect that net interest income will increase during 2018, although there can be no guarantee that this will be the case.
We also expect that salaries and benefits expenses and occupancy and equipment expenses will be higher in 2018 and going forward generally than they were in 2017 as a result of including the expenses related to the former Damascus employees and the staff associated with our new branch in Riverdale, Maryland, and the occupancy costs associated with the new Damascus and Riverdale branches, for the full year, as well as the addition of Bay Bank employees and branches upon consummation of the pending merger; such expenses may increase even further if we selectively take the opportunity to add more business development talent. We will continue to look for opportunities to reduce expenses as we did with the closing of three branches in 2016. 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.
Recent Acquisition
DCB Bancshares, Inc. On July 28, 2017, Old Line Bancshares acquired DCB, the parent company of Damascus. Upon consummation of the merger, each share of common stock of DCB outstanding immediately before the merger was converted into the right to receive 0.9269 shares of Old Line Bancshares’ common stock, provided that cash was paid in lieu of any fractional shares of Old Line Bancshares common stock. As a result, Old Line Bancshares issued 1,495,090 shares of its common stock in exchange for the shares of DCB common stock in the merger. The aggregate merger consideration was approximately $40.9 million based on the closing sales price of Old Line Bancshares’ common stock on July 28, 2017.
In connection with the merger, Damascus merged with and into Old Line Bank, with Old Line Bank the surviving bank.
At July 28, 2017, DCB had consolidated assets of approximately $311 million. This merger added six banking locations located in Montgomery, Frederick and Carroll Counties in Maryland.
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The acquired assets and assumed liabilities of DCB were measured at estimated fair value. Management made significant estimates and exercised significant judgment in accounting for the acquisition of DCB. Management judgmentally assigned risk ratings to loans based on appraisals and estimated collateral values, expected cash flows, prepayment speeds and estimated loss factors to measure fair value for loans. Management used quoted or current market prices to determine the fair value of Damascus’ investment securities.
Pending Acquisition
On September 27, 2017, Old Line Bancshares entered into an Agreement and Plan of Merger with BYBK, the parent company of Bay Bank. We expect the merger to close during the second quarter of 2018.
Critical Accounting Policies and Estimates
Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. They require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. The following are the accounting policies that we believe are critical. For a discussion of recent accounting pronouncements, see Note 1—Summary of Significant Accounting Policies in the Notes to our Consolidated Financial Statements.
We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America and follow general practices within the industry in which we operate. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. We base these estimates, assumptions, and judgments on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third party sources, when available.
The most significant accounting policies that we follow are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how we value significant assets and liabilities in the financial statements and how we determine those values. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses as the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.
Allowance for Loan Losses—We evaluate the adequacy of the allowance for loan losses based upon loan categories except for delinquent loans and loans for which management has knowledge about possible credit problems of the borrower or knowledge of problems with loan collateral, which management evaluates separately and assigns loss amounts based upon the evaluation. We apply loss ratios to each category of loans, where we further divide the loans by risk rating and apply loss ratios by risk rating, to determine estimated loss amounts. Categories of loans are consumer loans, residential real estate, commercial real estate and commercial loans. We further divide commercial real estate by owner occupied, investment, hospitality, land acquisition and development and junior liens.
The allowance for loan losses represents management’s best estimate of the losses known and inherent in the loan portfolio that are both probable and reasonable to estimate, based on, among other factors, prior loss experience, volume and type of lending conducted, estimated value of any underlying collateral, economic conditions (particularly as such conditions relate to Old Line Bank’s market area), regulatory guidance, peer statistics, management’s judgment, past due loans in the loan portfolio, loan charge off experience and concentrations of risk (if any). Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant estimates, assumptions, and judgments. The loan portfolio also represents the largest asset type on the consolidated balance sheets.
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Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for loan losses, including in connection with the valuation of collateral and the financial condition of the borrower, and in establishing loss ratios and risk ratings. The establishment of allowance factors is a continuing exercise and allowance factors may change over time, resulting in an increase or decrease in the amount of the provision or allowance based upon the same volume and classification of loans.
Changes in allowance factors or in management’s interpretation of those factors will have a direct impact on the amount of the provision, and a corresponding effect on income and assets. Also, errors in management’s perception and assessment of the allowance factors could result in the allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or charge offs, which would adversely affect income and capital. For additional information regarding the allowance for loan losses, see the “Asset Quality” section of this annual report.
Other-Than-Temporary Impairment—Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include (1) duration and magnitude of the decline in value, (2) the financial condition of the issuer or issuers and (3) the structure of the security. A decline in the market value of any available for sale security below cost that is deemed other-than-temporary results in a charge to earnings and establishment of a new cost basis for that security.
Goodwill and Other Intangible Assets—Goodwill represents the excess of the purchase price over the sum of the estimated fair values of tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed related to the acquisitions of Maryland Bankcorp, WSB Holdings, Regal Bancorp and DCB. Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in these transactions. The core deposit intangible is being amortized over 18 years for Maryland Bankcorp, ten years for WSB Holdings, and eight years for Regal Bancorp and DCB, and the estimated useful lives are periodically reviewed for reasonableness.
Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing the reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill assigned to that reporting unit is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment of goodwill assigned to that reporting unit.
If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. We have determined that Old Line Bancshares has one reporting unit.
We engaged an external valuation specialist to assist us in the goodwill assessment performed at September 30, 2017, our annual test date, and determined that no impairment charge was necessary for our goodwill at that date. Fair value of the reporting unit in 2017 was determined using three methods, one based on the prices paid for common shares of reasonably similar publically traded companies, another based on the prices paid for acquisition of control of reasonably similar companies, and lastly, a third method based on discounted cash flow models with estimated cash flows based on internal forecasts of net income. These three methods provided a range of valuations that we used in evaluating goodwill for possible impairment. Additionally, should Old Line Bancshares’ future earnings and cash flows decline and/or discount rates increase, an impairment charge to goodwill and other intangible assets may be required. There have been no events subsequent to the September 30, 2017 evaluation that caused us to perform an interim review of the carrying value of goodwill.
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Business Combinations— U.S. GAAP requires that the acquisition method of accounting, formerly referred to as purchase method, be used for all business combinations and that an acquirer be identified for each business combination. Under U.S. GAAP, the acquirer is the entity that obtains control of one or more businesses in the business combination, and the acquisition date is the date the acquirer achieves control. U.S. GAAP requires that the acquirer recognize the fair value of assets acquired, liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date.
Acquired Loans—These loans are recorded at fair value at the date of acquisition, and accordingly no allowance for loan losses is transferred to the acquiring entity in connection with purchase accounting. The fair values of loans with evidence of credit deterioration (purchased, credit-impaired loans) are initially recorded at fair value, but thereafter accounted for differently than purchased, non-credit-impaired loans. For purchased, credit-impaired loans, the excess of all cash flows estimated to be collectable at the date of acquisition over the purchase price of the purchase credit-impaired loan is recognized as interest income, using a level-yield basis over the life of the loan. This amount is referred to as the accretable yield. The purchased credit-impaired loan’s contractually-required payments receivable estimated to be in excess of the amount of its future cash flows expected at the date of acquisition is referred to as the non-accretable difference, and is not reflected as an adjustment to the yield, in the form of a loss accrual or a valuation allowance.
If a loan that was previously rated a pass performing loan, from our acquisitions, deteriorates subsequent to the acquisition, the subject loan will be assessed for risk and, if necessary, evaluated for impairment. If the risk assessment rating is adversely changed and the loan is determined to not be impaired, the loan will be placed in a migration category and the credit mark established for the loan will be compared to the general reserve allocation that would be applied using the current allowance for loan losses formula for General Reserves. If the credit mark exceeds the allowance for loan losses formula for General Reserves, there will be no change to the allowance for loan losses. If the credit mark is less than the current allowance for loan losses formula for General Reserves, the allowance for loan losses will be increased by the amount of the shortfall by a provision recorded in the income statement. If the loan is deemed impaired, the loan will be subject to evaluation for loss exposure and a specific reserve. If the estimate of loss exposure exceeds the credit mark, the allowance for loan losses will be increased by the amount of the excess loss exposure through a provision. If the credit mark exceeds the estimate of loss exposure there will be no change to the allowance for loan losses. If a loan from the acquired loan portfolio is carrying a specific credit mark and a current evaluation determines that there has been an increase in loss exposure, the allowance for loan losses will be increased by the amount of the current loss exposure in excess of the credit mark.
Subsequent to the acquisition date, management continues to monitor cash flows on a quarterly basis, to determine the performance of each purchased, credit-impaired loan in comparison to management’s initial performance expectations. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent significant increases in cash flows result in a reversal of the provision for loan losses to the extent of prior provisions, or a reclassification of amount from non-accretable difference to accretable yield, with a positive impact on the accretion of interest income in future periods.
Acquired performing loans are accounted for using the contractual cash flows method of recognizing discount accretion or premium amortization based on the acquired loans’ contractual cash flows. Acquired performing loans are recorded as of the purchase date at fair value. Credit losses on the acquired performing loans are estimated based on analysis of the performing portfolio. A provision for loan losses is recognized for any further credit deterioration that occurs in these loans subsequent to the acquisition date.
Income Taxes—The provision for income taxes includes taxes payable for the current year and deferred income taxes. We determine deferred tax assets and liabilities based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which we expect the differences to reverse. If needed, we use a valuation allowance to reduce the deferred tax assets to the amount we expect to realize. We allocate tax expense and tax benefits to Old Line Bancshares and its subsidiaries based on their proportional share of taxable income.
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TCJA significantly changes U.S. tax law by, among other things, lowering the corporate income tax rate and implementing changes to business-related exclusions. TCJA permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income at the time of enactment of such change in tax rates. Accordingly, in the fourth quarter 2017 we recorded a provisional tax expense, based on estimates, for the effects of TCJA.
The SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of TCJA. SAB 118 describes three scenarios associated with a company’s status of accounting for TCJA income tax reform: (1) a company reflects the income tax effects of TCJA in which the accounting under ASC 740 is complete; (2) a company is able to determine a reasonable estimate for certain effects of TCJA and records that estimate as a provisional amount; or (3) a company is not able to determine a reasonable estimate and therefore continues to apply Statement of Financial Accounting Standards, Accounting Standards Codification (“ASC”) 740, Income Taxes, based on the provisions of the tax laws in effect immediately prior to tax reform being enacted.
In its consolidated financial statements for the year ended December 31, 2017, Old Line Bancshares recorded an expense of $2.9 million for the effects of the change in tax law, including all materially impacted items and for which the accounting under ASC 740 is complete. Provisional amounts would include, for example, reasonable estimates that give rise to new current or deferred taxes based on certain provisions within TCJA, as well as adjustments to existing current or deferred taxes that existed prior to TCJA’s enactment date. Old Line Bancshares had maintained a deferred tax asset valuation allowance in relation to net operating loss carryovers and other items in relation to the acquisition of Regal Bank, which occurred in December 2015. Management determined that the concerns that existed at the time we established the valuation reserve relating to this acquisition no longer existed and Old Line Bancshares therefore reversed this valuation allowance in total during the fourth quarter. The effect of the reversal of the valuation reserve increased net deferred income taxes in the amount of $3.4 million, resulting in a decrease in income tax expense. The net impact of these two items was a reduction of income tax expense by $472 thousand. There were no other items for which we were unable to make reasonable estimates for effects of the tax law change. The ultimate impact may differ, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of TCJA. The accounting related to the impact of TCJA must be completed no later than one year from date of its enactment.
We calculated the impact of TCJA using a process taking into account all available information. The amounts are considered to be estimates. Updates to the estimate will occur in the normal course, including as we receive additional information, upon the issuance of relevant tax legislative guidance, and resulting from actions we may take as a result of TCJA.
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Average Balances, Yields and Accretion of Fair Value Adjustments Impact
The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the periods indicated, 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.
| 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||||
| Twelve months ended | Average | Yield or | Average | Yield or | Average | Yield or | ||||||||||||||||||||||||||||||
| December 31, | Balance | Interest | Rate Paid | Balance | Interest | Rate Paid | Balance | Interest | Rate Paid | |||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||
| Federal funds sold(1) | $ | 528,260 | 6,441 | 1.22 | % | $ | 490,653 | 2,350 | 0.48 | % | $ | 365,198 | 1,027 | 0.28 | % | |||||||||||||||||||||
| Interest bearing deposits | 1,227,606 | 874 | 0.07 | 1,350,471 | 429 | 0.03 | 1,322,436 | 19 | 0.01 | |||||||||||||||||||||||||||
| Investment securities(1)(2) | ||||||||||||||||||||||||||||||||||||
| U.S. Treasury | 3,021,320 | 28,143 | 0.93 | 3,002,860 | 19,929 | 0.66 | 3,000,357 | 11,195 | 0.37 | |||||||||||||||||||||||||||
| U.S. government agency | 11,197,975 | 288,597 | 2.58 | 17,576,233 | 281,652 | 1.60 | 38,414,019 | 552,033 | 1.44 | |||||||||||||||||||||||||||
| Corporate bonds | 11,645,056 | 628,622 | 5.40 | 2,562,022 | 130,374 | 5.09 | ||||||||||||||||||||||||||||||
| Mortgage backed securities | 113,386,984 | 2,213,346 | 1.95 | 111,803,259 | 2,060,415 | 1.84 | 78,253,923 | 1,502,468 | 1.92 | |||||||||||||||||||||||||||
| Municipal securities | 71,976,386 | 2,775,183 | 3.86 | 60,152,096 | 2,506,943 | 4.17 | 41,869,571 | 1,991,942 | 4.76 | |||||||||||||||||||||||||||
| Other equity securities | 8,415,799 | 583,180 | 6.93 | 6,408,092 | 383,296 | 5.98 | 4,807,916 | 238,859 | 4.97 | |||||||||||||||||||||||||||
| Total investment securities | 219,643,520 | 6,517,071 | 2.97 | 201,504,562 | 5,382,609 | 2.67 | 166,345,786 | 4,296,497 | 2.58 | |||||||||||||||||||||||||||
| Loans:(1) | ||||||||||||||||||||||||||||||||||||
| Commercial | 186,391,285 | 7,596,169 | 4.08 | 151,539,645 | 5,998,257 | 3.96 | 138,609,896 | 5,351,764 | 3.86 | |||||||||||||||||||||||||||
| Mortgage real estate | 1,310,301,829 | 59,758,168 | 4.56 | 1,089,605,816 | 50,554,758 | 4.64 | 874,089,522 | 43,089,824 | 4.93 | |||||||||||||||||||||||||||
| Consumer | 28,651,307 | 1,900,247 | 6.63 | 6,300,586 | 400,245 | 6.35 | 8,442,865 | 456,501 | 5.41 | |||||||||||||||||||||||||||
| Total loans | 1,525,344,421 | 69,254,584 | 4.54 | 1,247,446,047 | 56,953,260 | 4.57 | 1,021,142,283 | 48,898,089 | 4.79 | |||||||||||||||||||||||||||
| Allowance for loan losses | 5,940,338 | — | 5,867,612 | — | 4,648,177 | — | ||||||||||||||||||||||||||||||
| Total loans, net of allowance | 1,519,404,083 | 69,254,584 | 4.56 | 1,241,578,435 | 56,953,260 | 4.59 | 1,016,494,106 | 48,898,089 | 4.81 | |||||||||||||||||||||||||||
| Total interest earning assets(1) | 1,740,803,469 | 75,778,970 | 4.35 | 1,444,924,121 | 62,338,648 | 4.31 | 1,184,527,526 | 53,195,632 | 4.49 | |||||||||||||||||||||||||||
| Non-interest bearing cash | 33,307,218 | 35,498,836 | 38,327,715 | |||||||||||||||||||||||||||||||||
| Premises and equipment | 38,834,701 | 36,196,496 | 34,402,717 | |||||||||||||||||||||||||||||||||
| Other assets | 85,788,571 | 74,839,004 | 66,766,197 | |||||||||||||||||||||||||||||||||
| Total assets(1) | 1,898,733,959 | 1,591,458,457 | 1,324,024,155 | |||||||||||||||||||||||||||||||||
| Liabilities and Stockholders’ Equity: | ||||||||||||||||||||||||||||||||||||
| Interest bearing deposits | ||||||||||||||||||||||||||||||||||||
| Savings | 116,754,118 | 130,322 | 0.11 | 101,028,925 | 122,270 | 0.12 | 91,645,292 | 111,385 | 0.12 | |||||||||||||||||||||||||||
| Money market and NOW | 473,125,699 | 1,863,164 | 0.39 | 394,821,212 | 1,014,981 | 0.26 | 331,201,292 | 723,666 | 0.22 | |||||||||||||||||||||||||||
| Time deposits | 498,710,927 | 5,327,545 | 1.07 | 445,419,886 | 4,371,583 | 0.98 | 377,037,062 | 3,411,939 | 0.90 | |||||||||||||||||||||||||||
| Total interest bearing deposits | 1,088,590,744 | 7,321,031 | 0.67 | 941,270,023 | 5,508,834 | 0.59 | 799,883,646 | 4,246,990 | 0.53 | |||||||||||||||||||||||||||
| Borrowed funds | 216,669,514 | 4,177,602 | 1.93 | 160,858,392 | 2,016,278 | 1.25 | 101,832,108 | 617,308 | 0.61 | |||||||||||||||||||||||||||
| Total interest bearing liabilities | 1,305,260,258 | 11,498,633 | 0.88 | 1,102,128,415 | 7,525,112 | 0.68 | 901,715,754 | 4,864,298 | 0.54 | |||||||||||||||||||||||||||
| Non-interest bearing deposits | 394,246,163 | 324,555,990 | 274,917,333 | |||||||||||||||||||||||||||||||||
| 1,699,506,421 | 1,426,684,405 | 1,176,633,087 | ||||||||||||||||||||||||||||||||||
| Other liabilities | 12,023,925 | 14,754,357 | 8,220,112 | |||||||||||||||||||||||||||||||||
| Non-controlling interest | — | 979,255 | 269,964 | |||||||||||||||||||||||||||||||||
| Stockholders’ equity | 187,203,613 | 149,040,440 | 138,900,992 | |||||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 1,898,733,959 | $ | 1,591,458,457 | $ | 1,324,024,155 | ||||||||||||||||||||||||||||||
| Net interest spread(1) | 3.47 | 3.63 | 3.95 | |||||||||||||||||||||||||||||||||
| Net interest margin(1) | 64,280,337 | 3.69 | % | 54,813,536 | 3.79 | % | 48,331,334 | 4.08 | % | |||||||||||||||||||||||||||
________________________
| (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. |
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Rate/Volume Analysis
The following table describes the impact on our interest income and expense resulting from changes in average balances and average rates for the periods indicated. The change in interest income due to both volume and rate is reported with the rate variance.
| Twelve Months Ended December 31, | Twelve Months Ended December 31, | |||||||||||||||||||||||
| 2017 compared to 2016 | 2016 compared to 2015 | |||||||||||||||||||||||
| Variance due to: | Variance due to: | |||||||||||||||||||||||
| Total | Rate | Volume | Total | Rate | Volume | |||||||||||||||||||
| Interest earning assets: | ||||||||||||||||||||||||
| Federal funds sold(1) | $ | 4,091 | $ | 3,898 | $ | 193 | $ | 1,323 | $ | 887 | $ | 436 | ||||||||||||
| Interest bearing deposits | 445 | 487 | (42 | ) | 410 | 410 | — | |||||||||||||||||
| Investment Securities(1) | ||||||||||||||||||||||||
| U.S. Treasury | 8,214 | 8,091 | 123 | 8,734 | 8,725 | 9 | ||||||||||||||||||
| U.S. government agency | 6,945 | 405,696 | (398,751 | ) | (270,381 | ) | 56,242 | (326,623 | ) | |||||||||||||||
| Corporate bonds | 498,248 | — | 498,248 | 130,374 | — | 130,374 | ||||||||||||||||||
| Mortgage backed securities | 152,931 | 3,534,038 | (3,381,107 | ) | 557,947 | (66,261 | ) | 624,208 | ||||||||||||||||
| Municipal securities | 268,240 | (1,325,936 | ) | 1,594,176 | 515,001 | (274,856 | ) | 789,857 | ||||||||||||||||
| Other | 199,884 | (70,848 | ) | 270,732 | 144,437 | 54,333 | 90,104 | |||||||||||||||||
| Loans: | ||||||||||||||||||||||||
| Commercial | 1,597,912 | 182,230 | 1,415,682 | 646,493 | 125,046 | 521,447 | ||||||||||||||||||
| Mortgage real estate | 9,203,410 | (875,293 | ) | 10,078,703 | 7,464,934 | (2,747,727 | ) | 10,212,661 | ||||||||||||||||
| Consumer | 1,500,002 | 18,397 | 1,481,605 | (56,256 | ) | 70,784 | (127,040 | ) | ||||||||||||||||
| Total interest income(1) | 13,440,322 | 1,880,760 | 11,559,562 | 9,143,016 | (2,772,417 | ) | 11,915,433 | |||||||||||||||||
| Interest bearing liabilities: | ||||||||||||||||||||||||
| Savings | 8,052 | (9,993 | ) | 18,045 | 10,885 | — | 10,885 | |||||||||||||||||
| Money market and NOW | 848,183 | 617,803 | 230,380 | 291,315 | 69 | 291,246 | ||||||||||||||||||
| Time deposits | 955,962 | 406,338 | 549,624 | 959,644 | 161,373 | 798,271 | ||||||||||||||||||
| Borrowed funds | 2,161,324 | 1,314,176 | 847,148 | 1,398,970 | 755,760 | 643,210 | ||||||||||||||||||
| Total interest expense | 3,973,521 | 2,328,324 | 1,645,197 | 2,660,814 | 917,202 | 1,743,612 | ||||||||||||||||||
| Net interest income(1) | $ | 9,466,801 | $ | (447,564 | ) | $ | 9,914,365 | $ | 6,482,202 | $ | (3,689,619 | ) | $ | 10,171,821 | ||||||||||
________________________
| (1) | Interest revenue is presented on a fully taxable equivalent (FTE) basis. Management believes providing this information on a FTE basis provides investors with a more accurate picture of our net interest spread and net interest income and we believe it to be the preferred industry measurement of these calculations. See “Reconciliation of Non-GAAP Measures. |
The fair value yield on loan accretion decreased in 2017 due to a decrease in the level of payoffs on acquired loans with positive accretion as compared to payoffs in 2016. The fair value accretion increased the net interest margin as follows:
| Twelve Months Ended December 31, | ||||||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||
| Fair Value | % Impact on | Fair Value | % Impact on | Fair Value | % Impact on | |||||||||||||||||||
| Accretion | Net Interest | Accretion | Net Interest | Accretion | Net Interest | |||||||||||||||||||
| Dollars | Margin | Dollars | Margin | Dollars | Margin | |||||||||||||||||||
| Commercial loans | $ | 75,437 | 0.00 | % | $ | 35,454 | 0.00 | % | $ | 21,744 | 0.00 | % | ||||||||||||
| Mortgage loans | 737,435 | 0.04 | 847,872 | 0.06 | 1,538,455 | 0.12 | ||||||||||||||||||
| Consumer loans | 174,098 | 0.01 | 106,581 | 0.01 | 22,946 | — | ||||||||||||||||||
| Interest bearing deposits | 249,095 | 0.02 | 259,835 | 0.02 | 151,123 | 0.01 | ||||||||||||||||||
| Total Fair Value Accretion | $ | 1,236,065 | 0.07 | % | $ | 1,249,742 | 0.09 | % | $ | 1,734,268 | 0.13 | % | ||||||||||||
| 43 |
Comparison of Operating Results for the Years Ended December 31, 2017 and 2016.
Net Interest Income. Net interest income before provision for loan losses for the year ended December 31, 2017 increased $9.2 million or 17.33% to $62.1 million from $52.9 million for the year ended December 31, 2016. As discussed below and outlined in detail in the Rate/Volume Analysis, these changes were the result of an increase in total interest income resulting primarily from a $277.9 million increase in the average balance of our loans, partially offset by an increase in interest expense resulting from increases in both the average balance and average rate on our interest bearing liabilities.
The growth in average interest bearing liabilities during 2017 resulted primarily from increases of $147.3 million in average interest bearing deposits, which increased to $1.1 billion for the year ended December 31, 2017 from $941.3 million for the year ended December 31, 2016, and $55.8 million in borrowings. The average balance of our borrowings increased due to an increase in our FHLB advances and the subordinated notes we issued in August 2016 (the “Notes”) being outstanding for the full year in 2017 compared to five months in 2016. The average rate paid on our borrowings increased as a result of higher rates on our FHLB advances, which resulted from the increase in the prime interest rate and switching from fixed rate advances to daily-rate FHLB advances, which have a higher interest rate, combined with the 5.625% interest rate on the Notes. We continue to adjust the mix and volume of interest earning assets and interest bearing liabilities on the balance sheet to maintain a relatively strong net interest margin.
The growth in both average interest earning assets and average interest bearing deposits was a result of the DCB acquisition in July 2017 and, to a lesser extent, organic growth.
We had a slight increase in the average yield on interest earning assets for the year ended December 31, 2017 compared to the prior year, primarily as a result of higher average yields on our investment securities available for sale, partially offset by a slight decrease in the average yield on our loans held for investment portfolio. The competitive rate environment also resulted in an increase in the rates we paid on our money market and NOW accounts and time deposits. We expect the Federal Reserve Board to continue to increase the federal funds rate during 2018 and that our competitors may start increasing the rates they pay on deposits as a result. As a result, we expect that we will have to further increase the rates we pay on our deposits.
Our net interest margin was 3.69% for the year ended December 31, 2017 compared to 3.79% for the year ended December 31, 2016. The yield on average interest earning assets increased by 4 basis points from 4.31% for the year ended December 31, 2016 to 4.35% for the year ended December 31, 2017. This increase was primarily due to higher yields on our investment securities, partially offset by a slight decrease in the yield on loans due to yields on new loans and re-pricing in the loan portfolio. The net effect of fair value accretion/amortization on acquired loans affects our net interest income. The fair value accretion/amortization is recorded on paydowns during the period recognized and the fair value accretion on loans decreased to 7 basis points in 2017 from 9 basis points in the prior year. The net interest margin in 2016 benefited from a higher level of accretion on acquired loans due to a greater level of early payoffs on acquired loans with credit marks.
Provision for Loan Losses. The provision for loan losses totaled $955 thousand for the year ended December 31, 2017, a decrease of $629 thousand, or 39.72%, from the 2016 amount of $1.6 million. Management identified additional probable losses in the loan portfolio and recorded charge-offs of $1.3 million for the year ended December 31, 2017, compared to $410 thousand for the year ended December 31, 2016. Recoveries of $41 thousand were recognized in 2017 compared to $111 thousand in 2016. The decrease in our provision for loan losses during the twelve months ended December 31, 2017 compared to the same period of 2016 is due to a decrease in our specific reserves primarily due to one large commercial borrower, consisting of 23 commercial loans totaling $3.0 million, of which $1.0 million was charged-off against the allowance for loan losses and $2.0 million was reclassified as trouble debt restructurings during the first quarter of 2017. Amounts charged off in relation to these loans during 2017 were in line with specific reserves at December 31, 2016. These trouble debt restructurings are classified as impaired and all our impaired loans have been adequately reserved for at December 31, 2017. The allowance for loan losses to gross loans held for investment was 0.35%, and the allowance for loan losses to non-accrual loans was 335.51%, at December 31, 2017.
| 44 |
Non-Interest Income. Non-interest income totaled $7.8 million for the year ended December 31, 2017, a decrease of $455 thousand, or 5.52%, from the 2016 amount of $8.3 million. Non-interest income for the years ended December 31, 2017 and 2016 are as follows:
| Years ended December 31, | ||||||||||||||||
| 2017 | 2016 | $ Change | % Change | |||||||||||||
| Service charges on deposit accounts | $ | 1,982,981 | $ | 1,728,636 | $ | 254,345 | 14.71 | % | ||||||||
| Gain on sales or calls of investment securities | 35,258 | 1,227,915 | (1,192,657 | ) | (97.13 | ) | ||||||||||
| Earnings on bank owned life insurance | 1,167,467 | 1,132,401 | 35,066 | 3.10 | ||||||||||||
| Gain (loss) on disposal of assets | 73,663 | (27,176 | ) | 100,839 | (371.06 | ) | ||||||||||
| Gain on sale of loans | 94,714 | — | 94,714 | 100.00 | ||||||||||||
| Rental income | 706,990 | 744,038 | (37,048 | ) | (4.98 | ) | ||||||||||
| Income on marketable loans | 2,319,806 | 2,317,648 | 2,158 | 0.09 | ||||||||||||
| Other fees and commissions | 1,419,726 | 1,132,575 | 287,151 | 25.35 | ||||||||||||
| Total non-interest income | $ | 7,800,605 | $ | 8,256,037 | $ | (455,432 | ) | (5.52 | )% | |||||||
The primary reason for the decrease in non-interest income during 2017 was a decrease in gain on sales or calls of investment securities, partially offset by increases in service charges on deposit accounts, gain on disposal of assets, other fees and commissions and a gain on the sale of loans.
The decrease in gain on sales or calls or investment securities is the result of our re-positioning our investment portfolio during 2016, pursuant to which we sold approximately $108 million of our lowest yielding, longer duration investments; during the twelve months ended December 31, 2017, we had $61.9 million in sales and calls of investment securities, $41.8 million of which was from, and sold immediately after, the DCB merger, resulting in no gain or loss. We used the proceeds of these sales and calls to purchase investment securities with a slightly higher book yield.
The increase in service charges on deposits accounts is the result of increased income on bank debit cards due to the increased deposit base, primarily as a result of the DCB merger.
The increase in gain on disposal of assets is due to the sale of two of our previously-owned locations, the Accokeek branch that was closed in 2016 and the Callaway branch that was closed in 2017.
Other fees and commissions increased primarily due to the result of recoveries of previously charged-off acquired loans.
The increase in gain on sale of loans (other than residential mortgage loans held for sale) is due to the sale of one SBA loan during the 2017 period, whereas we did not sell any portfolio loans during the 2016 period.
| 45 |
Non-Interest Expenses. Non-interest expense increased $5.2 million, or 13.12%, for the year ended December 31, 2017 compared to the year ended December 31, 2016. The following chart outlines the amounts of and changes in non-interest expenses during 2017 and 2016.
| Years ended December 31, | ||||||||||||||||
| 2017 | 2016 | $ Change | % Change | |||||||||||||
| Salaries and benefits | $ | 20,551,526 | $ | 20,031,638 | $ | 519,888 | 2.60 | % | ||||||||
| Occupancy and equipment | 7,073,696 | 6,788,213 | 285,483 | 4.21 | ||||||||||||
| Data processing | 1,671,720 | 1,549,863 | 121,857 | 7.86 | ||||||||||||
| FDIC insurance and State of Maryland assessments | 1,001,522 | 1,040,507 | (38,985 | ) | (3.75 | ) | ||||||||||
| Merger and integration | 3,985,514 | 661,018 | 3,324,496 | 502.94 | ||||||||||||
| Core deposit premium amortization | 968,880 | 830,805 | 138,075 | 16.62 | ||||||||||||
| Gain on sale of other real estate owned | (13,589 | ) | (77,943 | ) | 64,354 | (82.57 | ) | |||||||||
| OREO expense | 301,394 | 318,498 | (17,104 | ) | (5.37 | ) | ||||||||||
| Director fees | 659,300 | 665,700 | (6,400 | ) | (0.96 | ) | ||||||||||
| Network Services | 519,652 | 549,639 | (29,987 | ) | (5.46 | ) | ||||||||||
| Telephone | 821,260 | 762,943 | 58,317 | 7.64 | ||||||||||||
| Other operating | 7,302,172 | 6,522,285 | 779,887 | 11.96 | ||||||||||||
| Total non-interest expenses | $ | 44,843,047 | $ | 39,643,166 | $ | 5,199,881 | 13.12 | % | ||||||||
The increase in non-interest expenses during 2017 as compared to 2016 is primarily the result of increases in merger and integration expenses and, to a lesser extent, other operating expenses, salaries and benefits and occupancy and equipment expenses.
Merger and integration expenses increased $3.3 million to $4.0 million for the twelve months ended December 31, 2017 due to the DCB acquisition, compared to $661 thousand of merger and integration expenses during 2016 in connection with the Regal Bancorp acquisition that was consummated in December 2015.
Other operating expenses increased primarily as a result of increased Internet banking support and ATM expenses resulting from the increased deposit base in 2017 compared to the prior year, primarily as a result of the DCB acquisition.
Salaries and benefits increased $520 thousand, primarily as a result of the increased number of employees resulting from our acquisition of DCB as well as the addition of the staff at our new Riverdale branch and the inclusion of a full year of salaries and benefits for the employees at our Rockville Town Center branch compared to only six months of such expenses during 2016. The impact of these increases was partially offset by a lack of severance payments in 2017 compared to $443 thousand of such payments in 2016.
Occupancy and equipment expenses increased $285 thousand, primarily as a result of the additional branches that we acquired in the DCB acquisition.
Income Taxes. Income tax expense was $8.2 million (33.81% of pre-tax income) for the year ended December 31, 2017 compared to $6.8 million (34.12% of pre-tax income) for 2016. The effective tax rate decreased for 2017 due to an increase in non-deductible merger and integration expenses associated with the DCB acquisition, while the amount of taxes we paid increased due to the increased level of income before taxes, partially offset by the net tax effect of two non-recurring income tax matters during 2017. First was the TCJA, which as discussed above lowered corporate income tax marginal rates beginning in 2018. Upon its enactment, companies were required under applicable accounting standards to revalue their deferred tax assets and liabilities as of December 31, 2017 at the lower enacted rate. Based on an analysis of the deferred tax accounts, we estimated that the rate change resulted in a provisional adjustment of $2.9 million to the net deferred income taxes and a resulting increase in income tax expense. Second, and unrelated to TCJA, in 2016 we had maintained a deferred tax asset valuation allowance in relation to net operating loss carryovers and other items related to the acquisition of Regal Bank in December of 2015. We determined that the concerns that existed at the time we established this reserve no longer existed and we therefore reversed this valuation allowance in total. The effect of reversing the valuation reserve increased net deferred income taxes in the amount of $3.4 million, with a resulting decrease in income tax expense. The net impact of these two items was a reduction of the amount of our income tax in 2017.
| 46 |
Net Income Available to Common Stockholders. Net income available to common stockholders was $16.0 million or $1.38 per basic and $1.35 per diluted common share for the year ending December 31, 2017 compared to net income available to common stockholders of $13.2 million or $1.21 per basic and $1.20 per diluted common share for the year ended December 31, 2016. The increase in net income available to common stockholders for 2017 was primarily the result of the $9.2 million increase in net interest income, partially offset by increases of $5.2 million in non-interest expenses and $1.3 million in income tax expense and a $455 thousand decrease in non-interest income.
Comparison of Operating Results for the Years Ended December 31, 2016 and 2015
Net Interest Income. Net interest income before provision for loan losses for the year ended December 31, 2016 increased $6.4 million or 13.63% to $52.9 million from $46.6 million for the year ended December 31, 2015. As discussed below and outlined in detail in the Rate/Volume Analysis, these changes were the result of an increase in total interest income resulting primarily from an increase in the average balance of our loans, partially offset by an increase in interest expense resulting from increases in both the average balance and average rate on our interest bearing liabilities.
A continuing competitive rate environment and a low prime rate resulted in a slight decrease in the average yield on our interest earnings assets. The decreases in the yield on interest earning assets is the result of re-pricing in the loan portfolio and lower yields on new loans causing the average loan yield to decline. The competitive rate environment also resulted in an increase in the rates paid on our money market and NOW and time deposits.
The average balance of our borrowings increased due to an increase in our FHLB advances and the issuance of the Notes in August 2016. The average rate paid on our borrowings increased as a result of higher rates on our FHLB advances, which resulted from the increase in the prime interest rate and switching from daily-rate FHLB advances to fixed-rate advances, which have a higher interest rate, combined with our issuance of the Notes, which carry an interest rate of 5.625%. We used the proceeds from the issuance of the Notes to repay the remaining balance of a $5.8 million promissory note previously issued by Pointer Ridge and for general corporate purpose, including increasing the capital levels of the Bank.
We offset the effect on net interest income caused by the low interest rate environment primarily by growing total average interest earning assets by $260.4 million or 21.98% to $1.4 billion for the year ended December 31, 2016 from $1.2 billion for the year ended December 31, 2015. The growth in average interest earning assets consisted primarily of increases of $226.3 million in average total loans and $35.2 million in average investment securities. The growth in average interest bearing liabilities during 2016 resulted primarily from increases of $141.4 million in average interest bearing deposits, which increased to $941.3 million for the year ended December 31, 2016 from $799.9 million for the year ended December 31, 2015, and $59.0 million in borrowings.
The growth in both average interest earning assets and average interest bearing deposits was primarily a result of strong organic growth and the Regal acquisition in December 2015. Average deposits for 2016 includes approximately $69.6 million in deposits we acquired from Regal Bank and average loans for 2016 includes approximately $91.4 million we acquired from Regal Bank.
Our net interest margin was 3.79% for the year ended December 31, 2016 compared to 4.08% for the year ended December 31, 2015. The yield on average interest earning assets decreased by 18 basis points from 4.49% for the year ended December 31, 2015 to 4.31% for the year ended December 31, 2016. This decrease was primarily due to lower yields on new loans and re-pricing in the loan portfolio. The net effect of fair value accretion/amortization on acquired loans affects our net interest income. The fair value accretion/amortization is recorded on paydowns during the period recognized and the fair value accretion on loans decreased to 6 basis points from 12 basis points in the prior year. The net interest margin in 2015 benefited from a higher level of accretion on acquired loans due to a greater level of early payoffs on acquired loans with credit marks.
Provision for Loan Losses. The provision for loan losses totaled $1.6 million for the year ended December 31, 2016, an increase of $274 thousand, or 20.87%, from the 2015 amount of $1.3 million. Management identified probable losses in the loan portfolio and recorded charge-offs of $410 thousand for the year ended December 31, 2016, compared to $893 thousand for the year ended December 31, 2015. Recoveries of $111 thousand were recognized in 2016 compared to $210 thousand in 2015. The increase in our provision for loan losses during the twelve months ended December 31, 2016 compared to the same period of 2015 is due to the increase in our loans held for investment portfolio and an increase in our reserves on specific loans. The reserves on specific loans increased primarily due to an additional reserve on one large commercial real estate loan and a reserve on one hospitality loan. These loans are classified as impaired and we believe that they have been adequately reserved for at December 31, 2016. The allowance for loan losses to gross loans held for investment was 0.45%, and the allowance for loan losses to non-accrual loans was 97.05%, at December 31, 2016.
| 47 |
Non-Interest Income. Non-interest income totaled $8.3 million for the year ended December 31, 2016, an increase of $1.4 million, or 20.61% from the 2015 amount of $6.8 million. Non-interest income for the years ended December 31, 2016 and 2015 are as follows:
| Years Ended December 31, | ||||||||||||||||
| 2016 | 2015 | $ Change | % Change | |||||||||||||
| Service charges on deposit accounts | $ | 1,728,636 | $ | 1,729,773 | $ | (1,137 | ) | (0.07 | )% | |||||||
| Gain on sales or calls of investment securities | 1,227,915 | 65,222 | 1,162,693 | 1,782.67 | ||||||||||||
| Earnings on bank owned life insurance | 1,132,401 | 1,009,653 | 122,748 | 12.16 | ||||||||||||
| Gain (loss) on disposal of assets | (27,176 | ) | 14,128 | (41,304 | ) | (292.36 | ) | |||||||||
| Rental Income | 744,038 | 841,075 | (97,037 | ) | (11.54 | ) | ||||||||||
| Income on marketable loans | 2,317,648 | 2,019,313 | 298,335 | 14.77 | ||||||||||||
| Other fees and commissions | 1,132,575 | 1,165,831 | (33,256 | ) | (2.85 | ) | ||||||||||
| Total non-interest income | $ | 8,256,037 | $ | 6,844,995 | $ | 1,411,042 | 20.61 | % | ||||||||
Non-interest income for the years ended December 31, 2016 and 2015 included fee income from service charges on deposit accounts, gain on sales or calls of investment securities, earnings on bank owned life insurance, gain or loss on disposal of assets, rental income, income on marketable loans and other fees and commissions. The reason for the increase in non-interest income during 2016 was an increase in gain on sales or calls of investment securities and, to a lesser extent, increases in, income on marketable loans and earnings on bank owned life insurance, partially offset by decreases in rental income and other fees and commissions and a loss on disposal of assets.
The increase in gain on sales of investment securities is the result of re-positioning our investment portfolio, pursuant to which we sold approximately $107.9 million of our lowest yielding, longer duration investments and $13.4 million of investments that were called during 2016, resulting in a gain on investments of $1.2 million for the twelve months ending December 31, 2016. We used the proceeds of these sales and calls to purchase investment securities with a slightly higher book yield. There were no sales of investment securities during the twelve months ending December 31, 2015, however, five municipal bonds were called and one agency security matured for a total of $65 thousand in gains for 2015.
Income on marketable loans consists of income received on the sale of such loans and any fees we received in connection with such sales. Income on marketable loans increased $298 thousand to $2.3 million for the year ending December 31, 2016 from $2.0 million for the year ending December 31, 2015, primarily as a result of increased premiums received on residential mortgage loans sold in the secondary market for 2016 as compared to the same period of 2015. The residential mortgage division sold $100.6 million of loans in the secondary market during 2016 compared to $103.5 million of loans during 2015. There were no significant changes to our mortgage department, staffing or strategy during 2016.
The increase in earnings on bank owned life insurance is due to the bank owned life insurance we acquired in the Regal Bank acquisition.
| 48 |
Other fees and commissions decreased primarily due to other loan fees that were included in 2015 related to a prepayment penalty and the gain of $153 thousand received during the third quarter of 2015 as a result of selling our credit card portfolio in 2015, partially offset by a one-time incentive fee received for our debit card program during 2016.
Rental income decreased during the year ending December 31, 2016 as a result of the vacant space at our building located at 4201 Mitchellville Road in Bowie, Maryland, which was occupied during part of 2015.
Non-Interest Expenses. Non-interest expense increased $3.4 million, or 9.28%, for the year ended December 31, 2016 compared to the year ended December 31, 2015. The following chart outlines the amounts of and changes in non-interest expenses during 2016 and 2015.
| Years ended December 31, | ||||||||||||||||
| 2016 | 2015 | $ Change | % Change | |||||||||||||
| Salaries and benefits | $ | 20,031,638 | $ | 17,237,222 | $ | 2,794,416 | 16.21 | % | ||||||||
| Occupancy and equipment | 6,788,213 | 5,775,874 | 1,012,339 | 17.53 | ||||||||||||
| Data processing | 1,549,863 | 1,432,182 | 117,681 | 8.22 | ||||||||||||
| FDIC insurance and State of Maryland assessments | 1,040,507 | 966,982 | 73,525 | 7.60 | ||||||||||||
| Merger and integration | 661,018 | 1,420,570 | (759,552 | ) | (53.47 | ) | ||||||||||
| Core deposit premium amortization | 830,805 | 792,351 | 38,454 | 4.85 | ||||||||||||
| Gain on sale of other real estate owned | (77,943 | ) | 49,717 | (127,660 | ) | (256.77 | ) | |||||||||
| OREO expense | 318,498 | 430,559 | (112,061 | ) | (26.03 | ) | ||||||||||
| Director fees | 665,700 | 651,500 | 14,200 | 2.18 | ||||||||||||
| Network Services | 549,639 | 699,649 | (150,010 | ) | (21.44 | ) | ||||||||||
| Telephone | 762,943 | 659,934 | 103,009 | 15.61 | ||||||||||||
| Other operating | 6,522,285 | $ | 6,159,143 | $ | 363,142 | 5.90 | ||||||||||
| Total non-interest expenses | $ | 39,643,166 | $ | 36,275,683 | $ | 3,367,483 | 9.28 | % | ||||||||
The increase in non-interest expenses during 2016 as compared to 2015 is primarily the result of increases in salaries and benefits and occupancy and equipment expenses, partially offset by reductions in merger and integration, network services and OREO expenses and a gain on sales of OREO properties.
Salaries and benefits increased $2.8 million primarily as a result of additional staff due to our acquisition of Regal Bank and the additional staff for our two new Rockville locations. Included in salaries and benefits is severance payments of $443 thousand that were associated with previously announced strategic staffing reductions.
Occupancy and equipment increased $1.0 million as a result of the additional branches acquired in the Regal Bank acquisition and the addition of our two new Rockville locations as well as the costs associated with the branch closures, which were approximately $285 thousand, during the third quarter of 2016.
Merger and integration expenses decreased due to the majority of such expenses associated with the acquisition of Regal Bancorp being incurred during 2015, the year that the merger was consummated.
Network services decreased as a result of our transition from outsourced services to internal monitoring with respect to our information technology.
Gain on sales of OREO properties increased $128 thousand as a result of recording a net gain of $78 thousand for seven properties that sold during the twelve months ending December 31, 2016 compared to a net loss of $50 thousand during the same period of 2015. OREO expenses decreased as a result of a reduction in our expenses on the properties in our OREO portfolio.
Income Taxes. Income tax expense was $6.8 million (34.12% of pre-tax income) for the year ended December 31, 2016 compared to $5.4 million (33.97% of pre-tax income) for 2015. Taxes were higher in 2016 primarily because income increased and the percentage of income related to tax-exempt securities was lower as compared to the year ended December 31, 2015.
| 49 |
Net Income Available to Common Stockholders. Net income available to common stockholders was $13.2 million or $1.21 per basic and $1.20 per diluted common share for the year ending December 31, 2016 compared to net income available to common stockholders of $10.5 million or $0.98 per basic and $0.97 per diluted common share for the year ended December 31, 2015. The increase in net income available to common stockholders for 2016 was primarily the result of the increases of $6.4 million in net interest income and $1.4 million in non-interest income, partially offset by increases of $3.4 million in non-interest expenses and $274 thousand in the provision for loan losses. Included in net income for 2016 was $443 thousand for severance payments and $285 thousand in occupancy and equipment expense resulting from the staff reductions and branch closures during 2016 and $661 thousand in merger related expense associated with the acquisition of Regal Bancorp during the fourth quarter of 2015.
Comparison of Financial Condition at December 31, 2017 and 2016
Investment Securities. Our portfolio consists primarily of investment grade securities including U.S. Treasury securities, U.S. government agency securities, U.S. government sponsored entity securities, corporate bonds, securities issued by states, counties and municipalities, mortgage backed securities (“MBS”), certain equity securities (recorded at cost), Federal Home Loan Bank stock, Maryland Financial Bank stock, and Atlantic Community Bankers Bank stock.
We have prudently managed our investment portfolio to maintain liquidity and safety. The portfolio provides a source of liquidity, collateral for borrowings as well as a means of diversifying our earning asset portfolio. While we usually intend to hold the investment securities until maturity, currently we classify all of our investment securities as available for sale. This classification provides us the opportunity to divest of securities that may no longer meet our liquidity objectives. We account for investment securities at fair value and report the unrealized appreciation and depreciation as a separate component of stockholders’ equity, net of income tax effects. Although we may sell securities to reposition the portfolio, generally, we invest in securities for the yield they produce and not to profit from trading the securities. We continually evaluate our investment portfolio to ensure it is adequately diversified, provides sufficient cash flow and does not subject us to undue interest rate risk. There are no trading securities in our portfolio.
The available for sale investment securities at December 31, 2017 amounted to $218.4 million, an increase of $18.8 million, or 9.45%, from the December 31, 2016 amount of $199.5 million. As outlined above, at December 31, 2017, all securities were classified as available for sale. This increase is the result of sales and purchases of securities during 2017 as part of our continued efforts to diversify our balance sheet. We sold approximately $53.8 million of investment securities during 2017, $41.8 million of which was from, and sold immediately after, the DCB merger; we also had $7.6 million of investment securities that were called or matured during 2017, resulting in a gain on investments of $22 thousand for the twelve months ending December 31, 2017. Principal pay downs on our MBS portfolio was $15.9 million for the year. We used the proceeds of these securities sales to purchase $51.0 million of investment securities with a slightly higher book yield.
The fair value of available for sale securities included net unrealized losses of $3.9 million at December 31, 2017 ($2.3 million net of taxes) as compared to net unrealized losses of $8.2 million ($5.0 million net of taxes) at December 31, 2016. The increase in the value of the investment securities is due to a decrease in market interest rates, which resulted in an increase in bond values. We have evaluated securities with larger unrealized losses not backed by the U.S. Government and unrealized losses for an extended period of time and determined that these losses are temporary and 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 are expected to decline or dissipate.
The following table sets forth a summary of the investment securities portfolio as of the dates indicated. Available for sale securities are reported at estimated fair value.
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| December 31, | 2017 | 2016 | 2015 | |||||||||
| Available For Sale Securities | ||||||||||||
| U.S. Treasury | $ | 3,005,391 | $ | 2,995,782 | $ | 3,000,000 | ||||||
| U.S. government agency | 17,733,766 | 7,266,315 | 36,606,663 | |||||||||
| Corporate bonds | 14,658,059 | 8,171,637 | — | |||||||||
| Municipal securities | 79,555,288 | 67,686,805 | 50,202,706 | |||||||||
| Mortgage backed securities | 103,400,054 | 113,384,665 | 100,282,637 | |||||||||
| SBA loan pools | — | — | 4,613,669 | |||||||||
| Total Available for Sale Securities | $ | 218,352,558 | $ | 199,505,204 | $ | 194,705,675 | ||||||
| Equity securities | $ | 8,977,747 | $ | 8,303,347 | $ | 4,942,346 | ||||||
The following table shows the maturities for the securities portfolio at December 31, 2017:
| Amortized | ||||||||
| Cost | Fair Value | |||||||
| U.S. Treasury | $ | 3,007,728 | $ | 3,005,391 | ||||
| 1 year or less | — | — | ||||||
| After 1 year through 5 years | — | — | ||||||
| After 5 years through 10 years | — | — | ||||||
| After 10 years | 3,007,728 | 3,005,391 | ||||||
| U. S. government agencies | ||||||||
| 1 year or less | 1,500,000 | 1,489,671 | ||||||
| After 1 year through 5 years | — | — | ||||||
| After 5 years through 10 years | 9,023,280 | 8,911,839 | ||||||
| After 10 years | 7,477,920 | 7,332,256 | ||||||
| 18,001,200 | 17,733,766 | |||||||
| Corporate bonds | ||||||||
| 1 year or less | — | — | ||||||
| After 1 year through 5 years | — | — | ||||||
| After 5 years through 10 years | 14,621,378 | 14,658,059 | ||||||
| After 10 years | — | — | ||||||
| 14,621,378 | 14,658,059 | |||||||
| Municipal bonds | ||||||||
| 1 year or less | 305,405 | 307,724 | ||||||
| After 1 year through 5 years | 483,985 | 483,744 | ||||||
| After 5 years through 10 years | 23,400,317 | 23,068,947 | ||||||
| After 10 years | 56,601,724 | 55,694,874 | ||||||
| 80,791,431 | 79,555,289 | |||||||
| Mortgage-backed securities | ||||||||
| 1 year or less | — | — | ||||||
| After 1 year through 5 years | 136,761 | 139,277 | ||||||
| After 5 years through 10 years | 4,716,871 | 4,631,072 | ||||||
| After 10 years | 100,933,599 | 98,629,704 | ||||||
| 105,787,231 | 103,400,053 | |||||||
| Total Securities | $ | 222,208,968 | $ | 218,352,558 | ||||
We have pledged U.S. government and municipal securities to customers who require collateral for overnight repurchase agreements and deposits. While we classify MBS based on the maturity date, the contractual maturities of these securities are not reliable indicators of their expected life because mortgage borrowers have the right to prepay mortgages at any time. Additionally, the issuer may call the U.S. government callable agency securities listed above prior to the contractual maturity. The weighted average yield in the table above does not include tax equivalent computation on tax exempt obligations.
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Loan Portfolio. Net of allowance, unearned fees and origination costs, loans held for investment increased $335.2 million or 24.62% to $1.7 billion at December 31, 2017 from $1.4 billion at December 31, 2016. Commercial real estate loans increased by $188.5 million, residential real estate loans by $45.5 million, commercial and industrial loans by $45.4 million, and consumer loans by $54.8 million, from their respective balances at December 31, 2016. The loan growth during the year was due to the acquisition of the Damascus loan portfolio and, to a lesser extent, organic growth. Approximately $197.2 million of the growth in net loans were loans we acquired in the DCB acquisition. Organic growth in our held for investment portfolio is the result of new originations within our market area and the surrounding area, primarily in our commercial real estate and construction permanent loan portfolios.
Loans held for sale was $4.4 million at December 31, 2017, compared to $8.4 million at December 31, 2016. We originated $95.4 million loans sold in the secondary market resulting in income on the sale of loans of $2.3 million for the twelve months ending December 31, 2017, a slight increase of $2 thousand compared to 2016.
Most of our lending activity occurs within the state of Maryland in the suburban Washington, D.C. and Baltimore market areas in Anne Arundel, Baltimore, Calvert, Carroll, Charles, Montgomery, Frederick, Prince George’s and St. Mary’s Counties. The majority of our loan portfolio consists of commercial real estate loans and residential real estate loans.
Major classifications of loans held for investment for at December 31, 2017, 2016, 2015, 2014 and 2013 are as follows:
| December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
| Legacy(1) | Acquired | Total | Legacy(1) | Acquired | Total | |||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||
| Owner Occupied | $ | 268,128,087 | $ | 87,658,855 | $ | 355,786,942 | $ | 238,220,475 | $ | 53,850,612 | $ | 292,071,087 | ||||||||||||
| Investment | 485,536,921 | 52,926,739 | 538,463,660 | 414,012,709 | 37,687,804 | 451,700,513 | ||||||||||||||||||
| Hospitality | 164,193,228 | 7,395,186 | 171,588,414 | 141,611,858 | 11,193,427 | 152,805,285 | ||||||||||||||||||
| Land and A&D | 67,310,660 | 9,230,771 | 76,541,431 | 51,323,297 | 6,015,813 | 57,339,110 | ||||||||||||||||||
| Residential Real Estate | ||||||||||||||||||||||||
| First Lien-Investment | 79,762,682 | 21,220,518 | 100,983,200 | 72,150,512 | 23,623,660 | 95,774,172 | ||||||||||||||||||
| First Lien-Owner Occupied | 67,237,699 | 62,524,794 | 129,762,493 | 54,732,604 | 42,443,767 | 97,176,371 | ||||||||||||||||||
| Residential Land and A&D | 35,879,853 | 6,536,160 | 42,416,013 | 39,667,222 | 5,558,232 | 45,225,454 | ||||||||||||||||||
| HELOC and Jr. Liens | 21,520,339 | 16,019,418 | 37,539,757 | 24,385,215 | 2,633,718 | 27,018,933 | ||||||||||||||||||
| Commercial and Industrial | 154,244,645 | 33,100,688 | 187,345,333 | 136,259,560 | 5,733,904 | 141,993,464 | ||||||||||||||||||
| Consumer | 10,758,589 | 49,082,751 | 59,841,340 | 4,868,909 | 139,966 | 5,008,875 | ||||||||||||||||||
| 1,354,572,703 | 345,695,880 | 1,700,268,583 | 1,177,232,361 | 188,880,903 | 1,366,113,264 | |||||||||||||||||||
| Allowance for loan losses | (5,738,534 | ) | (182,052 | ) | (5,920,586 | ) | (6,084,478 | ) | (110,991 | ) | (6,195,469 | ) | ||||||||||||
| Deferred loan costs, net | 2,013,434 | — | 2,013,434 | 1,257,411 | — | 1,257,411 | ||||||||||||||||||
| $ | 1,350,847,603 | $ | 345,513,828 | $ | 1,696,361,431 | $ | 1,172,405,294 | $ | 188,769,912 | $ | 1,361,175,206 | |||||||||||||
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| December 31, 2015 | December 31, 2014 | |||||||||||||||||||||||
| Legacy(1) | Acquired | Total | Legacy(1) | Acquired | Total | |||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||
| Owner Occupied | $ | 193,909,818 | $ | 57,212,598 | $ | 251,122,416 | $ | 192,723,718 | $ | 27,891,137 | $ | 220,614,855 | ||||||||||||
| Investment | 298,434,087 | 57,749,376 | 356,183,463 | 208,766,058 | 41,624,825 | 250,390,883 | ||||||||||||||||||
| Hospitality | 91,440,548 | 10,776,561 | 102,217,109 | 76,342,916 | 8,319,644 | 84,662,560 | ||||||||||||||||||
| Land and A&D | 50,584,469 | 7,538,964 | 58,123,433 | 40,260,506 | 4,785,753 | 45,046,259 | ||||||||||||||||||
| Residential Real Estate | ||||||||||||||||||||||||
| First Lien-Investment | 69,121,743 | 31,534,452 | 100,656,195 | 49,578,862 | 24,185,571 | 73,764,433 | ||||||||||||||||||
| First Lien-Owner Occupied | 37,486,858 | 52,204,717 | 89,691,575 | 31,822,773 | 51,242,355 | 83,065,128 | ||||||||||||||||||
| Residential Land and A&D | 35,219,801 | 6,578,950 | 41,798,751 | 22,239,663 | 8,509,239 | 30,748,902 | ||||||||||||||||||
| HELOC and Jr. Liens | 24,168,289 | 4,350,956 | 28,519,245 | 20,854,737 | 3,046,749 | 23,901,486 | ||||||||||||||||||
| Commercial and Industrial | 105,963,233 | 9,519,465 | 115,482,698 | 98,310,009 | 9,694,782 | 108,004,791 | ||||||||||||||||||
| Consumer | 6,631,311 | 243,804 | 6,875,115 | 9,068,755 | 313,739 | 9,382,494 | ||||||||||||||||||
| 912,960,157 | 237,709,843 | 1,150,670,000 | 749,967,997 | 179,613,794 | 929,581,791 | |||||||||||||||||||
| Allowance for loan losses | (4,821,214 | ) | (88,604 | ) | (4,909,818 | ) | (4,261,835 | ) | (20,000 | ) | (4,281,835 | ) | ||||||||||||
| Deferred loan costs, net | 1,274,533 | — | 1,274,533 | 1,283,455 | (9,923 | ) | 1,273,532 | |||||||||||||||||
| $ | 909,413,476 | $ | 237,621,239 | $ | 1,147,034,715 | $ | 746,989,617 | $ | 179,583,871 | $ | 926,573,488 | |||||||||||||
| December 31, 2013 | ||||||||||||
| Legacy(1) | Acquired | Total | ||||||||||
| Commercial Real Estate | ||||||||||||
| Owner Occupied | $ | 163,105,356 | $ | 30,102,731 | $ | 193,208,087 | ||||||
| Investment | 162,188,671 | 54,091,676 | 216,280,347 | |||||||||
| Hospitality | 67,291,387 | 8,546,239 | 75,837,626 | |||||||||
| Land and A&D | 40,595,806 | 8,399,178 | 48,994,984 | |||||||||
| Residential Real Estate | ||||||||||||
| First Lien-Investment | 45,294,434 | 28,364,096 | 73,658,530 | |||||||||
| First Lien-Owner Occupied | 13,909,939 | 62,247,502 | 76,157,441 | |||||||||
| Residential Land and A&D | 19,845,291 | 13,724,942 | 33,570,233 | |||||||||
| HELOC and Jr. Liens | 18,302,560 | 3,359,063 | 21,661,623 | |||||||||
| Commercial and Industrial | 89,629,043 | 11,161,347 | 100,790,390 | |||||||||
| Consumer | 10,127,525 | 870,843 | 10,998,368 | |||||||||
| 630,290,012 | 220,867,617 | 851,157,629 | ||||||||||
| Allowance for loan losses | (4,397,552 | ) | (531,661 | ) | (4,929,213 | ) | ||||||
| Deferred loan costs, net | 1,021,167 | (993 | ) | 1,020,174 | ||||||||
| $ | 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, WSB Holdings, the parent company of WSB, in May 2013, Regal Bancorp, the parent company of Regal Bank, in December 2015 and DCB, the parent company of Damascus in July 2017, we have segmented the portfolio into two components, loans originated by Old Line Bank (legacy) and loans acquired from MB&T, WSB, Regal Bank and Damascus (acquired). |
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The following table presents the maturities or re-pricing periods of loans outstanding at December 31, 2017:
| Loan Maturity Distribution at December 31, 2017 | ||||||||||||||||
| 1 year or less | 1 - 5 years | After 5 years | Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||
| Owner occupied | $ | 55,734,251 | $ | 219,344,262 | $ | 80,708,429 | $ | 355,786,942 | ||||||||
| Investment | 90,073,123 | 227,186,778 | 221,203,759 | 538,463,660 | ||||||||||||
| Hospitality | 34,722,186 | 122,760,248 | 14,105,980 | 171,588,414 | ||||||||||||
| Land and A & D | 49,006,445 | 16,907,759 | 10,627,227 | 76,541,431 | ||||||||||||
| Real Estate: | ||||||||||||||||
| Residential First Lien-Investment | 19,360,023 | 60,356,872 | 21,266,305 | 100,983,200 | ||||||||||||
| Residential First Lien-Owner Occupied | 10,782,822 | 25,947,356 | 93,032,315 | 129,762,493 | ||||||||||||
| Residential—Land and A&D | 27,981,313 | 10,291,907 | 4,142,793 | 42,416,013 | ||||||||||||
| HELOC and Jr. Liens | 37,108,752 | 193,098 | 237,907 | 37,539,757 | ||||||||||||
| Commercial and Industrial | 79,684,230 | 66,777,834 | 40,883,269 | 187,345,333 | ||||||||||||
| Consumer | 2,721,036 | 21,339,689 | 35,780,615 | 59,841,340 | ||||||||||||
| Total Loans | $ | 407,174,181 | $ | 771,105,803 | $ | 521,988,599 | $ | 1,700,268,583 | ||||||||
| Fixed Rates | $ | 63,662,255 | $ | 228,500,590 | $ | 458,620,079 | $ | 750,782,924 | ||||||||
| Variable Rates | 343,511,926 | 542,605,213 | 63,368,520 | 949,485,659 | ||||||||||||
| Total Loans | $ | 407,174,181 | $ | 771,105,803 | $ | 521,988,599 | $ | 1,700,268,583 | ||||||||
Bank Owned Life Insurance. We have invested $41.6 million in life insurance policies on our executive officers, other officers of Old Line Bank, retired officers of MB&T and former officers of WSB, Regal Bank and Damascus at December 31, 2017. The bank owned life insurance (“BOLI”) investment increased $4.1 million during the twelve months ended December 31, 2017, primary due to $3.1 million of BOLI acquired in the DCB acquisition. The increase also includes interest earned on these policies. Gross earnings on BOLI were $1.2 million during the year ending December 31, 2017, which earnings were partially offset by $198 thousand in expenses associated with the policies, for total net earnings of $969 thousand in 2017. We anticipate that the earnings on these policies will continue to help offset our employee benefit expenses as well as our obligations under our Salary Continuation Agreements and Supplemental Life Insurance Agreements that we entered into with our executive officers as well as that MB&T and WSB had entered into with their executive officers. There are no post-retirement death benefits associated with the BOLI policies owned by Old Line Bank prior to the acquisition of MB&T. We have accrued a $206 thousand liability associated with the post-retirement death benefits of the BOLI policies acquired from MB&T and there are no such benefits related to the BOLI policies acquired from WSB, Regal Bank or Damascus.
Annuity Plan. The new annuity plan is an interest earning investment that that relates to a new supplemental retirement plan that will provide a lifetime benefit to the participants. As of December 31, 2017, we had made the investment, but the Plan itself will be put in place during the first quarter of 2018.
Other Real Estate Owned. As a result of the acquisitions of MB&T, WSB, Regal Bank and Damascus, we have segmented the OREO into two components, real estate obtained as a result of loans originated by Old Line Bank (legacy) and other real estate acquired from MB&T, WSB, Regal Bank and Damascus or obtained as a result of loans originated by MB&T, WSB, and Regal Bank (acquired); we did not acquire any OREO properties as a result of the DCB acquisition. We are currently aggressively either marketing these properties for sale or improving them in preparation for sale.
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The following outlines the transactions in OREO during 2017.
| December 31, 2017 | Legacy | Acquired | Total | |||||||||
| Beginning balance | $ | 425,000 | $ | 2,321,000 | $ | 2,746,000 | ||||||
| Real estate acquired through foreclosure of loans | 321,600 | 101,248 | 422,848 | |||||||||
| Addiitonal valuation adjustment of real estate owned | - | (166,550 | ) | (166,550 | ) | |||||||
| Sales/deposits on sales | (363,714 | ) | (648,175 | ) | (1,011,889 | ) | ||||||
| Net realized gain/(loss) | 42,114 | (28,525 | ) | 13,589 | ||||||||
| Total end of period | $ | 425,000 | $ | 1,578,998 | $ | 2,003,998 | ||||||
Goodwill and Core Deposit Intangible. At December 31, 2017, goodwill was $25.1 million and consisted of $633,790 related to the MB&T acquisition, $7.2 million related to the WSB acquisition, $2.0 million related to the Regal Bank acquisition and $15.3 million related to the Damascus acquisition. As a result of the acquisitions of MB&T, WSB, Regal Bank and Damascus, we recorded core deposit intangibles of $11.9 million. This amount represented the premium that we paid to acquire MB&T, WSB, Regal Bank and Damascus’ core deposits over the fair value of such deposits. We are amortizing MB&T’s core deposit intangible on an accelerated basis over its estimated useful life of 18 years, WSB’s over its estimated useful life of ten years, Regal Bank’s over its estimated useful life of eight years and Damascus’ over its estimated useful life of eight years. The core deposit intangible was $6.3 million and $3.5 million, respectively, at December 31, 2017 and 2016.
Deposits. At December 31, 2017, the deposit portfolio had increased to $1.7 billion, a $327.0 million or 24.66% increase over the December 31, 2016 level of $1.3 billion. Non-interest bearing deposits increased $120.5 million during the year to $451.8 million from $331.3 million at December 31, 2016. These increases are due to the Damascus acquisition and our enhanced presence in our market and surrounding areas as a result of our marketing efforts and the continued efforts of our cash management and financial services teams. The DCB acquisition provided approximately $278.0 million in deposits while new organic deposits were approximately $49.0 million for the year ending December 31, 2017. Interest bearing deposits increased $206.6 million to $1.2 billion at December 31, 2017 from $994.5 million at December 31, 2016. Our interest-bearing non-maturity deposits increased $137.1 million and our time deposits increased by $69.4 million during 2017. The following table outlines the growth in interest bearing deposits during 2017:
| December 31, | December 31, | |||||||||||||||
| 2017 | 2016 | $ Change | % Change | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Certificates of deposit | $ | 530,027 | $ | 460,595 | $ | 69,432 | 15.07 | % | ||||||||
| Interest bearing checking | 538,102 | 433,195 | 104,907 | 24.22 | ||||||||||||
| Savings | 132,971 | 100,759 | 32,212 | 31.97 | ||||||||||||
| Total | $ | 1,201,100 | $ | 994,549 | $ | 206,551 | 20.77 | % | ||||||||
We acquired brokered money market and certificate of deposits 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 network’s reciprocal deposit program. We can also place deposits through this network without receiving matching deposits. At December 31, 2017, we had $49.2 million in CDARS and $144.9 million in money market accounts through Promontory’s reciprocal deposit program compared to $39.9 million and $126.8 million, respectively, at December 31, 2016.
We do not currently have any brokered certificates of deposits other than CDARS. The $4.0 million of brokered certificates of deposit that we acquired in the WSB transaction matured during the first quarter of 2017. Old Line Bank did not obtain any brokered certificates of deposit during the year ending December 31, 2017. We may, however, use brokered deposits in the future as an element of our funding strategy if and when required to maintain an acceptable loan to deposit ratio.
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The following is a summary of the maturity distribution of certificates of deposit of $100,000 or more as of December 31, 2017.
| Certificate of Deposit Maturity Distribution | ||||||||||||||||||||
| December 31, 2017 | ||||||||||||||||||||
| Over Three | Over Six | |||||||||||||||||||
| Three Months | Months through | Months through | Over | |||||||||||||||||
| or | Six | Twelve | Twelve | |||||||||||||||||
| Less | Months | Months | Months | Total | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Certificates of deposit | ||||||||||||||||||||
| Time Certificates of deposit $100,000 or more | $ | 53,027 | $ | 45,463 | $ | 64,021 | $ | 152,997 | $ | 315,508 | ||||||||||
| Other time deposits of $100,000 or more | 22,159 | 17,871 | 5,535 | 1,461 | 47,026 | |||||||||||||||
| Total | $ | 75,186 | $ | 63,334 | $ | 69,556 | $ | 154,458 | $ | 362,534 | ||||||||||
Borrowings. Our borrowings consist of unsecured short-term promissory notes, securities sold under agreements to repurchase, a long-term senior note, the Notes, trust preferred subordinated debentures assumed in the Regal merger and, from time to time, advances from the FHLB. At December 31, 2017, borrowings totaled $230.7 million, an increase of $9.4 million from December 31, 2016. The increase was primarily due to increases in the FHLB daily rate advance. We used the additional borrowings primarily to fund new loan originations.
The following is a summary of our short-term and long-term borrowings at December 31, 2017, 2016 and 2015:
| December 31. 2017 | ||||||||||||||||||||
| Maximum | Average | |||||||||||||||||||
| Weighted | Amount | Interest | ||||||||||||||||||
| Average | Outstanding at | Average | Rate | |||||||||||||||||
| Balance at End | Interest | Any Month | Balance | During | ||||||||||||||||
| of Year | Rate | End | During Year | Year | ||||||||||||||||
| Short-term borrowings | ||||||||||||||||||||
| Repurchase agreements | $ | 37,611,971 | 0.80 | % | $ | 37,611,971 | $ | 27,469,892 | 0.80 | % | ||||||||||
| FHLB daily rate advance | 45,000,000 | 1.59 | 45,000,000 | 28,098,630 | 1.22 | |||||||||||||||
| FHLBfixed rate advances | 110,000,000 | 1.40 | 165,000,000 | 176,881,966 | 0.97 | |||||||||||||||
| Total short-term borrowings | 192,611,971 | 247,611,971 | 232,450,488 | |||||||||||||||||
| Long-term borrowings | ||||||||||||||||||||
| Senior note, fixed at 6.28% | — | — | — | — | — | |||||||||||||||
| Subordinated Note - fixed to floating, due 2026 | 35,000,000 | 35,000,000 | 35,000,000 | |||||||||||||||||
| Discount on subordinated note | (452,651 | ) | (500,692 | ) | (480,755 | ) | ||||||||||||||
| Issuance cost for subordinated note | (471,590 | ) | (521,641 | ) | (500,870 | ) | ||||||||||||||
| Net carrying value for subordinated note | 34,075,759 | 5.625 | 33,977,667 | 34,018,375 | 5.625 | |||||||||||||||
| Subordinated Debentures | ||||||||||||||||||||
| Trust 1 - Floating 90-day LIBOR plus 2.85%, due 2034 | 4,000,000 | 4.39 | ||||||||||||||||||
| Acquisition fair value adjustment | (1,468,572 | ) | ||||||||||||||||||
| Trust 2 - Floating 90-day LIBOR plus 1.60%, due 2035 | 2,500,000 | 3.14 | ||||||||||||||||||
| Acquisition fair value adjustment | (1,202,257 | ) | ||||||||||||||||||
| Stock on subordinated debentures | 202,000 | |||||||||||||||||||
| Net carrying value | 4,031,171 | 3.91 | 3,887,101 | 3,947,384 | 4.34 | |||||||||||||||
| Total long-term borrowings | $ | 38,106,930 | 71,842,435 | 71,984,134 | ||||||||||||||||
| Total borrowings | $ | 230,718,901 | $ | 319,454,406 | $ | 304,434,622 | ||||||||||||||
| 56 |
| December 31, 2016 | ||||||||||||||||||||
| Maximum | Average | |||||||||||||||||||
| Weighted | Amount | Interest | ||||||||||||||||||
| Average | Outstanding at | Average | Rate | |||||||||||||||||
| Balance at End | Interest | Any Month | Balance | During | ||||||||||||||||
| of Year | Rate | End | During Year | Year | ||||||||||||||||
| Short-term borrowings | ||||||||||||||||||||
| Repurchase agreements | $ | 33,433,892 | 0.47 | % | $ | 33,880,864 | $ | 30,573,019 | 0.47 | % | ||||||||||
| FHLB daily rate advance | 30,000,000 | 0.80 | 54,000,000 | 32,263,661 | 0.65 | |||||||||||||||
| FHLB adjustable rate advances | — | — | 4,000,000 | 1,478,698 | 0.59 | |||||||||||||||
| FHLBfixed rate advances | 120,000,000 | 0.61 | 159,000,000 | 104,822,830 | 0.39 | |||||||||||||||
| Total short-term borrowings | 183,433,892 | 250,880,864 | 169,138,208 | |||||||||||||||||
| Long-term borrowings | ||||||||||||||||||||
| Senior note, fixed at 6.28% | — | — | 5,865,438 | 3,887,114 | 6.28 | |||||||||||||||
| Subordinated Note - fixed to floating, due 2026 | 35,000,000 | 35,000,000 | 11,953,552 | |||||||||||||||||
| Discount on subordinated note | (505,151 | ) | (525,000 | ) | 176,174 | |||||||||||||||
| Issuance cost for subordinated note | (526,286 | ) | (535,427 | ) | 173,339 | |||||||||||||||
| Net carrying value for subordinated note | 33,968,563 | 5.625 | 33,939,573 | 12,303,065 | 5.625 | |||||||||||||||
| Subordinated Debentures | ||||||||||||||||||||
| Trust 1 - Floating 90-day LIBOR plus 2.85%, due 2034 | 4,000,000 | 3.82 | ||||||||||||||||||
| Acquisition fair value adjustment | (1,558,946 | ) | ||||||||||||||||||
| Trust 2 - Floating 90-day LIBOR plus 1.60%, due 2035 | 2,500,000 | 2.57 | ||||||||||||||||||
| Acquisition fair value adjustment | (1,269,050 | ) | ||||||||||||||||||
| Stock on subordinated debentures | 202,000 | |||||||||||||||||||
| Net carrying value | 3,874,004 | 3.34 | 3,716,838 | 3,757,633 | 3.53 | |||||||||||||||
| Total long-term borrowings | $ | 37,842,567 | 77,461,421 | 32,250,877 | ||||||||||||||||
| Total borrowings | $ | 221,276,459 | $ | 328,342,285 | $ | 201,389,085 | ||||||||||||||
| December 31, 2015 | ||||||||||||||||||||
| Maximum | Average | |||||||||||||||||||
| Weighted | Amount | Interest | ||||||||||||||||||
| Average | Outstanding at | Average | Rate | |||||||||||||||||
| Balance at End | Interest | Any Month | Balance | During | ||||||||||||||||
| of Year | Rate | End | During Year | Year | ||||||||||||||||
| Short-term borrowings | ||||||||||||||||||||
| Repurchase agreements | $ | 33,557,246 | 0.17 | % | $ | 33,557,246 | $ | 29,038,197 | 0.17 | % | ||||||||||
| FHLB daily rate advance | 34,000,000 | 0.49 | 64,000,000 | 18,756,567 | 0.38 | |||||||||||||||
| FHLB adjustable rate advances | 3,000,000 | 0.38 | 2,500,000 | 504,734 | 0.36 | |||||||||||||||
| FHLB fixed rate advances | 37,000,000 | 0.39 | 87,500,000 | 47,059,726 | 0.21 | |||||||||||||||
| Total short-term borrowings | 107,557,246 | 187,557,246 | 95,359,224 | |||||||||||||||||
| Long-term borrowings | ||||||||||||||||||||
| Senior note, fixed at 6.28% | 5,874,560 | 6.28 | 5,978,771 | 5,926,602 | 6.28 | |||||||||||||||
| Subordinated Debentures | ||||||||||||||||||||
| Trust 1 - Floating 90-day LIBOR plus 2.85%, due 2034 | 4,000,000 | 3.18 | ||||||||||||||||||
| Acquisition fair value adjustment | (1,647,400 | ) | ||||||||||||||||||
| Trust 2 - Floating 90-day LIBOR plus 1.60%, due 2035 | 2,500,000 | 1.94 | ||||||||||||||||||
| Acquisition fair value adjustment | (1,335,842 | ) | ||||||||||||||||||
| Stock on subordinated debentures | 202,000 | |||||||||||||||||||
| Net carrying value | 3,718,758 | 2.71 | 3,716,838 | 285,127 | 2.35 | |||||||||||||||
| Total long-term borrowings | $ | 9,593,318 | 9,695,609 | 6,211,729 | ||||||||||||||||
| Total borrowings | $ | 117,150,564 | $ | 197,252,855 | $ | 101,570,953 | ||||||||||||||
Short-term borrowings from the FHLB have a remaining maturity of less than one year. The repurchase agreements listed in short term borrowings roll over daily with no fixed maturity.
Long-term borrowings consists primarily of the Notes. The fair value of the Notes, which are due in 2026, at December 31, 2017 is $34.1 million . The initial interest rate on the Notes is 5.625% per annum from August 15, 2016 to August 14, 2021, payable semi-annually on each February 15 and August 15. Beginning August 15, 2021, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month LIBOR rate plus 450.2 basis points, payable quarterly on each February 15, May 15, August 15 and November 15 through maturity or early redemption. Also included in long-term borrowings are trust preferred subordinated debentures totaling $4.0 million (net of $2.7 million fair value adjustment) at December 31, 2017, which we acquired in the Regal acquisition. The trust preferred subordinated debentures consists of two trusts – Trust 1 in the amount of $4.0 million (fair value adjustment of $1.5 million) maturing on March 17, 2034 and Trust 2 in the amount of $2.5 million (fair value adjustment $1.2 million) maturing on December 14, 2035.
| 57 |
Old Line Bancshares has additional lines of credit available as discussed in “Liquidity and Capital Resources.”
Stockholders’ Equity. Our stockholders’ equity was $207.7 million at December 31, 2017 and $150.7 million at December 31, 2016. We are considered “well capitalized” under the risk-based capital guidelines adopted by the Federal Reserve Board. Stockholders’ equity increased during 2017 primarily due to $40.8 million additional paid in capital from the DCB acquisition, $16.0 million of net income available to common stockholders, the issuance of $695 thousand of stock based compensation awards, $665 thousand in proceeds from the exercise of stock options and $2.6 million in after tax unrealized losses on available for sale securities. These items were partially offset by the $3.8 million paid in dividends on our common stock.
Asset Quality
Overview. Management performs reviews of all delinquent loans 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 four non-employee directors and four executive officers. Management generally classifies loans as non-accrual when it does not expect collection of full principal and interest under the original terms of the loan or payment of principal or interest has become 90 days past due. Classifying a loan as non-accrual results in our no longer accruing interest on such loan and reversing any interest previously accrued but not collected. We will generally restore a non-accrual loan to accrual status when the borrower brings delinquent principal and interest payments current and we expect to collect future monthly principal and interest payments. We recognize interest on non-accrual loans only when received.
Substandard loans generally represent assets inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. These assets have a well-defined weakness, or weaknesses, that jeopardize liquidation of the debt and are characterized by the distinct possibility that the bank will sustain some loss if deficiencies are not corrected. Special mentioned loans generally represent currently protected, but potentially weak assets that deserve management’s close attention. If left uncorrected, the potential weaknesses may, at some future date, result in deterioration of the repayment prospects for the loan. Special mention loans constitute an unwarranted credit risk, but do not expose Old Line Bank to sufficient risk to warrant adverse classification.
We classify loans as troubled debt restructurings (“TDRs”) when certain modifications are made to the loan terms and concessions are granted to the borrowers due to financial difficulty experienced by those borrowers. We only restructure loans for borrowers in financial difficulty that have presented a viable business plan to fully pay off all obligations, including outstanding debt, interest, and fees, either by generating additional income from the business or through liquidation of assets. Generally, these loans are restructured to provide the borrower additional time to execute upon their plans. The concessions granted on TDRs generally include terms to reduce the interest rate or extend the term of the debt obligation.
Loans on non-accrual status at the date of modification are initially classified as non-accrual TDRs. Loans on accruing status at the date of concession are initially classified as accruing TDRs if the loan is reasonably assured of repayment and performance is expected in accordance with its modified terms. Such loans may be designated as non-accrual loans subsequent to the concession date if reasonable doubt exists as to the collection of interest or principal under the restructured agreement. TDRs are returned to accruing status when there is economic substance to the restructuring, there is documented credit evaluation of the borrower’s financial condition, the remaining balance is reasonably assured of repayment in accordance with its modified terms, and the borrower has demonstrated sustained repayment performance in accordance with the modified terms for a reasonable period of time (generally a minimum of six months).
| 58 |
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 TDRs and other loans for which collection of all contractual principal and interest is not probable, based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, we recognize impairment through a valuation allowance and corresponding provision for loan losses. Old Line Bank considers consumer loans as homogenous loans and thus does not apply the impairment test to these loans. We write off impaired loans when collection of the loan is doubtful.
Potential problem loans are loans that management has serious doubts as to the ability of the borrowers to comply with present repayment terms. Management has identified potential problem loans classified as TDRs totaling $2.7 million that are complying with their repayment terms. With respect to these loans, management has concerns either about the ability of the borrower to continue to comply with repayment terms because of the borrower’s 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. Potential problem loans, which are not included in nonperforming assets, amounted to $28.9 million at December 31, 2017 compared to $32.8 million at December 31, 2016. At December 31, 2017, we had $16.4 million and $12.5 million, respectively, of potential problem loans attributable to our legacy and acquired loan portfolios, compared to $17.3 million and $15.5 million, respectively, at December 31, 2016.
We individually evaluate all acquired loans that we risk rated substandard subsequent to the acquisition, certain acquired special mention loans and all acquired TDRs for impairment. We also evaluate all loans acquired and recorded at fair value under ASC 310-30 for impairment.
Acquired Loans. Loans acquired in an acquisition are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan 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.
We recorded at fair value all acquired loans from MB&T, WSB, Regal Bank and Damascus. The fair value of the acquired loans includes expected loan losses, and as a result there was no allowance for loan losses recorded for acquired loans at the time of acquisition. Accordingly, the existence of the acquired loans reduces the ratios of the allowance for loan losses to total gross loans and the allowance for loan losses to non-accrual loans, and this measure is not directly comparable to prior periods. Similarly, net loan charge-offs are normally lower for acquired loans since we recorded these loans net of expected loan losses. Therefore, the ratio of net charge-offs during the period to average loans outstanding is reduced as a result of the existence of acquired loans, and the measures are not directly comparable to prior periods. Other institutions may not have acquired loans, and therefore there may be no direct comparability of these ratios between and among other institutions when compared in total.
The accounting guidance also requires that if we experience a decrease in the expected cash flows subsequent to the acquisition date, we establish an allowance for loan losses for those acquired loans with decreased cash flows. At December 31, 2017 and 2016, there was an allowance for loan losses on acquired loans of $182 thousand and $111 thousand, respectively, as a result of a decrease in the expected cash flows subsequent to the acquisition dates.
| 59 |
Nonperforming Assets. At December 31, 2017, our nonperforming assets totaled $3.9 million and consisted of $1.8 million of non-accrual loans, $116 thousand of loans 90 days or more past due and still accruing and OREO of $2.0 million. The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated:
| Nonperforming Assets | ||||||||||||||||||||||||
| December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
| Legacy | Acquired | Total | Legacy | Acquired | Total | |||||||||||||||||||
| Accruing loans 90 or more days past due | ||||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||
| Owner Occupied | $ | — | $ | — | $ | — | $ | — | $ | 634,290 | $ | 634,290 | ||||||||||||
| Residential Real Estate: | ||||||||||||||||||||||||
| First Lien-Owner Occupied | — | 37,560 | 37,560 | — | 250,000 | 250,000 | ||||||||||||||||||
| Consumer | — | 78,406 | 78,406 | 19,242 | — | 19,242 | ||||||||||||||||||
| Total accruing loans 90 or more days past due | — | 115,966 | 115,966 | 19,242 | 884,290 | 903,532 | ||||||||||||||||||
| Non-accrued loans: | ||||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||
| Owner Occupied | — | 228,555 | 228,555 | 2,370,589 | — | 2,370,589 | ||||||||||||||||||
| Hospitality | — | — | — | 1,346,736 | — | 1,346,736 | ||||||||||||||||||
| Land and A&D | — | 190,193 | 190,193 | 77,395 | 194,567 | 271,962 | ||||||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||||||
| First Lien-Investment | 192,501 | — | 192,501 | 312,061 | 99,293 | 411,354 | ||||||||||||||||||
| First Lien-Owner Occupied | 281,130 | 872,272 | 1,153,402 | 222,237 | — | 222,237 | ||||||||||||||||||
| Commercial | — | — | — | 1,760,824 | — | 1,760,824 | ||||||||||||||||||
| Consumer | — | — | — | — | — | — | ||||||||||||||||||
| Total non-accrued past due loans: | 473,631 | 1,291,020 | 1,764,651 | 6,089,842 | 293,860 | 6,383,702 | ||||||||||||||||||
| Other real estate owned (“OREO”) | 425,000 | 1,578,998 | 2,003,998 | 425,000 | 2,321,000 | 2,746,000 | ||||||||||||||||||
| Total non performing assets | $ | 898,631 | $ | 2,985,984 | $ | 3,884,615 | $ | 6,534,084 | $ | 3,499,150 | $ | 10,033,234 | ||||||||||||
| Accruing Troubled Debt Restructurings | ||||||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||||||
| Owner Occupied | $ | 1,560,726 | $ | — | $ | 1,560,726 | $ | — | $ | — | $ | — | ||||||||||||
| Residential Real Estate: | ||||||||||||||||||||||||
| First Lien-Owner Occupied | — | 644,744 | 644,744 | — | 662,661 | 662,661 | ||||||||||||||||||
| First Lien-Investment | — | — | — | — | 67,397 | 67,397 | ||||||||||||||||||
| Land and A&D | — | — | — | — | 91,669 | 91,669 | ||||||||||||||||||
| Commercial | 459,333 | — | 459,333 | — | 75,701 | 75,701 | ||||||||||||||||||
| Total Accruing Troubled Debt Restructurings | $ | 2,020,059 | $ | 644,744 | $ | 2,664,803 | $ | — | $ | 897,428 | $ | 897,428 | ||||||||||||
| 60 |
| Nonperforming Assets | ||||||||||||||||||||||||
| December 31, 2015 | December 31, 2014 | |||||||||||||||||||||||
| Legacy | Acquired | Total | Legacy | Acquired | Total | |||||||||||||||||||
| Accruing loans 90 or more days past due | ||||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||
| Owner Occupied | $ | — | $ | — | $ | — | $ | — | $ | 305,323 | $ | 305,323 | ||||||||||||
| Residential Real Estate: | ||||||||||||||||||||||||
| First Lien-Investment | — | — | — | — | — | — | ||||||||||||||||||
| First Lien-Owner Occupied | — | — | — | — | — | — | ||||||||||||||||||
| Land and A&D | — | 128,938 | 128,938 | — | — | — | ||||||||||||||||||
| Consumer | — | 499 | 499 | — | — | — | ||||||||||||||||||
| Total accruing loans 90 or more days past due | — | 129,437 | 129,437 | — | 305,323 | 305,323 | ||||||||||||||||||
| Non-accrued loans: | ||||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||
| Owner Occupied | 2,474,813 | — | 2,474,813 | 1,849,685 | 55,707 | 1,905,392 | ||||||||||||||||||
| Investment | — | 64,447 | 64,447 | — | — | — | ||||||||||||||||||
| Hospitality | — | — | — | — | — | |||||||||||||||||||
| Land and A&D | — | 261,700 | 261,700 | — | 795,300 | 795,300 | ||||||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||||||
| First Lien-Investment | 102,443 | 580,696 | 683,139 | 113,264 | 310,735 | 423,999 | ||||||||||||||||||
| First Lien-Owner Occupied | — | 566,701 | 566,701 | — | 795,920 | 795,920 | ||||||||||||||||||
| Land and A&D | — | — | — | — | — | — | ||||||||||||||||||
| Commercial | 1,842,819 | — | 1,842,819 | 1,165,955 | — | 1,165,955 | ||||||||||||||||||
| Consumer | — | — | — | 120,641 | — | 120,641 | ||||||||||||||||||
| Total non-accrued past due loans: | 4,420,075 | 1,473,544 | 5,893,619 | 3,249,545 | 1,957,662 | 5,207,207 | ||||||||||||||||||
| Other real estate owned (“OREO”) | 425,000 | 2,047,044 | 2,472,044 | 475,291 | 1,976,629 | 2,451,920 | ||||||||||||||||||
| Total non performing assets | $ | 4,845,075 | $ | 3,650,025 | $ | 8,495,100 | $ | 3,724,836 | $ | 4,239,614 | $ | 7,964,450 | ||||||||||||
| Accruing Troubled Debt Restructurings | ||||||||||||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||||||
| First Lien-Owner Occupied | $ | — | $ | 631,777 | $ | 631,777 | $ | — | $ | 505,250 | $ | 505,250 | ||||||||||||
| First Lien-Investment | — | — | — | — | — | — | ||||||||||||||||||
| Land and A&D | — | — | — | — | — | — | ||||||||||||||||||
| Commercial | — | 79,574 | 79,574 | — | 83,261 | 83,261 | ||||||||||||||||||
| Total Accruing Troubled Debt Restructurings | $ | — | $ | 711,351 | $ | 711,351 | $ | — | $ | 588,511 | $ | 588,511 | ||||||||||||
| 61 |
| Nonperforming Assets | ||||||||||||
| December 31, 2013 | ||||||||||||
| Legacy | Acquired | Total | ||||||||||
| Accruing loans 90 or more days past due | ||||||||||||
| Commercial Real Estate | ||||||||||||
| Owner Occupied | $ | — | $ | 309,767 | 309,767 | |||||||
| Residential Real Estate: | ||||||||||||
| First Lien-Investment | — | — | — | |||||||||
| First Lien-Owner Occupied | — | 429,144 | 429,144 | |||||||||
| Land and A&D | — | 915,649 | 915,649 | |||||||||
| Consumer | — | — | — | |||||||||
| Total accruing loans 90 or more days past due | — | 1,654,560 | 1,654,560 | |||||||||
| Non-accrued loans: | ||||||||||||
| Commercial Real Estate | ||||||||||||
| Owner Occupied | $ | 1,849,685 | $ | — | $ | 1,849,685 | ||||||
| Investment | — | 376,050 | 376,050 | |||||||||
| Hospitality | 4,473,345 | — | 4,473,345 | |||||||||
| Land and A&D | — | — | — | |||||||||
| Residential Real Estate: | ||||||||||||
| First Lien-Investment | 123,183 | — | 123,183 | |||||||||
| First Lien-Owner Occupied | 925,814 | 156,143 | 1,081,957 | |||||||||
| Land and A&D | — | 130,532 | 130,532 | |||||||||
| Commercial | 769,597 | — | 769,597 | |||||||||
| Consumer | 14,426 | — | 14,426 | |||||||||
| Total non-accrued past due loans: | 8,156,050 | 662,725 | 8,818,775 | |||||||||
| Other real estate owned (“OREO”) | 475,291 | 3,836,051 | 4,311,342 | |||||||||
| Total non performing assets | $ | 8,631,341 | $ | 6,153,336 | $ | 14,784,677 | ||||||
| Accruing Troubled Debt Restructurings | ||||||||||||
| Residential Real Estate: | ||||||||||||
| First Lien-Owner Occupied | $ | — | $ | 579,583 | $ | 579,583 | ||||||
| Commercial | — | 87,387 | 87,387 | |||||||||
| Total Accruing Troubled Debt Restructurings | $ | — | $ | 666,970 | $ | 666,970 | ||||||
The table below reflects our ratios of our non-performing assets at December 31, 2017 and 2016.
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Ratios, Excluding Acquired Assets | ||||||||
| Total nonperforming assets as a percentage of total loans held for investment and OREO | 0.07 | % | 0.55 | % | ||||
| Total nonperforming assets as a percentage of total assets | 0.05 | % | 0.43 | % | ||||
| Total nonperforming assets as a percentage of total loans held for investment | 0.07 | % | 0.56 | % | ||||
| Ratios, Including Acquired Assets | ||||||||
| Total nonperforming assets as a percentage of total loans held for investment and OREO | 0.23 | % | 0.73 | % | ||||
| Total nonperforming assets as a percentage of total assets | 0.18 | % | 0.59 | % | ||||
| Total nonperforming assets as a percentage of total loans held for investment | 0.23 | % | 0.73 | % | ||||
| 62 |
The table below outlines loans on non-accrual status by loan category at December 31, 2017 and 2016:
| December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||
| Unpaid | Interest | Unpaid | ||||||||||||||||||||||||||||||
| # of | Principal | Recorded | Not | # of | Principal | Recorded | Interest Not | |||||||||||||||||||||||||
| Contracts | Balance | Investment | Accrued | Contracts | Balance | Investment | Accrued | |||||||||||||||||||||||||
| Legacy | ||||||||||||||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||||||||||||||
| Owner Occupied | — | $ | — | $ | — | $ | — | 3 | $ | 2,370,589 | $ | 2,370,589 | $ | 89,204 | ||||||||||||||||||
| Investment | — | — | — | — | 1 | 77,395 | 77,395 | 2,290 | ||||||||||||||||||||||||
| Hospitality | — | — | — | — | 1 | 1,346,736 | 1,346,736 | 61,937 | ||||||||||||||||||||||||
| Residential Real Estate | ||||||||||||||||||||||||||||||||
| First Lien-Investment | 1 | 192,501 | 192,501 | 21,901 | 3 | 312,061 | 312,061 | 12,229 | ||||||||||||||||||||||||
| First Lien-Owner Occupied | 2 | 281,130 | 281,130 | 13,303 | 1 | 222,237 | 222,237 | 5,436 | ||||||||||||||||||||||||
| Commercial | — | — | — | — | 24 | 1,760,824 | 1,760,824 | 264,259 | ||||||||||||||||||||||||
| Consumer | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Total non-accrual loans | 3 | 473,631 | 473,631 | 35,204 | 33 | 6,089,842 | 6,089,842 | 435,355 | ||||||||||||||||||||||||
| Acquired(1) | ||||||||||||||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||||||||||||||
| Owner Occupied | 1 | 253,865 | 228,555 | 12,334 | — | — | — | — | ||||||||||||||||||||||||
| Investment | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Land and A & D | 2 | 482,467 | 190,193 | 169,657 | 2 | 485,905 | 194,567 | 5,503 | ||||||||||||||||||||||||
| Residential Real Estate | ||||||||||||||||||||||||||||||||
| Owner Occupied | 5 | 987,505 | 872,272 | 82,452 | 1 | 158,224 | 99,293 | 22,130 | ||||||||||||||||||||||||
| Total non-accrual loans | 8 | $ | 1,723,837 | $ | 1,291,020 | $ | 264,443 | 3 | $ | 644,129 | $ | 293,860 | $ | 27,633 | ||||||||||||||||||
| Total all non-accrual loans | 11 | $ | 2,197,468 | $ | 1,764,651 | $ | 299,647 | 36 | $ | 6,733,971 | $ | 6,383,702 | $ | 462,988 | ||||||||||||||||||
________________________
| (1) | Generally accepted accounting principles require that we record acquired loans at fair value which includes a discount for loans with credit impairment. These loans are not performing according to their contractual terms and meet our definition of a non-performing loan. The discounts that arise from recording these loans at fair value were due to credit quality. Although we do not accrue interest income at the contractual rate on these loans, we may accrete these discounts to interest income as a result of pre-payments that exceed our cash flow expectations or payment in full of amounts due even though we classify them as 90 or more days past due. |
Non-accrual legacy loans at December 31, 2017 decreased $5.6 million from December 31, 2016, primarily due to one hospitality loan for $1.3 million that was paid off during the first quarter and one large commercial borrower, consisting of 23 commercial loans totaling $3.0 million, of which $1.0 million has been charged against the allowance for loan losses and $2.0 million has been reclassified as TDR.
Non-accrual acquired loans at December 31, 2017 increased $997 thousand from December 31, 2016, due to four additional residential real estate loans being classified as non-accrual during 2017.
The balance of OREO at December 31, 2017 decreased $742 thousand to $2.0 million from the balance of $2.7 million at December 31, 2016.
Legacy OREO consists of one property. One legacy property was transferred into legacy OREO during the first quarter and sold for a gain on sale of OREO of $35 thousand during the third quarter of 2017.
Acquired OREO at December 31, 2017, decreased $742 thousand from December 31, 2016. The decrease in acquired OREO was driven by the sale of three properties, which offset the transfer of one property into acquired OREO.
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Delinquent Loans. The tables below present a breakdown of the recorded book balance of past due loans at December 31, 2017 and 2016:
| Past Due Loans | ||||||||||||||||||||||||
| Recorded Book Balance | ||||||||||||||||||||||||
| December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
| Legacy | Acquired | Total | Legacy | Acquired | Total | |||||||||||||||||||
| Accruing past due loans: | ||||||||||||||||||||||||
| 30 - 89 days past due | ||||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||
| Owner Occupied | $ | — | $ | — | $ | — | $ | 2,799,802 | $ | — | $ | 2,799,802 | ||||||||||||
| Investment | 1,089,022 | 843,706 | 1,932,728 | — | 794,037 | 794,037 | ||||||||||||||||||
| Land and A&D | 254,925 | 158,899 | 413,824 | — | — | — | ||||||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||||||
| First Lien-Investment | 270,822 | 506,600 | 777,422 | 517,498 | 397,944 | 915,442 | ||||||||||||||||||
| First Lien-Owner Occupied | 229 | 2,457,299 | 2,457,528 | — | 879,718 | 879,718 | ||||||||||||||||||
| HELOC and Jr. Liens | — | 130,556 | 130,556 | 99,946 | — | 99,946 | ||||||||||||||||||
| Commercial | 51,088 | 261,081 | 312,169 | 325,161 | — | 325,161 | ||||||||||||||||||
| Consumer | 26,134 | 1,017,195 | 1,043,329 | — | — | — | ||||||||||||||||||
| Total 30 - 89 days past due | 1,692,220 | 5,375,336 | 7,067,556 | 3,742,407 | 2,071,699 | 5,814,106 | ||||||||||||||||||
| 90 or more days past due | ||||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||
| Owner Occupied | — | — | — | — | 634,290 | 634,290 | ||||||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||||||
| First Lien-Owner Occupied | — | 37,560 | 37,560 | — | 250,000 | 250,000 | ||||||||||||||||||
| Consumer | — | 78,407 | 78,407 | 19,242 | — | 19,242 | ||||||||||||||||||
| Total 90 or more days past due | — | 115,967 | 115,967 | 19,242 | 884,290 | 903,532 | ||||||||||||||||||
| Total accruing past due loans | 1,692,220 | 5,491,303 | 7,183,523 | 3,761,649 | 2,955,989 | 6,717,638 | ||||||||||||||||||
Allowance for Loan Losses. Originating loans involves a degree of risk that credit losses will occur in varying amounts according to, among other factors, the type of loans being made, the credit worthiness of the borrowers over the term of the loans, the quality of the collateral for the loan, if any, as well as general economic conditions. We charge the provision for loan losses to earnings to maintain the total allowance for loan losses at a level considered by management to represent its best estimate of the losses known and inherent in the portfolio that are both probable and reasonable to estimate, based on, among other factors, prior loss experience, volume and type of lending conducted, estimated value of any underlying collateral, economic conditions (particularly as such conditions relate to Old Line Bank’s market area), regulatory guidance, peer statistics, management’s judgment, past due loans in the loan portfolio, loan charge off experience and concentrations of risk (if any). We charge losses on loans against the allowance when we believe that collection of loan principal is unlikely. We add back recoveries on loans previously charged-off to the allowance.
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 SEC’s Staff Accounting Bulletin No. 102, Loan Loss Allowance Methodology and Documentation, the Federal Financial Institutions Examination Council’s Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions and the Interagency Policy Statement on the Allowance for Loan and Lease Losses. We also continue to measure the credit impairment at each period end on all loans that have been classified as a TDR using the guidance in ASC 310-10-35.
In the event that our review of the adequacy of the allowance results in any unallocated amounts, we reallocate such amounts to our loan categories based on the percentage that each category represents to total gross loans. We have risk management practices designed to ensure timely identification of changes in loan risk profiles. Undetected losses, however, inherently exist within the portfolio. We believe that the allocation of the unallocated portion of the reserve in the manner described above is appropriate. Although we may allocate specific portions of the allowance for specific credits or other factors, the entire allowance is available for any credit that we should charge off. We will not create a separate valuation allowance unless we consider a loan impaired.
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The loans classified in our held for sale portfolio consists of loans that have been committed to be purchased by investors in the secondary market at the balance sheet date and will be settled subsequent to that date. Only loans purchased by investors with recourse obligations are included in other liabilities.
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. 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.
All loan categories are divided by risk rating and loss factors and weighted by risk rating to determine estimated loss amounts.
Within each of the above loan categories, each portfolio is sorted by the risk assessment rating of each loan as Pass, Pass-Watch, Special Mention or Substandard.
Old Line Bank’s loss experience by category for each of the last 12 quarters is aggregated and that total is used to create a percentage of the loan portfolio as it existed at the beginning of the 12 quarter “look back.” Old Line Bank’s loss experience (Loss Factor) is progressively tiered by risk category for Pass, Pass-Watch, Special Mention and Substandard loans by applying a higher loss factor to higher risk rated categories. Loans rated “Doubtful” or “Loss” are, by definition, impaired and will be specifically reserved based upon Bank management’s best estimate of the loss exposure for each loan.
Qualitative factors include: levels and trends in delinquencies and non-accruals; trends in volumes and terms of loans; effects of any changes in lending policies; the experience, ability and depth of management; regional and local economic trends and conditions; peer group loan loss history; concentrations of credit; quality of Old Line Bank’s loan review system; external factors, such as competition, legal and regulatory requirements; and management’s collective assessment of the appropriateness of the allowance for loan losses in light of recent trends, events, political impact and other considerations.
The following tables detail activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2017, 2016, 2015, 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 2013, the loan segments were changed to align with our new allowance methodology, which resulted in balance transfers from prior loan categories and assignment to each new loan segment.
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| Commercial | Residential | |||||||||||||||||||
| December 31, 2017 | Commercial | Real Estate | Real Estate | Consumer | Total | |||||||||||||||
| Beginning balance | $ | 1,372,235 | $ | 3,990,152 | $ | 823,520 | $ | 9,562 | $ | 6,195,469 | ||||||||||
| Provision for loan losses | 660,497 | 231,488 | 22,203 | 40,920 | 955,108 | |||||||||||||||
| Recoveries | 2,350 | 2,017 | 900 | 35,525 | 40,792 | |||||||||||||||
| 2,035,082 | 4,223,657 | 846,623 | 86,007 | 7,191,369 | ||||||||||||||||
| Loans charged off | (773,052 | ) | (439,922 | ) | (2,268 | ) | (55,541 | ) | (1,270,783 | ) | ||||||||||
| Ending Balance | $ | 1,262,030 | $ | 3,783,735 | $ | 844,355 | $ | 30,466 | $ | 5,920,586 | ||||||||||
| Amount allocated to: | ||||||||||||||||||||
| Legacy Loans: | ||||||||||||||||||||
| Individually evaluated for impairment | $ | 96,212 | $ | 69,903 | $ | 76,496 | $ | — | $ | 242,611 | ||||||||||
| Other loans not individually evaluated | 1,141,301 | 3,633,760 | 690,396 | 30,466 | 5,495,923 | |||||||||||||||
| Acquired Loans: | ||||||||||||||||||||
| Individually evaluated for impairment | 24,517 | 80,072 | 77,463 | — | 182,052 | |||||||||||||||
| Ending balance | $ | 1,262,030 | $ | 3,783,735 | $ | 844,355 | $ | 30,466 | $ | 5,920,586 | ||||||||||
| Commercial | Residential | |||||||||||||||||||
| December 31, 2016 | Commercial | Real Estate | Real Estate | Consumer | Total | |||||||||||||||
| Beginning balance | $ | 1,161,318 | $ | 3,053,925 | $ | 682,962 | $ | 11,613 | $ | 4,909,818 | ||||||||||
| Provision for loan losses | 172,059 | 936,227 | 486,935 | (10,679 | ) | 1,584,542 | ||||||||||||||
| Recoveries | 43,330 | — | 49,464 | 18,482 | 111,276 | |||||||||||||||
| 1,376,707 | 3,990,152 | 1,219,361 | 19,416 | 6,605,636 | ||||||||||||||||
| Loans charged off | (4,472 | ) | — | (395,841 | ) | (9,854 | ) | (410,167 | ) | |||||||||||
| Ending Balance | $ | 1,372,235 | $ | 3,990,152 | $ | 823,520 | $ | 9,562 | $ | 6,195,469 | ||||||||||
| Amount allocated to: | ||||||||||||||||||||
| Legacy Loans: | ||||||||||||||||||||
| Individually evaluated for impairment | $ | 609,152 | $ | 611,498 | $ | 61,365 | $ | — | $ | 1,282,015 | ||||||||||
| Other loans not individually evaluated | 735,876 | 3,378,654 | 678,371 | 9,562 | 4,802,463 | |||||||||||||||
| Acquired Loans: | ||||||||||||||||||||
| Individually evaluated for impairment | 27,207 | — | 83,784 | — | 110,991 | |||||||||||||||
| Ending balance | $ | 1,372,235 | $ | 3,990,152 | $ | 823,520 | $ | 9,562 | $ | 6,195,469 | ||||||||||
| Commercial | Residential | |||||||||||||||||||
| December 31, 2015 | Commercial | Real Estate | Real Estate | Consumer | Total | |||||||||||||||
| Beginning balance | $ | 696,371 | $ | 2,558,368 | $ | 926,995 | $ | 100,101 | $ | 4,281,835 | ||||||||||
| Provision for loan losses | 675,598 | 495,537 | 282,398 | (142,549 | ) | 1,310,984 | ||||||||||||||
| Recoveries | 16,068 | 20 | 135,908 | 58,105 | 210,101 | |||||||||||||||
| 1,388,037 | 3,053,925 | 1,345,301 | 15,657 | 5,802,920 | ||||||||||||||||
| Loans charged off | (226,719 | ) | — | (662,339 | ) | (4,044 | ) | (893,102 | ) | |||||||||||
| Ending Balance | $ | 1,161,318 | $ | 3,053,925 | $ | 682,962 | $ | 11,613 | $ | 4,909,818 | ||||||||||
| Amount allocated to: | ||||||||||||||||||||
| Legacy Loans: | ||||||||||||||||||||
| Individually evaluated for impairment | $ | 605,336 | $ | 119,198 | $ | — | $ | — | $ | 724,534 | ||||||||||
| Other loans not individually evaluated | 555,982 | 2,934,727 | 594,358 | 11,613 | 4,096,680 | |||||||||||||||
| Acquired Loans: | ||||||||||||||||||||
| Individually evaluated for impairment | — | — | 88,604 | — | 88,604 | |||||||||||||||
| Ending balance | $ | 1,161,318 | $ | 3,053,925 | $ | 682,962 | $ | 11,613 | $ | 4,909,818 | ||||||||||
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| Commercial | Residential | |||||||||||||||||||
| December 31, 2014 | Commercial | Real Estate | Real Estate | Consumer | Total | |||||||||||||||
| Beginning balance | $ | 495,051 | $ | 3,569,395 | $ | 841,234 | $ | 23,533 | $ | 4,929,213 | ||||||||||
| Provision for loan losses | 206,558 | 1,668,877 | 843,810 | 108,052 | 2,827,297 | |||||||||||||||
| Recoveries | 12,342 | 122 | 75,149 | 27,319 | 114,932 | |||||||||||||||
| 713,951 | 5,238,394 | 1,760,193 | 158,904 | 7,871,442 | ||||||||||||||||
| Loans charged off | (17,580 | ) | (2,680,026 | ) | (833,198 | ) | (58,803 | ) | (3,589,607 | ) | ||||||||||
| Ending Balance | $ | 696,371 | $ | 2,558,368 | $ | 926,995 | $ | 100,101 | $ | 4,281,835 | ||||||||||
| Amount allocated to: | ||||||||||||||||||||
| Legacy Loans: | ||||||||||||||||||||
| Individually evaluated for impairment | $ | 159,040 | $ | — | $ | — | $ | 56,500 | $ | 215,540 | ||||||||||
| Other loans not individually evaluated | 537,331 | 2,558,368 | 906,995 | 43,601 | 4,046,295 | |||||||||||||||
| Acquired Loans: | ||||||||||||||||||||
| Individually evaluated for impairment | — | — | 20,000 | — | 20,000 | |||||||||||||||
| Ending balance | $ | 696,371 | $ | 2,558,368 | $ | 926,995 | $ | 100,101 | $ | 4,281,835 | ||||||||||
| Commercial | Residential | |||||||||||||||||||
| December 31, 2013 | Commercial | Real Estate | Real Estate | Consumer | Total | |||||||||||||||
| Beginning balance | 3,965,347 | |||||||||||||||||||
| Provision for loan losses | 1,289,153 | |||||||||||||||||||
| Allocated 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 following table provides our ratio of allowance for loan losses:
| At December 31, | ||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
| Ratio of allowance for loan losses to: | ||||||||||||||||||||
| Total gross loans held for investment | 0.35 | % | 0.45 | % | 0.43 | % | 0.46 | % | 0.58 | % | ||||||||||
| Non-accrual loans | 335.51 | % | 97.05 | % | 83.31 | % | 82.23 | % | 55.89 | % | ||||||||||
| Net charge-offs to average loans | 0.08 | % | 0.02 | % | 0.07 | % | 0.39 | % | 0.07 | % | ||||||||||
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The following tables provide a breakdown of the allowance for loan losses at the dates indicated.
| Allocation of Allowance for Loan Losses | ||||||||||||||||||||||||
| December 31, 2017 | December 31, 2016 | December 31, 2015 | ||||||||||||||||||||||
| % of Loans | % of Loans | % of Loans | ||||||||||||||||||||||
| in Each | in Each | in Each | ||||||||||||||||||||||
| Amount | Category | Amount | Category | Amount | Category | |||||||||||||||||||
| Commercial | $ | 1,262,030 | 11.02 | % | $ | 1,372,234 | 10.39 | % | $ | 1,161,318 | 10.04 | % | ||||||||||||
| Commercial Real Estate | 3,783,735 | 67.19 | 3,990,152 | 69.83 | 3,053,925 | 66.71 | ||||||||||||||||||
| Residential Real Estate | 844,355 | 18.27 | 823,521 | 19.41 | 682,962 | 22.65 | ||||||||||||||||||
| Consumer | 30,466 | 3.52 | 9,562 | 0.37 | 11,613 | 0.60 | ||||||||||||||||||
| Total | $ | 5,920,586 | 100.00 | % | $ | 6,195,469 | 100.00 | % | $ | 4,909,818 | 100.00 | % | ||||||||||||
| Allocation of Allowance for Loan Losses | ||||||||||||||||
| December 31, 2014 | December 31, 2013 | |||||||||||||||
| % of Loans | % of Loans | |||||||||||||||
| in Each | in Each | |||||||||||||||
| Amount | Category | Amount | Category | |||||||||||||
| Commercial | $ | 696,371 | 11.62 | % | $ | 495,051 | 11.84 | % | ||||||||
| Commercial Real Estate | 2,558,368 | 64.62 | 3,569,395 | 62.78 | ||||||||||||
| Residential Real Estate | 926,995 | 22.75 | 841,234 | 24.09 | ||||||||||||
| Consumer | 100,101 | 1.01 | 23,533 | 1.29 | ||||||||||||
| Total | $ | 4,281,835 | 100.00 | % | $ | 4,929,213 | 100.00 | % | ||||||||
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.
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 outlined in the borrowing section of this report, we have credit lines, unsecured and secured, available from several correspondent banks totaling $43.5 million. Additionally, we may borrow funds from the FHLB and the Federal Reserve Bank of Richmond. We can use these credit facilities in conjunction with the normal deposit strategies, which include pricing changes to increase deposits as necessary. We can also sell available for sale investment securities or pledge investment securities as collateral to create additional liquidity. From time to time we may sell or participate out loans to create additional liquidity as required. Additional sources of liquidity include funds held in time deposits and cash 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 December 31, 2017, we had $33.6 million in cash and due from banks, $1.4 million in interest bearing accounts, and $257 thousand in federal funds sold. As of December 31, 2016, we had $22.1 million in cash and due from banks, $1.2 million in interest bearing accounts, and $248 thousand in federal funds sold.
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Old Line Bank has sufficient liquidity to meet its loan commitments as well as fluctuations in deposits. We usually retain maturing certificates of deposit as we offer competitive rates on certificates of deposit. Management is not aware of any demands, trends, commitments, or events that would result in Old Line Bank’s inability to meet anticipated or unexpected liquidity needs.
While we periodically experience large withdrawals, these have not resulted in liquidity issues for Old Line Bancshares. During the last recession and the turmoil in the financial markets that followed, some institutions experienced large deposit withdrawals that caused liquidity problems, although we did not. Although we plan for various liquidity scenarios, if turmoil in the financial markets occurs in the future 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 $38.5 million at December 31, 2017. Old Line Bank has an additional secured line of credit from the FHLB of $618.3 million at December 31, 2017. 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 the FHLB collateral to support up to $335.7 million of borrowings. We may increase availability by providing additional collateral. Additionally, we have provided collateral in the form of investment securities to support the $37.6 million repurchase agreement.
The following table shows Old Line Bancshares, Inc.’s regulatory capital ratios and the minimum capital ratios currently required by its banking regulator to be “well capitalized.” For a discussion of these capital requirements, see “Supervision and Regulation—Capital Adequacy Guidelines.”
| December 31, | 2017 | 2016 | 2015 | |||||||||
| Tier 1 Capital | ||||||||||||
| Common stock | $ | 125 | $ | 109 | $ | 108 | ||||||
| Additional paid-in capital | 148,883 | 106,693 | 105,294 | |||||||||
| Retained earnings | 61,054 | 48,842 | 38,291 | |||||||||
| Add: additional tier 1 capital instruments | 4,031 | 3,874 | — | |||||||||
| Less: disallowed assets | 30,122 | 11,898 | 11,526 | |||||||||
| Less: deferred assets | 3,870 | 5,699 | 5,497 | |||||||||
| Total Tier 1 Capital | 180,101 | 141,921 | 126,670 | |||||||||
| Tier 2 Capital: | ||||||||||||
| Add: additional tier 2 capital instruments | 35,000 | 35,000 | — | |||||||||
| Less: deductions | — | — | — | |||||||||
| Other | 61 | — | — | |||||||||
| Allowance for loan losses | 5,921 | 6,247 | 5,133 | |||||||||
| Total Risk Based Capital | $ | 221,083 | $ | 183,168 | $ | 131,803 | ||||||
| Risk weighted assets | $ | 1,872,984 | $ | 1,492,629 | $ | 1,189,816 | ||||||
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Risk Based Capital Analysis
(Dollars in thousands)
| Regulatory | To be Well | |||||||||||||||||||
| December 31, | 2017 | 2016 | 2015 | Minimum | Capitalized | |||||||||||||||
| Capital Ratios: | ||||||||||||||||||||
| Tier 1 risk based capital ratio | 9.6 | % | 9.5 | % | 10.7 | % | 6.0 | % | 8.0 | % | ||||||||||
| Total risk based capital ratio | 11.8 | % | 12.3 | % | 11.1 | % | 8.0 | % | 10.0 | % | ||||||||||
| Leverage ratio | 8.8 | % | 8.6 | % | 9.1 | % | 4.0 | % | 5.0 | % | ||||||||||
| Common Equity Tier 1 | 9.4 | % | 9.2 | % | 10.7 | % | 4.5 | % | 6.5 | % | ||||||||||
Contractual Obligations, Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements
We are 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. We use these financial instruments to meet the financing needs of our customers. These financial instruments involve, to varying degrees, elements of credit, interest rate, and liquidity risk. These do not represent unusual risks and management does not anticipate any losses which would have a material effect on Old Line Bancshares, Inc. We also have operating lease obligations.
Outstanding loan commitments and lines and letters of credit at December 31, 2017 and 2016 are as follows:
| December 31, | 2017 | 2016 | ||||||
| (Dollars in thousands) | ||||||||
| Commitments to extend credit and available credit lines: | ||||||||
| Commercial | $ | 132,246 | $ | 92,263 | ||||
| Construction | 132,855 | 134,944 | ||||||
| Consumer | 41,151 | 26,204 | ||||||
| $ | 306,252 | $ | 253,411 | |||||
| Standby letters of credit | $ | 12,362 | $ | 18,907 | ||||
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. We generally require collateral to support financial instruments with credit risk on the same basis as we do for balance sheet instruments. Management generally bases the collateral required on the credit evaluation of the counterparty. Commitments generally include 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 we expect many of the commitments to expire without being drawn upon, and since it is unlikely that customers will draw upon their lines of credit in full at any time, the total commitment amount or line of credit amount does not necessarily represent future cash requirements. We evaluate each customer’s credit worthiness on a case by case basis. During periods of economic turmoil, we 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 $132.9 million, or 43.43% of the $306.3 million of standing loan commitments and lines and letters of credit at December 31, 2017, 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.
| 70 |
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, we make loan commitments, credit lines and letters of credit on the same terms, including with respect to collateral, as outstanding loans. We evaluate each customer’s credit worthiness and the collateral required on a case by case basis.
We have various financial obligations, including contractual obligations and commitments. The following table presents, as of December 31, 2017, significant fixed and determinable contractual obligations to third parties by payment date.
Contractual Obligations
(Dollars in thousands)
| Within | One to | Three to | Over | |||||||||||||||||
| one year | three years | five years | five years | Total | ||||||||||||||||
| Non-interest bearing deposits | $ | 451,803 | $ | — | $ | — | $ | — | $ | 451,803 | ||||||||||
| Interest bearing deposits | 908,792 | 227,581 | 64,727 | — | 1,201,100 | |||||||||||||||
| Short term borrowings | 192,612 | — | — | — | 192,612 | |||||||||||||||
| Long term borrowings | — | — | — | 38,107 | 38,107 | |||||||||||||||
| Purchase obligations | 6,670 | 10,939 | 11,654 | 4,585 | 33,848 | |||||||||||||||
| Operating leases | 2,352 | 5,037 | 889 | 4,069 | 12,347 | |||||||||||||||
| Total | $ | 1,562,229 | $ | 243,557 | $ | 77,270 | $ | 46,761 | $ | 1,929,817 | ||||||||||
Our operating lease obligations represent rental payments for 22 branches and five loan production offices. The interest bearing obligations include accrued interest. Purchase obligations amounts represent estimated obligations under agreements to purchase goods or services that are enforceable and legally binding. The purchase obligations amounts include estimated obligations under data processing and network servicing and installation contracts, income tax payable, pension obligations and accounts payable for goods and services.
Reconciliation of Non-GAAP Measures
Below is a reconciliation of the Federal Tax Exempt adjustments and the GAAP basis information presented in this report:
Twelve Months Ended December 31, 2017
| Net | ||||||||||||
| Net Interest | Interest | |||||||||||
| Income | Yield | Spread | ||||||||||
| GAAP net interest income | $ | 62,114,088 | 3.57 | % | 3.35 | % | ||||||
| Tax equivalent adjustment | ||||||||||||
| Federal funds sold | 243 | — | — | |||||||||
| Investment securities | 1,043,821 | 0.06 | 0.06 | |||||||||
| Loans | 1,122,185 | 0.06 | 0.06 | |||||||||
| Total tax equivalent adjustment | 2,166,249 | 0.12 | 0.12 | |||||||||
| Tax equivalent interest yield | $ | 64,280,337 | 3.69 | % | 3.47 | % | ||||||
| 71 |
Twelve Months Ended December 31, 2016
| Net | ||||||||||||
| Net Interest | Interest | |||||||||||
| Income | Yield | Spread | ||||||||||
| GAAP net interest income | $ | 52,939,428 | 3.66 | % | 3.50 | % | ||||||
| Tax equivalent adjustment | ||||||||||||
| Federal funds sold | 16 | — | — | |||||||||
| Investment securities | 951,978 | 0.07 | 0.07 | |||||||||
| Loans | 922,114 | 0.06 | 0.06 | |||||||||
| Total tax equivalent adjustment | 1,874,108 | 0.13 | 0.13 | |||||||||
| Tax equivalent interest yield | $ | 54,813,536 | 3.79 | % | 3.63 | % | ||||||
Twelve Months Ended December 31, 2015
| Net | ||||||||||||
| Net Interest | Interest | |||||||||||
| Income | Yield | Spread | ||||||||||
| GAAP net interest income | $ | 46,588,496 | 3.95 | % | 3.82 | % | ||||||
| Tax equivalent adjustment | ||||||||||||
| Federal funds sold | 5 | — | — | |||||||||
| Investment securities | 793,155 | 0.06 | 0.06 | |||||||||
| Loans | 949,678 | 0.07 | 0.07 | |||||||||
| Total tax equivalent adjustment | 1,742,838 | 0.13 | 0.13 | |||||||||
| Tax equivalent interest yield | $ | 48,331,334 | 4.08 | % | 3.95 | % | ||||||
Impact of Inflation and Changing Prices and Seasonality
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 institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, and may frequently reflect government policy initiatives or economic factors not measured by price index. As discussed in Item 7A, we strive to manage our interest sensitive assets and liabilities in order to offset the effects of rate changes and inflation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. Various factors, including interest rates, foreign exchange rates, commodity prices, or equity prices, may cause these changes. We are subject to market risk primarily through the effect of changes in interest rates on our portfolio of assets and liabilities. Foreign exchange rates, commodity prices, or equity prices do not pose significant market risk to us.
| 72 |
Interest Rate Sensitivity Analysis and Interest Rate Risk Management
A principal objective of Old Line Bank’s asset/liability management policy is to minimize exposure to changes in interest rates by an ongoing review of the maturity and re-pricing of interest earning assets and interest bearing liabilities. The Asset and Liability Committee of the board of directors oversees this review.
The Asset and Liability Committee establishes policies to control interest rate sensitivity. Interest rate sensitivity is the volatility of a bank’s earnings resulting from movements in market interest rates. Management monitors rate sensitivity in order to reduce vulnerability to interest rate fluctuations while maintaining adequate capital levels and acceptable levels of liquidity. Monthly financial reports supply management with information to evaluate and manage rate sensitivity and adherence to policy. Old Line Bank’s asset/liability policy’s goal is to manage assets and liabilities in a manner that stabilizes net interest income and net economic value within a broad range of interest rate environments. Adjustments to the mix of assets and liabilities are made periodically in an effort to achieve dependable, steady growth in net interest income regardless of the behavior of interest rates in general.
As part of the interest rate risk sensitivity analysis, the Asset and Liability Committee examines the extent to which Old Line Bank’s assets and liabilities are interest rate sensitive and monitors the interest rate sensitivity gap. An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market rates. The interest rate sensitivity gap is the difference between interest earning assets and interest bearing liabilities scheduled to mature or reprice within such time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of declining interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to adversely affect net interest income. If repricing of assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal.
Old Line Bank currently has a negative gap, which suggests that the net interest income on interest earning assets may decrease during periods of rising interest rates. However, a simple interest rate “gap” analysis by itself may not be an accurate indicator of how changes in interest rates will affect net interest income. Changes in interest rates may not uniformly affect income associated with interest earning assets and costs associated with interest bearing liabilities. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. Although certain assets and liabilities may have similar maturities or periods of re-pricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market interest rates, while interest rates on other types may lag behind changes in general market rates. In the event of a change in interest rates, prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the interest rate gap. The ability of many borrowers to service their debts also may decrease in the event of an interest rate increase.
| 73 |
The table below presents Old Line Bank’s interest rate sensitivity at December 31, 2017. Because certain categories of securities and loans are prepaid before their maturity date even without regard to interest rate fluctuations, we have made certain assumptions to calculate the expected maturity of securities and loans.
| Interest Sensitivity Analysis | ||||||||||||||||||||
| December 31, 2017 | ||||||||||||||||||||
| Maturing or Repricing | ||||||||||||||||||||
| Within | 4 - 12 | 1 - 5 | Over | |||||||||||||||||
| 3 Months | Months | Years | 5 Years | Total | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Interest Earning Assets: | ||||||||||||||||||||
| Interest bearing accounts | $ | 30 | $ | — | $ | — | $ | — | $ | 30 | ||||||||||
| Time deposits in other banks | — | — | — | — | — | |||||||||||||||
| Federal funds sold | 257 | — | — | — | 257 | |||||||||||||||
| Investment securities | 1,499 | 3,304 | 623 | 212,927 | 218,353 | |||||||||||||||
| Loans | 291,403 | 115,769 | 771,105 | 521,991 | 1,700,268 | |||||||||||||||
| Total interest earning assets | 293,189 | 119,073 | 771,728 | 734,918 | 1,918,908 | |||||||||||||||
| Interest Bearing Liabilities: | ||||||||||||||||||||
| Interest-bearing transaction deposits | 355,498 | 182,605 | — | — | 538,103 | |||||||||||||||
| Savings accounts | 44,323 | 44,324 | 44,324 | — | 132,971 | |||||||||||||||
| Time deposits | 98,292 | 183,750 | 247,984 | — | 530,026 | |||||||||||||||
| Total interest-bearing deposits | 498,113 | 410,679 | 292,308 | — | 1,201,100 | |||||||||||||||
| FHLB advances | 155,000 | — | — | — | 155,000 | |||||||||||||||
| Other borrowings | 37,612 | — | — | 38,107 | 75,719 | |||||||||||||||
| Total interest-bearing liabilities | 690,725 | 410,679 | 292,308 | 38,107 | 1,431,819 | |||||||||||||||
| Period Gap | $ | (397,536 | ) | $ | (291,606 | ) | $ | 479,420 | $ | 696,811 | $ | 487,089 | ||||||||
| Cumulative Gap | $ | (397,536 | ) | $ | (689,142 | ) | $ | (209,722 | ) | $ | 487,089 | |||||||||
| Cumulative Gap/Total Assets | (18.88 | )% | (32.73 | )% | (9.96 | )% | 23.13 | % | ||||||||||||
| 74 |
Quarterly Data (unaudited)
(in 000’s)
| First | Second | Third | Fourth | |||||||||||||
| Year Ended December 31, 2017 | Quarter | Quarter | Quarter | Quarter | ||||||||||||
| Interest income | $ | 16,635 | $ | 17,054 | $ | 19,492 | $ | 20,432 | ||||||||
| Interest expense | 2,474 | 2,801 | 3,019 | 3,204 | ||||||||||||
| Net interest income | 14,161 | 14,253 | 16,473 | 17,228 | ||||||||||||
| Provision for loan losses | 440 | 279 | 136 | 100 | ||||||||||||
| Net interest income after provision for loan losses | 13,721 | 13,974 | 16,337 | 17,127 | ||||||||||||
| Income before income taxes | 6,044 | 6,040 | 3,848 | 8,185 | ||||||||||||
| Income tax expense | 2,070 | 2,070 | 1,685 | 2,328 | ||||||||||||
| Net income available to common stockholders | 3,974 | 3,970 | 2,163 | 5,857 | ||||||||||||
| Basic earnings per common share | 0.36 | 0.36 | 0.18 | 0.47 | ||||||||||||
| Diluted earnings per common share | 0.36 | 0.36 | 0.18 | 0.46 | ||||||||||||
| First | Second | Third | Fourth | |||||||||||||
| Year Ended December 31, 2016 | Quarter | Quarter | Quarter | Quarter | ||||||||||||
| Interest income | $ | 14,158 | $ | 14,614 | $ | 15,339 | $ | 16,354 | ||||||||
| Interest expense | 1,546 | 1,638 | 2,000 | 2,341 | ||||||||||||
| Net interest income | 12,612 | 12,976 | 13,339 | 14,013 | ||||||||||||
| Provision for loan losses | 779 | 300 | 306 | 200 | ||||||||||||
| Net interest income after provision for loan losses | 11,833 | 12,676 | 13,033 | 13,812 | ||||||||||||
| Income before income taxes | 3,193 | 4,687 | 5,374 | 6,715 | ||||||||||||
| Income tax expense | 1,043 | 1,554 | 1,831 | 2,385 | ||||||||||||
| Net income | 2,150 | 3,133 | 3,543 | 4,330 | ||||||||||||
| Less: Net income (loss) attributable to the non-controlling interest | (2 | ) | 2 | - | - | |||||||||||
| Net income available to common stockholders | 2,152 | 3,131 | 3,543 | 4,330 | ||||||||||||
| Basic earnings per common share | 0.20 | 0.29 | 0.33 | 0.40 | ||||||||||||
| Diluted earnings per common share | 0.20 | 0.28 | 0.32 | 0.39 | ||||||||||||
| First | Second | Third | Fourth | |||||||||||||
| Year Ended December 31, 2015 | Quarter | Quarter | Quarter | Quarter | ||||||||||||
| Interest income | $ | 12,508 | $ | 12,352 | $ | 13,007 | $ | 13,624 | ||||||||
| Interest expense | 1,046 | 1,181 | 1,259 | 1,378 | ||||||||||||
| Net interest income | 11,462 | 11,171 | 11,748 | 12,246 | ||||||||||||
| Provision for loan losses | 562 | 86 | 264 | 400 | ||||||||||||
| Net interest income after provision for loan losses | 10,900 | 11,085 | 11,484 | 11,845 | ||||||||||||
| Income before income taxes | 4,040 | 3,797 | 4,720 | 3,289 | ||||||||||||
| Income tax expense | 1,295 | 1,195 | 1,605 | 1,287 | ||||||||||||
| Net income | 2,745 | 2,602 | 3,115 | 2,002 | ||||||||||||
| Less: Net income (loss) attributable to the non-controlling interest | (9 | ) | 1 | 3 | 1 | |||||||||||
| Net income available to common stockholders | 2,754 | 2,601 | 3,112 | 2,001 | ||||||||||||
| Basic earnings per common share | 0.25 | 0.25 | 0.30 | 0.19 | ||||||||||||
| Diluted earnings per common share | 0.25 | 0.24 | 0.29 | 0.19 | ||||||||||||
| 75 |
The following consolidated financial statements are filed with this report:
| 76 |
Report Of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Old Line Bancshares, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Old Line Bancshares, Inc. and Subsidiaries (the “Company”)’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, Old Line Bancshares, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of Old Line Bancshares, Inc. as of December 31, 2017 and 2016, and for each of the years in the three years ended December 31, 2017, and our report dated March 9, 2018, expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s report on internal control over financial reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
As described in Management’s Report On Internal Control Over Financial Reporting, the scope of management’s assessment of internal control over financial reporting as of December 31, 2017 has excluded DCB Bancshares, Inc. acquired on July 28, 2017. We have also excluded DCB Bancshares, Inc. from the scope of our audit of internal control over financial reporting. DCB Bancshares, Inc. constituted 7.18 percent of consolidated revenue (total net interest income and total noninterest income) for the year ended December 31, 2017, and 9.94 percent of consolidated total assets as of December 31, 2017
| 77 |
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Dixon Hughes Goodman LLP
Atlanta, Georgia
March 9, 2018
| 78 |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Old Line Bancshares, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Old Line Bancshares, Inc. and Subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Dixon Hughes Goodman LLP
We have served as the Company’s auditor since 2013.
Atlanta, Georgia
March 9, 2018
| 79 |
Part 1. Financial Information
Old Line Bancshares, Inc. & Subsidiaries
| December 31, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Assets | ||||||||
| Cash and due from banks | $ | 33,562,652 | $ | 22,062,912 | ||||
| Interest bearing deposits in other financial institutions | 1,354,870 | 1,151,917 | ||||||
| Federal funds sold | 256,589 | 248,342 | ||||||
| Total cash and cash equivalents | 35,174,111 | 23,463,171 | ||||||
| Investment securities available for sale-at fair value | 218,352,558 | 199,505,204 | ||||||
| Loans held for sale, fair value of $4,557,722 and $8,707,516 | 4,404,294 | 8,418,435 | ||||||
| Loans held for investment (net of allowance for loan losses of $5,920,586 and $6,195,469, respectively) | 1,696,361,431 | 1,361,175,206 | ||||||
| Equity securities at cost | 8,977,747 | 8,303,347 | ||||||
| Premises and equipment | 41,173,810 | 36,744,704 | ||||||
| Accrued interest receivable | 5,476,230 | 4,278,229 | ||||||
| Deferred income taxes | 7,317,096 | 9,578,350 | ||||||
| Bank owned life insurance | 41,612,496 | 37,557,566 | ||||||
| Annuity Plan | 5,981,809 | — | ||||||
| Other real estate owned | 2,003,998 | 2,746,000 | ||||||
| Goodwill | 25,083,675 | 9,786,357 | ||||||
| Core deposit intangible | 6,297,970 | 3,520,421 | ||||||
| Other assets | 7,396,227 | 3,942,640 | ||||||
| Total assets | $ | 2,105,613,452 | $ | 1,709,019,630 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Deposits | ||||||||
| Non-interest bearing | $ | 451,803,052 | $ | 331,331,263 | ||||
| Interest bearing | 1,201,100,317 | 994,549,269 | ||||||
| Total deposits | 1,652,903,369 | 1,325,880,532 | ||||||
| Short term borrowings | 192,611,971 | 183,433,892 | ||||||
| Long term borrowings | 38,106,930 | 37,842,567 | ||||||
| Supplemental executive retirement plan | 5,893,255 | 5,613,799 | ||||||
| Income taxes payable | 2,157,375 | 18,706 | ||||||
| Other liabilities | 6,213,366 | 5,563,349 | ||||||
| Total liabilities | 1,897,886,266 | 1,558,352,845 | ||||||
| Stockholders’ equity | ||||||||
| Common stock, par value $0.01 per share; 25,000,000 shares authorized; issued and outstanding 12,508,332 for 2017 and 10,910,915 for 2016 | 125,083 | 109,109 | ||||||
| Additional paid-in capital | 148,882,865 | 106,692,958 | ||||||
| Retained earnings | 61,054,487 | 48,842,026 | ||||||
| Accumulated other comprehensive income (loss) | (2,335,249 | ) | (4,977,308 | ) | ||||
| Total Old Line Bancshares, Inc. stockholders’ equity | 207,727,186 | 150,666,785 | ||||||
| Total liabilities and stockholders’ equity | $ | 2,105,613,452 | $ | 1,709,019,630 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 80 |
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Income
| Years Ended December 31, | 2017 | 2016 | 2015 | |||||||||
| Interest Income | ||||||||||||
| Loans, including fees | $ | 68,132,398 | $ | 56,031,146 | $ | 47,948,411 | ||||||
| Interest and dividends on taxable investments: | ||||||||||||
| U.S. Treasury securities | 25,636 | 18,838 | 10,520 | |||||||||
| U.S. government agency securities | 272,751 | 266,302 | 521,947 | |||||||||
| Corporate bonds | 628,622 | 130,374 | — | |||||||||
| Mortgage backed securities | 2,213,346 | 2,060,415 | 1,502,468 | |||||||||
| Municipal securities | 1,772,539 | 1,586,956 | 1,239,290 | |||||||||
| Federal funds sold | 6,198 | 2,334 | 1,022 | |||||||||
| Other | 561,231 | 368,175 | 229,136 | |||||||||
| Total interest income | 73,612,721 | 60,464,540 | 51,452,794 | |||||||||
| Interest expense | ||||||||||||
| Deposits | 7,321,031 | 5,508,833 | 4,246,990 | |||||||||
| Borrowed funds | 4,177,602 | 2,016,279 | 617,308 | |||||||||
| Total interest expense | 11,498,633 | 7,525,112 | 4,864,298 | |||||||||
| Net interest income | 62,114,088 | 52,939,428 | 46,588,496 | |||||||||
| Provision for loan losses | 955,108 | 1,584,542 | 1,310,984 | |||||||||
| Net interest income after provision for loan losses | 61,158,980 | 51,354,886 | 45,277,512 | |||||||||
| Non-interest income | ||||||||||||
| Service charges on deposit accounts | 1,982,981 | 1,728,636 | 1,729,773 | |||||||||
| Gains on sales or calls of investment securities | 35,258 | 1,227,915 | 65,222 | |||||||||
| Earnings on bank owned life insurance | 1,167,467 | 1,132,401 | 1,009,653 | |||||||||
| Gain (loss) on disposal of assets | 73,663 | (27,176 | ) | 14,128 | ||||||||
| Gain on sale of loans | 94,714 | — | — | |||||||||
| Income on marketable loans | 2,319,806 | 2,317,648 | 2,019,313 | |||||||||
| Other fees and commissions | 2,126,716 | 1,876,613 | 2,006,906 | |||||||||
| Total non-interest income | 7,800,605 | 8,256,037 | 6,844,995 | |||||||||
| Non-interest expense | ||||||||||||
| Salaries and benefits | 20,551,526 | 20,031,638 | 17,237,222 | |||||||||
| Occupancy and equipment | 7,073,696 | 6,788,213 | 5,775,874 | |||||||||
| Data processing | 1,671,720 | 1,549,863 | 1,432,182 | |||||||||
| FDIC insurance and State of Maryland assessments | 1,001,522 | 1,040,507 | 966,982 | |||||||||
| Merger and integration | 3,985,514 | 661,018 | 1,420,570 | |||||||||
| Core deposit premium amortization | 968,880 | 830,805 | 792,351 | |||||||||
| (Gain) loss on sales of other real estate owned | (13,589 | ) | (77,943 | ) | 49,717 | |||||||
| OREO expense | 301,394 | 318,498 | 430,559 | |||||||||
| Director Fees | 659,300 | 665,700 | 651,500 | |||||||||
| Network services | 519,652 | 549,639 | 699,649 | |||||||||
| Telephone | 821,260 | 762,943 | 659,934 | |||||||||
| Other operating | 7,302,172 | 6,522,285 | 6,159,143 | |||||||||
| Total non-interest expense | 44,843,047 | 39,643,166 | 36,275,683 | |||||||||
| Income before income taxes | 24,116,538 | 19,967,757 | 15,846,824 | |||||||||
| Income tax expense | 8,152,724 | 6,812,598 | 5,382,390 | |||||||||
| Net income | 15,963,814 | 13,155,159 | 10,464,434 | |||||||||
| Less: Net gain (loss) attributable to the non-controlling interest | — | 62 | (4,152 | ) | ||||||||
| Net income available to common stockholders | $ | 15,963,814 | $ | 13,155,097 | $ | 10,468,586 | ||||||
| Basic earnings per common share | $ | 1.38 | $ | 1.21 | $ | 0.98 | ||||||
| Diluted earnings per common share | $ | 1.35 | $ | 1.20 | $ | 0.97 | ||||||
| Dividend per common share | $ | 0.32 | $ | 0.24 | $ | 0.21 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Comprehensive Income
| Years Ended December 31, | 2017 | 2016 | 2015 | |||||||||
| Net income | $ | 15,963,814 | $ | 13,155,159 | $ | 10,464,434 | ||||||
| Other Comprehensive Income (Loss): | ||||||||||||
| Unrealized gain (loss) on securities available for sale, net of taxes of $1,734,922, (2,782,707) and $146,528 respectively. | 2,663,409 | (4,271,943 | ) | 224,945 | ||||||||
| Reclassification adjustment for realized gain on securities available for sale included in net income, net of taxes of $13,908, $484,351 and $25,727, respectively. | (21,350 | ) | (743,564 | ) | (39,495 | ) | ||||||
| Other comprehensive income (loss) | 2,642,059 | (5,015,507 | ) | 185,450 | ||||||||
| Comprehensive Income | 18,605,873 | 8,139,652 | 10,649,884 | |||||||||
| Comprehensive income (loss) attributable to the non-controlling interest | — | 62 | (4,152 | ) | ||||||||
| Comprehensive income available to common stockholders | $ | 18,605,873 | $ | 8,139,590 | $ | 10,654,036 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
| Accumulated | ||||||||||||||||||||||||||||
| Additional | other | Non- | Total | |||||||||||||||||||||||||
| Common stock | paid-in | Retained | comprehensive | controlling | stockholders’ | |||||||||||||||||||||||
| Shares | Par value | capital | earnings | income (loss) | interest | equity | ||||||||||||||||||||||
| Balance, December 31, 2014 | 10,810,930 | $ | 108,110 | $ | 105,235,646 | $ | 30,067,798 | $ | (147,250 | ) | $ | 262,333 | $ | 135,526,637 | ||||||||||||||
| Net income attributable to Old Line Bancshares,Inc. | — | — | — | 10,468,586 | — | — | 10,468,586 | |||||||||||||||||||||
| Acquisition of Regal Bancorp | 230,640 | 2,306 | 4,142,295 | — | — | — | 4,144,601 | |||||||||||||||||||||
| Unrealized gain on securities available for sale,net of income tax expense of $120,801 | — | — | — | — | 185,450 | — | 185,450 | |||||||||||||||||||||
| Net loss attributable to non-controlling interest | — | — | — | — | — | (4,152 | ) | (4,152 | ) | |||||||||||||||||||
| Stock based compensation awards | — | — | 418,419 | — | — | — | 418,419 | |||||||||||||||||||||
| Stock options exercised including tax benefitof$94,185 | 69,500 | 695 | 815,158 | — | — | — | 815,853 | |||||||||||||||||||||
| Restricted stock issued | 30,727 | 307 | (307 | ) | — | — | — | — | ||||||||||||||||||||
| Stock buyback | (339,237 | ) | (3,392 | ) | (5,317,605 | ) | (5,320,997 | ) | ||||||||||||||||||||
| Common stock cash dividend $0.21 per share | — | — | — | (2,245,508 | ) | — | — | (2,245,508 | ) | |||||||||||||||||||
| Balance, December 31, 2015 | 10,802,560 | $ | 108,026 | $ | 105,293,606 | $ | 38,290,876 | $ | 38,200 | $ | 258,181 | $ | 143,988,889 | |||||||||||||||
| Net income attributable to Old Line Bancshares,Inc. | — | — | — | 13,155,097 | — | — | 13,155,097 | |||||||||||||||||||||
| Unrealized loss on securities available for sale,net of income tax benefit of $3,267,058 | — | — | — | — | (5,015,508 | ) | — | (5,015,508 | ) | |||||||||||||||||||
| Purchase of non-controlling interest | — | — | — | — | — | (258,181 | ) | (258,181 | ) | |||||||||||||||||||
| Stock based compensation awards | — | — | 562,672 | — | — | — | 562,672 | |||||||||||||||||||||
| Stock options exercised including tax benefitof$149,429 | 71,794 | 718 | 837,045 | — | — | — | 837,763 | |||||||||||||||||||||
| Restricted stock issued | 36,561 | 365 | (365 | ) | — | — | — | — | ||||||||||||||||||||
| Common stock cash dividend $0.24 per share | — | — | — | (2,603,947 | ) | — | — | (2,603,947 | ) | |||||||||||||||||||
| Balance, December 31, 2016 | 10,910,915 | $ | 109,109 | $ | 106,692,958 | $ | 48,842,026 | $ | (4,977,308 | ) | $ | — | $ | 150,666,785 | ||||||||||||||
| Net income attributable to Old Line Bancshares,Inc. | — | — | — | 15,963,814 | — | — | 15,963,814 | |||||||||||||||||||||
| Unrealized loss on securities available for sale,net of income tax benefit of $1,721,014 | — | — | — | — | 2,642,059 | — | 2,642,059 | |||||||||||||||||||||
| Acquisition of DCB | 1,495,090 | 14,951 | 40,830,924 | — | — | — | 40,845,875 | |||||||||||||||||||||
| Stock based compensation awards | — | — | 694,593 | — | — | — | 694,593 | |||||||||||||||||||||
| Stock options exercised including tax benefitof$217,132 | 61,614 | 616 | 664,797 | — | — | — | 665,413 | |||||||||||||||||||||
| Restricted stock issued | 40,713 | 407 | (407 | ) | — | — | — | — | ||||||||||||||||||||
| Common stock cash dividend $0.32 per share | — | — | — | (3,751,353 | ) | — | — | (3,751,353 | ) | |||||||||||||||||||
| Balance, December 31, 2017 | 12,508,332 | $ | 125,083 | $ | 148,882,865 | $ | 61,054,487 | $ | (2,335,249 | ) | $ | — | $ | 207,727,186 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Cash Flows
| Years Ended December 31, | 2017 | 2016 | 2015 | |||||||||
| Cash flows from operating activities | ||||||||||||
| Net income | $ | 15,963,814 | $ | 13,155,159 | $ | 10,464,434 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||
| Depreciation and amortization | 2,476,059 | 2,582,116 | 2,332,087 | |||||||||
| Provision for loan losses | 955,108 | 1,584,542 | 1,310,984 | |||||||||
| Amortization of intangible assets | 968,881 | 830,805 | 792,351 | |||||||||
| Change in deferred loan fees net of costs | (409,322 | ) | (329,541 | ) | (1,039 | ) | ||||||
| (Gain)/loss on sales or calls of securities | (35,258 | ) | (1,227,915 | ) | (65,222 | ) | ||||||
| Amortization of premiums and discounts | 968,404 | 1,082,570 | 910,426 | |||||||||
| Origination of loans held for sale | (95,358,878 | ) | (100,887,323 | ) | (103,508,482 | ) | ||||||
| Proceeds from sale of loans held for sale | 99,373,019 | 100,581,376 | 99,944,100 | |||||||||
| Income on marketable loans | (2,319,806 | ) | (2,317,648 | ) | (2,019,313 | ) | ||||||
| (Gain)/loss on sales of other real estate owned | (13,589 | ) | (77,943 | ) | 49,717 | |||||||
| Gain on sale of loans | (94,714 | ) | — | — | ||||||||
| Write down of other real estate owned | — | — | 145,165 | |||||||||
| Gain on sale of fixed assets | (73,663 | ) | (27,176 | ) | (14,128 | ) | ||||||
| Deferred income taxes | 1,139,576 | 7,509,357 | 2,496,521 | |||||||||
| Stock based compensation awards | 694,593 | 562,672 | 418,419 | |||||||||
| Increase (decrease) in | ||||||||||||
| Accrued interest payable | 155,350 | 852,670 | 128,352 | |||||||||
| Income tax payable | 2,138,669 | (3,596,971 | ) | 3,130,242 | ||||||||
| Supplemental executive retirement plan | 279,456 | 277,290 | 241,368 | |||||||||
| Other liabilities | (2,305,696 | ) | 593,395 | (1,531,062 | ) | |||||||
| Decrease (increase) in | ||||||||||||
| Accrued interest receivable | (612,806 | ) | (463,683 | ) | (342,255 | ) | ||||||
| Bank owned life insurance | (969,147 | ) | (951,461 | ) | (866,588 | ) | ||||||
| Other assets | 1,241,258 | 624,397 | (13,821 | ) | ||||||||
| Net cash provided by operating activities | $ | 24,161,308 | $ | 20,356,688 | 14,002,256 | |||||||
| Cash flows from investing activities | ||||||||||||
| Net cash and cash equivalents of acquired bank | 35,566,945 | — | 6,344,304 | |||||||||
| Acquisition cash consideration | — | — | (2,852,321 | ) | ||||||||
| Purchase of investment securities available for sale | (50,360,299 | ) | (153,226,365 | ) | (51,567,606 | ) | ||||||
| Proceeds from disposal of investment securities | ||||||||||||
| Available for sale at maturity, call or paydowns | 23,489,734 | 32,295,968 | — | |||||||||
| Available for sale sold | 53,802,337 | 107,993,646 | 41,835,214 | |||||||||
| Annuity Plan | (5,981,809 | ) | — | — | ||||||||
| Loans made, net of principal collected | (117,568,330 | ) | (214,308,249 | ) | (129,132,289 | ) | ||||||
| Proceeds from sale of other real estate owned | 1,178,439 | 1,034,362 | 1,413,869 | |||||||||
| Change in equity securities | (674,400 | ) | (3,361,001 | ) | 869,351 | |||||||
| Purchase of premises and equipment | (2,735,017 | ) | (3,151,842 | ) | (2,399,547 | ) | ||||||
| Proceeds from the sale of premises and equipment | 73,663 | 27,176 | 14,128 | |||||||||
| Net cash used in investing activities | (63,208,737 | ) | (232,696,305 | ) | (135,474,897 | ) | ||||||
| Cash flows from financing activities | ||||||||||||
| Net increase (decrease) in | ||||||||||||
| Time deposits | 69,431,735 | 17,131,785 | 94,563,356 | |||||||||
| Other deposits | (20,276,347 | ) | 72,868,781 | 21,602,161 | ||||||||
| Short term borrowings | 4,424,558 | 75,876,646 | 46,554,357 | |||||||||
| Long term borrowings | 264,363 | 28,249,249 | (16,200,985 | ) | ||||||||
| Stock proceeds from stock repurchase program | — | — | (5,320,997 | ) | ||||||||
| Proceeds from stock options exercised | 665,413 | 837,763 | 816,213 | |||||||||
| Cash dividends paid-common stock | (3,751,353 | ) | (2,603,947 | ) | (2,245,508 | ) | ||||||
| Purchase of minority member(s) interest | — | (258,181 | ) | — | ||||||||
| Net cash provided by financing activities | 50,758,369 | 192,102,096 | 139,768,597 | |||||||||
| Net (decrease) increase in cash and cash equivalents | 11,710,940 | (20,237,521 | ) | 18,295,956 | ||||||||
| Cash and cash equivalents at beginning of period | 23,463,171 | 43,700,692 | 25,404,736 | |||||||||
| Cash and cash equivalents at end of period | $ | 35,174,111 | $ | 23,463,171 | 43,700,692 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Cash Flows (Continued)
| Years Ended December 31, | 2017 | 2016 | 2015 | |||||||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||||||
| Cash paid during the period for: | ||||||||||||
| Interest | $ | 11,343,284 | $ | 6,423,846 | $ | 4,735,946 | ||||||
| Income taxes | $ | 4,874,478 | $ | 2,725,000 | $ | 415,220 | ||||||
| Supplemental Disclosure of Non-Cash Flow Operating Activities: | ||||||||||||
| Loans transferred to other real estate owned | $ | 422,848 | $ | 1,230,375 | $ | 820,725 | ||||||
| 2017 | 2016 | 2015 | ||||||||||
| Fair value of assets and liabilities from acquisition: | ||||||||||||
| Fair value of tangible assets acquired | $ | 310,974,425 | $ | — | $ | 129,901,303 | ||||||
| Other intangible assets acquired | 15,297,318 | — | 2,715,463 | |||||||||
| Fair value of liabilities assumed | (285,421,333 | ) | — | (125,619,844 | ) | |||||||
| Total merger consideration | 40,850,410 | — | 6,996,922 | |||||||||
| Supplemental disclosure of noncash activities: | ||||||||||||
| Transfer to loans from other real estate owned | $ | — | $ | — | $ | 820,725 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Organization and Description of Business—Old Line Bancshares, Inc. (“Bancshares”) is the holding company for Old Line Bank (the “Bank”). We provide a full range of banking services to customers located in Anne Arundel, Baltimore, Calvert, Charles, Carroll, Prince George’s and St. Mary’s Counties in Maryland and surrounding areas.
Basis of Presentation and Consolidation—The accompanying consolidated financial statements include the activity of Bancshares, its wholly owned subsidiary, Old Line Bank, and their wholly owned subsidiary Pointer Ridge Office Investment, LLC (“Pointer Ridge”). We have eliminated all significant intercompany transactions and balances.
For 2015, we reported the non-controlling interests in Pointer Ridge separately in the consolidated balance sheets. We report the income of Pointer Ridge attributable to Bancshares from the date of Bancshares’ acquisition of majority interest on the consolidated statements of income.
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.
Cash and Cash Equivalents—For purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents include cash on hand, amounts due from banks, interest bearing deposits and federal funds sold. Generally, we purchase and sell federal funds for one day periods.
Investment Securities—As we purchase securities, management determines if we should classify the securities as held to maturity, available for sale or trading. We record the securities that management has the intent and ability to hold to maturity at amortized cost which is cost adjusted for amortization of premiums and accretion of discounts to maturity. We classify securities that we may sell before maturity as available for sale and carry these securities at fair value with unrealized gains and losses included in stockholders’ equity on an after tax basis. Management has not identified any investment securities as trading.
We record gains and losses on the sale of securities on the trade date and determine these gains or losses using the specific identification method. We amortize premiums and accrete discounts using the interest method.
Management systematically evaluates investment securities for other- than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include (1) duration and magnitude of the decline in value, (2) the financial condition of the issuer or issuers and (3) the structure of the security. A decline in the market value of any available for sale security below cost that is deemed other-than-temporary results in a charge to earnings and establishment of a new cost basis for that security.
Stock Based Compensation Awards—The cost of employee services received in exchange for equity instruments, including stock options and restricted stock awards, is generally measured at fair value on the grant date. A Black-Scholes model is used to estimate the fair value of stock options, while the market price of Bancshares’ common stock at the date of grant is used as the fair value of restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards and as the restriction period for restricted stock awards. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Equity Securities—Equity securities include stock from Federal Home Loan Bank, Atlantic Central Bankers Bank and Maryland Financial Bank, which are carried at cost that approximates fair value.
| 86 |
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Premises and Equipment—We record premises and equipment at cost less accumulated depreciation. Generally, we compute depreciation using the straight line method over the estimated useful life of the assets. Estimated useful life for our buildings is five to 50 years. Estimated useful life for our leasehold improvements is three to 30 years. Estimated useful life for our furniture and equipment is three to 23 years.
Other Real Estate Owned—Other real estate owned consists of properties obtained through foreclosure proceedings or acceptance of a deed in lieu of foreclosure, and is reported on an individual asset basis at net realizable value. Net realizable value equals fair value and is determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources less estimated selling costs. While initial fair value is determined by independent third parties, management may subsequently reassess these valuations and apply additional discounts if necessary. When properties are acquired through foreclosure, any excess of the loan balance at the time of foreclosure over the fair value of the real estate held as collateral is recognized and charged to the allowance for loan losses. Subsequent write-downs are charged to a separate allowance for losses pertaining to real estate owned, established through provisions for estimated losses on other real estate owned charged to operations. Based upon management’s evaluation of the real estate acquired through foreclosure, additional expense is recorded when necessary in an amount sufficient to reflect any estimated declines in fair value. Gains and losses recognized on the disposition of the properties are also recorded in non-interest expense in the consolidated statements of income. Costs of improvements to real estate are capitalized, while costs associated with holding the real estate are charged to operations.
Mortgage Banking Activities—As part of normal business operations, we originate residential mortgage loans that have been pre-approved by secondary investors. The terms of the loans are set by the secondary investors, and the purchase price that the investor will pay for the loan is agreed to prior to the commitment of the loan. Generally, within three weeks after funding, the loans are transferred to the investor in accordance with the agreed-upon terms. At the date the loans are transferred to the investor, the servicing is released. On the settlement date of these loans, we record the gains from the sale of these loans equal to the difference between the proceeds to be received and the carrying amount of the loan.
Goodwill and Other Intangible Assets—Goodwill represents the excess of the purchase price over the sum of the estimated fair values of tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed related to the acquisitions of Maryland Bankcorp, Inc., WSB Holdings, Inc., Regal Bancorp, Inc. and DCB. Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in these transactions. The core deposit intangible is being amortized over 18 years for Maryland Bankcorp, Inc., ten years for WSB Holdings, Inc., and eight years for Regal Bancorp, Inc. and DCB and the estimated useful lives are periodically reviewed for reasonableness.
Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, comparing the reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill assigned to that reporting unit is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment of goodwill assigned to that reporting unit.
If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. We have determined that Bancshares has one reporting unit.
| 87 |
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
We evaluated the carrying value of goodwill as of September 30, 2017, our annual test date, and determined that no impairment charge was necessary. Additionally, should Bancshares’ future earnings and cash flows decline and/or discount rates increase, an impairment charge to goodwill and other intangible assets may be required. There have been no events subsequent to the September 30, 2017 evaluation that caused us to perform an interim review of the carrying value of goodwill.
Business Combinations—Accounting principles generally accepted in the United States (U.S. GAAP) requires that the acquisition method of accounting be used for all business combinations and that an acquirer be identified for each business combination. Under U.S. GAAP, the acquirer is the entity that obtains control of one or more businesses in the business combination, and the acquisition date is the date the acquirer achieves control. U.S. GAAP requires that the acquirer recognize the fair value of assets acquired, liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date.
Loans and Interest Income—We report loans at face value plus deferred origination costs, less deferred origination fees and the allowance for loan losses. We accrue interest on loans based on the principal amounts outstanding. We amortize origination fees and costs to income over the terms of the loans using an approximate interest method.
We discontinue the accrual of interest when any portion of the principal or interest is 90 days past due and collateral is insufficient to discharge the debt in full. Based on current information, we consider loans impaired when management determines that it is unlikely that the borrower will make principal and interest payments according to contractual terms. Generally, we do not review loans for impairment until we have discontinued the accrual of interest. We consider several factors in determining impairment including payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Generally, we do not classify loans that experience insignificant payment delays and payment shortfalls as impaired. Management determines the significance of payment delays and payment shortfalls on a case by case basis. We consider all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. We measure impairment on a loan by loan basis for commercial and real estate loans by determining either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. If it is doubtful that we will collect principal, we apply all payments to principal.
We collectively evaluate large groups of smaller balance homogeneous loans for impairment. Accordingly, we do not separately identify individual consumer and residential loans for impairment unless such loans are the subject of a restructuring agreement or the borrower has filed bankruptcy.
Acquired Loans—These loans are recorded at fair value at the date of acquisition, and accordingly no allowance for loan losses is transferred to the acquiring entity in connection with purchase accounting. The fair values of loans with evidence of credit deterioration (purchased, credit-impaired loans) are initially recorded at fair value, but thereafter accounted for differently than purchased, non-credit-impaired loans. For purchased, credit-impaired loans, the excess of all cash flows estimated to be collectable at the date of acquisition over the purchase price of the purchase credit-impaired loan is recognized as interest income, using a level-yield basis over the life of the loan. This amount is referred to as the accretable yield. The purchased credit-impaired loan’s contractually-required payments receivable estimated to be in excess of the amount of its future cash flows expected at the date of acquisition is referred to as the non-accretable difference, and is not reflected as an adjustment to the yield, in the form of a loss accrual or a valuation allowance.
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Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Subsequent to the acquisition date, management continues to monitor cash flows on a quarterly basis, to determine the performance of each purchased, credit-impaired loan in comparison to management’s initial performance expectations. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent significant increases in cash flows result in a reversal of the provision for loan losses to the extent of prior provisions or a reclassification of amount from non-accretable difference to accretable yield, with a positive impact on the accretion of interest income in future periods.
Acquired performing loans are accounted for using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Acquired performing loans are recorded as of the purchase date at fair value. Credit losses on the acquired performing loans are estimated based on analysis of the performing portfolio. A provision for loan losses is recognized for any further credit deterioration that occurs in these loans subsequent to the acquisition date.
Loans Held for Sale—The loans classified in the held for sale portfolio consists of loans that have been committed to be purchased by investors in the secondary market at December 31, 2017 and will be settled subsequent to that date and reported at lower of cost.
Allowance for Loan Losses—The allowance for loan losses represent an amount that, in management’s judgment, will be adequate to absorb probable losses on existing loans and other extensions of credit that may become uncollectible. Management bases its judgment in determining the adequacy of the allowance on evaluations of the collectability of loans. Management takes into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions that may affect the borrowers’ ability to pay, overall portfolio quality, and review of specific problem areas. If the current economy or real estate market continues to suffer a severe downturn, we may need to increase the estimate for uncollectible accounts. We charge off loans that we deem uncollectible and deduct them from the allowance. We add recoveries on loans previously charged off to the allowance.
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.
Within each of the above loan types, each portfolio is sorted by the risk assessment rating of each loan as Pass, Pass-Watch, Special Mention or Substandard. The Bank’s loss experience (Loss Factor) is progressively tiered by risk category for Pass, Pass-Watch, Special Mention and Substandard loans by applying a higher loss factor to higher risk rated categories. Loans rated “Doubtful” or “Loss” are, by definition, impaired and will be specifically reserved based upon Bank management’s best estimate of the loss exposure for each loan.
The Bank’s loss experience for each of the last 12 quarters is aggregated and that total is used to create a percentage of the loan portfolio as it existed at the beginning of the 12 quarter “look back.” We collectively evaluate large groups of smaller balance homogeneous loans for impairment. Accordingly, we do not separately identify individual consumer and residential loans for impairment unless such loans are the subject of a restructuring agreement or the borrower has filed bankruptcy.
Qualitative factors include: levels and trends in delinquencies and non-accruals; trends in volumes and terms of loans; effects of any changes in lending policies; the experience, ability and depth of management; regional and local economic trends and conditions; Peer Group loan loss history; concentrations of credit; quality of the bank’s loan review system; external factors, such as competition, legal and regulatory requirements; and, management’s collective assessment of the appropriateness of the allowance for loan losses in light of recent trends, events, political impact and other considerations.
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Notes to Consolidated Financial Statements
(Continued)
Advertising—We expense advertising costs over the life of ad campaigns. We expense general purpose advertising as we incur it.
Income Taxes—The provision for income taxes includes taxes payable for the current year and deferred income taxes. We determine deferred tax assets and liabilities based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which we expect the differences to reverse. If needed, we use a valuation allowance to reduce the deferred tax assets to the amount we expect to realize. We allocate tax expense and tax benefits to Bancshares and its subsidiaries based on their proportional share of taxable income. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income at the time of enactment of such change in tax rates. In the fourth quarter 2017, the Tax Cut Jobs Act was signed into law, which requires the deferred tax assets and liabilities to be revalued using the 21% federal tax rate enacted. The provisional effect was recorded in the fourth quarter tax provision.
Earnings Per 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 and warrants, calculated using the treasury stock method.
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Net Income | $ | 15,963,814 | $ | 13,155,097 | $ | 10,468,586 | ||||||
| Denominator: | ||||||||||||
| Weighted average common shares outstanding | 11,588,045 | 10,837,939 | 10,647,986 | |||||||||
| Effect of Diluted Shares | 211,139 | 159,546 | 136,337 | |||||||||
| Diluted shares | 11,799,184 | 10,997,485 | 10,784,323 | |||||||||
| Net income per share: | ||||||||||||
| Basic | $ | 1.38 | $ | 1.21 | $ | 0.98 | ||||||
| Diluted | $ | 1.35 | $ | 1.20 | $ | 0.97 | ||||||
Comprehensive Income—Comprehensive income includes net income attributable to Bancshares and the unrealized gain (loss) on investment securities available for sale net of related income taxes. The line item affected in the consolidated statements of income by the re-classified amounts is gain on sales or calls of investment securities.
Reclassifications—We have made certain reclassifications to the 2016 and 2015 financial presentation to conform to the 2017 presentation. Such reclassifications had no effect on previously reported cash flows, stockholders’ equity or net income.
Recent Accounting Pronouncements— In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 – Revenue from Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principal of this ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The ASU allows for either full retrospective or modified retrospective adoption. The ASU does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under U.S. GAAP. This ASU will be effective for us in our first quarter of 2018. Bancshares is continuing to assess its revenue streams and is reviewing its contracts with customers that are potentially affected by the new guidance, including fees on deposits, gains and losses on the sale of other real estate owned, credit and debit card interchange fees, and rental income, to determine the potential impact the new guidance is expected to have on Bancshares’ consolidated financial statements. However, Bancshares does not expect its revenue recognition pattern for these revenue streams to change materially from current practice as a result of the ASU. Our revenue is comprised of net interest income on financial assets and liabilities, which is explicitly excluded from the scope of the new guidance, and noninterest income. The contracts that are within scope of the guidance are primarily related to service charges on deposit accounts, cardholder and merchant income, wealth advisory services income, other service charges and fees, sales of other real estate, insurance commissions and miscellaneous fees. Based on our overall assessment of revenue streams and review of related contracts affected by the ASU, Bancshares does not anticipate a material impact on our consolidated financial position or consolidated results of operations as a result of the adoption of this ASU. Bancshares is planning to adopt the ASU on January 1, 2018, utilizing the modified retrospective approach.
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Notes to Consolidated Financial Statements
(Continued)
In January 2016, FASB issued ASU No. 2016-01, Financial Instruments – Recognition and Measurement of Financial Assets and Liabilities, which is intended to improve the recognition and measurement of financial instruments by: requiring equity investments (other than equity method or consolidation) to be measured at fair value with changes in fair value recognized in net income; requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities; eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This ASU is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU permits early adoption of the instrument-specific credit risk provision. This ASU will be effective for us in our first quarter of 2018. With the adoption of this ASU, equity securities can no longer be classified as available for sale, and as such marketable equity securities will be disclosed as a separate line item on the balance sheet with changes in the fair value of equity securities reflected in net income. This ASU will not have a significant impact on our consolidated financial statements.
In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of this ASU is permitted for all entities. This ASU will be effective for us in our first quarter of 2019. Bancshares is currently assessing the impact that the adoption of this standard will have on its financial condition and results of operations and will closely monitor any new developments or additional guidance to determine the potential impact the new standard will on have on our consolidated financial statements.
In March 2016, FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 was effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of ASU 2016-09 on January 1, 2017 did not impact Bancshares’ consolidated financial statements.
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Notes to Consolidated Financial Statements
(Continued)
In June 2016, FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which sets forth a “current expected credit loss” (“CECL”) model requiring Bancshares to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. For public business entities that are U.S. Securities and Exchange Commission filers, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Bancshares has constituted a committee that has the responsibility to gather loan information and consider acceptable methodologies to comply with this ASU. The committee meets periodically to discuss the latest developments and committee members keep themselves updated on such developments via webcasts, publications, and conferences. We are also evaluating selected third party vendor solutions to assist us in the application of the ASU 2016-13. The adoption of ASU 2016-13 is likely to result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses on debt securities. Bancshares’ evaluation indicates that the provisions of ASU No. 2016-13 are expected to impact its consolidated financial statements, in particular the level of the reserve for loan losses. We are, however, continuing to evaluate the extent of the potential impact.
In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on the following nine specific cash flow issues: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned; 6) life insurance policies; 7) distributions received from equity method investees; 8) beneficial interests in securitization transactions; and 9) separately identifiable cash flows and application of the predominance principle. The ASU is effective for all annual and interim periods beginning January 1, 2018 and is required to be applied retrospectively to all periods presented. While the adoption of this guidance will result in a change in classification in the statement of cash flows, it will not have a material impact on our consolidated financial statements as the new guidance will be applied are immaterial, and it will not have any impact on our financial position or results of operations.
In January 2017, FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the definition of a business, which clarifies the definition of a business and assists entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under this guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset (or group of similar assets), the assets acquired would not represent a business. In addition, in order to be considered a business, an acquisition would have to include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The guidance also narrows the definition of outputs by more closely aligning it with how outputs are described in FASB guidance for revenue recognition. This guidance is effective for interim and annual periods for Bancshares on January 1, 2018, with early adoption permitted. Bancshares does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In January 2017, FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, under the ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Bancshares does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
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Notes to Consolidated Financial Statements
(Continued)
In March 2017, FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The adoption of this guidance is not expected to have a material impact on Bancshares’ consolidated financial statements.
In August 2017, FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. This ASU’s objectives are to: (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities; and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. ASU No. 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. Bancshares currently does not designate any derivative financial instruments as formal hedging relationships, and therefore, does not utilize hedge accounting. However, Bancshares is currently evaluating this ASU to determine whether its provisions will enhance its ability to employ risk management strategies, while improving the transparency and understanding of those strategies for financial statement users.
In February 2018, FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). This ASU allows an entity to elect a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act that changed our income tax rate from 35% to 21%. The amount of that reclassification should include the effect of changes of tax rate on the deferred tax amount, any related valuation allowance and other income tax effects on the items in AOCI. The ASU requires an entity to state if an election to reclassify the tax effect to retained earnings is made along with the description of other income tax effects that are reclassified from AOCI. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. Bancshares has elected to adopt ASU 2018-02 in the first quarter of 2018. The change in accounting principal will be accounted for as a cumulative effect adjustment to the balance sheet resulting in a reclass of approximately $460 thousand from AOCI to decrease retained earnings in the first quarter of 2018.
2. ACQUISITION OF DCB BANCSHARES, INC.
On July 28, 2017, Bancshares acquired DCB Bancshares, Inc. (“DCB”), the parent company of Damascus Community Bank (“Damascus”). Upon the consummation of the merger, each share of common stock of DCB outstanding immediately before the merger was converted into the right to receive 0.9269 shares of Bancshares’ common stock, provided that cash was paid in lieu of any fractional shares of Bancshares common stock. As a result, Bancshares issued 1,495,090 shares of its common stock in exchange for the shares of DCB common stock in the merger. The aggregate merger consideration was approximately $40.9 million based on the closing sales price of Bancshares’ common stock on July 28, 2017.
In connection with the merger, Damascus merged with and into the Bank, with the Bank the surviving bank.
At July 28, 2017, DCB had consolidated assets of approximately $311 million. This merger added six banking locations located in Montgomery, Frederick and Carroll Counties in Maryland.
The acquired assets and assumed liabilities of DCB were measured at estimated fair value. Management made significant estimates and exercised significant judgment in accounting for the acquisition of DCB. Management judgmentally assigned risk ratings to loans based on appraisals and estimated collateral values, expected cash flows, prepayment speeds and estimated loss factors to measure fair value for loans. Management used quoted or current market prices to determine the fair value of DCB’s investment securities.
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Notes to Consolidated Financial Statements
(Continued)
The following table provides the purchase price as of the acquisition date and the identifiable assets acquired and liabilities assumed at their estimated fair values.
| Purchase Price Consideration | ||||
| Cash consideration | $ | 4,534 | ||
| Purchase price assigned to shares exchanged for stock | 40,845,876 | |||
| Total purchase price for DCB acquisition | 40,850,410 | |||
| Fair Value of Assets Acquired | ||||
| Cash and due from banks | $ | 35,571,479 | ||
| Investment securities available for sale | 42,349,201 | |||
| Loans, net | 216,172,008 | |||
| Premises and equipment | 5,214,193 | |||
| Accrued interest receivable | 585,195 | |||
| Deferred income taxes | 599,336 | |||
| Bank owned life insurance | 3,085,783 | |||
| Core deposit intangible | 3,746,430 | |||
| Other assets | 3,650,800 | |||
| Total assets acquired | $ | 310,974,425 | ||
| Fair Value of Liabilities assumed | ||||
| Deposits | $ | 277,867,449 | ||
| Short term borrowings | 4,753,521 | |||
| Other liabilities | 2,800,363 | |||
| Total liabilities assumed | $ | 285,421,333 | ||
| Fair Value of net assets acquired | 25,553,092 | |||
| Total Purchase Price | 40,850,410 | |||
| Goodwill recorded for DCB | $ | 15,297,318 | ||
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Notes to Consolidated Financial Statements
(Continued)
The following pro forma information combines the historical results of Bancshares and pre-merger DCB. The pro forma financial information does not include the potential impacts of possible business model changes, current market conditions, revenue enhancements, expense efficiencies, or other factors. The pro forma results exclude the impact of merger-related expenses of $4.0 million. While adjustments were made for the estimated impact of certain fair value adjustments, the following results are not indicative of what would have occurred had the DCB acquisition taken place on indicated dates.
If the DCB acquisition had been completed on January 1, 2017, net interest income would have been approximately $68.3 million for the twelve months ended December 31, 2017. Net income would have been approximately $20.6 million for the same twelve month period.
If the DCB acquisition had been completed on January 1, 2016, net interest income would have been approximately $62.6 million for the twelve months ended December 31, 2016. Net income would have been approximately $14.4 million for the same twelve month period.
The following is an outline of the expenses that we have incurred during the twelve months ended December 31, 2017 in conjunction with the DCB merger.
| Year Ending December 31, | 2017 | |||
| Data processing | $ | 1,426,269 | ||
| Severence costs | 1,515,207 | |||
| Advisory & legal fees | 703,224 | |||
| Other | 340,814 | |||
| $ | 3,985,514 | |||
3. Goodwill and Other Intangible Assets
The following is a summary of changes in the carrying amounts of goodwill as well as the gross carrying amounts and accumulated amortization of core deposit intangibles:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Goodwill: | ||||||||
| Carrying amount at beginning of year | $ | 9,786,357 | $ | 9,786,357 | ||||
| Goodwill from DCB acquisition | 15,297,318 | — | ||||||
| Carrying amount at end of year | $ | 25,083,675 | $ | 9,786,357 | ||||
| Core deposit intangible: | ||||||||
| Core deposit intangible | $ | 8,160,420 | $ | 8,160,420 | ||||
| Acquired during the year | 3,746,430 | — | ||||||
| Less accumulated amortization | (5,608,880 | ) | (4,639,999 | ) | ||||
| Carrying amount at end of year | $ | 6,297,970 | $ | 3,520,421 | ||||
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Notes to Consolidated Financial Statements
(Continued)
| Core Deposit | ||||
| Years ended December 31, | Premium | |||
| 2018 | 1,195,796 | |||
| 2019 | 1,101,084 | |||
| 2020 | 1,000,018 | |||
| 2021 | 912,325 | |||
| 2022 | 832,643 | |||
| Thereafter | 1,256,104 | |||
| Total | $ | 6,297,970 | ||
4. Cash and Cash Equivalents
The Bank may carry balances with other banks that exceed the federally insured limit. We did not have any accounts that exceeded the federally insured limit in 2017 or 2016. The Bank also sells federal funds on an unsecured basis to the same banks. The average balance sold was $528 thousand and $491 thousand at December 31, 2017 and 2016, respectively. Federal banking regulations require banks to carry non-interest bearing cash reserves at specified percentages of deposit balances. The Bank’s normal amount of cash on hand and on deposit with other banks is sufficient to satisfy the reserve requirements.
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Notes to Consolidated Financial Statements
(Continued)
5. Investment Securities
Investment securities are summarized as follows:
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | Estimated | |||||||||||||
| cost | gains | losses | fair value | |||||||||||||
| December 31, 2017 | ||||||||||||||||
| Available for sale | ||||||||||||||||
| U. S. treasury | $ | 3,007,728 | $ | — | $ | (2,337 | ) | $ | 3,005,391 | |||||||
| U.S. government agency | 18,001,200 | — | (267,434 | ) | 17,733,766 | |||||||||||
| Corporate Bonds | 14,621,378 | 144,574 | (107,893 | ) | 14,658,059 | |||||||||||
| Municipal securities | 80,791,431 | 126,566 | (1,362,709 | ) | 79,555,288 | |||||||||||
| Mortgage backed securities: | ||||||||||||||||
| FHLMC certificates | 19,907,299 | 2,516 | (455,580 | ) | 19,454,235 | |||||||||||
| FNMA certificates | 64,476,038 | — | (1,530,121 | ) | 62,945,917 | |||||||||||
| GNMA certificates | 21,403,894 | — | (403,992 | ) | 20,999,902 | |||||||||||
| $ | 222,208,968 | $ | 273,656 | $ | (4,130,066 | ) | $ | 218,352,558 | ||||||||
| December 31, 2016 | ||||||||||||||||
| Available for sale | ||||||||||||||||
| U. S. treasury | $ | 2,999,483 | $ | 27 | $ | (3,728 | ) | $ | 2,995,782 | |||||||
| U.S. government agency | 7,653,595 | — | (387,280 | ) | 7,266,315 | |||||||||||
| Municipal securities | 8,100,000 | 90,477 | (18,840 | ) | 8,171,637 | |||||||||||
| Mortgage backed securities | 71,103,969 | 170,512 | (3,587,676 | ) | 67,686,805 | |||||||||||
| FHLMC certificates | ||||||||||||||||
| FNMA certificates | 22,706,185 | 11,712 | (917,543 | ) | 21,800,354 | |||||||||||
| GNMA certificates | 73,425,200 | — | (2,976,384 | ) | 70,448,816 | |||||||||||
| SBA loan pools | 21,736,255 | 3,506 | (604,266 | ) | 21,135,495 | |||||||||||
| $ | 207,724,687 | $ | 276,234 | $ | (8,495,717 | ) | $ | 199,505,204 | ||||||||
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Notes to Consolidated Financial Statements
(Continued)
The table below summarizes investment securities with unrealized losses and the length of time the securities have been in an unrealized loss position as of December 31, 2017 and 2016:
| December 31, 2017 | ||||||||||||||||||||||||
| Less than 12 months | 12 Months or More | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| value | losses | value | losses | value | losses | |||||||||||||||||||
| U. S. treasury | $ | 1,506,328 | $ | 1,422 | $ | 1,499,063 | $ | 915 | $ | 3,005,391 | $ | 2,337 | ||||||||||||
| U.S. government agency | 12,266,502 | 93,043 | 5,467,264 | 174,391 | 17,733,766 | 267,434 | ||||||||||||||||||
| Corporate bonds | 9,407,810 | 107,893 | — | — | 9,407,810 | 107,893 | ||||||||||||||||||
| Municipal securities | 25,548,751 | 189,668 | 31,343,394 | 1,173,041 | 56,892,145 | 1,362,709 | ||||||||||||||||||
| Mortgage backed securities | ||||||||||||||||||||||||
| FHLMC certificates | — | — | 19,314,957 | 455,580 | 19,314,957 | 455,580 | ||||||||||||||||||
| FNMA certificates | 2,516,080 | 19,937 | 60,429,837 | 1,510,184 | 62,945,917 | 1,530,121 | ||||||||||||||||||
| GNMA certificates | 8,822,021 | 114,278 | 12,177,882 | 289,714 | 20,999,903 | 403,992 | ||||||||||||||||||
| $ | 60,067,492 | $ | 526,241 | $ | 130,232,397 | $ | 3,603,825 | $ | 190,299,889 | $ | 4,130,066 | |||||||||||||
| December 31, 2016 | ||||||||||||||||||||||||
| Less than 12 months | 12 Months or More | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| value | losses | value | losses | value | losses | |||||||||||||||||||
| U. S. treasury | $ | 1,496,016 | $ | 3,728 | $ | — | $ | — | $ | 1,496,016 | $ | 3,728 | ||||||||||||
| U.S. government agency | 7,266,315 | 387,280 | — | — | 7,266,315 | 387,280 | ||||||||||||||||||
| Corporate bonds | 1,981,160 | 18,840 | — | — | 1,981,160 | 18,840 | ||||||||||||||||||
| Municipal securities | 50,722,157 | 3,587,676 | — | — | 50,722,157 | 3,587,676 | ||||||||||||||||||
| Mortgage backed securities | ||||||||||||||||||||||||
| FHLMC certificates | 21,413,620 | 917,543 | — | — | 21,413,620 | 917,543 | ||||||||||||||||||
| FNMA certificates | 70,448,817 | 2,976,384 | — | — | 70,448,817 | 2,976,384 | ||||||||||||||||||
| GNMA certificates | 16,403,268 | 475,022 | 4,227,210 | 129,244 | 20,630,478 | 604,266 | ||||||||||||||||||
| $ | 169,731,353 | $ | 8,366,473 | $ | 4,227,210 | $ | 129,244 | $ | 173,958,563 | $ | 8,495,717 | |||||||||||||
At December 31, 2017, we had 56 investment securities that were in an unrealized loss position for less than 12 months and 116 investment securities in an unrealized loss position for 12 months or more.
We consider all unrealized losses on securities as of December 31, 2017 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 December 31, 2017, we do not have the intent to sell any of the securities classified as available for sale with unrealized losses 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 recognized any other than temporary impairment loss in our consolidated statement of income.
During the year ended December 31, 2017, we received $77.3 million in proceeds from sales, maturities or calls and principal pay-downs on investment securities for a net gain of $35 thousand. The net proceeds of these transactions were used to pay down our Federal Home Loan Bank of Atlanta (“FHLB”) borrowings and purchase new investment securities. We acquired a total of $42.3 million investment portfolio as a result of the DCB merger. The securities sold included $41.8 million of securities that we acquired in the DCB merger and sold immediately after the closing of the merger, resulting in no gain or loss on such sales.
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Notes to Consolidated Financial Statements
(Continued)
Contractual maturities and pledged securities at December 31, 2017 and 2016 are shown below. Actual maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties. In addition, we classify mortgage backed securities based on maturity date, although the Bank receives payments on a monthly basis. We have pledged securities to customers who have funds invested in overnight repurchase agreements and deposits.
| 2017 | 2016 | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| December 31, | cost | value | cost | value | ||||||||||||
| Maturing | ||||||||||||||||
| Within one year | $ | 1,499,978 | $ | 1,499,063 | $ | 1,499,739 | $ | 1,499,766 | ||||||||
| Over one to five years | 3,933,902 | 3,926,744 | 4,788,422 | 4,801,586 | ||||||||||||
| Over five to ten years | 51,761,846 | 51,269,917 | 31,359,410 | 30,528,639 | ||||||||||||
| Over ten years | 165,013,242 | 161,656,834 | 170,077,116 | 162,675,213 | ||||||||||||
| $ | 222,208,968 | $ | 218,352,558 | $ | 207,724,687 | $ | 199,505,204 | |||||||||
| Pledged securities | $ | 61,250,667 | $ | 59,932,905 | $ | 52,471,389 | $ | 50,704,637 | ||||||||
6. Loans and Allowance for Loan Losses
Major classifications of loans are as follows:
| December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
| Legacy(1) | Acquired | Total | Legacy(1) | Acquired | Total | |||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||
| Owner Occupied | $ | 268,128,087 | $ | 87,658,855 | $ | 355,786,942 | $ | 238,220,475 | $ | 53,850,612 | $ | 292,071,087 | ||||||||||||
| Investment | 485,536,921 | 52,926,739 | 538,463,660 | 414,012,709 | 37,687,804 | 451,700,513 | ||||||||||||||||||
| Hospitality | 164,193,228 | 7,395,186 | 171,588,414 | 141,611,858 | 11,193,427 | 152,805,285 | ||||||||||||||||||
| Land and A&D | 67,310,660 | 9,230,771 | 76,541,431 | 51,323,297 | 6,015,813 | 57,339,110 | ||||||||||||||||||
| Residential Real Estate | ||||||||||||||||||||||||
| First Lien—Investment | 79,762,682 | 21,220,518 | 100,983,200 | 72,150,512 | 23,623,660 | 95,774,172 | ||||||||||||||||||
| First Lien—Owner Occupied | 67,237,699 | 62,524,794 | 129,762,493 | 54,732,604 | 42,443,767 | 97,176,371 | ||||||||||||||||||
| Residential Land and A&D | 35,879,853 | 6,536,160 | 42,416,013 | 39,667,222 | 5,558,232 | 45,225,454 | ||||||||||||||||||
| HELOC and Jr. Liens | 21,520,339 | 16,019,418 | 37,539,757 | 24,385,215 | 2,633,718 | 27,018,933 | ||||||||||||||||||
| Commercial and Industrial | 154,244,645 | 33,100,688 | 187,345,333 | 136,259,560 | 5,733,904 | 141,993,464 | ||||||||||||||||||
| Consumer | 10,758,589 | 49,082,751 | 59,841,340 | 4,868,909 | 139,966 | 5,008,875 | ||||||||||||||||||
| 1,354,572,703 | 345,695,880 | 1,700,268,583 | 1,177,232,361 | 188,880,903 | 1,366,113,264 | |||||||||||||||||||
| Allowance for loan losses | (5,738,534 | ) | (182,052 | ) | (5,920,586 | ) | (6,084,478 | ) | (110,991 | ) | (6,195,469 | ) | ||||||||||||
| Deferred loan costs, net | 2,013,434 | — | 2,013,434 | 1,257,411 | — | 1,257,411 | ||||||||||||||||||
| $ | 1,350,847,603 | $ | 345,513,828 | $ | 1,696,361,431 | $ | 1,172,405,294 | $ | 188,769,912 | $ | 1,361,175,206 | |||||||||||||
________________________
| (1) | As a result of the acquisitions of Maryland Bankcorp, Inc. (“Maryland Bankcorp”), the parent company of Maryland Bank & Trust Company, N.A. (“MB&T”), in April 2011, WSB Holdings Inc., the parent company of The Washington Savings Bank (“WSB”), in May 2013, Regal Bancorp, Inc. (“Regal”), the parent company of Regal Bank & Trust (“Regal Bank”), in December 2015 and DCB, the parent company of Damascus, in July 2017, we have segmented the portfolio into two components, “Legacy” loans originated by the Bank and “Acquired” loans acquired from MB&T, WSB, Regal Bank and Damascus. |
Credit Policies and Administration
We have adopted a comprehensive lending policy, which includes stringent underwriting standards for all types of loans. We have designed our underwriting standards to promote a complete banking relationship rather than a transactional relationship. In an effort to manage risk, prior to funding, the loan committee consisting of the Executive Officers and seven members of the board of directors must approve by a majority vote all credit decisions in excess of a lending officer’s lending authority.
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Notes to Consolidated Financial Statements
(Continued)
Management believes that it employs experienced lending officers, secures appropriate collateral and carefully monitors the financial condition of its borrowers and loan concentrations.
In addition to the internal business processes employed in the credit administration area, the Bank retains an outside independent firm to review the loan portfolio. This firm performs a detailed annual review and an interim update. We use the results of the firm’s report to validate our internal ratings and we review the commentary on specific loans and on our loan administration activities in order to improve our operations.
Commercial Real Estate Loans
We finance commercial real estate for our clients, for owner occupied and investment properties. Commercial real estate loans totaled $1.1 billion and $953.9 million, respectively, at December 31, 2017 and 2016. 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 that does not exceed loan to value of 80% and investor real estate at a maximum loan to value of 75%.
Commercial real estate lending entails significant risks. Risks inherent in managing our commercial real estate portfolio relate to sudden or gradual drops in property values as well as changes in the economic climate that may detrimentally impact the borrower’s ability to repay. We monitor the financial condition and operating performance of the borrower through a review of annual tax returns and updated financial statements. In addition, we meet with the borrower and/or perform site visits as required.
At December 31, 2017 and 2016, we had approximately $171.6 million and $152.8 million, respectively, of commercial real estate loans outstanding to the hospitality industry. An individual review of these loans indicates that they generally have a low loan to value, more than acceptable existing or projected cash flow, are to experienced operators and are generally dispersed throughout the region.
Residential Real Estate Loans
We offer a variety of consumer oriented residential real estate loans including home equity lines of credit, home improvement loans and first or second mortgages on investment properties. Our residential loan portfolio amounted to $310.7 million and $265.2 million, respectively, at December 31, 2017 and 2016. Although most of these loans are in our market area, the diversity of the individual loans in the portfolio reduces our potential risk. Usually, we secure our residential real estate loans with a security interest in the borrower’s primary or secondary residence with a loan to value not exceeding 85%. Our initial underwriting includes an analysis of the borrower’s debt/income ratio which generally may not exceed 43%, collateral value, length of employment and prior credit history. A credit score of 640 is required. We do not originate any subprime residential real estate loans.
This segment of our portfolio also consists of funds advanced for construction of custom single family residences homes (where the home buyer is the borrower) and financing to builders for the construction of pre-sold homes and multi-family housing. These loans generally have short durations, meaning maturities typically of twelve months or less. The Bank limits its construction lending risk through adherence to established underwriting procedures. These loans generally have short durations, meaning maturities typically of twelve months or less. Residential houses, multi-family dwellings and commercial buildings under construction and the underlying land for which the loan was obtained secure the construction loans. The vast majority of these loans are concentrated in our market area.
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Notes to Consolidated Financial Statements
(Continued)
Construction lending also entails significant risk. These risks generally involve larger loan balances concentrated with single borrowers with funds advanced upon the security of the land or the project under construction. An appraisal of the property estimates the value of the project “as is” and “as if completed.” An appraisal of the property estimates the value of the project prior to completion of construction. Thus, initial funds are advanced based on the current value of the property with the remaining construction funds advanced under a budget sufficient to successfully complete the project within the “as completed” loan to value. To further mitigate the risks, we generally limit loan amounts to 80% or less of appraised values and obtain first lien positions on the property.
We generally only offer real estate construction financing only to experienced builders, commercial entities or individuals who have demonstrated the ability to obtain a permanent loan “take-out” (conversion to a permanent mortgage upon completion of the project). We also perform a complete analysis of the borrower and the project under construction. This analysis includes a review of the cost to construct, the borrower’s ability to obtain a permanent “take-out” the cash flow available to support the debt payments and construction costs in excess of loan proceeds, and the value of the collateral. During construction, we advance funds on these loans on a percentage of completion basis. We inspect each project as needed prior to advancing funds during the term of the construction loan. We may provide permanent financing on the same projects for which we have provided the construction financing.
We also offer fixed rate home improvement loans. Our home equity and home improvement loan portfolio gives us a diverse client base. Although most of these loans are in our market area, the diversity of the individual loans in the portfolio reduces our potential risk. Usually, we secure our home equity loans and lines of credit with a security interest in the borrower’s primary or secondary residence.
Under our loan approval policy, all residential real estate loans approved must comply with federal regulations. Generally, we will make residential mortgage loans in amounts up to the limits established by Fannie Mae and Freddie Mac for secondary market resale purposes. Currently this amount for single-family residential loans currently varies from $453,100 up to a maximum of $679,650 for certain high-cost designated areas. We also make residential mortgage loans up to limits established by the Federal Housing Administration, which currently is $679,650. The Washington, D.C. and Baltimore areas are both considered high-cost designated areas. We will, however, make loans in excess of these amounts if we believe that we can sell the loans in the secondary market or that the loans should be held in our portfolio. For loans we originate for sale in the secondary market, we typically require a credit score or 620 or higher, with some exceptions provided we receive an approval recommendation from FannieMae, FreddieMac or FHA’s automated underwriting approval system. Loans sold in the secondary market are sold to investors on a servicing released basis and recorded as loans as held for sale. The premium is recorded in income on marketable loans in non-interest income, net of commissions paid to the loan officers.
Commercial and Industrial Lending
Our commercial and industrial lending consists of lines of credit, revolving credit facilities, accounts receivable financing, term loans, equipment loans, 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 the Bank.
Commercial business loans have a higher degree of risk than residential mortgage loans because the availability of funds for repayment generally depends on the success of the business. They may also involve high average balances, increased difficulty monitoring and a high risk of default. To help manage this risk, we typically limit these loans to proven businesses and we generally obtain appropriate collateral and personal guarantees from the borrower’s principal owners and monitor the financial condition of the business. For loans in excess of $250,000, monitoring generally includes a review of the borrower’s annual tax returns and updated financial statements.
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Notes to Consolidated Financial Statements
(Continued)
Consumer Loans
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 applicant’s payment history on other debts and an assessment of his or her ability to meet existing obligations and payments on the proposed loan. As a general guideline, a consumer’s total debt service should not exceed 40% of his or her gross income.
Our consumer loan portfolio, includes indirect loans, which consists primarily of auto and RV loans. These loans are financed through dealers and the dealers receive a percentage of the finance charge, which varies depending on terms of each loan. We use the same underwriting standards in originating these indirect loans as we do for consumer loans generally.
Consumer loans may present greater credit risk than residential mortgage loans because many consumer loans are unsecured or rapidly depreciating assets secure these loans. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance because of the greater likelihood of damage, loss or depreciation. Consumer loan collections depend on the borrower’s continuing financial stability. If a borrower suffers personal financial difficulties, the consumer may not repay the loan. Also, various federal and state laws, including bankruptcy and insolvency laws, may limit the amount we can recover on such loans.
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, Baltimore, Calvert, Carroll, Charles, Frederick, Montgomery, Prince George’s and St. Mary’s Counties. The majority of our loan portfolio consists of commercial real estate loans and residential real estate loans.
Non-Accrual and Past Due Loans
We consider loans past due if the borrower has not paid the required principal and interest payments when due under the original or modified terms of the promissory note and place a loan on non-accrual status when the payment of principal or interest has become 90 days past due. When we classify a loan as non-accrual, we no longer accrue interest on such loan and we reverse any interest previously accrued but not collected. We will generally restore a non-accrual loan to accrual status when the borrower brings delinquent principal and interest payments current and we expect to collect future monthly principal and interest payments. We recognize interest on non-accrual legacy loans only when received. We originally recorded purchased, credit-impaired loans at fair value upon acquisition, and an accretable yield is established and recognized as interest income on purchased loans to the extent subsequent cash flows support the estimated accretable yield. Purchased, credit-impaired loans that perform consistently with the accretable yield expectations are not reported as non-accrual or 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.
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Notes to Consolidated Financial Statements
(Continued)
The table below presents an aging analysis of the loan held for investment portfolio at December 31, 2017 and 2016.
| Age Analysis of Past Due Loans | ||||||||||||||||||||||||
| December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
| Legacy | Acquired | Total | Legacy | Acquired | Total | |||||||||||||||||||
| Current | $ | 1,352,406,852 | $ | 338,913,557 | $ | 1,691,320,409 | $ | 1,167,380,870 | $ | 185,631,054 | $ | 1,353,011,924 | ||||||||||||
| Accruing past due loans: | ||||||||||||||||||||||||
| 30 - 89 days past due | ||||||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||||||
| Owner Occupied | — | — | — | 2,799,802 | — | 2,799,802 | ||||||||||||||||||
| Investment | 1,089,022 | 843,706 | 1,932,728 | — | 794,037 | 794,037 | ||||||||||||||||||
| Land and A&D | 254,925 | 158,899 | 413,824 | — | — | — | ||||||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||||||
| First Lien-Investment | 270,822 | 506,600 | 777,422 | 517,498 | 397,944 | 915,442 | ||||||||||||||||||
| First Lien-Owner Occupied | 229 | 2,457,299 | 2,457,528 | — | 879,718 | 879,718 | ||||||||||||||||||
| HELOC and Jr. Liens | — | 130,556 | 130,556 | 99,946 | — | 99,946 | ||||||||||||||||||
| Commercial and Industrial | 51,088 | 261,081 | 312,169 | 325,161 | — | 325,161 | ||||||||||||||||||
| Consumer | 26,134 | 1,017,195 | 1,043,329 | — | — | — | ||||||||||||||||||
| Total 30 - 89 days past due | 1,692,220 | 5,375,336 | 7,067,556 | 3,742,407 | 2,071,699 | 5,814,106 | ||||||||||||||||||
| 90 or more days past due | ||||||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||||||
| Owner Occupied | — | — | — | — | 634,290 | 634,290 | ||||||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||||||
| First Lien-Owner Occupied | — | 37,560 | 37,560 | — | 250,000 | 250,000 | ||||||||||||||||||
| Consumer | — | 78,407 | 78,407 | 19,242 | — | 19,242 | ||||||||||||||||||
| Total 90 or more days past due | — | 115,967 | 115,967 | 19,242 | 884,290 | 903,532 | ||||||||||||||||||
| Total accruing past due loans | 1,692,220 | 5,491,303 | 7,183,523 | 3,761,649 | 2,955,989 | 6,717,638 | ||||||||||||||||||
| Recorded Investment Non-accruing loans: | ||||||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||||||
| Owner Occupied | — | 228,555 | 228,555 | 2,370,589 | — | 2,370,589 | ||||||||||||||||||
| Investment | — | — | — | — | — | — | ||||||||||||||||||
| Hospitality | — | — | — | 1,346,736 | — | 1,346,736 | ||||||||||||||||||
| Land and A&D | — | 190,193 | 190,193 | 77,395 | 194,567 | 271,962 | ||||||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||||||
| First Lien-Investment | 192,501 | — | 192,501 | 312,061 | 99,293 | 411,354 | ||||||||||||||||||
| First Lien-Owner Occupied | 281,130 | 872,272 | 1,153,402 | 222,237 | — | 222,237 | ||||||||||||||||||
| Commercial and Industrial | — | — | — | 1,760,824 | — | 1,760,824 | ||||||||||||||||||
| Non-accruing past due loans: | 473,631 | 1,291,020 | 1,764,651 | 6,089,842 | 293,860 | 6,383,702 | ||||||||||||||||||
| Total Loans | $ | 1,354,572,703 | $ | 345,695,880 | $ | 1,700,268,583 | $ | 1,177,232,361 | $ | 188,880,903 | $ | 1,366,113,264 | ||||||||||||
We evaluate all impaired loans, which includes non-performing loans and troubled debt restructurings (TDRs). 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.
We individually evaluate all legacy substandard loans risk rated seven, certain legacy special mention loans risk rated six and all legacy TDR for impairment. We individually evaluate all acquired loans that we risk rated substandard seven subsequent to the acquisition, certain acquired special mention loans risk rated six and all acquired TDRs for impairment. We also evaluate all loans acquired and recorded at fair value under ASC 310-30 for impairment.
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Notes to Consolidated Financial Statements
(Continued)
The table below presents our impaired loans at December 31, 2017.
| Unpaid | Average | Interest | ||||||||||||||||||
| Principal | Recorded | Related | Recorded | Income | ||||||||||||||||
| Balance | Investment | Allowance | Investment | Recognized | ||||||||||||||||
| Legacy | ||||||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||
| Owner Occupied | $ | 1,797,030 | $ | 1,797,030 | $ | — | $ | 1,913,873 | $ | 70,623 | ||||||||||
| Investment | 1,155,595 | 1,155,595 | — | 1,183,738 | 51,806 | |||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||
| First Lien-Owner Occupied | 226,554 | 226,554 | — | 233,618 | 10,536 | |||||||||||||||
| Commercial and Industrial | 387,208 | 387,208 | — | 379,983 | 30,245 | |||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||
| Investment | 592,432 | 592,432 | 69,903 | 601,959 | 30,576 | |||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||
| First Lien-Owner Occupied | 54,576 | 54,576 | 37,075 | 217,673 | — | |||||||||||||||
| First Lien-Investment | 192,501 | 192,501 | 39,420 | 192,501 | — | |||||||||||||||
| Commercial and Industrial | 96,212 | 96,212 | 96,212 | 97,923 | 4,960 | |||||||||||||||
| Total legacy impaired | 4,502,108 | 4,502,108 | 242,610 | 4,821,268 | 198,746 | |||||||||||||||
| Acquired(1) | ||||||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||
| Owner Occupied | 253,865 | 253,865 | — | 252,988 | 2,155 | |||||||||||||||
| Land and A&D | 334,271 | 45,000 | — | 334,271 | — | |||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||
| First Lien-Owner Occupied | 1,382,055 | 1,269,796 | — | 1,390,037 | 31,601 | |||||||||||||||
| First Lien-Investment | 131,294 | 74,066 | — | 132,812 | 4,378 | |||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||
| Land and A&D | 148,196 | 148,196 | 80,072 | 155,621 | 2,498 | |||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||
| First Lien-Owner Occupied | 250,194 | 250,194 | 77,464 | 273,596 | 23,424 | |||||||||||||||
| Commercial and Industrial | 72,125 | 72,125 | 24,517 | 74,279 | 3,775 | |||||||||||||||
| Total acquired impaired | 2,572,000 | 2,113,242 | 182,053 | 2,613,604 | 67,831 | |||||||||||||||
| Total impaired | $ | 7,074,108 | $ | 6,615,350 | $ | 424,663 | $ | 7,434,872 | $ | 266,577 | ||||||||||
________________________
| (1) | Generally accepted accounting principles require that we record acquired loans at fair value at acquisition, which includes a discount for loans with credit impairment. These purchased credit impaired loans are not performing according to their contractual terms and meet the definition of an impaired loan. Although we do not accrue interest income at the contractual rate on these loans, we do recognize an accretable yield as interest income to the extent such yield is supported by cash flow analysis of the underlying loans. |
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Notes to Consolidated Financial Statements
(Continued)
The table below presents our impaired loans at December 31, 2016.
| Unpaid | Average | Interest | ||||||||||||||||||
| Principal | Recorded | Related | Recorded | Income | ||||||||||||||||
| Balance | Investment | Allowance | Investment | Recognized | ||||||||||||||||
| Legacy | ||||||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||
| Owner Occupied | $ | 566,973 | $ | 566,973 | $ | — | $ | 1,223,360 | $ | 12,759 | ||||||||||
| Investment | 1,212,771 | 1,212,771 | — | 1,208,240 | 54,531 | |||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||
| First Lien-Owner Occupied | 222,237 | 222,237 | — | 243,699 | 5,440 | |||||||||||||||
| 843,809 | 843,809 | — | 3,338,295 | 3,761 | ||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||
| Owner Occupied | 2,048,989 | 2,048,989 | 443,489 | 6,605,858 | 50,348 | |||||||||||||||
| Investment | 610,485 | 610,485 | 33,335 | 610,373 | 46,550 | |||||||||||||||
| Hospitality | 1,346,736 | 1,346,736 | 134,674 | 4,199,162 | 20,959 | |||||||||||||||
| Land and A&D | 77,395 | 77,395 | 15,860 | 82,587 | 4,729 | |||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||
| First Lien-Owner Occupied | 312,061 | 312,061 | 45,505 | 547,024 | 9,348 | |||||||||||||||
| 1,016,479 | 1,016,479 | 609,152 | 1,976,689 | 4,476 | ||||||||||||||||
| Total legacy impaired | 8,257,935 | 8,257,935 | 1,282,015 | 20,035,287 | 212,901 | |||||||||||||||
| Acquired(1) | ||||||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||
| Land and A&D | 255,716 | 91,669 | — | 255,661 | 13,686 | |||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||
| First Lien-Owner Occupied | 662,835 | 662,835 | — | 1,408,689 | 19,899 | |||||||||||||||
| First Lien-Investment | 292,349 | 171,348 | — | 233,133 | 4,383 | |||||||||||||||
| Land and A&D | 334,271 | 45,000 | — | 334,271 | — | |||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||
| Land and A&D | 151,634 | 151,634 | 83,784 | 161,622 | 5,264 | |||||||||||||||
| Commercial and Industrial | 76,243 | 76,243 | 27,207 | 83,049 | 3,992 | |||||||||||||||
| Total acquired impaired | 1,773,048 | 1,198,729 | 110,991 | 2,476,425 | 47,224 | |||||||||||||||
| Total impaired | $ | 10,030,983 | $ | 9,456,664 | $ | 1,393,006 | $ | 22,511,712 | $ | 260,125 | ||||||||||
________________________
| (1) | Generally accepted accounting principles require that we record acquired loans at fair value at acquisition, which includes a discount for loans with credit impairment. These purchased credit impaired loans are not performing according to their contractual terms and meet the definition of an impaired loan. Although we do not accrue interest income at the contractual rate on these loans, we do recognize an accretable yield as interest income to the extent such yield is supported by cash flow analysis of the underlying loans. |
We consider a loan a TDR when we conclude that both of the following conditions exist: the restructuring constitutes a concession and the debtor is experiencing financial difficulties. Restructured loans at December 31, 2017 consisted of seven loans for $2.7 million compared to seven loans at December 31, 2016 for $897 thousand.
The following table includes the recorded investment and number of modifications for TDRs for the years ended December 31, 2017 and 2016. We report the recorded investment in loans prior to a modification and also the recorded investment in the loans after the loans were restructured. Reductions in the recorded investment are primarily due to the partial charge-off of the principal balance prior to the modification.
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Notes to Consolidated Financial Statements
(Continued)
| Loans Modified as a TDR for the twelve months ended | ||||||||||||||||||||||||
| December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
| Pre- | Post | Pre- | Post | |||||||||||||||||||||
| Modification | Modification | Modification | Modification | |||||||||||||||||||||
| Outstanding | Outstanding | Outstanding | Outstanding | |||||||||||||||||||||
| TroubledDebtRestructurings— | # of | Recorded | Recorded | # of | Recorded | Recorded | ||||||||||||||||||
| (Dollarsinthousands) | Contracts | Investment | Investment | Contracts | Investment | Investment | ||||||||||||||||||
| Legacy | ||||||||||||||||||||||||
| Commercial Real Estate | 1 | 1,596,740 | 1,560,726 | — | — | — | ||||||||||||||||||
| Commercial | 1 | 414,324 | 387,208 | — | — | — | ||||||||||||||||||
| Total legacy TDR's | 2 | 2,011,064 | 1,947,934 | — | — | — | ||||||||||||||||||
| Acquired | ||||||||||||||||||||||||
| Commercial Real Estate | — | — | — | — | — | — | ||||||||||||||||||
| Residential Real Estate Non-Owner Occupied | — | — | — | 2 | 392,842 | 158,382 | ||||||||||||||||||
| Total acquired TDR's | — | — | — | 2 | 392,842 | 158,382 | ||||||||||||||||||
| Total Troubled Debt Restructurings | 2 | $ | 2,011,064 | $ | 1,947,934 | 2 | $ | 392,842 | $ | 158,382 | ||||||||||||||
There were no loans that were modified as TDRs during the previous 12 months and for which there was a payment default during the years ended December 31, 2017 or 2016.
Acquired Impaired Loans
The following table documents changes in the accretable discount/(premium) on all purchased credit impaired loans during the years ended December 31, 2017 and 2016, along with the outstanding balances and related carrying amounts for the beginning and end of those respective periods.
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Balance at beginning of period | $ | (22,980 | ) | $ | 276,892 | |||
| Additions due to DCB acquisition | 6,686 | — | ||||||
| Accretion of fair value discounts | (149,636 | ) | (308,629 | ) | ||||
| Reclassification from non-accretable (1) | 280,996 | 8,757 | ||||||
| Balance at end of period | $ | 115,066 | $ | (22,980 | ) | |||
| Contractually | ||||||||
| Required | ||||||||
| Payments | Carrying | |||||||
| Receivable | Amount | |||||||
| At December 31, 2017 | $ | 8,277,731 | $ | 6,617,774 | ||||
| At December 31, 2016 | 9,597,703 | 7,558,415 | ||||||
________________________
| (1) | Represents amounts paid in full on loans, payments on loans with zero balances and an increase in cash flows expected to be collected. |
For our acquisition of Damascus on July 28, 2017, we recorded all loans acquired at the estimated fair value on their purchase date with no carryover of the related allowance for loan losses. On the acquisition date, we segregated the loan portfolio into two loan pools, performing and non-performing.
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Notes to Consolidated Financial Statements
(Continued)
We had an independent third party determine the net discounted value of cash flows on 5,023 performing loans totaling $218.9 million. The valuation took into consideration the loans’ underlying characteristics including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-value ratios, loss exposures, and remaining balances. These performing loans were segregated into pools based on loan and payment type and, in some cases, risk grade. The effect of this fair valuation process was a net discount of $158 thousand at acquisition. We then adjusted these values for inherent credit risk within each pool, which resulted in a total credit adjustment of $2.6 million.
We also individually evaluated two impaired loans totaling $116 thousand to determine their fair value as of the July 28, 2017 measurement date. In determining the fair value for each individually evaluated impaired loan, we considered a number of factors including the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral and net present value of cash flows we expect to receive, among others.
We established a credit related non-accretable difference of $92 thousand relating to these purchased credit impaired loans, reflected in the recorded fair value. We further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount of $7 thousand on the acquisition date relating to those impaired loans.
The acquired performing contract book balance for the loans acquired in the DCB acquisition is $197.2 million with remaining accretable discount of $2.4 million for a net balance of $199.6 million as reflected in the balance sheet.
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.
With respect to commercial loans, management assigns a risk rating of one through nine as follows:
| • | Risk rating 1 (Highest Quality)—This category has the highest relative probability of repayment. Borrowers in this category would normally be investment grade risks, meaning entities having access (or capable of access) to the public capital markets and the supporting loan underwriting conforms to the standards of institutional credit providers. Credit risk is virtually absent due to the borrower’s substantial financial capacity, superior liquidity, and outstanding debt service coverage. This rating is generally reserved for the strongest customers of the Bank, or for loans that are secured by a perfected security interest in U. S. Government securities, investment grade government sponsored entities bonds, investment grade municipal bonds, insured savings accounts and insured certificates of deposit drawn on Old Line Bank or other high quality financial institutions. Loans to individuals of vast financial capacity, or those supported by conservatively margined liquid collateral, may warrant this Highest Quality rating. |
| • | Risk rating 2 (Very Good Quality) is normally assigned to a loan with a very high probability of repayment. Borrowers in this category may have access to alternative sources of financing. Credit risk is minimal due to the borrower’s sound primary and secondary repayments sources, strong debt capacity and coverage and good management in all key positions. This rating is generally reserved for strong customers of the Bank, or for loans secured by a properly margined portfolio of high quality traded stocks, lower grade municipal bonds and uninsured certificates of deposit at other financial institutions. Loans to individuals of substantial financial capacity, exhibiting significant liquidity, low leverage and a well-defined source of repayment may warrant this Very Good Quality rating. |
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Notes to Consolidated Financial Statements
(Continued)
| • | Risk rating 2 (Very Good Quality) is normally assigned to a loan with a very high probability of repayment. Borrowers in this category may have access to alternative sources of financing. Credit risk is minimal due to the borrower’s sound primary and secondary repayments sources, strong debt capacity and coverage and good management in all key positions. This rating is generally reserved for strong customers of the Bank, or for loans secured by a properly margined portfolio of high quality traded stocks, lower grade municipal bonds and uninsured certificates of deposit at other financial institutions. Loans to individuals of substantial financial capacity, exhibiting significant liquidity, low leverage and a well-defined source of repayment may warrant this Very Good Quality rating. |
| • | Risk rating 3 (Good Quality) is normally assigned to a loan with a sound primary and secondary source of repayment. This category represents a below average degree of risk as to repayment with no loss potential indicated. Borrowers in this category represent a reasonable credit risk with demonstrated ability to repay the debt from normal business operations. Borrowers should have a sound balance sheet, modest leverage, good liquidity and above average debt service coverage. There should be no significant departure from the intended source and timing of repayment and no undue reliance on secondary sources of repayment. To the extent that some variance exists in one or more criteria being measured, it may be offset by the relative strength of other factors and/or collateral pledged to secure the transaction. Loans to individuals of strong financial capacity, exhibiting good liquidity, reasonable leverage and defined primary and secondary sources of repayment may warrant this Good Quality rating. |
| • | Risk rating 4 (Average Quality)—This category represents an average degree of risk as to repayment with minimal to no loss potential indicated. Borrowers in this category exhibit generally stable operating trends. Borrowers should have a satisfactory balance sheet, manageable leverage, moderate liquidity and average debt service coverage. There should be no adverse departure from the intended source and timing of repayment and secondary sources of repayment should be readily available. Loans to individuals with adequate to strong net worth and some liquidity may warrant an Average Quality rating. |
| • | Risk rating 5 (Pass/Watch)—Borrowers in this category generally exhibit characteristics of an Average Quality credit, but may be experiencing income volatility, negative operating trends and a more highly leveraged balance sheet, thus warranting more than the normal level of supervision. Loans to borrowers with industry volatility, declining market share, marginal or new management, weak internal reporting systems, inadequate financial reporting to the Bank and loans to start-up businesses or businesses with untested management generally warrant a “Watch” designation; provided, however, that events or circumstances prompting this rating do not constitute an undue or unwarranted credit risk. Credits that require additional monitoring such as construction loans, asset based loans and loans granted under certain government lending programs (i.e. U. S. Small Business Administration—“SBA”) may be carried in this category where the risk or monitoring needs may be higher than the norm. Additionally, credits may be placed in this category because of an adverse event that has not weakened the credit, but which should be followed to assure that resolution occurs without material impact on the borrower. |
| • | Risk rating 6 (Special Mention)—Loans in this category generally represent currently protected, but potentially weak assets that deserve management’s close attention. If left uncorrected, the potential weaknesses may, at some future date, result in deterioration of the repayment prospects for the loan or in the Bank’s credit position. These loans constitute an unwarranted credit risk, but do not expose the Bank to sufficient risk to warrant adverse classification. Loans in this category may include credits that the Bank may be unable to supervise properly because of a lack of expertise, inadequate loan agreement, outdated and /or incomplete financial reporting, the condition of and control over collateral, failure to obtain proper documentation, or any other deviations from prudent lending practices. Economic or market conditions that may, in the future, affect the borrower, an adverse trend in the borrower’s operations or an imbalanced position in the balance sheet that has not reached a point where liquidation is jeopardized may warrant this Special Mention designation. |
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Notes to Consolidated Financial Statements
(Continued)
| • | Risk rating 7 (Substandard)—Loans in this category represent assets inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. These assets have a well-defined weakness, or weaknesses, that jeopardize liquidation of the debt and are characterized by the distinct possibility that the Bank will sustain some loss if deficiencies are not corrected. Loss potential, while existing in the aggregate amount of Substandard credits, does not have to exist in individual extensions of credit classified Substandard. Loans in this category are subject to impairment analysis, may require a specific reserve allocation and may be placed on non-accrual status. |
| • | Risk rating 8 (Doubtful)—Loans in this category have all the weaknesses inherent in a Substandard credit with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly improbable. The key issue that makes a loan Doubtful is the potential for loss. The possibility for some degree of loss is extremely high, but because of certain important and reasonably specific pending factors that may be advantageous and strengthen the credit, a classification as an estimated loss is deferred until a more exact status can be determined. Such pending factors could include a proposed merger, acquisition or liquidation procedures, additional capital injection, perfection of liens on additional collateral and refinancing plans. Doubtful assets are subject to impairment analysis, a specific reserve allocation and must be placed on non-accrual status. |
| • | Risk rating 9 (Loss) is assigned to charged-off loans. We consider assets classified as loss as uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has no recovery value, but that it is not practical to defer writing off the worthless assets, even though partial recoveries may occur in the future. Loans are charged off within the period in which they are determined to be uncollectible. |
We charge off loans that management has identified as losses. We consider suggestions from our external loan review firm and bank examiners when determining which loans to charge off. We automatically charge off consumer loan accounts based on regulatory requirements. We partially charge off real estate loans that are collateral dependent based on the value of the collateral.
If a loan that was previously rated a pass performing loan, from our acquisitions, deteriorates subsequent to the acquisition, the subject loan will be assessed for risk and, if necessary, evaluated for impairment. If the risk assessment rating is adversely changed and the loan is determined to not be impaired, the loan will be placed in a migration category and the credit mark established for the loan will be compared to the general reserve allocation that would be applied using the current allowance for loan losses formula for General Reserves. If the credit mark exceeds the allowance for loan losses formula for General Reserves, there will be no change to the allowance for loan losses. If the credit mark is less than the current allowance for loan losses formula for General Reserves, the allowance for loan losses will be increased by the amount of the shortfall by a provision recorded in the income statement. If the loan is deemed impaired, the loan will be subject to evaluation for loss exposure and a specific reserve. If the estimate of loss exposure exceeds the credit mark, the allowance for loan losses will be increased by the amount of the excess loss exposure through a provision. If the credit mark exceeds the estimate of loss exposure there will be no change to the allowance for loan losses. If a loan from the acquired loan portfolio is carrying a specific credit mark and a current evaluation determines that there has been an increase in loss exposure, the allowance for loan losses will be increased by the amount of the current loss exposure in excess of the credit mark.
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Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
The following tables outline the allocation of the loan portfolio by risk rating at December 31, 2017 and 2016.
| Account Balance | ||||||||||||
| December 31, 2017 | Legacy | Acquired | Total | |||||||||
| Risk Rating | ||||||||||||
| Pass(1 - 5) | ||||||||||||
| Commercial Real Estate: | ||||||||||||
| Owner Occupied | $ | 262,377,665 | $ | 83,069,390 | $ | 345,447,055 | ||||||
| Investment | 483,404,883 | 51,064,247 | 534,469,130 | |||||||||
| Hospitality | 164,193,228 | 7,395,186 | 171,588,414 | |||||||||
| Land and A&D | 65,184,837 | 9,065,405 | 74,250,242 | |||||||||
| Residential Real Estate: | ||||||||||||
| First Lien-Investment | 78,814,931 | 19,846,749 | 98,661,680 | |||||||||
| First Lien-Owner Occupied | 66,888,943 | 57,895,058 | 124,784,001 | |||||||||
| Land and A&D | 33,712,187 | 5,727,719 | 39,439,906 | |||||||||
| HELOC and Jr. Liens | 21,520,339 | 16,019,418 | 37,539,757 | |||||||||
| Commercial | 150,881,948 | 32,738,715 | 183,620,663 | |||||||||
| Consumer | 10,758,589 | 49,017,427 | 59,776,016 | |||||||||
| 1,337,737,550 | 331,839,314 | 1,669,576,864 | ||||||||||
| Special Mention(6) | ||||||||||||
| Commercial Real Estate: | ||||||||||||
| Owner Occupied | 435,751 | 2,816,057 | 3,251,808 | |||||||||
| Investment | 384,011 | 1,037,254 | 1,421,265 | |||||||||
| Hospitality | — | — | — | |||||||||
| Land and A&D | 2,125,823 | 120,366 | 2,246,189 | |||||||||
| Residential Real Estate: | ||||||||||||
| First Lien-Investment | 300,824 | 1,034,942 | 1,335,766 | |||||||||
| First Lien-Owner Occupied | 67,626 | 1,848,385 | 1,916,011 | |||||||||
| Land and A&D | 2,167,666 | 663,248 | 2,830,914 | |||||||||
| HELOC and Jr. Liens | — | — | — | |||||||||
| Commercial | 1,519,394 | 59,902 | 1,579,296 | |||||||||
| Consumer | — | 65,324 | 65,324 | |||||||||
| 7,001,095 | 7,645,478 | 14,646,573 | ||||||||||
| Substandard(7) | ||||||||||||
| Commercial Real Estate: | ||||||||||||
| Owner Occupied | 5,314,671 | 1,773,408 | 7,088,079 | |||||||||
| Investment | 1,748,027 | 825,238 | 2,573,265 | |||||||||
| Hospitality | — | — | — | |||||||||
| Land and A&D | — | 45,000 | 45,000 | |||||||||
| Residential Real Estate: | ||||||||||||
| First Lien-Investment | 646,927 | 338,827 | 985,754 | |||||||||
| First Lien-Owner Occupied | 281,130 | 2,781,351 | 3,062,481 | |||||||||
| Land and A&D | — | 145,193 | 145,193 | |||||||||
| HELOC and Jr. Liens | — | — | — | |||||||||
| Commercial | 1,843,303 | 302,071 | 2,145,374 | |||||||||
| Consumer | — | — | — | |||||||||
| 9,834,058 | 6,211,088 | 16,045,146 | ||||||||||
| Doubtful(8) | — | — | — | |||||||||
| Loss(9) | — | — | — | |||||||||
| Total | $ | 1,354,572,703 | $ | 345,695,880 | $ | 1,700,268,583 | ||||||
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Notes to Consolidated Financial Statements
(Continued)
| Account Balance | ||||||||||||
| December 31, 2016 | Legacy | Acquired | Total | |||||||||
| Risk Rating | ||||||||||||
| Pass(1 - 5) | ||||||||||||
| Commercial Real Estate: | ||||||||||||
| Owner Occupied | $ | 231,985,682 | $ | 48,069,046 | $ | 280,054,728 | ||||||
| Investment | 408,875,014 | 35,130,038 | 444,005,052 | |||||||||
| Hospitality | 140,265,123 | 9,781,737 | 150,046,860 | |||||||||
| Land and A&D | 48,817,229 | 5,815,572 | 54,632,801 | |||||||||
| Residential Real Estate: | ||||||||||||
| First Lien-Investment | 70,980,640 | 21,898,603 | 92,879,243 | |||||||||
| First Lien-Owner Occupied | 54,201,816 | 39,011,487 | 93,213,303 | |||||||||
| Land and A&D | 36,910,902 | 4,299,830 | 41,210,732 | |||||||||
| HELOC and Jr. Liens | 24,385,215 | 2,633,718 | 27,018,933 | |||||||||
| Commercial | 132,518,224 | 5,460,820 | 137,979,044 | |||||||||
| Consumer | 4,868,909 | 139,966 | 5,008,875 | |||||||||
| 1,153,808,754 | 172,240,817 | 1,326,049,571 | ||||||||||
| Special Mention(6) | ||||||||||||
| Commercial Real Estate: | ||||||||||||
| Owner Occupied | 2,799,801 | 4,572,278 | 7,372,079 | |||||||||
| Investment | 400,228 | 1,776,837 | 2,177,065 | |||||||||
| Hospitality | — | 1,411,689 | 1,411,689 | |||||||||
| Land and A&D | 2,506,068 | 155,241 | 2,661,309 | |||||||||
| Residential Real Estate: | ||||||||||||
| First Lien-Investment | 577,767 | 1,248,453 | 1,826,220 | |||||||||
| First Lien-Owner Occupied | 308,552 | 1,882,182 | 2,190,734 | |||||||||
| Land and A&D | 2,678,925 | 791,399 | 3,470,324 | |||||||||
| HELOC and Jr. Liens | — | — | — | |||||||||
| Commercial | 456,093 | 197,383 | 653,476 | |||||||||
| Consumer | — | — | — | |||||||||
| 9,727,434 | 12,035,462 | 21,762,896 | ||||||||||
| Substandard(7) | ||||||||||||
| Commercial Real Estate: | ||||||||||||
| Owner Occupied | 3,434,990 | 1,209,289 | 4,644,279 | |||||||||
| Investment | 4,737,465 | 780,929 | 5,518,394 | |||||||||
| Hospitality | 1,346,736 | — | 1,346,736 | |||||||||
| Land and A&D | — | 45,000 | 45,000 | |||||||||
| Residential Real Estate: | ||||||||||||
| First Lien-Investment | 592,106 | 476,603 | 1,068,709 | |||||||||
| First Lien-Owner Occupied | 222,237 | 1,550,098 | 1,772,335 | |||||||||
| Land and A&D | 77,395 | 467,004 | 544,399 | |||||||||
| HELOC and Jr. Liens | — | — | — | |||||||||
| Commercial | 3,285,244 | 75,701 | 3,360,945 | |||||||||
| Consumer | — | — | — | |||||||||
| 13,696,173 | 4,604,624 | 18,300,797 | ||||||||||
| Doubtful(8) | — | — | — | |||||||||
| Loss(9) | — | — | — | |||||||||
| Total | $ | 1,177,232,361 | $ | 188,880,903 | $ | 1,366,113,264 | ||||||
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Notes to Consolidated Financial Statements
(Continued)
The following tables detail activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2017 and 2016. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
| December 31, 2017 | Commercial | Commercial Real Estate | Residential Real Estate | Consumer | Total | |||||||||||||||
| Beginning balance | $ | 1,372,235 | $ | 3,990,152 | $ | 823,520 | $ | 9,562 | $ | 6,195,469 | ||||||||||
| Provision for loan losses | 660,497 | 231,488 | 22,203 | 40,920 | 955,108 | |||||||||||||||
| Recoveries | 2,350 | 2,017 | 900 | 35,525 | 40,792 | |||||||||||||||
| 2,035,082 | 4,223,657 | 846,623 | 86,007 | 7,191,369 | ||||||||||||||||
| Loans charged off | (773,052 | ) | (439,922 | ) | (2,268 | ) | (55,541 | ) | (1,270,783 | ) | ||||||||||
| Ending Balance | $ | 1,262,030 | $ | 3,783,735 | $ | 844,355 | $ | 30,466 | $ | 5,920,586 | ||||||||||
| Amount allocated to: | ||||||||||||||||||||
| Legacy Loans: | ||||||||||||||||||||
| Individually evaluated for impairment | $ | 96,212 | $ | 69,903 | $ | 76,496 | $ | — | $ | 242,611 | ||||||||||
| Other loans not individually evaluated | 1,141,301 | 3,633,760 | 690,396 | 30,466 | 5,495,923 | |||||||||||||||
| Acquired Loans: | ||||||||||||||||||||
| Individually evaluated for impairment | 24,517 | 80,072 | 77,463 | — | 182,052 | |||||||||||||||
| Ending balance | $ | 1,262,030 | $ | 3,783,735 | $ | 844,355 | $ | 30,466 | $ | 5,920,586 | ||||||||||
| December 31, 2016 | Commercial | Commercial Real Estate | Residential Real Estate | Consumer | Total | |||||||||||||||
| Beginning balance | $ | 1,161,318 | $ | 3,053,925 | $ | 682,962 | $ | 11,613 | $ | 4,909,818 | ||||||||||
| Provision for loan losses | 172,059 | 936,227 | 486,935 | (10,679 | ) | 1,584,542 | ||||||||||||||
| Recoveries | 43,330 | — | 49,464 | 18,482 | 111,276 | |||||||||||||||
| 1,376,707 | 3,990,152 | 1,219,361 | 19,416 | 6,605,636 | ||||||||||||||||
| Loans charged off | (4,472 | ) | — | (395,841 | ) | (9,854 | ) | (410,167 | ) | |||||||||||
| Ending Balance | $ | 1,372,235 | $ | 3,990,152 | $ | 823,520 | $ | 9,562 | $ | 6,195,469 | ||||||||||
| Amount allocated to: | ||||||||||||||||||||
| Legacy Loans: | ||||||||||||||||||||
| Individually evaluated for impairment | $ | 609,152 | $ | 611,498 | $ | 61,365 | $ | — | $ | 1,282,015 | ||||||||||
| Other loans not individually evaluated | 735,876 | 3,378,654 | 678,371 | 9,562 | 4,802,463 | |||||||||||||||
| Acquired Loans: | ||||||||||||||||||||
| Individually evaluated for impairment | 27,207 | — | 83,784 | — | 110,991 | |||||||||||||||
| Ending balance | $ | 1,372,235 | $ | 3,990,152 | $ | 823,520 | $ | 9,562 | $ | 6,195,469 | ||||||||||
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Notes to Consolidated Financial Statements
(Continued)
Our recorded investment in loans as of December 31, 2017 and 2016 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:
| December 31, 2017 | Commercial | Commercial Real Estate | Residential Real Estate | Consumer | Total | |||||||||||||||
| Legacy loans: | ||||||||||||||||||||
| Individually evaluated for impairment with specific reserve | $ | 96,212 | $ | 592,432 | $ | 247,077 | $ | — | $ | 935,721 | ||||||||||
| Individually evaluated for impairment without specific reserve | 387,208 | 2,952,625 | 226,554 | — | 3,566,387 | |||||||||||||||
| Other loans not individually evaluated | 153,761,224 | 981,623,840 | 203,926,942 | 10,758,589 | 1,350,070,595 | |||||||||||||||
| Acquired loans: | ||||||||||||||||||||
| Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition) | 72,125 | 148,196 | 250,194 | — | 470,515 | |||||||||||||||
| Individually evaluated for impairment without specific reserve (ASC 310-20 at acquisition) | — | 298,865 | 1,269,796 | — | 1,568,661 | |||||||||||||||
| Individually evaluated for impairment with specific reserve (ASC 310-30 at acquisition) | — | 3,466,289 | 3,137,545 | 14,000 | 6,617,834 | |||||||||||||||
| Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition) | 33,028,564 | 153,298,200 | 101,643,355 | 49,068,751 | 337,038,870 | |||||||||||||||
| Ending balance | $ | 187,345,333 | $ | 1,142,380,447 | $ | 310,701,463 | $ | 59,841,340 | $ | 1,700,268,583 | ||||||||||
| December 31, 2016 | Commercial | Commercial Real Estate | Residential Real Estate | Consumer | Total | |||||||||||||||
| Legacy loans: | ||||||||||||||||||||
| Individually evaluated for impairment with specific reserve | $ | 1,016,479 | $ | 4,083,605 | $ | 312,061 | $ | — | $ | 5,412,145 | ||||||||||
| Individually evaluated for impairment without specific reserve | 843,809 | 1,779,744 | 222,237 | — | 2,845,790 | |||||||||||||||
| Other loans not individually evaluated | 134,399,272 | 839,304,990 | 190,401,255 | 4,868,909 | 1,168,974,426 | |||||||||||||||
| Acquired loans: | ||||||||||||||||||||
| Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition) | 76,243 | 151,634 | — | — | 227,877 | |||||||||||||||
| Individually evaluated for impairment without specific reserve (ASC 310-20 at acquisition) | — | 91,669 | 879,182 | — | 970,851 | |||||||||||||||
| Individually evaluated for impairment with specific reserve (ASC 310-30 at acquisition) | — | 4,632,885 | 2,925,529 | — | 7,558,414 | |||||||||||||||
| Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition) | 5,657,661 | 103,871,468 | 70,454,666 | 139,966 | 180,123,761 | |||||||||||||||
| Ending balance | $ | 141,993,464 | $ | 953,915,995 | $ | 265,194,930 | $ | 5,008,875 | $ | 1,366,113,264 | ||||||||||
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(Continued)
The following table outlines the maturity and rate re-pricing distribution of the loan portfolio. For purposes of this disclosure, we have classified non-accrual loans as immediately re-pricing or maturing.
| December 31, | 2017 | 2016 | ||||||
| Within one year | $ | 407,174,181 | $ | 310,405,004 | ||||
| Over one to five years | 771,105,803 | 683,085,446 | ||||||
| Over five years | 521,988,599 | 372,622,814 | ||||||
| $ | 1,700,268,583 | $ | 1,366,113,264 | |||||
As of December 31, 2017, the Bank has pledged loans totaling $335.7 million to support Federal Home Loan Bank borrowings.
The Bank makes loans to customers located in the Maryland suburbs and the surrounding Baltimore area. Residential and commercial real estate secure substantial portions of the Bank’s loans. Although the loan portfolio is diversified, the regional real estate market and economy will influence its performance.
7. Equity Securities
We own the following equity securities:
| December 31, | 2017 | 2016 | ||||||
| Atlantic Central Bankers Bank stock | $ | 219,500 | $ | 219,500 | ||||
| Federal Home Loan Bank stock | 8,402,000 | 7,727,600 | ||||||
| ICBA Stock | 1,750 | 1,750 | ||||||
| Maryland Financial Bank stock | 152,497 | 152,497 | ||||||
| Investment in Maryland Statutory Trust | 202,000 | 202,000 | ||||||
| Total | $ | 8,977,747 | $ | 8,303,347 | ||||
We carry these securities at cost and have evaluated them for other than temporary impairment. In 2017 and 2016, we did not record any such impairment.
8. Pointer Ridge Office Investment, LLC
We currently own 100% of Pointer Ridge and we have consolidated its results of operations from the date of acquisition. In August 2016, the Bank purchased the remaining aggregate 37.5% minority interest in Pointer Ridge not held by Bancshares and on September 2, 2016, we paid off the entire $5.8 million principal amount of a promissory note previously issued by Pointer Ridge. On September 28, 2017, Bancshares transferred and assigned its ownership interest in Pointer Ridge to the Bank, and as a result the Bank acquired all rights, title and interest in Pointer Ridge.
Pointer Ridge owns our headquarters building located at 1525 Pointer Ridge Place, Bowie, Maryland, containing approximately 40,000 square feet. We lease 98% of this building for our main office and operate a branch of the Bank from this address.
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(Continued)
9. Premises and Equipment
A summary of our premises and equipment and the related depreciation expense follows:
| December 31, | 2017 | 2016 | ||||||
| Land | $ | 7,938,389 | $ | 5,207,030 | ||||
| Building | 28,580,066 | 27,854,975 | ||||||
| Leasehold improvements | 8,115,555 | 6,745,221 | ||||||
| Furniture and equipment | 9,814,799 | 8,018,395 | ||||||
| 54,448,809 | 47,825,621 | |||||||
| Accumulated depreciation | 13,274,999 | 11,080,917 | ||||||
| Net premises and equipment | $ | 41,173,810 | $ | 36,744,704 | ||||
| Depreciation expense | $ | 2,472,405 | $ | 2,248,205 | ||||
10. Deposits
Major classifications of interest bearing deposits are as follows:
| December 31, | 2017 | 2016 | ||||||
| Money market and NOW | $ | 538,102,931 | $ | 433,195,434 | ||||
| Savings | 132,970,630 | 100,758,813 | ||||||
| Time deposits that meet or exceed the FDIC insured limit | 95,365,364 | 75,931,295 | ||||||
| Other time deposits | 434,661,392 | 384,663,727 | ||||||
| $ | 1,201,100,317 | $ | 994,549,269 | |||||
Time deposits mature as follows:
| December 31, | 2017 | 2016 | ||||||
| Within three months | $ | 98,291,816 | $ | 68,951,740 | ||||
| Over three to twelve months | 183,750,343 | 182,481,109 | ||||||
| Over one to three years | 183,257,118 | 125,289,678 | ||||||
| Over three to five years | 64,727,479 | 83,872,495 | ||||||
| $ | 530,026,756 | $ | 460,595,022 | |||||
Interest on deposits for the years ended December 31, 2017, 2016 and 2015, consisted of the following:
| December 31, | 2017 | 2016 | 2015 | |||||||||
| Money market and NOW | $ | 1,863,164 | $ | 1,014,981 | $ | 723,666 | ||||||
| Savings | 130,322 | 122,270 | 111,385 | |||||||||
| Other time deposits | 5,327,545 | 4,371,582 | 3,411,939 | |||||||||
| $ | 7,321,031 | $ | 5,508,833 | $ | 4,246,990 | |||||||
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Notes to Consolidated Financial Statements
(Continued)
11. Short Term Borrowings
Bancshares has available an unsecured $5.0 million line of credit. The Bank has available lines of credit including overnight federal funds and reverse repurchase agreements from its correspondent banks totaling $38.5 million as of December 31, 2017. The Bank has an additional secured line of credit from the FHLB of $618.3 million. Prior to allowing the Bank to borrow under the line of credit, the FHLB requires that the Bank provide collateral to support borrowings. This collateral consists primarily of our commercial real estate loans, residential real estate loans and our multi-family loans. At December 31, 2017, we had provided $335.7 million in lendable collateral value and as outlined below have borrowed $155.0 million. We have additional available borrowing capacity of $180.7 million. We may increase this availability by pledging additional collateral. As a condition of obtaining the line of credit from the FHLB, the FHLB also requires that the Bank purchase shares of capital stock in the FHLB.
Securities Sold Under Agreements to Repurchase
To support the $37.6 million in repurchase agreements at December 31, 2017, we have provided collateral in the form of investment securities. At December 31, 2017, we have pledged $59.9 million in U.S. government agency securities and mortgage-backed securities to customers who require collateral for overnight repurchase agreements and deposits. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. As a result, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. We monitor collateral levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities in the event the collateral fair value falls below stipulated levels. We closely monitor the collateral levels to ensure adequate levels are maintained. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents. We have the right to sell or re-pledge the investment securities. For government entity repurchase agreements, the collateral is held by Old Line Bank in a segregated custodial account under a tri-party agreement. The repurchase agreements totaling $37.6 million mature daily and will remain fully collateralized until the account has been closed or terminated.
At December 31, 2017, the book and market values of securities pledged as collateral for repurchase agreements were $61.3 million and $59.9 million, respectively.
Federal funds purchased are unsecured, overnight borrowings from other financial institutions. Short-term borrowings from the FHLB have a remaining maturity of less than one year.
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(Continued)
Information related to short term borrowings is as follows:
| December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
| Amount | Rate | Maximum Amount Borrowed During Any Month End Period | Amount | Rate | Maximum Amount Borrowed During Any Month End Period | |||||||||||||||||||
| Short term promissory notes | — | — | — | — | — | — | ||||||||||||||||||
| Repurchase agreements | $ | 37,611,971 | 0.80 | % | $ | 37,611,971 | $ | 33,433,892 | 0.47 | % | $ | 33,880,864 | ||||||||||||
| FHLB daily rate advances | 45,000,000 | 1.59 | 45,000,000 | 30,000,000 | 0.80 | 54,000,000 | ||||||||||||||||||
| FHLB adjustable rate advances | — | — | — | — | — | 4,000,000 | ||||||||||||||||||
| FHLB fixed rate advances | 110,000,000 | 1.40 | 165,000,000 | 120,000,000 | 0.61 | 159,000,000 | ||||||||||||||||||
| Total short term borrowings | $ | 192,611,971 | $ | 247,611,971 | $ | 183,433,892 | $ | 250,880,864 | ||||||||||||||||
| Average for the year | ||||||||||||||||||||||||
| Short term promissory notes | $ | — | — | % | $ | — | — | % | ||||||||||||||||
| Repurchase agreements | $ | 27,469,892 | 0.80 | % | $ | 30,573,019 | 0.47 | % | ||||||||||||||||
| FHLB daily rate advances | 28,098,630 | 1.22 | 32,263,661 | 0.64 | ||||||||||||||||||||
| FHLB adjustable rate advances | — | — | 1,478,698 | 0.59 | ||||||||||||||||||||
| FHLB fixed rate advances | 176,881,966 | 0.97 | 104,822,830 | 0.39 | ||||||||||||||||||||
| Total | $ | 232,450,488 | $ | 169,138,208 | ||||||||||||||||||||
12. Long Term Borrowings
The table below presents Bancshares’ long term borrowings at December 31, 2017 and 2016. The trust preferred subordinated debentures, acquired in the Regal acquisition, consists of two trusts - Trust 1 in the amount of $4.0 million (fair value adjustment of $1.5 million) maturing in 2034 and Trust 2 in the amount of $2.5 (fair value adjustment of $1.2 million) maturing in 2035. Long term borrowings also include $35 million in aggregate principal amount of Bancshares’ 5.625% Fixed-to-Floating Rate Subordinated Notes due 2026 (the “Notes”). The Notes were issued pursuant to an indenture and a supplemental indenture, each dated as of August 15, 2016, between Old Line Bancshares and U.S. Bank National Association as Trustee. The Notes are unsecured subordinated obligations of Old Line Bancshares and rank equally with all other unsecured subordinated indebtedness currently outstanding or issued in the future. The Notes are subordinated in right of payment of all senior indebtedness. The fair value of the Notes is $34.1 million at December 31, 2017.
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(Continued)
| 2017 | 2016 | |||||||||||||||
| December 31, | Amount | Rate | Amount | Rate | ||||||||||||
| Amount outstanding at year end | ||||||||||||||||
| Senior note | $ | — | — | % | $ | — | — | % | ||||||||
| Subordinated Note-fixed to floating rate | 35,000,000 | 35,000,000 | ||||||||||||||
| Discount on Subordinated note | (452,651 | ) | (505,151 | ) | ||||||||||||
| Issuance cost for subordinated note | (471,590 | ) | (526,286 | ) | ||||||||||||
| Net carrying value of subordinated debt | 34,075,759 | 5.625 | 33,968,563 | 5.625 | ||||||||||||
| Subordinated Debentures | ||||||||||||||||
| Trust 1 - Floating 90-day LIBOR plus 2.85%, due 2034 | 4,000,000 | 4.39 | 4,000,000 | 3.82 | ||||||||||||
| Acquisition fair value adjustment | (1,468,572 | ) | (1,558,946 | ) | ||||||||||||
| Trust 2 - Floating 90-day LIBOR plus 1.60%, due 2035 | 2,500,000 | 3.14 | 2,500,000 | 2.57 | ||||||||||||
| Acquisition fair value adjustment | (1,202,257 | ) | (1,269,050 | ) | ||||||||||||
| Stock on subordinated debentures | 202,000 | 202,000 | ||||||||||||||
| Net carrying value | 4,031,171 | 3.91 | (1) | 3,874,004 | 3.34 | (1) | ||||||||||
| Total | $ | 38,106,930 | $ | 37,842,567 | ||||||||||||
| Average for the year | ||||||||||||||||
| Senior note, fixed at 6.28% | $ | — | — | % | $ | 3,887,114 | 6.28 | % | ||||||||
| Subordinated note | 34,018,375 | 5.625 | 11,605,039 | 5.625 | ||||||||||||
| Trust preferred subordinated debentures (1) | 3,947,384 | 9.75 | 3,757,633 | 9.38 | ||||||||||||
| Total | $ | 37,965,759 | $ | 19,249,786 | ||||||||||||
(1) The effective yield of the acquired subordinated debentures
Principal payments on long term debt obligations are due as follows:
| Year | Amount | |||
| 2026 | 34,075,759 | |||
| over 10 years | 4,031,171 | |||
| $ | 38,106,930 | |||
13. Related Party Transactions
The Bank has entered into various transactions with firms in which owners are also members of the board of directors. Fees charged for these services are at similar rates charged by unrelated parties for similar work. Amounts paid to these related parties totaled $87,300, $282,602 and $276,618, during the years ended December 31, 2017, 2016 and 2015, respectively. The fees paid include rental payments to one of our former directors, G. Thomas Daugherty, who retired from the board of directors effective May 24, 2017. The fees listed are for the period that Mr. Daugherty served as a director of Bancshares.
Effective November 1, 2008, we purchased Chesapeake Custom Homes, L.L.C.’s 12.5% membership interest in Pointer Ridge for the book value of $205,000. This purchase increased Bancshares’ membership interest from 50.0% to 62.5%. A director of Bancshares and the Bank is the President and 52.0% stockholder of Lucente Enterprises, Inc. Lucente Enterprises, Inc. is the manager and majority member of Chesapeake Custom Homes, L.L.C. Lucente Enterprises retained its 12.5% membership interest in Pointer Ridge until August 19, 2016. In August 2016, the Bank purchased the aggregate 37.5% minority interest in Pointer Ridge not held by Bancshares. In 2017, 2016 and 2015, the Bank paid Pointer Ridge $0, $653,380 and $897,333, respectively, in lease payments.
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Notes to Consolidated Financial Statements
(Continued)
The directors, executive officers and their affiliated companies maintained deposits with the Bank of $4,929,631 and $10,337,238 at December 31, 2017 and 2016, respectively.
The schedule below summarizes changes in amounts of loans outstanding to directors and executive officers or their affiliated companies:
| December 31, | 2017 | 2016 | ||||||
| Balance at beginning of year | $ | 2,700,087 | $ | 2,471,949 | ||||
| Additions | 1,536,167 | 710,572 | ||||||
| Repayments | (311,115 | ) | (482,434 | ) | ||||
| Balance at end of year | $ | 3,925,139 | $ | 2,700,087 | ||||
In addition to the outstanding balances, the directors and executive officers or affiliated companies have $433,240 in unused commitments as of December 31, 2017. In the opinion of management, these transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties.
14. Income Taxes
On December 22, 2017 the Tax Cuts and Jobs Act was signed into law with sweeping modifications to the Internal Revenue Code. The primary change for Bancshares was to lower the Federal corporate income tax rate to 21% from 35%. Bancshares re-measured its deferred tax assets and liabilities based on the income tax rates at which they are expected to reverse in the future, which is generally 21%. However, Bancshares will continue to analyze certain aspects of the Act, which may result in refinements of the calculations that could potentially affect the measurement of these balances or give rise to new deferred tax amounts. The provisional amount recorded related to the re-measurement of Bancshares’ deferred tax balance was $2.9 million, resulting in an increase of income tax expense for the year ended December 31, 2017. Additionally, we had maintained a deferred tax asset valuation allowance in relation to net operating loss carryovers and other items in relation to the acquisition of Regal Bank. Management determined that the concerns that existed at the time we established the valuation reserve relating to this acquisition no longer existed and Bancshares therefore reversed this valuation allowance of $3.4 million, resulting in a decrease to tax expense. The net impact of these two items was a reduction of income tax expense of $472 thousand. The components of income tax expense are as follows:
| December 31, | 2017 | 2016 | 2015 | |||||||||
| Current | ||||||||||||
| Federal | $ | 4,850,926 | $ | (2,421,114 | ) | $ | 2,221,756 | |||||
| State | 2,162,222 | 1,724,355 | 664,113 | |||||||||
| 7,013,148 | (696,759 | ) | 2,885,869 | |||||||||
| Deferred | ||||||||||||
| Federal | 1,999,926 | 7,556,701 | 1,993,829 | |||||||||
| State | (860,350 | ) | (47,344 | ) | 502,692 | |||||||
| 1,139,576 | 7,509,357 | 2,496,521 | ||||||||||
| $ | 8,152,724 | $ | 6,812,598 | $ | 5,382,390 | |||||||
We determine deferred tax assets and liabilities based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which we expect the differences to reverse. We allocate tax expense and tax benefits to the Bank and Bancshares based on their proportional share of taxable income.
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Notes to Consolidated Financial Statements
(Continued)
The components of net deferred tax assets and liabilities are as follows:
| December 31, | 2017 | 2016 | ||||||
| Deferred tax assets | ||||||||
| Allowance for loan losses | $ | 1,245,747 | $ | 2,323,236 | ||||
| Non-accrual interest | 149,017 | 205,703 | ||||||
| Impairment losses and expenses on other real estate owned | 251,924 | 348,617 | ||||||
| Director stock options | 38,949 | 8,684 | ||||||
| Deferred compensation plans | 1,565,114 | 2,130,082 | ||||||
| Net operating loss carryover | 3,869,905 | 5,698,994 | ||||||
| Fair value adjustments for acquired assets and liabilities | 3,523,966 | 3,787,101 | ||||||
| Non-compete agreements | 52,972 | 85,136 | ||||||
| Other | — | (28,756 | ) | |||||
| Net unrealized loss on securities available for sale | 1,061,187 | 3,242,175 | ||||||
| $ | 11,758,781 | $ | 17,800,972 | |||||
| Deferred tax liabilities | ||||||||
| Deferred loan origination costs, net | $ | 527,338 | $ | 473,598 | ||||
| Depreciation | 2,135,418 | 2,973,744 | ||||||
| Other | 45,885 | — | ||||||
| Core deposit intangible amortization | 1,733,044 | 1,388,630 | ||||||
| 4,441,685 | 4,835,972 | |||||||
| Net deferred tax asset before valuation allowance | 7,317,096 | 12,965,000 | ||||||
| Valuation allowance for deferred tax asset | — | (3,386,650 | ) | |||||
| Net deferred tax asset | $ | 7,317,096 | $ | 9,578,350 | ||||
Maryland Bankcorp had net operating loss (“NOL”) carryovers of $3.54 million at the time of our business combination. We succeed to these carryovers and may take limited annual deductions allowed by the Internal Revenue Code. We will be able to deduct $779,812 every year the Bank has taxable income until the NOL is fully utilized. The amount we may deduct in any year will be reduced if we recognize a built in loss in such year or if our taxable income is lower than the statutory NOL deduction. If the NOL is not used by the limited annual deductions, any remaining amount of NOL carryforward will expire in 2030.
WSB Holdings, Inc. had NOL carryovers of $12.1 million at the time of our business combination in May 2013. We succeed to these carryovers and may take limited annual deductions allowed by the Internal Revenue Code. We will be able to deduct $1,477,746 every year the Bank has taxable income until the NOL is fully utilized. The amount we may deduct in any year will be reduced if we recognize a built in loss in such year or if our taxable income is lower than the statutory NOL deduction. If the NOL is not used by the limited annual deductions, any remaining amount of NOL carryforward will expire in 2033.
Regal had NOL carryovers of $8.7 million at the time of our business combination in December 2015. We succeed to these carryovers and may take limited annual deductions allowed by the Internal Revenue Service Code. We will be able to deduct $182,620 every year the Bank has taxable income until the NOL is fully utilized. The amount we may deduct in any year will be reduced if we recognize a built in loss in such year or if our taxable income is lower than the statutory NOL deduction. If the NOL is not used by the limited annual deductions, any remaining amount of NOL carryforward will expire in 2035. Additionally, the deferred tax asset was increased by $3.6 million at the time of acquisition and will be analyzed for utilization in future years. Management has determined that the concerns that existed at the time we established the valuation reserve relating to this acquisition no longer existed and therefore Bancshares has reversed this valuation allowance in total.
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(Continued)
DCB had NOL carryovers of $157 thousand at the time of our business combination in July 2017. We succeeded to these carryovers and may take limited annual deductions allowed by the Internal Revenue Code. The amount we may deduct in any year will be reduced if we recognize a built in loss in such year or if our taxable income is lower than the statutory NOL deduction. If the NOL is not used by the limited annual deductions, any remaining amount of NOL carryforward will expire in 2036.
We classify interest and penalties related to income tax assessments, if any, in income tax expense in the consolidated statements of operations. Bancshares and its subsidiaries file a consolidated U.S. federal tax return and both Bancshares and the Bank file a Maryland state income tax return. These returns are subject to examination by taxing authorities for all years after 2009. We had no material uncertain tax positions at December 31, 2017 or 2016 and there was no unrecognized tax benefit as of December 31, 2017 or 2016.
The following table reconciles the differences between the federal income tax rate of 34 percent and our effective tax rate:
| December 31, | 2017 | 2016 | 2015 | |||||||||
| Statutory federal income tax rate | 34.0 | % | 34.0 | % | 34 | % | ||||||
| Increase (decrease) resulting from State income taxes, net of federal income tax benefit | 6.3 | 5.3 | 4.7 | |||||||||
| Bank owned life insurance | (1.6 | ) | (1.9 | ) | (1.9 | ) | ||||||
| Other tax exempt income | (4.8 | ) | (5.0 | ) | (5.7 | ) | ||||||
| Stock based compensation awards | 0.7 | 0.7 | 0.6 | |||||||||
| Other non-deductible expenses | 1.8 | 0.8 | 1.2 | |||||||||
| Remove valuation allowance | (14.0 | ) | — | — | ||||||||
| Deferred tax asset rate change | 12.1 | |||||||||||
| Other | (0.6 | ) | 0.2 | 1.0 | ||||||||
| Effective tax rate | 33.9 | % | 34.1 | % | 33.9 | % | ||||||
15. Employee Benefits
Eligible employees participate in a profit sharing plan that qualifies under Section 401(k) of the Internal Revenue Code. The plan allows for elective employee deferrals and the Bank makes matching contributions of up to 4% of eligible employee compensation. Our contributions to the plan, included in employee benefit expenses, were $618,056, $599,395 and $506,325 for 2017, 2016, and 2015, respectively.
The Bank also offers Supplemental Executive Retirement Plans (“SERPs”) to its executive officers providing for retirement income benefits. We accrue the present value of the SERPs over the remaining number of years to the executives’ expected retirement dates. The combined accrued liability for these plans at December 31, 2017 and 2016 was $5.9 million and $5.6 million, respectively. The Bank’s expenses for the SERPs were $671,182, $649,244 and $617,888 in 2017, 2016, and 2015, respectively.
MB&T had an employee benefit plan entitled the Maryland Bankcorp, N.A. KSOP (“KSOP”). The KSOP included a profit sharing plan that qualified under section 401(k) of the Internal Revenue Code as an employee stock ownership plan. We have discontinued any future contributions to the employee stock ownership plan. At December 31, 2017, the employee stock ownership plan owned 32,949 shares of Bancshares’ common stock, had $19,193 invested in Bank certificates of deposit, and $19,463 in a Bank money market account. We have transferred the MB&T KSOP assets at acquisition of MB&T on April 2, 2011 into the Bank’s 401(k) plan discussed above.
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Notes to Consolidated Financial Statements
(Continued)
Stock Options and Restricted Stock
We maintain the Old Line Bancshares, Inc. 2010 Equity Incentive Plan (the “Plan”) under which we may grant, among other awards, options to purchase Bancshares’ common stock and restricted shares of common stock. The Compensation Committee of the board of directors administers the Plan. As the Plans outlines, the Compensation Committee approves stock option grants to directors and employees, determines the number of shares, the type of option, the option price, the term (not to exceed 10 years from the date of issuance) and the vesting period of options granted. The Compensation Committee has approved and we have granted options vesting immediately as well as over periods of two, three and five years. We recognize the compensation expense associated with these grants over their respective vesting periods. In 2013, stockholders approved an amendment to increase the number of shares issuable under the Plan by 450,000 shares. As of December 31, 2017, there were 291,448 shares remaining available for future issuance under the Plan. Shares issued upon exercise of options are issued from authorized but unissued shares.
The intrinsic value of the options that directors and officers exercised for the years ended December 31, 2017, 2016 and 2015 was $488,995, $830,962 and $411,743, respectively.
A summary of the status of outstanding options follows:
| 2017 | 2016 | 2015 | ||||||||||||||||||||||
| Number of shares | Weighted average exercise price | Number of shares | Weighted average exercise price | Number of shares | Weighted average exercise price | |||||||||||||||||||
| Outstanding, beginning of year | 360,988 | $ | 12.04 | 368,956 | $ | 10.67 | 393,162 | $ | 10.14 | |||||||||||||||
| Options granted | — | — | 58,926 | 17.75 | 50,594 | 14.38 | ||||||||||||||||||
| Options exercised | (26,914 | ) | 10.10 | (66,894 | ) | 9.52 | (74,800 | ) | 10.34 | |||||||||||||||
| Options forfeited | — | — | — | — | — | — | ||||||||||||||||||
| Options expired | (6,500 | ) | 10.85 | — | — | — | — | |||||||||||||||||
| Outstanding, end of year | 327,574 | $ | 12.22 | 360,988 | $ | 12.04 | 368,956 | $ | 10.67 | |||||||||||||||
| Outstanding Options | Exercisable Options | |||||||||||||||||||||
| Exercise price | Number of shares at December 31, 2017 | Weighted average remaining term in years | Weighted average exercise price | Number of shares at December 31, 2017 | Weighted average exercise price | |||||||||||||||||
| $6.30 | - | 10.95 | 134,723 | 2.43 | $ | 7.48 | 134,723 | $ | 7.48 | |||||||||||||
| $10.96 | - | 16.76 | 135,125 | 6.24 | 14.59 | 122,192 | 14.63 | |||||||||||||||
| $16.77 | - | 17.75 | 57,726 | 8.04 | 17.75 | 29,640 | 17.75 | |||||||||||||||
| 327,574 | 4.61 | $ | 12.22 | 286,555 | $ | 11.59 | ||||||||||||||||
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Notes to Consolidated Financial Statements
(Continued)
| Intrinsic value of vested exercisable options where the market value exceeds the exercise price | $ | 5,114,960 | ||
| Intrinsic value of outstanding options where the market value exceeds the exercise price | $ | 5,639,857 |
At December 31, 2017, there was $1.1 million of total unrecognized compensation cost related to non-vested stock options that we expect to realize over the next three years. The following table summarizes the fair values of the options granted and weighted-average assumptions used to calculate the fair values. We used the Black-Scholes option pricing model.
| Years Ended December 31, | 2017 | 2016 | 2015 | |||||||||||||
| Expected dividends | - | % | 1.00 | % | 1.00 | % | ||||||||||
| Risk free interest rate | - | % | 1.75 | % | 0.39 | % | ||||||||||
| Expected volatility | - | % | 25.28 | % | 30.76 | % | ||||||||||
| Weighted average volatility | - | % | 15.91 | % | 10.65 | % | ||||||||||
| Expected life in years | - | 4.68 | - | 5.72 | 5.50 | - | 6.00 | |||||||||
| Weighted average fair value of options granted | $ | - | $ | 5.40 | $ | 5.09 | ||||||||||
During the year ended December 31, 2017, we granted 40,713 restricted common stock awards under the Plan.
The following table outlines the vesting schedule of the unvested restricted stock awards.
Vesting Schedule of Unvested Restricted Stock
Awards December 31, 2017
| # of Restricted | ||||
| Vesting Date | Shares | |||
| 2/25/2018 | 3,917 | |||
| 7/2/2018 | 7,137 | |||
| 7/8/2018 | 7,531 | |||
| 8/29/2018 | 5,427 | |||
| 12/31/2018 | 4,662 | |||
| 2/24/2019 | 5,295 | |||
| 7/8/2019 | 7,537 | |||
| 8/29/2019 | 5,432 | |||
| 12/31/2019 | 4,662 | |||
| 2/24/2020 | 3,472 | |||
| 8/29/2020 | 5,439 | |||
| 12/31/2020 | 4,676 | |||
| 2/24/2021 | 3,090 | |||
| Total Issued | 68,277 | |||
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Notes to Consolidated Financial Statements
(Continued)
At December 31, 2017, there is $1.3 million unrecognized compensation cost related to non-vested restricted stock awards that we expect to realize over the next three years. A summary of the restricted stock awards during the year follows:
| December 31, 2017 | December 31, 2016 | December 31, 2015 | ||||||||||||||||||||||
| Number of shares | Weighted average grant date fair value | Number of shares | Weighted average grant date fair value | Number of shares | Weighted average grant date fair value | |||||||||||||||||||
| Nonvested, beginning of period | 54,151 | $ | 17.30 | 27,878 | $ | 15.52 | 8,522 | $ | 13.35 | |||||||||||||||
| Restricted stock granted | 42,066 | 28.22 | 36,461 | 18.20 | 30,725 | 15.31 | ||||||||||||||||||
| Restricted stock vested | (27,940 | ) | 17.17 | (10,188 | ) | 15.63 | (11,369 | ) | 11.19 | |||||||||||||||
| Restricted stock forfeited | — | — | — | — | — | — | ||||||||||||||||||
| Nonvested, end of period | 68,277 | $ | 23.86 | 54,151 | $ | 17.30 | 27,878 | $ | 15.52 | |||||||||||||||
| Total fair value of shares vested | $ | 811,696 | $ | 194,589 | $ | 148,630 | ||||||||||||||||||
| Intrinsic value of non-vested restricted stock awards where the market value exceeds the exercise price | $ | 380,824 | $ | 361,506 | $ | 489,816 | ||||||||||||||||||
| Intrinsic value of vested restricted stock awards where the market value exceeds the exercise price | $ | 1,677,537 | $ | 819,472 | $ | 199,753 | ||||||||||||||||||
16. Capital Standards
The Federal Deposit Insurance Corporation and the Federal Reserve Board have adopted risk based capital standards for banking organizations. These standards require ratios of capital to assets for minimum capital adequacy and to be classified as well capitalized under prompt corrective action provisions. Under the amended prompt corrective action regulations, effective January 1, 2015, a bank is considered “well capitalized” if it: (i) has a total risk-based capital ratio of 10.0% or greater; (ii) a Tier 1 risk-based capital ratio of 8.0% or greater; (iii) a common Tier 1 equity ratio of at least 6.5% or greater; (iv) a leverage capital ratio of 5.0% or greater; and (iv) is not subject to any written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure.
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Notes to Consolidated Financial Statements
(Continued)
As of December 31, 2017 and 2016, the capital ratios and the capital requirements to remain adequately and well capitalized are as follows:
| Actual | Minimum capital adequacy (1) | To be well capitalized (2) | ||||||||||||||||||||||
| December 31, 2017 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
| (Dollars in 000’s) | ||||||||||||||||||||||||
| Total capital (to risk weighted assets) | ||||||||||||||||||||||||
| Consolidated | $ | 221,083 | 11.8 | % | $ | 149,839 | 8 | % | $ | 187,298 | 10 | % | ||||||||||||
| Old Line Bank | $ | 212,452 | 11.4 | % | $ | 149,509 | 8 | % | $ | 186,886 | 10 | % | ||||||||||||
| Tier 1 capital (to risk weighted assets) | ||||||||||||||||||||||||
| Consolidated | $ | 180,101 | 9.6 | % | $ | 112,379 | 6 | % | $ | 149,839 | 8 | % | ||||||||||||
| Old Line Bank | $ | 206,471 | 11.0 | % | $ | 112,132 | 6 | % | $ | 149,509 | 8 | % | ||||||||||||
| Tier 1 capital (to average assets) | ||||||||||||||||||||||||
| Consolidated | $ | 180,101 | 8.8 | % | $ | 81,485 | 4 | % | $ | 101,857 | 5 | % | ||||||||||||
| Old Line Bank | $ | 206,471 | 10.1 | % | $ | 81,415 | 4 | % | $ | 101,769 | 5 | % | ||||||||||||
| Common Equity Tier 1 (to risk-weighted assets) | ||||||||||||||||||||||||
| Consolidated | $ | 176,070 | 9.4 | % | $ | 84,284 | 4.5 | % | $ | 121,744 | 6.5 | % | ||||||||||||
| Old Line Bank | $ | 206,471 | 11.0 | % | $ | 84,099 | 4.5 | % | $ | 121,476 | 6.5 | % | ||||||||||||
| Actual | Minimum capital adequacy (1) | To be well capitalized (2) | ||||||||||||||||||||||
| December 31, 2016 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
| (Dollars in 000’s) | ||||||||||||||||||||||||
| Total capital (to risk weighted assets) | ||||||||||||||||||||||||
| Consolidated | $ | 183,168 | 12.3 | % | $ | 119,410 | 8 | % | $ | 149,263 | 10 | % | ||||||||||||
| Old Line Bank | $ | 171,617 | 11.5 | % | $ | 118,941 | 8 | % | $ | 148,676 | 10 | % | ||||||||||||
| Tier 1 capital (to risk weighted assets) | ||||||||||||||||||||||||
| Consolidated | $ | 141,921 | 9.5 | % | $ | 89,558 | 6 | % | $ | 119,410 | 8 | % | ||||||||||||
| Old Line Bank | $ | 165,370 | 11.1 | % | $ | 89,205 | 6 | % | $ | 118,941 | 8 | % | ||||||||||||
| Tier 1 capital (to average assets) | ||||||||||||||||||||||||
| Consolidated | $ | 141,921 | 8.6 | % | $ | 66,369 | 4 | % | $ | 82,961 | 5 | % | ||||||||||||
| Old Line Bank | $ | 165,370 | 10.0 | % | $ | 66,213 | 4 | % | $ | 82,766 | 5 | % | ||||||||||||
| Common Equity Tier 1 (to risk-weighted assets) | ||||||||||||||||||||||||
| Consolidated | $ | 138,047 | 9.2 | % | $ | 67,168 | 4.5 | % | $ | 97,021 | 6.5 | % | ||||||||||||
| Old Line Bank | $ | 165,370 | 11.1 | % | $ | 66,904 | 4.5 | % | $ | 96,639 | 6.5 | % | ||||||||||||
| (1) | When fully phased-in on January 1, 2019, the Basel III capital rules include a capital conservation buffer of 2.5% that is added on top of each of the minimum risk-based capital ratios noted above. Implementation began on January 1, 2016 at the 0.625% level and will increase each subsequent January 1, until it reaches 2.5% on January 1, 2019. |
| (2) | Prompt corrective action provisions are not applicable at the bank holding company level. |
Tier 1 capital consists of common stock, additional paid-in capital and retained earnings. Total capital includes a limited amount of the allowance for loan losses. In calculating risk weighted assets, specified risk percentages are applied to each category of asset and off balance sheet items.
Failure to meet the capital requirement could affect our ability to pay dividends and accept deposits and may significantly affect our operations.
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Notes to Consolidated Financial Statements
(Continued)
In the most recent regulatory report, we were categorized as well capitalized under the prompt corrective action regulations. Management knows of no events or conditions that should change this classification.
17. Commitments and Contingencies
The Bank is party to financial instruments with off balance sheet risk in the normal course of business in order to meet the financing needs of customers. These financial instruments include commitments to extend credit, available credit lines and standby letters of credit.
| December 31, | 2017 | 2016 | ||||||
| Commitments to extend credit and available credit lines: | ||||||||
| Commercial | $ | 132,245,792 | $ | 92,262,530 | ||||
| Construction | 132,854,976 | 134,944,015 | ||||||
| Consumer | 41,151,049 | 25,422,254 | ||||||
| $ | 306,251,817 | $ | 252,628,799 | |||||
| Standby letters of credit | $ | 12,361,974 | $ | 18,907,384 | ||||
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. Commitments generally have fixed interest rates fixed at current market rates, expiration dates or other termination clauses and may require payment of a fee. Available credit lines represent the unused portion of lines of credit previously extended and available to the customer so long as there is no violation of any contractual condition. These lines generally have variable interest rates. Since many of the commitments are expected to expire without being drawn upon, and since it is unlikely that all customers will draw upon their lines of credit in full at any time, the total commitment amount or line of credit amount does not necessarily represent future cash requirements. We evaluate each customer’s credit worthiness on a case by case basis. We regularly reevaluate many of our commitments to extend credit. Because we conservatively underwrite these facilities at inception, we generally do not have to withdraw any commitments. We are not aware of any loss that we would incur by funding our commitments or lines of credit.
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.
We have recognized a reserve in the amount of $74,908, $19,547 and $22,461 for loans sold in the secondary market with recourse obligations as of December 31, 2017, 2016 and 2015. In addition, a reserve in the amount of $60,719, $51,808 and $222,729 has been established for the unfunded portion of loan commitments at December 31, 2017, 2016 and 2015, respectively. Both reserves are included in other liabilities.
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Notes to Consolidated Financial Statements
(Continued)
As of December 31, 2017, we leased 22 branch locations and five loan production offices from non-related parties under lease agreements expiring through 2040. Each of the leases provides extension options. We made lease payments to Pointer Ridge in connection with our lease of our corporate headquarters and one branch location from Pointer Ridge up through the purchase date of August 19, 2016.
The approximate future minimum lease commitments under the operating leases as of December 31, 2017, are presented below. We have eliminated 62.5% of lease commitments to Pointer Ridge in consolidation that was paid prior to Bank’s purchase of the remaining interest in Pointer Ridge.
| Year | Amount (in thousands) | |||
| 2018 | $ | 2,352 | ||
| 2019 | 2,062 | |||
| 2020 | 1,642 | |||
| 2021 | 1,333 | |||
| 2022 | 889 | |||
| Remaining | 4,069 | |||
| $ | 12,347 | |||
Rent expense was $2,104,832, $2,056,401 and $1,746,170 for the years ended December 31, 2017, 2016, and 2015, respectively.
18. Fair Value Measurement
The fair value of an asset or liability is the price that participants would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability, or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
The fair value hierarchy established by accounting standards defines three input levels for fair value measurement. The applicable standard describes three levels of inputs that may be used to measure fair value: Level 1 is based on quoted market prices in active markets for identical assets. Level 2 is based on significant observable inputs other than Level 1 prices. Level 3 is based on significant unobservable inputs that reflect a company’s own assumptions about the assumption that market participants would use in pricing an asset or liability. We evaluate fair value measurement inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer between levels. For the years ended December 31, 2017 and 2016, there were no transfers between levels.
At December 31, 2017, Bancshares holds, as part of its investment portfolio, available for sale securities reported at fair value consisting of municipal securities, U.S. government sponsored entities, corporate bonds and 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, and our corporate bonds, which fall into Level 3.
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Notes to Consolidated Financial Statements
(Continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
| At December 31, 2017 (in thousands) | ||||||||||||||||||||
| Carrying Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Changes in Fair Values Included in Period Earnings | ||||||||||||||||
| Available-for-sale: | ||||||||||||||||||||
| Treasury securities | $ | 3,005 | $ | 3,005 | $ | — | $ | — | $ | — | ||||||||||
| U.S. government agency | 17,734 | — | 17,734 | — | — | |||||||||||||||
| Corporate Bonds | 14,658 | — | 14,658 | |||||||||||||||||
| Municipal securities | 79,555 | — | 79,555 | — | — | |||||||||||||||
| FHLMC MBS | 19,455 | — | 19,455 | — | — | |||||||||||||||
| FNMA MBS | 62,946 | — | 62,946 | — | — | |||||||||||||||
| GNMA MBS | 21,000 | — | 21,000 | — | — | |||||||||||||||
| Total recurring assets at fair value | $ | 218,353 | $ | 3,005 | $ | 200,690 | $ | 14,658 | $ | — | ||||||||||
| At December 31, 2016 (in thousands) | ||||||||||||||||||||
| Carrying Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Changes in Fair Values Included in Period Earnings | ||||||||||||||||
| Available-for-sale: | ||||||||||||||||||||
| Treasury securities | $ | 2,996 | $ | 2,996 | $ | — | $ | — | $ | — | ||||||||||
| U.S. government agency | 7,266 | — | 7,266 | — | — | |||||||||||||||
| Corporate Bonds | 8,172 | — | 8,172 | |||||||||||||||||
| Municipal securities | 67,687 | — | 67,687 | — | — | |||||||||||||||
| FHLMC MBS | 21,800 | — | 21,800 | — | — | |||||||||||||||
| FNMA MBS | 70,449 | — | 70,449 | — | — | |||||||||||||||
| GNMA MBS | 21,135 | — | 21,135 | — | — | |||||||||||||||
| Total recurring assets at fair value | $ | 199,505 | $ | 2,996 | $ | 188,337 | $ | 8,172 | $ | — | ||||||||||
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.
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Notes to Consolidated Financial Statements
(Continued)
The following table provides a reconciliation of changes in fair value included in assets measured in the Consolidated Balance sheet using inputs classified as level 3 in the fair value for the period indicated:
| Level 3 | Level 3 | |||||||
| (in thousands) | Year Ended December 31, 2017 | Year Ended December 31, 2016 | ||||||
| Investment available-for-sale | ||||||||
| Balance as of January 1, 2017 | $ | 8,172 | — | |||||
| Realized and unrealized gains (losses) | ||||||||
| Included in earnings | — | — | ||||||
| Included in other comprehensive income | (35 | ) | 72 | |||||
| Purchases, issuances, sales and settlements | 6,521 | 8,100 | ||||||
| Transfers into or out of level 3 | — | — | ||||||
| Balance at December 31, 2017 | $ | 14,658 | 8,172 | |||||
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 are included in the table below.
| At December 31, 2017 (in thousands) | ||||||||||||||||
| Carrying Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Impaired Loans | ||||||||||||||||
| Legacy: | $ | 4,260 | — | — | $ | 4,260 | ||||||||||
| Acquired: | 1,931 | — | — | 1,931 | ||||||||||||
| Total Impaired Loans | 6,191 | — | — | 6,191 | ||||||||||||
| Other real estate owned: | ||||||||||||||||
| Legacy: | $ | 425 | — | — | $ | 425 | ||||||||||
| Acquired: | 1,579 | — | — | 1,579 | ||||||||||||
| Total other real estate owned: | 2,004 | — | — | 2,004 | ||||||||||||
| Total | $ | 8,195 | $ | — | $ | — | $ | 8,195 | ||||||||
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Notes to Consolidated Financial Statements
(Continued)
| At December 31, 2016 (in thousands) | ||||||||||||||||
| Carrying Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Impaired Loans | ||||||||||||||||
| Legacy: | $ | 6,976 | — | — | $ | 6,976 | ||||||||||
| Acquired: | 1,088 | — | — | 1,088 | ||||||||||||
| Total Impaired Loans | 8,064 | — | — | 8,064 | ||||||||||||
| Other real estate owned: | ||||||||||||||||
| Legacy: | $ | 425 | — | — | $ | 425 | ||||||||||
| Acquired: | 2,321 | — | — | 2,321 | ||||||||||||
| Total other real estate owned: | 2,746 | — | — | 2,746 | ||||||||||||
| Total | $ | 10,810 | $ | — | $ | — | $ | 10,810 | ||||||||
Loans considered impaired are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are subject to nonrecurring fair value adjustments to reflect write-downs that are based on the market price or current appraised value of the collateral, adjusted to reflect local market conditions or other economic factors. After evaluating the underlying collateral, the fair value of the impaired loans is determined by allocating specific reserves from the allowance for loan losses to the loans. Thus, the fair value reflects the loan balance as adjusted by partial charge-offs less the specifically allocated reserve. Certain collateral-dependent impaired loans are reported at the fair value of the underlying collateral.
Impairment is measured based on the fair value of the collateral, which is typically derived from appraisals that take into consideration prices in observed transactions involving similar assets and similar locations. Discounts applied to appraisals have been in the range of 0% to 50%. Each appraisal is updated on an annual basis, either through a new appraisal or through our internal review process. Appraised values are reviewed and monitored internally and fair value is re-assessed at least quarterly or more frequently when circumstances occur that indicate a change in fair value. The fair value of impaired loans that are not collateral dependent is measured using a discounted cash flow analysis considered to be a Level 3 input.
The fair value of other real estate owned (“OREO”) is based on property appraisals adjusted at management’s discretion to reflect a further decline in the fair value of properties since the time the appraisal analysis was performed. Discounts applied to appraisals have predominantly been in the range of 0% to 50%; however, in certain cases have ranged up to 75% which include estimated costs to sell or other reductions based on market expectations or an executed sales contract. Appraised values are reviewed and monitored internally and fair value is re-assessed at least quarterly or more frequently when circumstances occur that indicate a change in fair value. Therefore, the inputs used to determine the fair value of OREO and repossessed assets fall within Level 3. We may include within OREO other repossessed assets received as partial satisfaction of a loan. These assets are not material and do not typically have readily determinable market values and are considered Level 3 inputs. As a result of the acquisition of Maryland Bankcorp, WSB Holdings and Regal, we have segmented the other real estate owned into two components, real estate obtained as a result of loans originated by the Bank (legacy) and other real estate acquired from MB&T, WSB and Regal Bank or obtained as a result of loans originated by MB&T, WSB, and Regal Bank (acquired). We had no OREO acquired from the DCB acquisition. The increase in level 3 is due to an increase in our legacy non-accrual loans, and acquired other real estate owned.
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Notes to Consolidated Financial Statements
(Continued)
The following methods and assumptions were used to estimate the fair value for each class of our financial instruments.
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.
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.
The following disclosures of the estimated fair value of financial instruments are made in accordance with the requirements of ASC 825, “Disclosures about Fair Value of Financial Instruments”. We have determined the fair value amounts by using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
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Notes to Consolidated Financial Statements
(Continued)
| December 31,2017 (in thousands) | ||||||||||||||||||||
| Carrying Amount (000’s) | Total Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Other Unobservable Inputs (Level 3) | ||||||||||||||||
| Assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 35,174 | $ | 35,174 | $ | 35,174 | $ | — | $ | — | ||||||||||
| Loans receivable, net | 1,696,361 | 1,692,018 | — | — | 1,692,018 | |||||||||||||||
| Loans held for sale | 4,404 | 4,558 | — | 4,558 | — | |||||||||||||||
| Investment securities available for sale | 218,353 | 218,353 | 3,005 | 200,690 | 14,658 | |||||||||||||||
| Equity Securities at cost | 8,978 | 8,978 | — | 8,978 | — | |||||||||||||||
| Bank Owned Life Insurance | 41,612 | 41,612 | — | 41,612 | — | |||||||||||||||
| Accrued interest receivable | 5,476 | 5,476 | — | 1,215 | 4,261 | |||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Deposits: | ||||||||||||||||||||
| Non-interest-bearing | 451,803 | 451,803 | — | 451,803 | — | |||||||||||||||
| Interest bearing | 1,201,100 | 1,205,936 | — | 1,205,936 | — | |||||||||||||||
| Short term borrowings | 192,612 | 192,612 | — | 192,612 | — | |||||||||||||||
| Long term borrowings | 38,107 | 38,107 | — | 38,107 | — | |||||||||||||||
| Accrued Interest payable | 1,472 | 1,472 | — | 1,472 | — | |||||||||||||||
| December 31, 2016 (in thousands) | ||||||||||||||||||||
| Carrying Amount (000’s) | Total Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Other Unobservable Inputs (Level 3) | ||||||||||||||||
| Assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 23,463 | $ | 23,463 | $ | 23,463 | $ | — | $ | — | ||||||||||
| Loans receivable, net | 1,361,175 | 1,364,361 | — | — | 1,364,361 | |||||||||||||||
| Loans held for sale | 8,418 | 8,707 | — | 8,707 | — | |||||||||||||||
| Investment securities available for sale | 199,505 | 199,505 | 2,996 | 188,337 | 8,172 | |||||||||||||||
| Equity Securities at cost | 8,303 | 8,303 | — | 8,303 | — | |||||||||||||||
| Bank Owned Life Insurance | 37,558 | 37,558 | — | 37,558 | — | |||||||||||||||
| Accrued interest receivable | 4,278 | 4,278 | — | 991 | 3,287 | |||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Deposits: | ||||||||||||||||||||
| Non-interest-bearing | 331,331 | 331,331 | — | 331,331 | — | |||||||||||||||
| Interest bearing | 994,549 | 998,489 | — | 998,489 | — | |||||||||||||||
| Short term borrowings | 183,434 | 183,434 | — | 183,434 | — | |||||||||||||||
| Long term borrowings | 37,843 | 37,843 | — | 37,843 | — | |||||||||||||||
| Accrued Interest payable | 1,269 | 1,269 | — | 1,269 | — | |||||||||||||||
| 132 |
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
19. Other Operating Expenses
Other operating expenses that are significant are as follows:
| December 31, | 2017 | 2016 | 2015 | |||||||||
| Legal Expenses | $ | 247,723 | $ | 253,129 | $ | 337,033 | ||||||
| Professional Fees | 688,000 | 439,954 | 285,267 | |||||||||
| Audit and Exam | 388,000 | 504,167 | 423,878 | |||||||||
| ATM expenses | 346,000 | 182,519 | 168,301 | |||||||||
| Other | 5,632,449 | 5,142,516 | 4,944,664 | |||||||||
| Total | $ | 7,302,172 | $ | 6,522,285 | $ | 6,159,143 | ||||||
20. Parent Company—Condensed Financial Information
The condensed balance sheets, statements of income, and statements of cash flows for Bancshares (Parent Company) follow:
Old Line Bancshares, Inc.
Condensed Balance Sheets
| December 31, | 2017 | 2016 | ||||||
| Assets | ||||||||
| Cash and due from banks | $ | 4,856,350 | $ | 5,441,189 | ||||
| Investment in Real Estate LLC | — | 4,004,969 | ||||||
| Investment in MD Statutory Trust | 202,000 | 202,000 | ||||||
| Investment in Old Line Bank | 238,127,239 | 177,989,848 | ||||||
| Federal income tax receivable | 3,613,048 | 1,646,040 | ||||||
| Other assets | 307,165 | 18,965 | ||||||
| $ | 247,105,802 | $ | 189,303,011 | |||||
| Liabilities and Stockholders’ Equity | ||||||||
| Accounts payable | $ | 1,271,687 | $ | 793,659 | ||||
| Trust preferred | 4,031,170 | 3,874,004 | ||||||
| Subordinated debt | 34,075,759 | 33,968,563 | ||||||
| Stockholders’ equity | ||||||||
| Common stock | 125,083 | 109,109 | ||||||
| Additional paid-in capital | 148,882,865 | 106,692,958 | ||||||
| Retained earnings | 61,054,487 | 48,842,026 | ||||||
| Accumulated other comprehensive income (loss) | (2,335,249 | ) | (4,977,308 | ) | ||||
| 207,727,186 | 150,666,785 | |||||||
| $ | 247,105,802 | $ | 189,303,011 | |||||
| 133 |
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Old Line Bancshares, Inc.
Condensed Statements of Income
| Years Ended December 31, | 2017 | 2016 | 2015 | |||||||||
| Interest and dividend income (expense) | ||||||||||||
| Dividend from Old Line Bank | $ | 3,751,353 | $ | 2,603,947 | $ | 2,245,508 | ||||||
| Interest income on money market and certificates of deposit | — | — | 1,581 | |||||||||
| Interest expense on trust preferred and subordinated debt | (2,447,346 | ) | (1,166,298 | ) | — | |||||||
| Interest expense on loans | — | — | (9,081 | ) | ||||||||
| Net interest and dividend income | 1,304,007 | 1,437,649 | 2,238,008 | |||||||||
| Non-interest income (loss) | (195,896 | ) | (102,630 | ) | (6,920 | ) | ||||||
| Non-interest expense | 3,870,509 | 1,386,530 | 982,216 | |||||||||
| Income before income taxes | (2,762,398 | ) | (51,511 | ) | 1,248,872 | |||||||
| Income tax expense (benefit) | (1,859,603 | ) | (885,393 | ) | (184,871 | ) | ||||||
| (902,795 | ) | 833,882 | 1,433,743 | |||||||||
| Undistributed net income of Old Line Bank | 16,866,609 | 12,321,215 | 9,034,843 | |||||||||
| Net income | $ | 15,963,814 | $ | 13,155,097 | $ | 10,468,586 | ||||||
Old Line Bancshares, Inc.
Statements of Cash Flows
| Years Ended December 31, | 2017 | 2016 | 2015 | |||||||||
| Cash flows from operating activities | ||||||||||||
| Net income | $ | 15,963,814 | $ | 13,155,097 | $ | 10,468,586 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||
| Undistributed net income of Old Line Bank | (16,866,609 | ) | (12,321,215 | ) | (9,034,843 | ) | ||||||
| Stock based compensation awards | 694,593 | 562,672 | 418,419 | |||||||||
| Loss from investment in real estate Pointer Ridge LLC | 195,896 | 102,630 | 6,920 | |||||||||
| (Increase) decrease in income tax receivable | (1,967,008 | ) | (850,118 | ) | — | |||||||
| Increase (decrease) in other liabilities | 635,194 | (75,822 | ) | (212,192 | ) | |||||||
| (Increase) decrease in other assets | (288,200 | ) | 88,752 | 294,811 | ||||||||
| $ | (1,632,320 | ) | $ | 661,996 | $ | 1,941,701 | ||||||
| Cash flows from investing activities | ||||||||||||
| Cash and cash equivalents of acquired company | (35,566,947 | ) | — | (2,646,577 | ) | |||||||
| Purchase Pointer Ridge LLC | 4,004,969 | (3,677,297 | ) | — | ||||||||
| Net cash to bank | 35,573,868 | (23,756,314 | ) | — | ||||||||
| 4,011,890 | (27,433,611 | ) | (2,646,577 | ) | ||||||||
| Cash flows from financing activities | ||||||||||||
| Proceeds from stock options exercised, including tax benefit | 679,748 | 837,763 | 815,843 | |||||||||
| Proceeds from issuance of common stock | — | — | (4,899,186 | ) | ||||||||
| Acquisition cash consideration | — | — | 2,852,321 | |||||||||
| Subordinated debt issued | 107,196 | 33,968,563 | — | |||||||||
| Purchase of minority member(s) interest | — | (258,181 | ) | — | ||||||||
| Cash dividends paid-common stock | (3,751,353 | ) | (2,603,948 | ) | (2,245,508 | ) | ||||||
| (2,964,409 | ) | 31,944,197 | (3,476,530 | ) | ||||||||
| Net (decrease) increase in cash and cash equivalents | (584,839 | ) | 5,172,582 | (4,181,406 | ) | |||||||
| Cash and cash equivalents at beginning of year | 5,441,189 | 268,607 | 4,450,013 | |||||||||
| Cash and cash equivalents at end of year | $ | 4,856,350 | $ | 5,441,189 | $ | 268,607 | ||||||
| 134 |
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
21. Litigation
From time to time we may be involved in ordinary routine litigation incidental to our business. We are not, however, involved in any legal proceedings the outcome of which, in management’s opinion, would be material to our financial condition.
22. Subsequent Events
None
| 135 |
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
There were no disagreements with accountants on accounting matters and financial disclosures for the reporting periods presented.
Item 9A. Controls and Procedures
As of the end of the period covered by this annual report on Form 10-K, Old Line Bancshares’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of Old Line Bancshares, Inc.’s disclosure controls and procedures. Based upon that evaluation, Old Line Bancshares, Inc.’s Chief Executive Officer and Chief Financial Officer concluded that Old Line Bancshares, Inc.’s disclosure controls and procedures are effective as of December 31, 2017. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by Old Line Bancshares, Inc. 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 SEC’s rules and forms.
In addition, there were no changes in Old Line Bancshares, Inc.’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended December 31, 2017, that have materially affected, or are reasonably likely to materially affect, Old Line Bancshares, Inc.’s internal control over financial reporting.
Management’s Report On Internal Control Over Financial Reporting
The management of Old Line Bancshares, Inc. (“the Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control over financial reporting has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.
As permitted by guidance provided by the staff of the U.S. Securities and Exchange Commission, the scope of management’s assessment of internal control over financial reporting as of December 31, 2017 has excluded DCB Bancshares, Inc. acquired on July 28, 2017. We have also excluded DCB Bancshares, Inc. from the scope of our audit of internal control over financial reporting. DCB Bancshares, Inc. constituted 7.18 percent of consolidated revenue (total net interest income and total noninterest income) for the year ended December 31, 2017, and 9.94 percent of consolidated total assets as of December 31, 2017.
Management has conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017, utilizing the framework established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2017 is effective.
Dixon Hughes Goodman LLP, the registered public accounting firm that audited the Company’s financial statements included in this report as of December 31, 2017 and 2016 and for the three-year period ended December 31, 2017, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2017 that is included elsewhere in this report.
None
| 136 |
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Code of Ethics
Old Line Bancshares, Inc.’s board of directors has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. That Code of Ethics for Senior Financial Officers is posted on Old Line Bancshares, Inc.’s internet website at www.oldlinebank.com. A copy of the Code of Conduct that applies to all of Old Line Bancshares’ and Old Line Bank’s officers, directors and employees is also available on Old Line Bancshares, Inc.’s Internet website.
The remaining information required by this Item 10 is incorporated by reference to the information appearing under the captions “Election of Directors,” “Board Meetings and Committees” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement for the 2018 Annual Meeting of Stockholders of Old Line Bancshares, Inc.
Item 11. Executive Compensation
The information required by this Item 11 is incorporated by reference to the information appearing under the captions “Director Compensation,” “Executive Compensation” and “Board Meetings and Committees” in the Proxy Statement for the 2018 Annual Meeting of Stockholders of Old Line Bancshares, Inc.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Securities Authorized For Issuance Under Equity Compensation Plans
The following table sets forth certain information as of December 31, 2017, with respect to compensation plans under which equity securities of Old Line Bancshares are authorized for issuance.
Equity Compensation Plan Information
December 31, 2017
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under Equity compensation plans | |||||||||
| Equity compensation plans approved by security holders(1) | 327,574 | $ | 12.22 | 291,448 | ||||||||
____________________
| (1) | Includes the 2010 Equity Incentive Plan. |
The remaining information required by this Item 12 is incorporated by reference to the information appearing under the caption “Ownership of Old Line Bancshares Common Stock” in the Proxy Statement for the 2018 Annual Meeting of Stockholders of Old Line Bancshares, Inc.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 is incorporated by reference to the information appearing under the captions “Certain Relationships and Related Transactions” and “Election of Directors” in the Proxy Statement for the 2018 Annual Meeting of Stockholders of Old Line Bancshares, Inc.
| 137 |
Item 14. Principal Accounting Fees and Services
Audit and Non-Audit Fees
The following table presents combined fees for professional audit services rendered by Dixon Hughes Goodman LLP for the audit of Old Line Bancshares, Inc.’s annual consolidated financial statements for the years ended December 31, 2017 and 2016 and fees billed for other services rendered by Dixon Hughes Goodman LLP.
| Years Ended | ||||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Audit fees(1) | $ | 276,819 | $ | 214,150 | ||||
| Audit-related fees(2) | 24,910 | 132,080 | ||||||
| Tax fees(3) | 13,025 | 26,625 | ||||||
| All other fees | 15,000 | — | ||||||
| Total | $ | 329,754 | $ | 372,855 | ||||
______________________
| (1) | Audit fees consist of fees billed for professional services rendered for the audit of the Old Line Bancshares, Inc.’s consolidated (or Old Line Bank’s) annual financial statements and review of the interim consolidated financial statements included in quarterly reports that Dixon Hughes Goodman LLP normally provides in connection with statutory and regulatory filings or engagements. |
| (2) | Audit-related fees in 2017 are for reviewing filings and assistance related to the audits for the 401K plan and Housing and Urban Development programs. Audit related fees in 2016 were for reviewing filings and assistance related to the issuance of the subordinated debt, audit for the 401K plan and Housing and Urban Development programs. |
| (3) | Tax fees consist of fees billed for professional services rendered for federal and state tax compliance, tax advice and tax planning. |
| (4) | All other fees consists of other miscellaneous fees. |
Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Auditor
Old Line Bancshares, Inc.’s audit committee approves the engagement before Old Line Bancshares, Inc. or Old Line Bank engages the independent auditor to render any audit or non-audit services.
| 138 |
PART IV
Item 15. Exhibits, Financial Statement Schedules
| 139 |
| 140 |
| 141 |
______________________
| * | Management compensatory plan, contract or arrangement. |
| (A) | Previously filed by Old Line Bancshares, Inc. as a part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Registration Statement on Form 10-SB, as amended, under the Securities Exchange Act of 1934, as amended (File Number 000-50345). |
| (B) | Previously filed by Old Line Bancshares, Inc. as a part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Current Report on Form 8-K filed on March 24, 2011. |
| (C) | Previously filed by Old Line Bancshares, Inc. as a part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Quarterly Report on Form 10-Q filed on August 10, 2012. |
| (D) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Registration Statement on Form S-4, under the Securities Act of 1933, as amended (File Number 333-221714). |
| (E) | Previously filed by Old Line Bancshares, Inc. as a part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Registration Statement on Form S-8, under the Securities Act of 1933, as amended (File Number 333-116845). |
| (F) | Previously filed by Old Line Bancshares, Inc. as a part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 11, 2016. |
| (G) | Previously filed by Old Line Bancshares, Inc. as a part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Current Report on Form 8-K filed on January 5, 2005. |
| (H) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from Old Line Bancshares, Inc.’s Quarterly Report on Form 10-QSB filed on August 10, 2005. |
| (I) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Current Report on Form 8-K filed on August 15, 2016. |
| (J) | Previously filed by Old Line Bancshares, Inc. as a part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Current Report on Form 8-K filed on January 4, 2012. |
| (K) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Current Report on Form 8-K filed on January 6, 2006. |
| (L) | Reserved. |
| (M) | Previously filed by Old Line Bancshares, Inc. as a part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Current Report on Form 8-K filed on October 4, 2012. |
| (N) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017, filed on November 6, 2017. |
| (O) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Current Report on Form 8-K filed on January 7, 2008. |
| (P) | Previously filed by Old Line Bancshares, Inc. as a part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Quarterly Report on Form 10-Q filed on August 15, 2011. |
| (Q) | Previously filed by Old Line Bancshares, Inc. as a part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2014, filed on March 11, 2015. |
| 142 |
| (R) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from, Annex A to Old Line Bancshares, Inc.’s Registration Statement on Form S-4 under the Securities Act of 1933, as amended (File Number 333-184924). |
| (S) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Current Report on Form 8-K filed on February 1, 2017. |
| (T) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from, Amendment No. 1 to Old Line Bancshares, Inc.’s Registration Statement on Form S-4 under the Securities Act of 1933, as amended (File Number 333-184924). |
| (U) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Current Report on Form 8-K filed on January 28, 2010. |
| (V) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from, Annex A of Old Line Bancshares, Inc.’s Registration Statement on Form S-4 under the Securities Act of 1933, as amended (File Number 333-170464). |
| (W) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2010 filed on March 30, 2011. |
| (X) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009, filed on March 26, 2010. |
| (Y) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Pre-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 (File Number 333-184924) filed on May 20, 2013. |
| (Z) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from, Appendix A of Old Line Bancshares, Inc.’s Proxy Statement on Schedule 14A, filed with the Commission on April 19, 2010. |
| (AA) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Quarterly Report on Form 10-Q, filed with the Commission on November 14, 2013. |
| (BB) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from, Appendix B of Old Line Bancshares, Inc.’s Proxy Statement on Schedule 14A, filed with the Commission on July 12, 2013. |
| (CC) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Current Report on Form 8-K filed with the Commission on May 13, 2013. |
| (DD) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Quarterly Report on Form 10-Q filed with the Commission on May 9, 2014. |
| (EE) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Amendment No. 1 to Current Report on Form 8-K filed with the Commission on August 5, 2015. |
| (FF) | Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from, Old Line Bancshares, Inc.’s Current Report on Form 8-K/A filed with the Commission on September 28, 2017. |
None.
| 143 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 9, 2018 | By: | /s/ James W. Cornelsen |
| James W. Cornelsen, President (Principal Executive Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Name | Title | Date | ||
| /s/ James W. Cornelsen | Director, President and Chief Executive Officer (Principal | March 9, 2018 | ||
| James W. Cornelsen | Executive Officer) | |||
| /s/ Elise M. Hubbard | Chief Financial Officer (Principal Accounting and Financial | March 9, 2018 | ||
| Elise M. Hubbard | Officer) | |||
| /s/ Craig E. Clark | Director and Chairman of the Board | March 9, 2018 | ||
| Craig E. Clark | ||||
| /s/ James R. Clifford, Sr. | Director | March 9, 2018 | ||
| James R. Clifford, Sr. | ||||
| /s/ Stephen J. Deadrick | Director | March 9, 2018 | ||
| Stephen J. Deadrick | ||||
| /s/ James F. Dent | Director | March 9, 2018 | ||
| James F. Dent | ||||
| /s/ Andre’ J. Gingles | Director | March 9, 2018 | ||
| Andre’ J. Gingles | ||||
| /s/ Thomas H. Graham | Director | March 9, 2018 | ||
| Thomas H. Graham | ||||
| Director | March 9, 2018 | |||
| Frank Lucente, Jr. | ||||
| /s/ Gail D. Manuel | Director | March 9, 2018 | ||
| Gail D. Manuel | ||||
| /s/ Carla Hargrove McGill | Director | March 9, 2018 | ||
| Carla Hargrove McGill | ||||
| /s/ Gregory S. Proctor, Jr. | Director | March 9, 2018 | ||
| Gregory S. Proctor, Jr. |
| 144 |
| Name | Title | Date | ||
| /s/ Jeffrey A. Rivest | Director | March 9, 2018 | ||
| Jeffrey A. Rivest | ||||
| /s/ Suhas R. Shah | Director | March 9, 2018 | ||
| Suhas R. Shah | ||||
| /s/ John M. Suit, II | Director | March 9, 2018 | ||
| John M. Suit, II | ||||
| /s/ Frank E. Taylor | Director | March 9, 2018 | ||
| Frank E. Taylor |
145