Item 1.
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”, and “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) branch retention and market expansion, (ii) expected savings from the closure of four branch locations in 2014, (iii) statements regarding anticipated changes in non-interest expenses and that net interest income will continue to increase during 2015, (iv) anticipated changes in rental income, (v) maintenance of the net interest margin, (vi) our belief that we have identified any problem assets and that our borrowers will continue to remain current on their loans, (vii) Old Line Bancshares being well positioned to capitalize on potential opportunities in the current and in a healthier healthy economy, (viii) expected losses on and our intentions with respect to our investment securities, (ix) earnings on bank owned life insurance, and (x) continued use of brokered deposits for funding; (b) sources of and sufficiency of liquidity; (c) the adequacy of the allowance for loan losses; (d) expected loan, deposit, asset, balance sheet and income and earnings growth; (e) expectations with respect to the impact of pending legal proceedings; (f) improving earnings per share and stockholder value; (g) that income from our Silver Spring loan production office will continue to offset associated costs; (h) the impact of pending legal proceedings; (i) the impact of recent accounting pronouncements; and (j) 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: the risk that Old Line Bancshares 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, including regulations adopted pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”); that the market value of our investments could negatively impact stockholders’ equity; risks associated with or lending limit; expenses associated with operating as a public company; potential conflicts of interest associated with the interest in Pointer Ridge; deterioration in general economic conditions, continued slow growth during the recovery or another recession; and changes in competitive, governmental, regulatory, technological and other factors which may affect us specifically or the banking industry generally; and other risks otherwise discussed in this report, including under “Item 1A.
Item 1A. Risk Factors
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.
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 rely heavily on communications and information systems to conduct our business. The computer systems and network infrastructure we use could be vulnerable to unforeseen hardware and cybersecurity issues. 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 the Internet or other users. 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 our Internet banking services, any or all of which could have a material adverse effect on our results of operations and financial condition. Each year, we add additional security measures to our computer systems and network infrastructure to mitigate the possibility of cybersecurity breaches including firewalls and penetration testing, but there can be no assurance that such security measures will 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 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 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.
A worsening of current economic conditions could adversely affect our results of operations and financial condition. 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. Although the U.S. economy has emerged from the severe recession that occurred in 2007 through 2009, economic growth has been slow and
uneven, and employment growth remains weak. Recovery by many businesses has been impaired by lower consumer spending. A return to prolonged deteriorating economic conditions could significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Although signs of stability have emerged, 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. Further continuing economic uncertainty, including regarding concerns about U.S. debt levels and related governmental actions, including potential tax increases and cuts in government spending, may hamper the ongoing recovery or otherwise negatively impact economic conditions going forward. In addition, an increase in unemployment levels 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. These events may cause us to incur losses and may adversely affect our financial condition and results of operations.
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 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 recent recession, including government sponsored entities and investment banks. These investment write downs have 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 Federal Home Loan Bank 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 most recent 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 their ability to repay their loan, 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 our growth strategy. 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 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 federal regulation of financial institutions changes regularly and is the subject of constant legislative debate, we cannot forecast how federal 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 will 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 service 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.
The Capital rules that were issued require insured depository institutions and their holding companies to hold more capital. The impact of the new rules on our financial condition and operations is uncertain but could be materially adverse. In July 2013, the Federal Reserve adopted a final rule for the Basel III capital framework. These rules substantially amend the regulatory risk-based capital rules applicable to us. The rules phase in over a period of time beginning in 2015 and will become fully effective in 2019. The rules apply to the Company as well as to the Bank. Beginning in 2015, our minimum capital requirements will be (i) a common Tier 1 equity ratio of 4.5%, (ii) a Tier 1 capital (common Tier 1 capital plus Additional Tier 1 capital) of 6% (up from 4%) and (iii) a total capital ratio of 8% (the current requirement). Our leverage ratio requirement will remain at the 4% level now required. Beginning in 2016, a capital conservation buffer will phase in over three years, ultimately resulting in a requirement of 2.5% on top of the common Tier 1, Tier 1 and total capital requirements, resulting in a required common Tier 1 equity ratio of 7%, a Tier 1 ratio of 8.5%, and a total capital ratio of 10.5%. Failure to satisfy any of these three capital requirements will result in limits on paying dividends, engaging in share repurchases and paying discretionary bonuses. These limitations will establish a maximum percentage of eligible retained income that could be utilized for such actions.
Regulations pursuant to the Dodd-Frank Act may adversely impact our results of operations, liquidity or financial condition. The Dodd-Frank Act represents a comprehensive overhaul of the U.S. financial services industry. The Dodd-Frank Act requires the CFPB and other federal agencies to implement many new and significant rules and regulations to implement its various provisions. There are a number of regulations under the Dodd-Frank act that have not yet been proposed or adopted. We will not know the full impact of the Dodd-Frank Act on our business until regulations implementing the statute are adopted and implemented, which could be years. As a result, we cannot predict the full extent to which the Dodd-Frank Act will impact our business, operations or financial condition. However, compliance with these new laws and regulations may require us to make changes to our business and operations and will likely result in additional costs and a diversion of management’s time from other business activities, any of which may adversely impact our results of operations, liquidity or financial condition.
Because we serve a limited market area in Maryland, an economic downturn in our market area could more adversely affect us than it affects our larger competitors that are more geographically diverse. Our current primary market area consists of the suburban Maryland (Washington, D.C. suburbs) Counties of Anne Arundel, Calvert, Charles, Montgomery, Prince George’s and St. Mary’s. We may expand in contiguous northern and western Counties, such as Howard County, Maryland. However, broad geographic diversification is not currently part of our community bank focus. Overall, during and following the most recent recession, the business environment has negatively impacted many businesses and households in the United States and worldwide. Although the economic decline has not impacted the suburban Maryland and Washington D.C. suburbs as adversely as other areas of the United States, it has caused an increase in unemployment and business failures and a decline in property values. As a result, if our market area should suffer another economic downturn, it may more severely affect our business and financial condition than it affects larger bank competitors. In particular, due to the proximity of our primary market area to Washington, D.C., decreases in spending by the Federal government could impact us more than banks 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 earnings. Our loan portfolio includes residential mortgage loans that we originate. Although the local real estate market and economy in our primary market areas have performed better than many other
markets, a downturn could cause higher unemployment, more delinquencies, and could adversely affect the value of properties securing 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.
We may not have adequately assessed the fair value of the 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.
New regulations restrict our ability to originate residential real estate loans. A CFPB rule, effective January 10, 2014, is designed to clarify for lenders how they can avoid legal liability under the Dodd-Frank Act, which would otherwise hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet this “qualified mortgage” definition set forth in the rule will be presumed to have complied with the new ability-to-repay standard. Under the rule, a “qualified mortgage” loan must not contain certain specified features.
The rule also establishes general underwriting criteria for qualified mortgages, including that the consumer must have a total (or “back end”) debt-to-income ratio that is less than or equal to 43%. Lenders must also verify and document the income and financial resources relied upon to qualify the borrower on the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments. The CFPB’s rule on qualified mortgages limits our ability to make residential mortgage loans that include a balloon payment, and may cause us to decide to limit certain types of other loans or loans to certain borrowers, and would make it more costly and/or or time consuming to make these loans, which could limit our growth or profitability.
In addition, the Dodd-Frank Act requires the regulatory agencies to issue regulations that require securitizers of loans to retain “not less than 5% of the credit risk for any asset that is not a qualified residential mortgage.” The regulatory agencies issued a final rule to implement this requirement on October 21, 2014. The final rule aligns the definition of “qualified residential mortgage” with the definition of “qualified mortgage” issued by the CFPB for purposes of its regulations.. The final rule is effective February 23, 2015. Compliance with the final rule is required beginning December 24, 2015 with respect to asset-backed securities collateralized by residential mortgages, and beginning December 24, 2016 with respect to all other classes of asset-backed securities,. The final rule could have a significant effect on the secondary market for loans and the types of loans we originate, and restrict our ability to make loans.
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, our President and Chief Executive Officer, Joseph E. Burnett, our Executive Vice President and Chief Lending Officer, John Miller, our Executive Vice President and Chief Credit Officer, and Mark A. Semanie, our Executive Vice President, Chief Operating Officer. Although we have entered into employment agreements with Messrs. Cornelsen, Burnett, 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.
Also, our growth and success and our anticipated future growth and success, in a large part, is due and we anticipate will 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. 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 and may continue to make additional investments in equipment and personnel, which also will increase our non-interest expense. If we grow too quickly and are not able to control costs and maintain asset quality, 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. 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, even under normal economic conditions, we cannot predict such losses with certainty. The unprecedented volatility experienced in the financial and capital markets during the last several years makes this determination even more difficult as processes we use to estimate the allowance for loan losses may no longer be dependable because they rely on complex judgments, including forecasts of economic conditions that may not be accurate. As a result, we cannot be sure that our allowance is or will be adequate in the future. 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, 2014, commercial and industrial and commercial real estate mortgage loans comprise approximately 76.24% of our loan portfolio. 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.
Our profitability depends on interest rates and changes in monetary policy may impact us. Our results of operations depend to a large extent on our “net interest income,” which is the difference between the interest expense incurred in connection with our interest bearing liabilities, such as interest on deposit accounts, and the interest income received from our interest earning assets, such as loans and investment securities. 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. However, interest rate fluctuations, loan prepayments, loan production and deposit flows 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.
The market value of our investments could negatively impact stockholders’ equity. We have designated all of our investment securities portfolio (or 13.2% of total assets) at December 31, 2014 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, 2014, we had temporary unrealized losses in our available for sale portfolio of $147 thousand (net of taxes). As a result of the recent economic recession and the continued economic slowdown, several municipalities continue to report budget deficits and companies continue to report lower earnings. These 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.
Any future issuances of common stock in connection with acquisitions or otherwise could 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. Any such stock issuances would dilute your ownership interest in Old Line Bancshares and may dilute the per-share value of the common stock.
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, 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, 2014, we were able to lend approximately $17.4 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.
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. Current 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 face substantial competition which 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, have established customer bases, have greater financial resources and lending limits than we do, and are able to offer certain services that we are not able to offer. If we cannot attract deposits and make loans at a sufficient level, our operating results will suffer, as will our opportunities for growth.
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 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.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
As of December 31, 2014, we operate a total of 19 branch locations and six loan production offices. Our headquarters is located at 1525 Pointer Ridge Place, Bowie, Maryland in Prince George’s County. Pointer Ridge Office Investment, LLC, an entity in which we have an approximately $437 thousand investment and a 62.50% ownership interest, owns this property. Frank Lucente, a director of Old Line Bancshares, Inc. and Old Line Bank controls 12.50% of Pointer Ridge and controls the manager of Pointer Ridge. We also own the property and building located at 4201 Mitchellville Road, Bowie, Maryland, which we acquired in the acquisition of WSB Holdings. The net book value of the land, buildings, furniture, fixtures and equipment owned by us was $34.3 million at December 31, 2014.
During the second half of 2014, we took steps to realign branch offices within our footprint, which included the closing and consolidation of four branches on December 31, 2014. The branches closed were Crofton Centre, Lexington Park, Solomons and Waldorf Charles County Plaza. All of these branches had existing Old Line Bank branches within close proximity. The closings and consolidations are a result of an evaluation that measured near-term growth potential in the current locations as well as the Bank's ability to continue to service clients' needs at nearby locations.
(1)
Closed offices effective December 31, 2014.
Item 3.
Item 3. Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising out of our normal course of business. Currently, we are not involved in any legal proceedings the outcome of which, in management’s opinion, would be material to our financial condition or results of operations.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
			 		
PART II
Item 5.
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 (“NASDAQ”) 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.
At December 31, 2014, there were 10,810,930 shares of our common stock issued and outstanding held by approximately 467 stockholders of record. There were 393,162 shares of common stock issuable on the exercise of outstanding stock options, 323,562 of which were exercisable. The remaining shares are exercisable as follows:
Dividends
We have paid the following dividends on our common stock during the years indicated:
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.
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
We did not repurchase any of our securities during the three months ended December 31, 2014. As previously reported, on February 25, 2015, the board of directors approved the Company’s repurchase of up to 500,000 shares of its outstanding shares of common stock, and on March 4, 2015 the Company entered into a stock repurchase plan with a registered broker-dealer under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, pursuant to which the broker-dealer will have the authority to repurchase on the Company’s behalf up to 500,000 shares of its outstanding common stock through March 4, 2016, unless the repurchase plan is terminated earlier in accordance with its terms. Such stock repurchases, if and when commenced, may be suspended or discontinued at any time. Any repurchased shares of common stock will return to the status of authorized but unissued shares.
Item 6.
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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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.
(1)
See “Management’s Discussion and Analysis of Financial Condition and Results of Operating-Reconciliation of Non-GAAP Measures.”
Item 7.
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.
In an economic and regulatory climate that continues to present challenges for our industry, we are pleased to report our accomplishments during the year and continued profitability. Net income available to common stockholders was $7.1 million or $0.66 per basic and $0.65 per diluted common share for the year ending December 31, 2014 which represented a 9.04% decrease over the prior year’s net income available to common stockholders of $7.8 million.
The following highlights contain financial data and events that have occurred during 2014:
·
Net loans held-for-investment increased $79.3 million during the twelve months ended December 31, 2014, to $926.6 million at December 31, 2014, compared to $847.2 million at December 31, 2013, as a result of organic growth within our surrounding area.
·
Non-performing assets decreased 48.82% to 0.65% of total assets at December 31, 2014 compared to 1.27% at December 31, 2013 due primarily to the resolution of an impaired hospitality credit identified and specifically reserved for in the prior year.
·
Total deposits grew $41.4 million during the twelve months ending December 31, 2014. Non-interest bearing deposits increased $32.2 million, or 14.07%, during the twelve months ending December 31, 2014. Interest-bearing deposits grew $9.2 million, or 1.24%, during the twelve months ending December 31, 2014. Our interest-bearing non-maturity deposits increased $26.2 million, offsetting a $17.0 million decline in time deposits.
·
Net income was $7.1 million or $0.66 per basic and $0.65 per diluted share for the year ended December 31, 2014 compared to $7.8 million, or $0.87 per basic and $0.86 per diluted share, for 2013.
·
The provision for loan losses for the year ending December 31, 2014 was $2.8 million compared to $1.5 million for the year ending December 31, 2013, primarily due to one commercial/hotel loan that required an additional provision of $1.4 million to reserve for a loss on the property. The property was sold at foreclosure and settled in September 2014.
·
The net interest margin was 4.15% during 2014 compared to 4.53% for 2013. The net interest margin in 2013 benefited from a higher level of accretion on acquired loans due to early payoffs on acquired loans with credit marks. Re-pricing in the loan portfolio and lower yields on new loans also caused the average loan yield to decline.
·
Total assets at December 31, 2014 increased by $60.3 million, or 5.17%, from December 31, 2013.
·
For the twelve months ended December 31, 2014, Return on Average Assets (ROAA) and Return on Average Equity (ROAE) were 0.60% and 5.45%, respectively, compared to ROAA and ROAE of 0.74% and 7.80%, respectively, for the twelve months ended December 31, 2013.
·
We ended 2014 with a book value of $12.51 per common share and a tangible book value of $11.38 per common share compared to $11.71 and $10.50, respectively, at December 31, 2013.
·
We maintained strong liquidity and by all regulatory measures remained “well capitalized”.
Additionally, the following branch developments occurred during 2014:
·
At December 31, 2014, we took steps to realign branch offices within our footprint, which included the closing and consolidation of four branches. The branches closed were Crofton Centre, Lexington Park,
Solomons and Waldorf Charles County Plaza. All of these branches had existing Old Line Bank branches within close proximity. The planned closings and consolidations are a result of an evaluation that measured near-term growth potential in the current locations as well as the Bank's ability to continue to service clients' needs at nearby locations. The closing of these branches will result in an estimated pre-tax cost savings of approximately $1.6 million in 2015.
Strategic Plan
We have based our strategic plan on the premise of enhancing stockholder value and growth through branching and operating profits. Our short term goals include collecting payments on non-accrual and past due loans, profitably disposing of certain acquired loans and other real estate owned, enhancing and maintaining credit quality, maintaining an attractive branch network, expanding fee income, generating extensions of core banking services, and using technology to maximize stockholder value. During the past few years, we have expanded organically in Montgomery County, Prince George’s County and Anne Arundel County, Maryland.
We use the Internet and technology to augment our growth plans. Currently, we offer our customers image technology, Internet banking with on line account access and bill 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 take advantage of strategic opportunities presented to us via mergers occurring in our marketplace. For example, we may purchase branches that other banks close or lease branch space from other banks or hire additional loan officers. We also continually evaluate and consider opportunities with financial services companies or institutions with which we may become a strategic partner, merge or acquire such as we have done with Maryland Bankcorp and WSB Holdings.
Although the current economic climate continues to present significant challenges for our industry, we have worked diligently towards our goal of becoming the premier community bank in the Washington, D.C. market, resulting in increased penetration into the Charles, Prince George’s, Anne Arundel and Montgomery County markets. While we are uncertain about the pace of economic growth or the impact of the current political environment, and we believe that sluggish employment growth and growing national debt will continue to dampen the economic climate, we remain cautiously optimistic that we have identified any problem assets, that our remaining borrowers will stay current on their loans and that we can continue to grow our balance sheet and earnings. We believe that we are well positioned to capitalize on the opportunities that may become available in the current economy as well as a healthier economy.
If the Federal Reserve maintains the federal funds rate at current levels and the economy remains stable, we believe that we can continue to grow total loans and deposits during 2015. We also believe that we will be able to maintain a strong net interest margin during 2015. As a result of this growth and expected continued strength in the net interest margin, we expect that net interest income will continue to increase during 2015, although there can be no guarantee that this will be the case.
We also expect that salaries and benefits expenses and other operating expenses will continue to be higher in 2015 than they were in 2014 due to increase staff as we expand. We will continue to look for opportunities to reduce expense as we did with the closing of four branches in 2014. We believe with our remaining 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.
Mergers and Acquisitions.
WSB Holdings, Inc. On May 10, 2013, Old Line Bancshares acquired WSB Holdings, the parent company of The Washington Savings Bank, F.S.B. We converted each share of common stock of WSB Holdings into the right to receive, at the holder’s election, $6.0743 in cash or 0.557 shares of Old Line Bancshares’ common stock. We paid cash for any fractional shares of Old Line Bancshares’ common stock and aggregate cash consideration of $17.0 million. The
total merger consideration was $54.7 million based on trading prices of Old Line Bancshares’ common stock at the time of the merger.
In accordance with accounting for business combinations, during the second quarter of 2013, we recorded the acquired assets and liabilities of WSB at their estimated fair value on May 10, 2013, the acquisition date. The determination of the fair value of the loans caused a significant write down in the value of certain loans, which we assigned to an accretable or non-accretable discount. We recognize the accretable discount as interest income over the remaining term of the loan. The non-accretable discount will be adjusted based on subsequent increases or decreases to the expected cash flows and will result in either an increase to accretion income or provisions for loan losses, respectively. The accretion of the loan marks, along with other fair value adjustments, favorably impacted our net interest income by $83 thousand and $682 thousand for the twelve months ended December 31, 2014 and 2013, respectively.
In conjunction with the merger, we also recorded the deposits acquired at their fair value and recorded a core deposit intangible of $2.4 million. The amortization of this intangible asset decreased net income by $276 thousand and $180 thousand for the years ended December 31, 2014 and 2013, respecctively.
The former WSB franchise is currently operating under the Old Line Bank name.
Maryland Bankcorp, Inc. On April 1, 2011, Old Line Bancshares acquired Maryland Bankcorp, the parent company of Maryland Bank & Trust Company, N.A. We converted each share of common stock of Maryland Bankcorp into the right to receive, at the holder’s election, $29.11 in cash or 3.4826 shares of Old Line Bancshares’ common stock. We paid cash for any fractional shares of Old Line Bancshares’ common stock and aggregate cash consideration of $1.0 million. The total merger consideration was $18.8 million.
In accordance with accounting for business combinations, we recorded the acquired assets and liabilities of Maryland Bankcorp at their estimated fair value on April 1, 2011, the acquisition date. The determination of the fair value of the loans caused a significant write down in the value of certain loans, which we assigned to an accretable or non-accretable discount. We will recognize the accretable discount as interest income over the remaining term of the loan. The non-accretable discount will be adjusted based on subsequent increases or decreases to the expected cash flows and will result in either an increase to accretion income or provisions for loan losses, respectively. The accretion of the loan marks, along with other fair value adjustments, related to MB&T favorably impacted our net interest income by $838 thousand, $2.8 million and $3.4 million for the years ended December 31, 2014, 2013 and 2012, respectively.
In conjunction with the merger, we also recorded the deposits acquired at their fair value and recorded a core deposit intangible of $5.0 million. The amortization of this intangible asset decreased net income by $591 thousand, $659 thousand and $727 thousand for the years ended December 31, 2014, 2013 and 2012, respectively.
The former MB&T franchise is currently operating under the Old Line Bank name.
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.
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 and WSB Holdings. 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 and ten years for WSB Holdings 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, 2014, our annual test date, and determined that no impairment charge was necessary. Fair value of the reporting unit in 2014 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, 2014 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 (US GAAP) requires that the acquisition method of accounting, formerly referred to as purchase method, be used for all business combinations and that an acquirer be identified for each business combination. Under US GAAP, the acquirer is the entity that obtains control of one or more businesses in the business combination, and the acquisition date is the date the acquirer achieves control. US GAAP requires that the acquirer recognize the fair value of assets acquired, liabilities assumed, and any 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 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.
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.
Average Balances, Interest and Yields
(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.
			 		
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.
(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 2014 due to a lower level of payoffs on acquired loans with positive accretion as compared to payoffs in 2013. The fair value accretion increased the net interest margin as follows:
Comparison of Operating Results for the Years Ended December 31, 2014 and 2013
Net Interest Income. Net interest income before provision for loan losses for the year ended December 31, 2014 increased $1.6 million or 4.11% to $41.7 million from $40.1 million for the year ended December 31, 2013. As discussed below and outlined in detail in the Rate/Volume Analysis, these changes were the result of a decline in interest paid on interest bearing liabilities and growth in average interest earning assets, partially offset by a decrease in the average yield on interest earning assets.
A continuing competitive rate environment and a low prime rate resulted in decreases in both the rate paid on interest bearing liabilities and the yield on interest earning assets. Although this caused low market yields that continue to negatively impact net interest income, the relatively stable rate environment has allowed us to continue to adjust the mix and volume of interest earning assets and liabilities on the balance sheet.
We offset the effect on net interest income caused by the low rate environment primarily by growing total average interest earning assets $120.9 million or 13.07% to $1.0 billion for the year ended December 31, 2014 from $925.4 million for the year ended December 31, 2013. The growth in average interest earning assets derived from a $133.4 million increase in average total loans offsetting a decrease of $11.8 million in average investment securities. The growth in net interest income that derived from the increase in total average interest earning assets aided growth in average interest bearing liabilities. The growth in average interest bearing liabilities resulted primarily from the $74.1 million increase in average interest bearing deposits, which increased to $766.0 million for the year ended December 31, 2014 from $691.8 million for the year ended December 31, 2013.
The growth in both average interest earning assets and average interest bearing deposits was primarily a result of the acquisition of WSB in May 2013, and we also saw strong organic growth in both interest earning assets and interest bearing deposits.
Our net interest margin was 4.15% for the year ended December 31, 2014 compared to 4.53% for the year ended December 31, 2013. The yield on average interest earning assets decreased 46 basis points during the 12-month period from 4.98% for the year ended December 31, 2013 to 4.52% for the year ended December 31, 2014. This decrease was primarily due to lower accretion on acquired loans with credit marks and re-pricing in the loan portfolio and lower yields on new loans. This decrease was partially offset by a 9 basis point decline in the rate paid on interest bearing liabilities. 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 3 basis points from 32 basis points in the prior year. The net interest margin in 2013 benefited from a higher level of accretion on acquired loans due to early payoffs on acquired loans with credit marks.
The decline in the yield on interest bearing liabilities was the result of a decline in rates paid on savings and other time deposits as well as an improvement in the mix of interest bearing liabilities. The accretion of fair value adjustments on certificates of deposits acquired from MB&T and WSB also slightly reduced the yield paid on other time deposits.
Non-interest bearing deposits are a primary source of funding for our investment and loan portfolios. These deposits allow us to fund growth in interest earning assets at minimal cost. This was also a significant contributor to the improvement in the net interest margin as it allowed us to increase our level of interest earning assets, which allowed us to increase interest income without a corresponding increase in interest bearing liabilities and interest expense.
Our average deposits increased during the twelve months ended December 31, 2014 primarily due to an increase in average interest bearing deposits, which increased $74.1 million to $766.0 million during the twelve months ended December 31, 2014 from $691.8 million during the twelve months ended December 31, 2013. Our non-interest bearing deposits, which increased $28.6 million to $241.5 million during the twelve months ended December 31, 2014 from $212.9 million during the twelve months ended December 31, 2013. The increase in our average deposits is primarily due to organic growth generated from our enhanced presence in our primary market and the surrounding areas as a result of our marketing efforts and continued efforts of our cash management and Financial Services Team. To a lesser extent, the inclusion in the average of WSB’s deposits for a full year, compared to only eight months for the period ending December 31, 2013, also impacted the average balance of our deposits.
Provision for loan losses. Provision for loan losses totaled $2.8 million for the year ended December 31, 2014 an increase of $1.3 million, or 87.97% from the 2013 amount of $1.5 million. Management identified probable losses in the loan portfolio and recorded charge-offs of $3.6 million for the year ended December 31, 2014, compared to $820 thousand for the year ended December 31, 2013. Recoveries of $115 thousand were recognized in 2014 compared to $280 thousand in 2013. The primary reason for the increase in charge-offs and hence the increase in the provision for loan losses during 2014 was a $2.7 million charge-off for one commercial/hotel loan that was sold at foreclosure in the third quarter of 2014. This loss had been fully reserved for under a specific reserve for this impaired loan at June 30, 2014 and no additional loss
was recognized. This charge-off impacted our historical loss factors used to determine our allowance for loan losses.
Following the $2.7 million charge-off during 2014, we refined the methodology we use to estimate our allowance for loan losses to segregate our hospitality loans, previously combined into one category, into three separate categories based on the type of properties and the charge-off was applied to our loss history in the specific hospitality category that it related to. The result of this change in methodology was an increase in the general reserve portion of our allowance for loan losses, an increase mainly caused by the charge-off discussed above. We believe that this revised methodology will assist us in reserving at the proper allowance level going forward.
The allowance for loan losses to gross loans held-for-investment was 0.46%, and the allowance for loan losses to non-accrual loans was 82.23%, at December 31, 2014.
Non-Interest Income. Non-interest income totaled $6.0 million for the year ended December 31, 2014, a decrease of $2.9 million or 32.84% from the 2013 amount of $8.9 million. Non-interest income for the years ended December 31, 2014 and 2013 are as follows:
Non-interest income for the years ended December 31, 2014 and 2013 included fee income from service charges on deposit accounts, gain on sales or calls of investment securities, earnings on bank owned life insurance, loss on disposal of assets, rental income, gain on the sale of loans and other fees and commissions including revenues with respect to Pointer Ridge. The primary reason for the decrease in non-interest income was decreases in gain on the sale of loans and to a lesser extent in the gain on sale of investment securities, offsetting increases in service charges on deposit accounts, earnings on bank owned life insurance, rental income and other fees and commissions.
Gain on the sale of loans decreased $3.1 million to $772 thousand for the year ending December 31, 2014 from $3.9 million for the year ending December 31, 2013 due to the 2013 fourth quarter sale of impaired loans that we acquired in our previous mergers with MB&T and WSB, which resulted in a $3.4 million gain on the sale of loans. Gain on the sale of loans also includes gains on the sale of residential mortgage loans sold in the secondary market. The gain on sale of loans related to residential mortgage loans sold in the secondary market was $481 thousand for the year ending December 31, 2013. The increase is due to a full year of mortgage operations in 2014 as it was acquired in the WSB merger in May 2013.
Gain on sales or calls of investment securities decreased during 2014 because we sold a lower dollar amount of securities during the year ending December 31, 2014 as compared to the same twelve months of 2013. We sold securities in 2014 and 2013 in order to reallocate our holdings in the investment portfolio and minimize future prepayment risk. The sold securities in 2013 were primarily investments that were acquired in the WSB Holdings acquisition.
The $148 thousand increase in earnings on bank owned life insurance is the result of the full year of earnings on the approximately $13.0 million of bank owned life insurance acquired in the WSB Holdings merger in May 2013 compared to eight months of such earnings during 2013. The $296 thousand increase in service charges on deposit accounts is due to the increase in our deposits. Other fees and commissions increased $256 thousand in 2014 compared to 2013 primarily due to fees collected on our marketable loans and letter of credit fees. Rental income increased as a
result of the receipt of a full year of rent on space occupied by tenants at the office space located at 4201 Mitchellville Road, Bowie, Maryland that was acquired in the WSB Holdings merger, partially offset by there being less rentable space in this building as we utilized space that had previously been rented out. We have since vacated this space and will have more rentable space in 2015 and therefore expect modest increased in rental income during 2015. Loss on the disposal of assets decreased for 2014 compared to 2013 as we disposed of certain assets in connection with the WSB merger in 2013 that we did not experience in 2014. Pointer Ridge rent and other revenue decreased $106 thousand as a result of space that was previously rented out and was vacated. We will be utilizing some of this space for Bank staff in the future.
We had a $97 thousand gain on the sale of stock during the year ended December 31, 2014. We did not have any stock sales in 2013. This was a one-time gain on the sale of Student Loan Marketing Association (SLMA) stock valued at approximately $262 thousand that we acquired in the acquisition of MB&T. Therefore, we do not expect to have similar gains in future periods.
Non-Interest Expenses. Non-interest expense decreased $1.0 million or 2.86% for the year ended December 31, 2014 compared to the year ended December 31, 2013. The following chart outlines the changes in non-interest expenses for the period.
The reduction in non-interest expenses in 2014 as compared to 2013 was mainly attributable to decreases in merger and integration expenses, and to a lesser extent, an increase in the gain on sale of other real estate owned “OREO”, decreased OREO expense and a decrease in Pointer Ridge other operating expenses, offsetting the increases in salaries and benefits, occupancy and equipment, other operating expenses. Merger and integration expenses decreased $3.5 million, or 99.17%, during the year ended December 31, 2014 compared to the same period in 2013 as a result of the expenses we incurred during 2013 in connection with the acquisition of WSB Holdings in May 2013, primarily related to legal fees, investment banker fees and termination and de-conversion charges associated with the termination of WSB’s core data processing contract; the merger and integration expenses during 2014 were also related to the WSB merger.
Gain on the sale of other real estate owned was $698 thousand during the year ended December 31, 2014 compared to a gain of $145 thousand during 2013; we sold 13 foreclosed properties during 2014 compared to nine foreclosed properties during 2013. The gain recognized during 2014 is primarily due to a gain of $807 thousand on nine properties offsetting a $109 thousand loss on four properties. The gain recognized during 2013 is primarily due to a gain of $384 thousand on five properties offsetting a $239 thousand loss on four properties. We expect that the sale of these properties will reduce future legal and maintenance costs.
Cost associated with OREO expense, which includes taxes, maintenance and insurance related to OREO properties, decreased $285 thousand in 2014 compared to the same period of the prior year due to fewer OREO properties in our portfolio as a result of the sales discussed above.
Salaries and benefits increased by $1.2 million, or 7.30%, during the year ended December 31, 2014 when compared to the year ended December 31, 2013 primarily as a result of a full year of salaries and benefits for employees
added in the WSB Holdings merger, as well as severance payments totaling $793 thousand due to the WSB Holdings merger and branch closings. The cost of health insurance benefits also increased in 2014 compared to 2013 due to an increase in insurance rates and such expenses for a full year in 2014 associated with the acquisition of WSB Holdings.
Occupancy and equipment expenses increased $915 thousand or 17.10% during the year ended December 31, 2014 compared to 2013 primarily as a result of $462 thousand incurred during 2014 as a result of expenses associated with the closing of four branches.
Other operating expenses increased $1.0 million during the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily as a result of approximately $275 thousand in foreclosure expenses, $182 thousand in internal audit expense as a result of our increase in size and complexity as well as additional regulatory requirements and $76 thousand in marketing and advertising. In addition, FDIC insurance and State of Maryland assessments increased as a result of the increase in deposits.
Network services increased $161 thousand and telephone expense increased $103 thousand for the twelve months ending December 31, 2014 compared to the year ending December 31, 2013 due to a full year of such expenses in 2014 associated with the acquisition of WSB Holdings.
Income Taxes. Income tax expense was $2.7 million (27.53% of pre-tax income) for the year ended December 31, 2014 compared to $3.6 million (31.74% of pre-tax income) for 2013. Taxes were lower in 2014 period primarily because income decreased and a higher exclusion of certain income related to tax-exempt interest on certain commercial real estate loans and BOLI.
Net Income Available to Common Stockholders. Net income available to common stockholders was $7.1 million or $0.66 per basic and $0.65 per diluted common share for the year ending December 31, 2014 compared to net income available to common stockholders of $7.8 million or $0.87 per basic and $0.86 per diluted common share for the same period in 2013. The decrease in net income available to common stockholders for 2014 was primarily the result of decreases of $2.9 million in non-interest income, offsetting the $320 thousand increase in net interest income after provision for loan losses and the decrease of $1.0 million in non-interest expenses.
Comparison of Operating Results for the Years Ended December 31, 2013 and 2012
Net Interest Income. Net interest income before provision for loan losses for the twelve months ended December 31, 2013 increased $6.9 million or 20.79% to $40.1 million from $33.2 million for the same period in 2012. As discussed below, these changes were the result of a decline interest paid on interest bearing liabilities and growth in average interest earnings assets. The increase in the accretion of the fair value adjustments on loans and time deposits had a favorable impact on net interest income as compared to 2012 and was a result of the WSB acquisition.
A competitive rate environment and a low prime rate have resulted in decreases in both the rate paid on interest bearing liabilities and the yield on interest earning assets during 2013 compared to 2012.
We offset the effect on net interest income caused by the low rate environment primarily by growing total average interest earning assets $183.4 million or 24.72% to $925.4 million for the year ended December 31, 2013 from $742.0 million for the year ended December 31, 2012. The growth in average interest earning assets derived from a $178.9 million increase in average total loans and a $10.4 million increase in average investment securities. The growth in net interest income that derived from the increase in total average interest earning assets was partially offset by growth in average interest bearing liabilities. The growth in average interest bearing liabilities resulted primarily from the $153.9 million increase in average interest bearing deposits which increased to $691.8 million for the year ended December 31, 2013 from $537.9 million for the year ended December 31, 2012.
The growth in both average interest earning assets and interest bearing deposits was primarily a result of the acquisition of WSB in May 2013, but as with the year ending December 31, 2012, we also saw strong organic growth in both interest earning assets and interest bearing deposits.
Our net interest margin was 4.53% for the year ended December 31, 2013 compared to 4.65% for the year ended December 31, 2012. The yield on average interest earning assets decreased 36 basis points during the 12-month period from 5.34% for the year ended December 31, 2012 to 4.98% for the year ended December 31, 2013. This decrease was primarily because the lower prime rate and competitive rate environment caused a lower average rate on loans and securities. This decrease was partially offset by a 32 basis point decline in the rate paid on interest bearing liabilities, however, fair value accretion actually decreased to 37 basis points from 46 basis points in the prior year.
Re-pricing in the loan portfolio and slightly lower yields on our new loans also caused the average loan yield to decline. The decline in the yield on interest bearing liabilities was the result of a decline in rates paid on savings and other time deposits as well as an improvement in the mix of interest bearing liabilities. The accretion of fair value adjustments on certificates of deposits acquired from MB&T and WSB also slightly reduced the rate paid on other time deposits.
During 2013, we continued to successfully collect payments on acquired loans that we had recorded at fair value according to ASC 310-20 and ASC 310-30, albeit at a lower dollar value during the 2013 period than we accomplished during the same period of 2012. These payments were a direct result of our efforts to negotiate payments, sell notes or foreclose on and seek collateral after the acquisition date. This decrease is primarily due to a lower dollar value of impaired loans that we acquired from MB&T that was repaid during the year ending December 31, 2013 relative to the same period of 2012, which caused a slightly lower accretion of the fair value adjustment on purchased credit impaired loans.
Non-interest bearing deposits are a primary source of funding for our investment and loan portfolios. These deposits allow us to fund growth in interest earning assets at minimal cost. As a result of the WSB acquisition and growth generated from our legacy branch network, our average non-interest bearing deposits increased $13.4 million to $212.9 million during the twelve months ended December 31, 2013 compared to $199.6 million during the 12 months ended December 31, 2012. This was also a significant contributor to the improvement in the net interest margin as it allowed us to increase our level of interest earning assets, which allowed us to increase interest income without a corresponding increase in interest bearing liabilities and interest expense.
Provision for loan losses. Provision for loan losses for the year ended December 31, 2013 decreased $21 thousand, remaining at $1.5 million in both the years ended December 31, 2013 and 2012. Management identified probable losses in the loan portfolio and recorded charge-offs of $820 thousand for the year ended December 31, 2013, compared to $1.5 million for the year ended December 31, 2012. Recoveries of $280 thousand were recognized in 2013 compared to $222 thousand in 2012. The allowance for loan losses to gross loans held-for-investment was 0.58%, and the allowance for loan losses to non-accrual loans was 60.71%, at December 31, 2013. Additionally, as further discussed in our Annual Report on Form 10-K for the year ended December 31, 2013, we revised our allowance for loan losses methodology during the fourth quarter of 2013, which resulted in a lower indicated general reserve.
Non-Interest Income. Non-interest income totaled $8.9 million for the year ended December 31, 2013, an increase of $5.2 million or 139.21% from the 2012 amount of $3.7 million. Non-interest income for the years ended December 31, 2013 and 2012 are as follows:
Non-interest income for the year ended December 31, 2013 and 2012 included fee income from service charges on deposit accounts, gain on sales or calls of investment securities, earnings on bank owned life insurance, rental income
and other fees and commissions including revenues with respect to Pointer Ridge. The year ended December 31, 2013 also included a loss on the disposal of assets and a gain on the sale of loans. The primary reason for the increase in non-interest income was increases in gain on the sale of loans, rental income, earnings on bank owned life insurance, service charges on deposit accounts and other fees and commissions, offsetting the decrease in gains on sale of investment securities and loss on disposal of assets.
Net gain of $3.9 million on the sale of loans is primarily attributable to the net gain of $3.4 million earned on the sale of $22.6 million of loans in the fourth quarter of 2013 consisting of impaired loans acquired from previous mergers with MB&T and WSB. This disposal was conducted through brokered sale transactions and included approximately $12.0 million of loans that were over 90 days past due. The remaining $481 thousand of the gain on sale of loans is a result of gains recorded on loans originated in our residential mortgage origination department and sold in the secondary market.
The $292 thousand increase in earnings on bank owned life insurance is the result of the acquisition of approximately $13.0 million of bank owned life insurance in the recent WSB merger. The $327 thousand increase in service charges on deposit accounts is due to the increase in our deposits primarily as a result of the WSB acquisition. Other fees and commissions increased $1.3 million in 2013 compared to 2012 primarily due to fees collected on our marketable loans and fees collected from Old Line Financial Services. Rental income increased as a result of rent received on space occupied by tenants at the office space located at 4201 Mitchellville Road, Bowie, Maryland that was acquired in the WSB merger. Gain on sales or calls of investment securities decreased during the period because we sold a lower dollar amount of securities during the year ending December 31, 2013 as compared to the same twelve months of 2012. We elected to sell the securities in 2012 in order to reallocate our holdings in the investment portfolio and minimize future prepayment risk. Loss on the disposal of assets of $104,639 during 2013 is the result of our closing the Old Line Centre branch in March 2013 and the disposal of certain assets in connection with the WSB Holdings merger.
Non-Interest Expense. Non-interest expense increased $10.9 million or 43.38% for the year ended December 31, 2013 compared to the year ended December 31, 2012. The following chart outlines the changes in non-interest expenses for the period.
The growth in non-interest expenses in 2013 as compared to 2012, was mainly attributable to increases in merger and integration expenses, data processing expenses, salaries and benefits, occupancy and equipment expenses and other operating expenses as well as an increase in other real estate owned (“OREO”) expenses. Merger and integration expenses increased $3.0 million, or 647.12%, during the year ended December 31, 2013 compared to the same period in 2012 as a result of the acquisition of WSB Holdings. These expenses were primarily related to expenses associated with the termination of WSB’s core data processing contract and legal fees, investment banking fees and severance payments in connection with the merger. Data processing increased $553 thousand, or 63.54%, as a result of additional monthly expenses for WSB’s core banking processor.
Salaries and benefits increased by $4.6 million, or 38.04%, during the year ended December 31, 2013 when compared to the year ended December 31, 2012 primarily as a result of the additional staff acquired as a result of the WSB merger, and to a lesser extent, the additional staff for the Montgomery County lending team hired during the first quarter of 2013 and the Old Line Financial Services group that was hired during 2012. Also, during the first quarter of 2013, we added an Executive Vice President who, as expected, has enhanced our core operational capabilities. The cost of health insurance benefits also increased in 2013 compared to 2012 as a result of an increase in insurance rates and the increased staff.
Occupancy and equipment expenses increased $1.7 million or 45.18% during the year ended December 31, 2013 compared to the same period in 2012 primarily due to the additional lease and depreciation expense for the acquired WSB branches and the acceleration of the remaining lease expense for the Old Line Centre branch that we closed on March 29, 2013.
Other operating expenses increased $1.3 million during the year ended December 31, 2013 compared to the year ended December 31, 2012, primarily as a result of an approximately $316 thousand increase in network services associated with the expansion of our network as a result of the WSB Holdings merger and a $160 thousand increase in internal audit expense as a result of the agreement we signed with a third party to enhance our internal audit function. In addition, FDIC insurance and State of Maryland assessments increased as a result of the increase in deposits due to the WSB merger.
Gain on the sale of other real estate owned was $145 thousand during the year ended December 31, 2013 compared to a gain of $111 thousand during 2012. The gain recognized during 2013 is primarily due to a gain of $384 thousand on five properties offsetting a $239 thousand loss on four properties. The gain recognized in 2012 was due to one property for which we recorded a $183 thousand gain offset by losses on three other properties. We expect that the sale of these properties will reduce future legal and maintenance costs. Other real estate owned expenses increased in 2013 compared to 2012 as a result of additional expenses related to other real estate owned that we acquired in the WSB acquisition and therefore did not own in 2012.
Income Taxes. Income tax expense was $3.6 million (31.74% of pre- tax income) for the year ended December 31, 2013 compared to $2.7 million (26.71% of pre-tax income) for the same period in 2012. The increase in the effective tax rate was related to approximately $750 thousand of non-deductible items due to the WSB acquisition and because income before taxes increased compared to the twelve months ended December 31, 2012.
Net Income Available to Common Stockholders. Net income available to common stockholders was $7.8 million or $0.87 per basic and $0.86 per diluted common share for the year ending December 31, 2013 compared to net income available to common stockholders of $7.5 million or $1.10 per basic and $1.09 per diluted common share for the same period in 2012. The increase in net income available to common stockholders for 2013 was primarily the result of increases of $6.9 million in net interest income and $5.2 million in non-interest income. These increases were partially offset by a $10.9 million increase in non-interest expenses. Basic and diluted earnings per common share decreased for the year ended December 31, 2013 compared to the prior year as a result of the increases of 2.9 million shares of common stock issued to former WSB stockholders in the WSB acquisition and 936,695 shares issued in the private placement resulting in additional paid in capital of $49.8 million.
Comparison of Financial Condition at December 31, 2014 and 2013
Investment Securities. Our portfolio consists primarily of time deposits in other banks, investment grade securities including U.S. Treasury securities, U.S. government agency securities, U.S. government sponsored entity securities, securities issued by states, counties and municipalities, mortgage backed securities, and certain equity securities (recorded at cost), including Federal Reserve Bank stock, Federal Home Loan Bank stock, Maryland Financial Bank stock, and Atlantic Central Bankers Bank stock. Old Line Bank was a member of the Federal Reserve System and its primary federal regulator was the Federal Reserve Board. On March 6, 2015, Old Line Bank, cancelled its stock in the Federal Reserve Bank of Richmond, thus terminating its status as a member of the Federal Reserve System.
With the acquisition of MB&T, we acquired approximately $262 thousand of SLMA stock, which we sold in the first quarter of 2014 at a net gain of $97 thousand. Also during the second quarter of 2014, we repositioned our investment portfolio and sold investments that had lower yields and extended life durations. As part of this repositioning, we sold
$11.0 million in our mortgage-backed securities (MBS) and agency callable portfolio and reinvested $11.0 million in seasoned agency 15 year MBS and recorded a gain of $112 thousand. We also sold $15.9 million of our municipal bonds and recorded a gain of $18 thousand in the second quarter of 2014. The funds received in the sale of the municipal bonds were used for new loan originations. 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. We account for investment securities when classified in the held to maturity category at amortized cost. Although we will occasionally sell a security, generally, we invest in securities for the yield they produce and not to profit from trading the securities. We continually evaluate 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 investment securities at December 31, 2014 amounted to $161.7 million, a decrease of $10.5 million, or 6.10%, from the December 31, 2013 amount of $172.2 million. As outlined above, at December 31, 2014, all securities were classified as available for sale. The decrease is the result of the above mentioned sales.
The fair value of available for sale securities included net unrealized losses of $243 thousand at December 31, 2014 (reflected as unrealized losses of $147 thousand in stockholders’ equity after deferred taxes) as compared to net unrealized losses of $5.7 million ($3.4 million net of taxes) at December 31, 2013. In general, the increase in fair value was a result of changes in the duration or maturity of the portfolio and decreasing market interest rates. 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 is 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.
			 		
The following table shows the maturities for the securities portfolio at December 31, 2014:
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 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.
Loans. Net of allowance, unearned fees and origination costs, loans held for investment increased $79.3 million or 9.37% to $926.6 million at December 31, 2014 from $847.2 million at December 31, 2013. Commercial real estate loans increased by $66.4 million, residential real estate loans by $6.4 million, and commercial and industrial loans by $7.2 million and consumer loans decreased $1.6 million from their respective balances at December 31, 2013. The loan growth during the year was primarily due to new originations within our surrounding market area, primarily in our commercial real estate and construction permanent loan portfolios.
Most of our lending activity occurs within the state of Maryland within the suburban Washington, D.C. market area in Anne Arundel, Calvert, Charles, Montgomery, Prince George’s and St. Mary’s Counties. The majority of our loan portfolio consists of commercial real estate loans and commercial and industrial loans.
We made certain reclassifications to the loan portfolio in 2013 and the below presents the current classification for 2014 and 2013. Years ending December 31, 2012, 2011 and 2010 are presented to conform to the loan classifications at that time.
Major classifications of loans held for investment are as follows:
(1)
As a result of the acquisitions of Maryland Bankcorp, the parent company of MB&T, in April 2011 and of WSB Holdings, the parent company of WSB, in May 2013, we have segmented the portfolio into two components, loans originated by Old Line Bank (legacy) and loans acquired from MB&T and WSB (acquired).
The following table presents the maturities or re-pricing periods of loans outstanding at December 31, 2014:
Bank owned life insurance. We have invested $31.4 million in life insurance policies on our executive officers, other officers of the Bank, retired officers of MB&T and former officers of WSB at December 31, 2014. We anticipate that the earnings on these policies will help offset to our employee benefit expenses as well as our obligations under our Salary Continuation Agreements and Supplemental Life Insurance Agreements that we entered into with our executive officers in January 2006 as well as that MB&T and WSB had entered into with their executive officers. During 2014, the cash surrender value of the bank owned life insurance policies increased by $853 thousand as a result of earnings on these policies. There are no post-retirement death benefits associated with the BOLI policies owned by Old Line Bank prior to the acquisitions of MB&T and WSB. We have accrued a $235 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.
Terminated pension plan. MB&T had an employee pension plan that was frozen on June 9, 2003 and no additional benefits accrued subsequent to that date. We notified all plan participants that we terminated this plan effective August 1, 2011. We liquidated the securities the plan held, deposited the proceeds into interest bearing certificates of deposit and a money market account. On October 1, 2012, we purchased an annuity contract to transfer the remaining $2.1 million pension liability, effective November 1, 2012. In the fourth quarter of 2012, we recorded a $701 thousand
expense for the termination of this plan and reversed a deferred tax liability with a credit to income tax payable in the amount of $406 thousand. We transferred the remaining pension plan assets of $235 thousand to the employee 401(k) plan and recorded all remaining expenses associated with audits, actuarial and consulting fees to the plan. There were no charges related to the pension plan for the years ended December 31, 2014 and 2013.
Other real estate owned. As a result of the acquisitions of MB&T and WSB, we have segmented the other real estate owned into two components, real estate obtained as a result of loans originated by Old Line Bank (legacy) and other real estate acquired from MB&T and WSB or obtained as a result of loans originated by MB&T and WSB (acquired). We are currently aggressively either marketing these properties for sale or improving them in preparation for sale. During the year ended December 31, 2014, we sold 13 properties and recorded net gains on these sales of $698 thousand.
The following outlines the transactions in other real estate owned during the period.
Goodwill and Core Deposit Intangible. At December 31, 2014, goodwill was $7.8 million and consisted of $633,790 related to the MB&T acquisition in April 2011 and $7.2 million related to the WSB acquisition in May 2013.
As a result of the acquisitions of MB&T and WSB, we recorded core deposit intangibles of $7.4 million. This amount represented the premium that we paid to acquire MB&T and WSB’s 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 and WSB’s over its estimated useful life of ten years. At December 31, 2014, the core deposit intangible was $4.4 million as compared to $5.3 million at December 31, 2013.
Deposits. At December 31, 2014, the deposit portfolio had increased to $1.0 billion, a $41.4 million or 4.25% increase over the December 31, 2013 level of $974.4 million. Non-interest bearing deposits increased $32.2 million during the year to $260.9 million from $228.7 million at December 31, 2013. Interest bearing deposits rose $9.2 million to $754.8 million at December 31, 2014 from $745.6 million at December 31, 2013. Our interest-bearing non-maturity deposits increased $26.2 million offsetting a $17.0 million decline in our time deposits. These increases are due to our enhanced presence in our primary market and surrounding areas as a result of our marketing efforts as well as the continued efforts of our cash management and financial services teams. The following table outlines the growth in interest bearing deposits during 2014:
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, 2014, we had $40.6 million in CDARS and $85.3 million
in money market accounts through Promontory’s reciprocal deposit program compared to $27.4 million and $74.8 million, respectively, at December 31, 2013.
During 2013, we acquired $18.0 million in brokered certificates of deposit in the WSB acquisition. We did not obtain any additional brokered certificate of deposits during the year ended December 31, 2014. We expect that we will continue to use brokered deposits as an element of our funding strategy when required to maintain an acceptable loan to deposit ratio.
The following is a summary of the maturity distribution of certificates of deposit as of December 31, 2014.
Borrowings. Our borrowings consist of unsecured short-term promissory notes, securities sold under agreements to repurchase, a long-term senior note and, from time to time, advances from the Federal Home Loan Bank of Atlanta (FHLB). At December 31, 2014, borrowings totaled $67.0 million, an increase of $11.4 million from December 31, 2013. The increase was due to FHLB overnight advances, offsetting the decrease in our short-term promissory notes and repurchase agreements. The borrowings were used to fund new loan originations.
The following is a summary of our short-term and long-term borrowing at December 31, 2014, 2013 and 2012:
The Bank previously sold short term promissory notes to its customers. These notes re-priced daily and had maturities of 270 days or less. This program terminated in 2014. 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.
The senior note listed under long-term borrowings is an obligation of Pointer Ridge. It has a ten-year fixed interest rate of 6.28% and matures on September 5, 2016.
Old Line Bancshares has available a $5.0 million unsecured line of credit. In addition, Old Line Bank has available lines of credit, including overnight federal funds and repurchase agreements from its correspondent banks, totaling $24.5 million at December 31, 2014 and December 31, 2013. Old Line Bank has an additional secured line of credit from the FHLB of $326.8 million at December 31, 2014. As a condition of obtaining the line of credit from the FHLB, the FHLB requires that Old Line Bank purchase shares of capital stock in the FHLB. Prior to allowing Old Line Bank to borrow under the line of credit, the FHLB also requires that Old Line Bank provide collateral to support borrowings. Therefore, we have provided FHLB collateral to support up to $254.4 million of borrowings. We may increase availability by providing additional collateral.
Stockholders’ equity. Our stockholders’ equity amounted to $135.5 million at December 31, 2014 and $126.5 million at December 31, 2013. We are considered “well capitalized” under the risk- based capital guidelines adopted by the Federal Reserve Board. Stockholders’ equity increased during 2014 primarily due to $7.1 million net income available to common stockholders and a deccrease in after tax unrealized losses of $3.2 million on available for
sale securities. Basic and diluted earnings per common share decreased in 2014 compared to 2013 as a result of the increase in the number of outstanding shares.
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 independent (non-employee) directors and three 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 the 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 restructuring 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).
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 additional potential problem loans classified as TDRs totaling $589 thousand that are complying with their repayment terms, which are all acquired 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.
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.
In 2011, we recorded the loans acquired from MB&T at fair value and, on May 10, 2013, we recorded the loans acquired from WSB at fair value. The fair value of the acquired loans includes expected loan losses, and as a result there was no allowance for loan losses recorded for acquired loans at the time of acquisition. Accordingly, the existence of the acquired loans reduces the ratios of the allowance for loan losses to total gross loans and the allowance for loan losses to non-accrual loans, and this measure is not directly comparable to prior periods. Similarly, net loan charge offs are normally lower for acquired loans since we recorded these loans net of expected loan losses. Therefore, the ratio of net charge offs during the period to average loans outstanding is reduced as a result of the existence of acquired loans, and the measures are not directly comparable to prior periods. Other institutions may not have acquired loans, and therefore there may be no direct comparability of these ratios between and among other institutions when compared in total.
The accounting guidance also requires that if we experience a decrease in the expected cash flows subsequent to the acquisition date, we establish an allowance for loan losses for those acquired loans with decreased cash flows. At December 31, 2014 and 2013, there was an allowance for loan losses on acquired loans of $20 thousand and $532 thousand, respectively, as a result of a decrease in the expected cash flows subsequent to the acquisition dates.
During the fourth quarter of 2013, we sold $22.6 million (net of credit marks) of our acquired loans available for sale from loans acquired in the April 2011 merger with MB&T, the May 2013 merger with WSB and the repurchase, from another bank, of a participation on one of the WSB credit impaired loans. The net proceeds of this sale were approximately $26.5 million of which $3.4 million was recorded as gain on sale of loans during the year ending December 31, 2013.
Nonperforming Assets. At December 31, 2014, our nonperforming assets totaled $8.0 million and consisted of $5.2 million of non-accrual loans, $305 thousand of loans 90 days or more past due and still accruing and other real estate
owned of $2.5 million. The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.
The table below reflects our ratios of our non-performing assets at December 31, 2014 and 2013.
The table below outlines loans on non-accrual status by loan category at December 31, 2014 and 2013:
(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.
Nonperforming legacy loans decreased $4.9 million from 2013 primarily due to one large commercial real estate relationship that was placed on nonaccrual status in the fourth quarter of 2013. This one loan was secured by an economy level hotel affiliated with a national brand and was sold at foreclosure in September 2014. Non-performing acquired loans increased from 2013 primarily as a result of three land acquisition and development loans.
At December 31, 2014, the balance of OREO was $2.5 million, a $1.9 million decrease from the December 31, 2013 balance of $4.3 million. Legacy OREO remained stable. One foreclosed loan was transferred into OREO and was sold in 2014. Acquired OREO decreased $1.9 million due to the sale of foreclosed properties acquired in the WSB and MB&T acquisitions.
Delinquent Loans. The tables below present a breakdown of the recorded book balance of past due loans at December 31, 2014 and 2013:
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 Securities and Exchange Commission’s SAB 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 provided by the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration and Office of Thrift Supervision. We 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. However, undetected
losses inherently exist within the portfolio. We believe that the allocation of the unallocated portion of the reserve in the manner described above is appropriate. Although we may allocate specific portions of the allowance for specific credits or other factors, the entire allowance is available for any credit that we should charge off. We will not create a separate valuation allowance unless we consider a loan impaired.
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.
The 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.” 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.
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.
During 2014, the methodology utilized to estimate our allowance for loan losses was refined to segregate our hospitality loans, previously combined into one category, into three separate categories based on the type of properties and the charge-off was applied to our loss history in the specific hospitality category that it related to. The result of this change in methodology increased the general reserve portion of our allowance for loan losses, an increase mainly caused by the charge-off on the one commercial/hotel loan during the quarter.
The following tables detail activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2014, 2013, 2012, 2011 and 2010. 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.
The following table provides our ratio of allowance for loan losses:
The following tables provide a breakdown of the allowance for loan losses. During 2013, the loan segments were changed to align with our new allowance methodology which resulted in balance transfers from prior loan categories and assigned to each new loan segment.
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 $29.5 million. Additionally, we may borrow funds from the FHLB and the Federal Reserve
Bank of Richmond. We can use these credit facilities in conjunction with the normal deposit strategies, which include pricing changes to increase deposits as necessary. We can also sell available for sale investment securities or pledge investment securities as collateral to create additional liquidity. From time to time we may sell or participate out loans to create additional liquidity as required. Additional sources of liquidity include funds held in time deposits and cash from the investment and loan portfolios.
Our immediate sources of liquidity are cash and due from banks, federal funds sold and time deposits in other banks. On December 31, 2014, we had $23.6 million in cash and due from banks, $1.2 million in interest bearing accounts, and $601 thousand in federal funds sold. As of December 31, 2013, we had $28.3 million in cash and due from banks, $30 thousand in interest bearing accounts, and $712 thousand in federal funds sold.
Old Line Bank has sufficient liquidity to meet its loan commitments as well as fluctuations in deposits. We usually retain maturing certificates of deposit as we offer competitive rates on certificates of deposit. Management is not aware of any demands, trends, commitments, or events that would result in Old Line Bank’s inability to meet anticipated or unexpected liquidity needs.
During the recent period of turmoil in the financial markets, some institutions experienced large deposit withdrawals that caused liquidity problems. We did not have any significant withdrawals of deposits or any liquidity issues. Although we plan for various liquidity scenarios, if turmoil in the financial markets occurs and our depositors lose confidence in us, we could experience liquidity issues.
Old Line Bancshares has available a $5.0 million unsecured line of credit. In addition, Old Line Bank has available lines of credit, including overnight federal funds and repurchase agreements from its correspondent banks, totaling $24.5 million at December 31, 2014. Old Line Bank has an additional secured line of credit from the FHLB of $339.9 million at December 31, 2014. As a condition of obtaining the line of credit from the FHLB, the FHLB requires that Old Line Bank purchase shares of capital stock in the FHLB. Prior to allowing Old Line Bank to borrow under the line of credit, the FHLB also requires that Old Line Bank provide collateral to support borrowings. Therefore, we have provided FHLB collateral to support up to $254.4 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 $27.5 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.”
Risk Based Capital Analysis
(Dollars in thousands)
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, 2014 and 2013 are as follows:
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 counter party. 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 $57.9 million, or 40.49% of the $143.0 million at December 31, 2014, are generally short term and turn over rapidly, with principal repayment from permanent financing arrangements upon completion of construction or from sales of the properties financed.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Our exposure to credit loss in the event of non-performance by the customer is the contract amount of the commitment. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In general, 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, 2014, significant fixed and determinable contractual obligations to third parties by payment date.
Contractual Obligations
(Dollars in thousands)
Our operating lease obligations represent rental payments for sixteen branches, four loan production offices and our main office. We lease our main office and our Bowie branch location from Pointer Ridge. We have excluded 62.50% of these lease payments in consolidation. 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 Month Ended December 31, 2014
Twelve Month Ended December 31, 2013
Twelve Month Ended December 31, 2012
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.
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.
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.
The table below presents Old Line Bank’s interest rate sensitivity at December 31, 2014. 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.
Quarterly Data (unaudited)
Item 8.
Item 8. Financial Statements
The following consolidated financial statements are filed with this report:
						
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets-December 31, 2014 and 2013
Consolidated Statements of Income-For the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income-For the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Changes in Stockholders’ Equity-For the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows-For the years ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Old Line Bancshares, Inc.
We have audited Old Line Bancshares, Inc. and Subsidiaries (the Company’s) internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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.
In our opinion, Old Line Bancshares, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, 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), the consolidated financial statements of Old Line Bancshares, Inc. and Subsidiaries as of and for the year ended December 31, 2014, and our report dated March 11, 2015, expressed an unqualified opinion on those consolidated financial statements.
/s/ Dixon Hughes Goodman LLP
Atlanta, Georgia
March 11, 2015
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Old Line Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Old Line Bancshares, Inc. and Subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Old Line Bancshares, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Old Line Bancshares, Inc.’s internal controls over financial reporting as of December 31, 2014, 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 11, 2015, expressed an unqualified opinion thereon.
/s/ Dixon Hughes Goodman LLP
Atlanta, Georgia
March 11, 2015
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Old Line Bancshares, Inc.
Bowie, Maryland
We have audited the accompanying consolidated balance sheets of Old Line Bancshares, Inc. and Subsidiaries as of December 31, 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Old Line Bancshares, Inc. and Subsidiaries as of December 31, 2012, and the results of their operations and cash flows for each of the years in the two-year period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
/s/ Rowles & Company, LLP
Baltimore, Maryland
March 20, 2013
8100 Sandpiper Circle, Suite 308, Baltimore, Maryland 21236
443-725-5395 FAX 443-725-5074
Website: www.Rowles.com
Part 1. Financial Information
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Balance Sheets
The accompanying notes are an integral part of these consolidated financial statements
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Income
The accompanying notes are an integral part of these consolidated financial statements
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Comprehensive Income
The accompanying notes are an integral part of these consolidated financial statements
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
The accompanying notes are an integral part of these consolidated financial statements
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Cash Flows
The accompanying notes are an integral part of these consolidated financial statements.
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Cash Flows (Continued)
The accompanying notes are an integral part of these consolidated financial statements
			 		
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
1. Summary of Significant Accounting Policies
Organization and Description of Business-Old Line Bancshares, Inc. (Bancshares) is the holding company for Old Line Bank (Bank). We provide a full range of banking services to customers located in Anne Arundel, Calvert, Charles, 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 its majority owned membership interest in Pointer Ridge Office Investment, LLC (“Pointer Ridge”). We have eliminated all significant intercompany transactions and balances.
We report 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 our 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 which 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 which 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 the Company’s 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.
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
Equity Securities-Equity securities include stock from Federal Reserve, Federal Home Loan Bank, Atlantic Central Bankers Bank, Maryland Financial Bank and Student Loan Marketing Association (SLMA), which are carried at cost which approximates fair value.
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. 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. and WSB Holdings, Inc. 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. and ten years for WSB Holdings, Inc. 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
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
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.
We evaluated the carrying value of goodwill as of September 30, 2014, 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, 2014 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, 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.
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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Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(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, 2014 and will be settled subsequent to that date. Only loans purchased by investors with recourse obligations are included in other liabilities.
Allowance for Loan Losses-The allowance for loan losses represent an amount which, 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 which 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
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For the Years Ended December 31, 2014, 2013 and 2012
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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.
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.
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.
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 and unrealized gain (loss) on the pension plan. 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 2013 and 2012 financial presentation to conform to the 2014 presentation.
Recent Accounting Pronouncements- In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. This ASU states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to
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For the Years Ended December 31, 2014, 2013 and 2012
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the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, this ASU requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. This ASU is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09 - Revenue from Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principal of this ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This ASU will be effective for us in our first quarter of 2017. Early adoption is not permitted. The ASU allows for either full retrospective or modified retrospective adoption. We are evaluating the transition method that will be elected and the potential effects of the adoption of this ASU on our financial statements.
In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period. The amendments clarify the proper method of accounting for share-based payments when the terms of an award provide that a performance target that affects vesting could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. This update requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Management is currently evaluating the impact of adoption on the consolidated financial statements, but does not believe that adoption will have a material impact.
In August 2014, the FASB issued Accounting Standard Update ASU No. 2014-14- Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure, to address the diversity in practice regarding the classification and measurement of foreclosed loans which were part of a government-sponsored loan guarantee program (e.g. HUD, FHA, VA). The ASU outlines certain criteria that, if met, such loan should be derecognized and a separate other receivable should be recorded upon foreclosure at the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. This ASU will be effective for annual reporting period beginning after December 15, 2014, including interim periods within that reporting period. Early adoption is permitted, provided the entity has adopted ASU 2014-04. The ASU should be adopted either prospectively or on a modified retrospective basis. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15 Presentation of Financial Statement - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, to
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For the Years Ended December 31, 2014, 2013 and 2012
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reduce diversity in the timing and content of going concern disclosures. The ASU clarifies management’s responsibility to evaluate and provide related disclosures if there are any conditions or events, as a whole that raise substantial doubt about the entity’s ability to continue as a going concern for one year after the date the financial statements are issued (or, if applicable, available to be issued). The amendments in this ASU are effective for the annual period ending December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.
2. Acquisition of WSB Holdings, Inc.
On May 10, 2013, Bancshares acquired WSB Holdings, Inc. (WSB Holdings), the parent company of The Washington Savings Bank, F.S.B. (WSB). We converted each share of common stock of WSB Holdings into the right to receive, at the holder’s election, $6.0743 in cash or 0.557 shares of Bancshares’ common stock. We paid cash for any fractional shares of Bancshares’ common stock and aggregate cash consideration of $17.0 million. The total merger consideration was $54.7 million.
In connection with the acquisition, WSB was merged with and into Old Line Bank, with the Bank the surviving bank.
The acquired assets and assumed liabilities of WSB Holdings were measured at estimated fair value. Management made significant estimates and exercised significant judgment in accounting for the acquisition of WSB Holdings. Management judgmentally assigned risk ratings to loans based on appraisals and estimated collateral values, expected cash flows, prepayment speeds and estimated loss factors to measure fair values for loans. Other real estate acquired through foreclosure was valued based upon pending sales contracts and appraised values, adjusted for current market conditions. Premises and equipment was valued based on recent appraised values. Management used quoted or current market prices to determine the fair value of investment securities and long-term borrowings that were assumed from WSB Holdings.
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Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
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The statement of net assets acquired and the resulting goodwill recorded is presented in the following table. As explained in the notes that accompany the following table, the purchased assets, assumed liabilities and identifiable intangible assets were recorded at the acquisition date fair value.
Explanation of fair value adjustments
(a)
Adjustment reflects marking the available for sale portfolio to fair value as of the acquisition date.
(b)
Adjustment reflects the fair value adjustments based on Old Line Bancshares’ evaluation of the acquired loan portfolio and excludes the allowance for losses recorded by WSB Holdings.
(c)
Adjustment reflects the fair value adjustments based on Bancshares’ evaluation of the acquired premises and equipment.
(d)
Adjustment to record deferred tax asset related to fair value adjustments at 39.45% income tax rate.
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For the Years Ended December 31, 2014, 2013 and 2012
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(e)
Adjustment reflects the fair value adjustments to other real estate owned based on Bancshares’ evaluation of the acquired other real estate owned portfolio.
(f)
Adjustment reflects the recording of the core deposits intangible on the acquired deposit accounts.
(g)
Adjustment reflects the impairment of certain WSB Holdings’ prepaid and deferred accounts.
(h)
Adjustment arises since the rates on interest-bearing deposits are higher than rates available on similar deposits as of the acquisition date.
(i)
Adjustment reflects the fair value of WSB Holdings’ borrowings acquired on acquisition date and is related to the Federal Home Loan Bank of Atlanta (“FHLB”) pre-payment penalty incurred subsequent to the acquisition date in the connection with the repayment of all of WSB’s FHLB advances by Bancshares.
(j)
Within the measurement period, goodwill was increased $946,240.
We allocated the purchase price for WSB Holdings as follows:
The following is an outline of the expenses that we have incurred during the years ended December 31, 2014 and 2013 in conjunction with the WSB Holdings merger:
During the third quarter of 2013, within the measurement period, goodwill was increased $946,240 associated with the acquisition of WSB Holdings. This amount represented the difference between the estimated fair value of tangible and intangible assets acquired and liabilities assumed at acquisition date. This increase represents an increase of $102,484 to our fair value adjustment on one lot loan, a decrease of $2,949 in our deferred tax assets, a decrease of $8,310 to our fair value adjustment on one commercial land property in other real estate owned and a decrease of $849,117 on the fair value of our investments classified as available for sale that we identified during the period.
As a result of the acquisition of WSB Holdings, during the second quarter of 2013 we recorded a core deposit intangible of $2.4 million. This amount represented the premium that we paid to acquire WSB’s core deposits over the fair value of such deposits. We will amortize the core deposit intangible on an accelerated basis over its estimated useful life of ten years.
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Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
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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:
We recorded amortization expense related to the core deposit intangible of $866,704, $838,694 and $727,421 for the years ended December 31, 2014, 2013 and 2012, respectively. Core deposit intangibles are being amortized as follows:
4. Cash and 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 2014. The average balance exceeded the federally insured limit by $347,612 in 2013. The Bank also sells federal funds on an unsecured basis to the same banks. The average balance sold was $2,868,076 and $3,582,839 in 2014 and 2013, 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
For the Years Ended December 31, 2014, 2013 and 2012
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5. Investment Securities
Investment securities are summarized as follows:
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, 2014 and 2013:
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Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
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At December 31, 2014, we had 117 investment securities that were in an unrealized loss position for less than 12 months and 57 investment securities in an unrealized loss position for 12 months or more.
We consider all unrealized losses on securities as of December 31, 2014 to be temporary losses because we will redeem each security at face value at or prior to maturity. We have the ability and intent to hold these securities until recovery or maturity. As of December 31, 2014, 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, 2014, we received $43.5 million in proceeds from sales, maturities or calls and principal pay-downs on investment securities and realized gains of $239 thousand and realized losses of $109 thousand for total realized net gain of $130 thousand. During the year ended December 31, 2013, we received $95.3 million in proceeds from sales, maturities or calls and principal pay-downs on investment securities and realized gains of $857 thousand and realized losses of $214 thousand for a total net gain of $641 thousand.
Contractual maturities and pledged securities at December 31, 2014 and 2013, 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.
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Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
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6. Loans and Allowance for Loan Losses
Major classifications of loans are as follows:
(1)
As a result of the acquisitions of Maryland Bankcorp, Inc. (Maryland Bankcorp), the parent company of Maryland Bank & Trust Company, N.A. (MB&T), in April 2011 and of WSB Holdings, the parent company of WSB, in May 2013, we have segmented the portfolio into two components, loans originated by the Bank (legacy) and loans acquired from MB&T and WSB (acquired).
Credit Policies and Administration
We have adopted a comprehensive lending policy, which includes stringent underwriting standards for all types of loans. We have designed our underwriting standards to promote a complete banking relationship rather than a transactional relationship. In an effort to manage risk, prior to funding, the loan committee consisting of the Executive Officers and seven members of the Board of Directors must approve by a majority vote all credit decisions in excess of a lending officer’s lending authority.
Management believes that it employs experienced lending officers, secures appropriate collateral and carefully monitors the financial condition of its borrowers and loan concentrations.
In addition to the internal business processes employed in the credit administration area, the Bank retains an outside independent firm to review the loan portfolio. This firm performs a detailed annual review and an interim update. We use the results of the 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 $600.7 million and $534.3 million at December 31, 2014 and 2013. 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
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For the Years Ended December 31, 2014, 2013 and 2012
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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, 2014, we had approximately $84.7 million of commercial real estate loans outstanding to the hospitality industry. An individual review of these loans indicates that they generally have a low loan to value, more than acceptable existing or projected cash flow, are to experienced operators and are generally dispersed throughout the region.
Residential Real Estate Loans
We offer a variety of consumer oriented residential real estate loans including home equity lines of credit, home improvement loans and first or second mortgages on investment properties. Our residential loan portfolio amounted to $211.5 million and $205.0 million at December 31, 2014 and 2013. Although most of these loans are in our primary market area, the diversity of the individual loans in the portfolio reduces our potential risk. Usually, we secure our residential real estate loans with a security interest in the 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 660 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 nine 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 nine months or less. Residential houses, multi-family dwellings and commercial buildings under construction and the underlying land for which the loan was obtained secure the construction loans. The vast majority of these loans are concentrated in our primary market area.
Construction lending also entails significant risk. These risks 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 primary market area, the diversity of the individual loans
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Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
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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 from time to time by Fannie Mae and Freddie Mac for secondary market resale purposes. This amount for single-family residential loans currently varies from $417,000 up to a maximum of $625,500 for certain high-cost designated areas. We also make residential mortgage loans up to limits established by the Federal Housing Administration, which currently is $625,500. The Washington, D.C. and Baltimore areas are both considered high-cost designated areas. We will, however, make loans in excess of these amounts if we believe that we can sell the loans in the secondary market or that the loans should be held in our portfolio. For loans sold in the secondary market, we require a credit score of at least 640 with some exceptions to 620 for veterans. Loans sold in the secondary market are sold to investors on a servicing released basis and recorded as loans as held-for-sale. The premium is recorded in gain on sale of loans in non-interest income, net of commissions paid to the loan officers.
Commercial and Industrial Lending
Our commercial and industrial lending consists of lines of credit, revolving credit facilities, accounts receivable financing, term loans, equipment loans, SBA loans, standby letters of credit and unsecured loans. We originate commercial loans for any business purpose including the financing of leasehold improvements and equipment, the carrying of accounts receivable, general working capital, and acquisition activities. We have a diverse client base and we do not have a concentration of these types of loans in any specific industry segment. We generally secure commercial business loans with accounts receivable, equipment, deeds of trust and other collateral such as marketable securities, cash value of life insurance and time deposits at 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.
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, a consumer’s total debt service should not exceed 40% of his or her gross income.
Consumer loans may present greater credit risk than residential mortgage loans because many consumer loans are unsecured or rapidly depreciating assets secure these loans. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance because of the greater likelihood of damage, loss or depreciation. Consumer loan collections depend on the 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. However, in our opinion, many of these risks do not apply to the luxury boat portion of the loan portfolio due to the credit quality and liquidity of these borrowers.
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Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
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Concentrations of Credit
Most of our lending activity occurs within the state of Maryland within the suburban Washington, D.C. market area in Anne Arundel, Calvert, Charles, Montgomery, Prince George’s and St. Mary’s Counties. The majority of our loan portfolio consists of commercial real estate loans and commercial and industrial 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.
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
The table below presents an aging analysis of the loan held for investment portfolio at December 31, 2014 and 2013.
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 TDRs, 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.
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
The table below presents our impaired loans at December 31, 2014.
(1)
Generally accepted accounting principles require that we record acquired loans at fair value which includes a discount for loans with credit impairment. These loans are not performing according to their contractual terms and meet our definition of an impaired loan. Although we do not accrue interest income at the contractual rate on these loans, we do recognize an accretable yield as interest income to the extent such yield is supported by cash flow analysis of the underlying loans. Acquired credit impaired loans where the cash flows do not perform according to initial accretable yield estimates are consider impaired.
The table below presents our impaired loans at December 31, 2013.
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
(1)
Generally accepted accounting principles require that we record acquired loans at fair value at acquisition date. These loans are not performing according to their contractual terms and meet our definition of an impaired loan. Although we do not accrue interest income at the contractual rate on these loans, we may accrete their fair value discounts to interest income as a result of pre-payments that exceeds our cash flow expectations or payment in full of amounts due even though we classify them as non-accrual.
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, 2014 consisted of four loans for $589 thousand compared to five loans at December 31, 2013 for $667 thousand.
The following table includes the recorded investment and number of modifications for TDRs for the years ended December 31, 2014 and 2013. We report the recorded investment in loans prior to a modification and also the recorded
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
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.
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, 2014 or 2013.
Acquired loans
At our acquisition of WSB Holdings, we recorded all loans acquired at the estimated fair value on their purchase date with no carryover of the related allowance for loan losses. On the acquisition date, we segregated the loan portfolio into two loan pools, performing and non-performing. We disposed of approximately $22.6 million, which consisted primarily of purchase credit impaired loans that we marketed with brokers and settled during the fourth quarter of 2013 through brokered sales transactions. The proceeds of this sale were approximately $3.4 million, which was recorded as gain on sale of loans in 2013.
The following table documents changes in the accretable discount on acquired loans during the period December 31, 2014 and 2013, along with the outstanding balances and related carrying amounts for the beginning and end of those respective periods.
(1)
Represents amounts paid in full on loans, payments on loans with zero balances and an increase in cash flows expected to be collected.
(2)
Represents previously acquired impaired loans we pooled and sold in the fourth quarter.
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
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.
·
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.
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
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.
·
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.
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
·
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.
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.
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
The following tables outline the allocation of the loan portfolio by risk rating at December 31, 2014 and 2013.
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
The following tables detail activity in the allowance for loan losses by portfolio segment for the years ended December 31, 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.
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
Our recorded investment in loans as of December 31, 2014 and 2013 related to each balance in the allowance for probable loan losses by portfolio segment and disaggregated on the basis of our impairment methodology was as follows:
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(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.
As of December 31, 2014, the Bank has pledged loans totaling $254,399,436 to support Federal Home Loan Bank borrowings.
The Bank makes loans to customers located in the Maryland suburbs of Washington D.C. 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:
With the exception of the SLMA stock, which we carry at fair value based on current quoted market prices, we carry these securities at cost and have evaluated them for other than temporary impairment. In 2014 and 2013, we did not record any such impairment.
8. Pointer Ridge Office Investment, LLC
We own 62.5% of Pointer Ridge and consolidate its results of operations with ours. The following table summarizes the condensed Balance Sheets and Statements of Income information for Pointer Ridge.
Pointer Ridge Office Investment, LLC
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
9. Premises and Equipment
A summary of our premises and equipment and the related depreciation expense follows:
10. Deposits
Major classifications of interest bearing deposits are as follows:
Time deposits mature as follows:
Interest on deposits for the years ended December 31, 2014, 2013 and 2012, consisted of the following:
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 $24.5 million as of December 31, 2014. The Bank has an additional secured line of credit from the Federal Home Loan Bank of Atlanta
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
(FHLB) of $360.3 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, 2014, we had provided $254.4 million in collateral value and as outlined below have borrowed $33.5 million. We have additional available borrowing capacity of $326.8 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.
Short term borrowings consist of promissory notes or overnight repurchase agreements sold to the Bank’s customers, federal funds purchased and advances from the FHLB.
The Bank sells short term promissory notes to its customers. These notes re-price daily and have maturities of 270 days or less. 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.
Information related to short term borrowings is as follows:
At December 31, 2014, the book and market values of securities pledged as collateral for repurchase agreements were $44,139,026 and $43,935,865, respectively.
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
12. Long Term Borrowings
The senior note is an obligation of Pointer Ridge. It has a 10 year fixed interest rate of 6.28% and matures on September 5, 2016.
Principal payments on long term debt obligations are due as follows:
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 $275,530, $266,059 and $261,234, during the years ended December 31, 2014, 2013 and 2012, respectively.
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%. Frank Lucente, 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 has retained its 12.5% membership interest in Pointer Ridge. In 2014, 2013 and 2012, the Bank paid Pointer Ridge $794,453, $738,576 and $704,128 in lease payments, respectively.
The directors, executive officers and their affiliated companies maintained deposits with the Bank of $11,986,023 and $13,217,801 at December 31, 2014 and, 2013, respectively.
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
The schedule below summarizes changes in amounts of loans outstanding to directors and executive officers or their affiliated companies:
In addition to the outstanding balances, the directors and executive officers or affiliated companies have $290,329 in unused commitments as of December 31, 2014. 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
The components of income tax expense are as follows:
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
The components of deferred income taxes are as follows:
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. We allocate tax expense and tax benefits to the Bank and Bancshares based on their proportional share of taxable income.
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
The components of net deferred tax assets and liabilities are as follows:
No valuation allowance was deemed necessary on deferred tax assets at December 31 2014 or 2013. Management believes that the realization of the deferred tax assets is more likely than not based on the expectation that Bancshares will generate the necessary taxable income in future periods.
We initially recorded a valuation allowance of $1.2 million for the deferred tax asset with the acquisition of Maryland Bankcorp because of our uncertainty about our ability to utilize its net operating loss (NOL) carryover and built in losses, and because of uncertainty about the status of the tax return filings and related accounting for income taxes at the April 1, 2011 combination date. We applied $154,000 of the allowance to tax liabilities associated with the defined benefit plan. From April 1, 2011 through December 31, 2012, management took several actions to enhance the combined company’s profitability. The profitability of the combined company from April 1, 2011 through December 31, 2012 became sufficient evidence to support the use of at least a portion of the NOL. This was not new information about facts and circumstances that existed at the acquisition date. Therefore, we reduced the valuation allowance by $500,000 and credited income tax expense during the fourth quarter of 2011.
During the fourth quarter of 2012, we reversed the remaining $545,939 valuation allowance for deferred tax asset that we recorded at the acquisition of Maryland Bankcorp due to uncertainties about the status of the tax return filings and related accounting for income taxes at the April 1, 2011 combination. During the fourth quarter of 2012, we received acknowledgement from the Internal Revenue Service of the final amended tax returns filed for Maryland Bankcorp during the third quarter of 2012. The completion of the tax returns and our profitability in 2012 provided sufficient evidence to support the use of the remaining net operating loss.
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
Maryland Bankcorp had 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. When the Bank has taxable income, we will be able to deduct $779,812 every year 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. When the Bank has taxable income, we will be able to deduct $1,477,746 every year 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.
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, 2014 or 2013 and there was no unrecognized tax benefit as of December 31, 2014 or 2013.
The following table reconciles the differences between the federal income tax rate of 34 percent and our effective tax rate:
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 $474,028, $439,647 and $297,213 for 2014, 2013, and 2012, 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, 2014 and 2013 was $5.1 million and $4.9 million, respectively. The Bank’s expenses for the SERPs were $535,331, $608,890 and $497,709 in 2014, 2013, and 2012, respectively.
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
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, 2014, the employee stock ownership plan owned 91,999 shares of Bancshares’ stock, had $19,033 invested in Old Line Bank Certificates of Deposit, and $43,030 in an Old Line Bank money market account. We have transferred the MB&T KSOP assets into the Old Line 401(k) plan discussed above.
MB&T had an employee pension plan (MB&T Pension Plan) that was frozen on June 9, 2003 and no additional benefits accrued subsequent to that date. We notified all plan participants that we terminated this plan effective August 1, 2011. We liquidated the securities the plan held, and deposited the proceeds into interest bearing certificates of deposit and a money market account. On October 1, 2012, we purchased an annuity contract to transfer the remaining $2,116,489 pension liability, effective November 1, 2012 and expensed $700,884 in pension expense to recognize the final cost associated with termination of the pension plan. We transferred the remaining pension plan assets to the employee 401(k) plan after we recorded all remaining expenses associated with audits, actuarial and consulting fees to the plan. There was no activity for the year ended December 31, 2014 and 2013 related to this plan.
Stock Options
We have two stock option plans under which we may issue options, the 2004 and 2010 Equity Incentive Plans. Our Compensation Committee administers the stock option plans. As the plans outline, 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 issued. 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 period. In 2013, the stockholders approved an amendment to increase the number of shares issuable under the 2010 Equity Incentive Plan by 450,000 shares. As of December 31, 2014, there were 489,157 shares remaining available for future issuance under the stock option plans. The source of shares exercised is authorized but unissued shares.
The intrinsic value of the options that directors and officers exercised for the years ended December 31, 2014, 2013, and 2012 was $113,230, $290,129 and $81,693, respectively.
A summary of the status of the outstanding options follows:
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
At December 31, 2014, there was $251,339 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.
During the year ended December 31, 2014, we granted 8,257 restricted common stock awards.
The following table outlines the vesting schedule of the unvested restricted stock awards.
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
At December 31, 2014, there is $66,626 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:
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. As of December 31, 2014 and 2013, the capital ratios and the capital requirements to remain adequately and well capitalized are as follows:
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
Tier 1 capital consists of common and preferred 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.
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.
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
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
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 $23,449 and $13,900 for loans sold in the secondary market with recourse obligations as of December 31, 2014 and 2013. In addition, a reserve in the amount of $195,219 and $185,810 has been established for the unfunded portion of loan commitments at December 31, 2014 and 2013. Both reserves are included in other liabilities. No such reserves were recorded in 2012.
As of December 31, 2014, we leased 13 branch locations and six loan production offices from non-related parties under lease agreements expiring through 2040. We lease our corporate headquarters and one branch location from Pointer Ridge. Each of the leases provides extension options. On September 26, 2014, we announced plans to consolidate four of our branches that are in close proximity to other Bank branches effective December 31, 2014. We own the building of one of the planned closings and the other three locations have been notified to terminate the leases.
The approximate future minimum lease commitments under the operating leases as of December 31, 2014, are presented below. We have eliminated 62.5% of lease commitments to Pointer Ridge in consolidation.
Rent expense was $2,066,656, $1,864,738 and $1,373,490 for the years ended December 31, 2014, 2013, and 2012, respectively.
On August 25, 2006, Pointer Ridge entered into a loan agreement with an unrelated bank, in an original principal amount of $6.6 million to finance the commercial office building located at 1525 Pointer Ridge Place, Bowie, Maryland. We lease approximately 85% of this building for our main office and operate a branch from this address. Pursuant to the terms of a guaranty between the bank and Bancshares dated August 25, 2006, Bancshares has guaranteed up to 62.5% of the loan amount plus costs incurred by the lender resulting from any acts, omissions or alleged acts or omissions.
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
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
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, 2014 and 2013, there were no transfers between levels.
At December 31, 2014, 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 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.
Bancshares values Sallie Mae (SLMA) equity securities (included in equity securities) at fair value on a recurring basis. We value SLMA equity securities under Level 1. During the first quarter of 2014, the SLMA equity security was sold and the realized gain of $96,993 is recorded in gain (loss) on disposal of assets on the consolidated statement of income.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We may be required from time to time, to measure certain assets at fair value on a non-recurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below.
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
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%. 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 and WSB Holdings, 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 and WSB or obtained as a result of loans originated by MB&T and WSB (acquired). The increase in level 3 is due to an increase in our legacy non-accrual loans, and acquired other real estate owned.
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(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
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
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.
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
19. Other Operating Expenses
Other operating expenses that are significant are as follows:
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
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(Continued)
			
		
Old Line Bancshares, Inc.
Condensed Statements of Income
Old Line Bancshares, Inc.
Statements of Cash Flows
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2014, 2013 and 2012
(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.
			 		
Item 9.
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.
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, 2014. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by Old Line Bancshares, Inc. in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, 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 Securities Exchange Act of 1934, as amended) during the quarter ended December 31, 2014, 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.
Management has conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014, 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, 2014 is effective.
Dixon Hughes Goodman LLP, the registered public accounting firm that audited the Company’s financial statements included in this report for the years ended December 31, 2014 and 2013, has issued an attestation report on the Company’s internal control over financial reporting that is included elsewhere in this report.
Item 9B.
Item 9B. Other Information
None
PART III
Item 10.
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 2015 Annual Meeting of Stockholders of Old Line Bancshares, Inc.
Item 11.
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 2015 Annual Meeting of Stockholders of Old Line Bancshares, Inc.
Item 12.
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, 2014, with respect to compensation plans under which equity securities of Old Line Bancshares are authorized for issuance.
Equity Compensation Plan Information
December 31, 2014
(1)
Includes the 2004 Equity Incentive Plan and 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 2015 Annual Meeting of Stockholders of Old Line Bancshares, Inc.
Item 13.
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 2015 Annual Meeting of Stockholders of Old Line Bancshares, Inc.
Item 14.
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, 2014 and 2013 and fees billed for other services rendered by Dixon Hughes Goodman LLP. For the year
ended December 31, 2013, fees include expenses paid to Rowles & Company, LLP whom was our independent registered public accounting firm for the quarter ending March 31, 2013.
(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, and services that Dixon Hughes Goodman LLP and Rowles & Company, LLP normally provides in connection with statutory and regulatory filings or engagements.
(2)
Tax fees consist of fees billed for professional services rendered for federal and state tax compliance, tax advice and tax planning.
(3)
All other fees in 2014 and 2013 are for reviewing filings and for 2013 assistance related to the acquisition of WSB Holdings.
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.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
Exhibit No.
Description of Exhibits
2.1(V)
						
Agreement and Plan of Merger by and between Old Line Bancshares, Inc. and Maryland Bankcorp, Inc., dated as of September 1, 2010, and Amendment No. 1 thereto
						
						
2.2(R)
						
Agreement and Plan of Merger by and between Old Line Bancshares, Inc. and WSB Holdings, Inc., dated as of September 10, 2012, and Amendment No. 1 thereto
						
						
3.1(A)
						
Articles of Amendment and Restatement of Old Line Bancshares, Inc.
						
						
3.1.1(L)
						
Articles of Amendment of Old Line Bancshares, Inc.
						
						
3.1.2(L)
						
Articles of Amendment of Old Line Bancshares, Inc.
						
						
3.1.3(AA)
						
Articles of Amendment of Old Line Bancshares, Inc.
						
						
3.2(A)
						
Amended and Restated Bylaws of Old Line Bancshares, Inc.
						
						
3.2.1(B)
						
Amendment to the Amended and Restated Bylaws of Old Line Bancshares, Inc.
						
						
3.2.2(C)
						
Second Amendment to the Amended and Restated Bylaws of Old Line Bancshares, Inc.
						
						
4(Y)
						
Specimen Stock Certificate for Old Line Bancshares, Inc.
						
						
10.1(W)*
						
Amended and Restated Executive Employment Agreement between Old Line Bank and James W. Cornelsen dated January 28, 2011
						
						
10.2(D)*
						
First Amendment to Amended and Restated Employment Agreement between Old Line Bank and James W. Cornelsen dated as of January 1, 2012
10.2.1(I)*
						
Third Amendment to Amended and Restated Employment Agreement between Old Line Bank and James W. Cornelsen dated May 9, 2013
						
						
10.3(K)*
						
Salary Continuation Agreement dated January 3, 2006 between Old Line Bank and James W. Cornelsen
						
						
10.4(O)*
						
First Amendment dated December 31, 2007 to the Salary Continuation Agreement between Old Line Bank and James W. Cornelsen
						
						
10.5(K)*
						
Supplemental Life Insurance Agreement dated January 3, 2006 between Old Line Bank and James W. Cornelsen
						
						
10.6(O)*
						
First Amendment dated December 31, 2007 to the Supplemental Life Insurance Agreement between Old Line Bank and James W. Cornelsen
						
						
10.7(W)*
						
Amended and Restated Executive Employment Agreement dated January 28, 2011 between Old Line Bank and Joseph Burnett
Exhibit No.
Description of Exhibits
10.8(I)*
						
Second Amendment to Amended and Restated Employment Agreement between Old Line Bank and Joseph Burnett dated as of May 9, 2013
						
						
10.9(K)*
						
Salary Continuation Agreement dated January 3, 2006 between Old Line Bank and Joseph Burnett
						
						
10.10(O)*
						
First Amendment dated December 31, 2007 to the Salary Continuation Agreement between Old Line Bank and Joseph Burnett
						
						
10.11(K)*
						
Supplemental Life Insurance Agreement dated January 3, 2006 between Old Line Bank and Joseph Burnett
10.12(O)*
						
First Amendment dated December 31, 2007 to the Supplemental Life Insurance Agreement between Old Line Bank and Joseph Burnett
						
						
10.13(DD)*
						
Salary Continuation Plan Agreement (2014) by and between Old Line Bank and Mark Semanie dated as of March 27, 2014
						
						
10.18(O)*
						
First Amendment dated December 31, 2007 to the Supplemental Life Insurance Agreement between Old Line Bank and Christine Rush
						
						
10.19(E)*
						
2004 Equity Incentive Plan
						
						
10.20(G)*
						
Form of Incentive Stock Option Agreement for 2004 Equity Incentive Plan
						
						
10.21(X)*
						
Form of Nonqualified Stock Option Agreement for 2004 Equity Incentive Plan
						
						
10.22(U)*
						
Form of Restricted Stock Agreement for the 2004 Equity Incentive Plan
						
						
10.23(G)*
						
Old Line Bancshares, Inc. and Old Line Bank Director Compensation Policy
						
						
10.24(F)
						
Operating Agreement for Pointer Ridge Office Investment, LLC among J. Webb Group, Inc., Michael M. Webb, Lucente Enterprises, Inc., Chesapeake Custom Homes, L.L.C. and Old Line Bancshares, Inc., all as Members and Chesapeake Pointer Ridge Manager, LLC.
						
						
10.25(H)*
						
Incentive Plan Model and Stock Option Model
						
						
10.26(N)
						
Deed of Trust note dated November 3, 2005 between Pointer Ridge Office Investment, LLC and Manufacturers and Traders Trust Company
						
						
10.27(N)
						
Completion Guaranty Agreement dated November 3, 2005 between Pointer Ridge Office Investment, LLC and Manufacturers and Traders Trust Company
						
						
10.28(L)
						
Indemnity Agreement between Old Line Bancshares, Inc. and Prudential Mortgage Capital Company, LLC dated August 25, 2006
						
						
10.29(S)
						
Third Amendment to Operating Agreement For Pointer Ridge Office Investment, LLC by and between Old Line Bancshares, Inc. J. Webb, Inc., Michael M. Webb Revocable Trust, and Lucente Enterprises, Inc. dated as of November 1, 2008
						
						
10.30(BB)*
						
Old Line Bancshares, Inc. 2010 Equity Incentive Plan
*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 Annual Report on Form 10-K for the year ended December 31, 2012, filed on March 30, 2012.
(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 Quarterly Report on Form 10-QSB filed on November 8, 2004.
(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 Quarterly Report on Form 10-Q filed on August 14, 2013.
(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)
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 November 9, 2006.
(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 Annual Report on Form 10-KSB filed on March 28, 2006.
(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 Current Report on Form 8-K filed on February 2, 2010.
(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 November 19, 2008.
(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 to 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 27, 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 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.
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.
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 11, 2015
James W. Cornelsen
						
Executive Officer)
						
						
						
						
						
						
/s/ Elise M. Hubbard
						
Chief Financial Officer (Principal Accounting and Financial
						
March 11, 2015
Elise M. Hubbard
						
Officer)
						
						
						
						
						
						
/s/ Craig E. Clark
						
Director and Chairman of the Board
						
March 11, 2015
Craig E. Clark
						
						
						
						
						
						
						
						
/s/ G. Thomas Daugherty
						
Director
						
March 11, 2015
G. Thomas Daugherty
						
						
						
						
						
						
						
						
/s/ James F. Dent
						
Director
						
March 11, 2015
James F. Dent
						
						
						
						
						
						
						
						
/s/ Andre’ J. Gingles
						
Director
						
March 11, 2015
Andre’ J. Gingles
						
						
						
						
						
						
						
						
/s/ Thomas H. Graham
						
Director
						
March 11, 2015
Thomas H. Graham
						
						
						
						
						
						
						
						
/s/ William J. Harnett
						
Director
						
March 11, 2015
William J. Harnett
						
						
						
						
						
						
						
						
/s/ Frank Lucente, Jr.
						
Director
						
March 11, 2015
Frank Lucente, Jr.
						
						
						
						
						
						
						
						
/s/ Gail D. Manuel
						
Director
						
March 11, 2015
Gail D. Manuel
						
						
						
						
						
						
						
						
/s/ Carla Hargrove McGill
						
Director
						
March 11, 2015
Carla Hargrove McGill
						
						
						
						
						
						
						
						
/s/ Gregory S. Proctor, Jr.
						
Director
						
March 11, 2015
Gregory S. Proctor, Jr.
						
						
						
						
Name
						
Title
						
Date
						
						
						
						
/s/ Jeffrey A. Rivest
						
Director
						
March 11, 2015
Jeffrey A. Rivest
						
						
						
						
						
						
						
						
/s/ Suhas R. Shah
						
Director
						
March 11, 2015
Suhas R. Shah
						
						
						
						
						
						
						
						
/s/ John M. Suit, II
						
Director
						
March 11, 2015
John M. Suit, II
						
						
						
						
						
						
						
						
/s/ Frank E. Taylor
						
Director
						
March 11, 2015
Frank E. Taylor