1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Description of Business - Old Line Bancshares, Inc. (“Old Line Bancshares”) was incorporated under the laws of the State of Maryland on April 11, 2003 to serve as the holding company of Old Line Bank. The primary business of Old Line Bancshares is to own all of the capital stock of Old Line Bank. We provide a full range of banking services to customers located in Anne Arundel, Baltimore, Baltimore City, Calvert, Carroll, Charles, Frederick, Harford, Howard, Montgomery, Prince George’s, and St. Mary’s Counties in Maryland and surrounding areas.

 

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

 

The foregoing consolidated financial statements for the periods ended March 31, 2019 and 2018 are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), however, in the opinion of management we have included all adjustments necessary for a fair presentation of the results of the interim period. We derived the balances as of December 31, 2018 from audited financial statements. These statements should be read in conjunction with Old Line Bancshares’ financial statements and accompanying notes included in Old Line Bancshares’ Form 10-K for the year ended December 31, 2018. We have made no significant changes to Old Line Bancshares’ accounting policies as disclosed in the Form 10-K, except as described in the Recent Accounting Pronouncements section below.

 

Accounting Changes - Accounting Standards Update (“ASU”) 2016-02, Leases ( Topic 842) ” requires that lessees and lessors recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements.  ASU 2016-02 was effective for us on January 1, 2019.  ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients.  We have elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and have not restated comparative periods.

 

Our operating leases relate primarily to office space and bank branches.  As a result of implementing ASU 2016-02, we recognized an operating lease right-of-use (“ROU”) asset of $26.2 million and an operating lease liability of $26.5 million on January 1, 2019, with no impact on our consolidated statements of income or consolidated statements of cash flows compared to the prior lease accounting model. The ROU asset and operating lease liability are recorded in other assets and other liabilities, respectively, in the consolidated balance sheets. See Note 11 - Leases for additional information.

 

Use of Estimates - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions may affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses.

 

Reclassifications - We have made certain reclassifications to the 2018 financial presentation to conform to the 2019 presentation. These reclassifications did not change net income or stockholders’ equity.

 

 

Recent Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13 , Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which sets forth a “current expected credit loss” (“CECL”) model requiring Old Line Bancshares to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. For public business entities that are U.S. Securities and Exchange Commission filers, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Old Line Bancshares has constituted a committee that has the responsibility to gather loan information and consider acceptable methodologies to comply with this ASU. The committee meets periodically to discuss the latest developments and committee members keep themselves updated on such developments via webcasts, publications, and conferences. We have also evaluated and selected a third party vendor solution to assist us in the application of ASU 2016-13. The adoption of ASU 2016-13 is likely to result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. We expect to run our current model parallel to the CECL model by the end of the second quarter in 2019. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses on debt securities held to maturity. Old Line Bancshares’ evaluation indicates that the provisions of ASU 2016-13 will impact its consolidated financial statements, in particular the level of the reserve for loan losses. We are, however, continuing to evaluate the extent of the potential impact.

 

In March 2017, FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities . This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption was permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The adoption of this guidance did not have a material impact on Old Line Bancshares’ consolidated financial statements.

 

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements.   The amendments set forth therein provide entities with an additional (and optional) transition method to adopt the new leases standard set forth in ASU 2016-02. Under such new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with U.S. GAAP (Topic 840, Leases ).  The amendments also provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance (Topic 606) and certain criteria are met. If the non-lease component or components associated with the lease component are the predominant component of the combined component, an entity is required to account for the combined component in accordance with Topic 606. Otherwise, the entity must account for the combined component as an operating lease in accordance with Topic 842 .  The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for Old Line Bancshares). Old Line Bancshares elected the transition options. ASU 2018-11 did not have a material impact on its consolidated financial statements.

 

ASU 2019-01, Leases (Topic 842) , provides clarifications to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing essential information about leasing transactions. Specifically, ASU 2019-01 (i) allows the fair value of the underlying asset reported by lessors that are not manufacturers or dealers to continue to be its cost and not fair value as measured under the fair value definition, (ii) allows for the cash flows received for sales-type and direct financing leases to continue to be presented as results from investing, and (iii) clarifies that entities do not have to disclose the effect of the lease standard on adoption year interim amounts. ASU 2019-01 will be effective for us on January 1, 2020 and will not have a material impact on our consolidated financial statements.

 

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2.	ACQUISITION OF BAY BANCORP, INC.

 

On April 13, 2018, Old Line Bancshares acquired Bay Bancorp, Inc. (“BYBK”), the parent company of Bay Bank, FSB (“Bay Bank”). Upon the consummation of the merger, each share of common stock of BYBK outstanding immediately before the merger was converted into the right to receive 0.4088 shares of Old Line Bancshares’ common stock, provided that cash was paid in lieu of any fractional shares of Old Line Bancshares common stock. As a result, Old Line Bancshares issued 4,408,087 shares of its common stock in exchange for the shares of BYBK common stock in the merger. The aggregate merger consideration was approximately $143.6 million based on the closing sales price of Old Line Bancshares’ common stock on April 13, 2018.

 

In connection with the merger, Bay Bank merged with and into Old Line Bank, with Old Line Bank the surviving bank.

 

At April 13, 2018, BYBK had consolidated assets of approximately $661 million. This merger added eleven banking locations located in BYBK’s primary market areas of Baltimore City and Anne Arundel, Baltimore, Howard and Harford Counties in Maryland.

 

The BYBK transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. Management made significant estimates and exercised significant judgment in accounting for the acquisition of BYBK. Management judgmentally assigned risk ratings to loans based on appraisals and estimated collateral values, expected cash flows, prepayment speeds and estimated loss factors to measure fair value for loans. Management used quoted or current market prices to determine the fair value of BYBK’s investment securities.

 

The following table provides the purchase price as of the acquisition date and the identifiable assets acquired and liabilities assumed at their estimated fair values.

 

Purchase Price Consideration
Cash consideration		$	973,383
Purchase price assigned to shares exchanged for stock			142,645,695
Total purchase price for BYBK acquisition			143,619,078

 

 

 

Fair Value of Assets Acquired
Cash and due from banks		$	22,590,994
Investment securities			51,895,757
Restricted equity securities, at cost			2,339,700
Loans, net			546,215,988
Premises and equipment			3,127,963
Accrued interest receivable			1,714,054
Accrued taxes receivable			1,912,807
Deferred income taxes			1,219,602
Bank owned life insurance			16,319,198
Other real estate owned			1,041,079
Core deposit intangible			11,243,714
Other assets			1,817,233
Total assets acquired		$	661,438,089
Fair Value of Liabilities assumed
Deposits		$	541,368,907
Short term borrowings			41,100,000
Other liabilities			4,934,884
Total liabilities assumed		$	587,403,791
Fair Value of net assets acquired			74,034,298
Total Purchase Price			143,619,078
Goodwill recorded for BYBK		$	69,584,780

 

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3.	INVESTMENT SECURITIES

 

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

 

		Amortized cost				Gross unrealized gains				Gross unrealized losses				Estimated fair value
March 31, 2019
Available for sale
U.S. treasury		$	3,000,457			$	—			$	(5,379	)		$	2,995,078
U.S. government agency			96,472,874				217,719				(262,471	)			96,428,122
Corporate bonds			18,614,263				124,085				(3,038	)			18,735,310
Foreign bonds			3,500,000				89				(2,994	)			3,497,095
Municipal securities			78,627,930				220,780				(692,362	)			78,156,348
Mortgage backed securities:
FHLMC certificates			18,562,486				747				(632,632	)			17,930,601
FNMA certificates			64,468,935				3,276				(2,022,007	)			62,450,204
GNMA certificates			27,542,845				2,288				(703,540	)			26,841,593
Total available for sale securities		$	310,789,790			$	568,984			$	(4,324,423	)		$	307,034,351
December 31, 2018
Available for sale
U.S. treasury		$	3,003,410			$	—			$	(10,910	)		$	2,992,500
U.S. government agency			19,123,653				—				(517,475	)			18,606,178
Corporate bonds			22,115,768				227,789				(4,231	)			22,339,326
Municipal securities			79,416,920				19,392				(2,147,608	)			77,288,704
Mortgage backed securities
FHLMC certificates			19,079,921				962				(1,007,115	)			18,073,768
FNMA certificates			56,720,930				—				(3,062,170	)			53,658,760
GNMA certificates			27,873,539				—				(1,127,013	)			26,746,526
Total available for sale securities		$	227,334,141			$	248,143			$	(7,876,522	)		$	219,705,762

 

At March 31, 2019 and December 31, 2018, securities with unrealized losses segregated by length of impairment were as follows:

 

		March 31, 2019
		Less than 12 months								12 Months or More								Total
		Fair value				Unrealized losses				Fair value				Unrealized losses				Fair value				Unrealized losses
U.S. treasury		$	1,501,172			$	391			$	1,493,906			$	4,988			$	2,995,078			$	5,379
U.S. government agency			17,583,100				675				15,385,407				261,796				32,968,507				262,471
Corporate bonds			4,496,963				3,038				—				—				4,496,963				3,038
Foreign debt securities			2,997,006				2,994				—				—				2,997,006				2,994
Municipal securities			—				—				35,457,987				692,362				35,457,987				692,362
Mortgage backed securities
FHLMC certificates			1,730,387				3,519				16,150,038				629,113				17,880,425				632,632
FNMA certificates			3,002,122				1,913				51,829,711				2,020,094				54,831,833				2,022,007
GNMA certificates			7,448,968				47,480				17,917,972				656,060				25,366,940				703,540
Total		$	38,759,718			$	60,010			$	138,235,021			$	4,264,413			$	176,994,739			$	4,324,423

 

 

		December 31, 2018
		Less than 12 months								12 Months or More								Total
		Fair value				Unrealized losses				Fair value				Unrealized losses				Fair value				Unrealized losses
U.S. treasury		$	1,503,516			$	1,313			$	1,488,984			$	9,597			$	2,992,500			$	10,910
U.S. government agency			1,357,980				26,795				15,288,957				490,680				16,646,937				517,475
Corporate bonds			2,995,769				4,231				—				—				2,995,769				4,231
Municipal securities			13,707,759				100,387				54,243,374				2,047,221				67,951,133				2,147,608
Mortgage backed securities
FHLMC certificates			1,715,756				26,062				16,293,413				981,053				18,009,169				1,007,115
FNMA certificates			1,164,291				11,023				52,494,470				3,051,147				53,658,761				3,062,170
GNMA certificates			8,871,024				138,099				17,875,503				988,914				26,746,527				1,127,013
Total		$	31,316,095			$	307,910			$	157,684,701			$	7,568,612			$	189,000,796			$	7,876,522

 

At March 31, 2019 and December 31, 2018, we had 134 and 166 investment securities, respectively, in an unrealized loss position for 12 months or more and 18 and 34 securities, respectively, in an unrealized loss position for less than 12 months.  We consider all unrealized losses on securities as of March 31, 2019 to be temporary losses because we will redeem each security at face value at or prior to maturity. We have the ability and intent to hold these securities until recovery or maturity. As of March 31, 2019, we do not have the intent to sell any of the securities classified as available for sale and believe that it is more likely than not that we will not have to sell any such securities before a recovery of cost. In most cases, market interest rate fluctuations cause a temporary impairment in value. We expect the fair value to recover as the investments approach their maturity date or re-pricing date or if market yields for these investments decline. We do not believe that credit quality caused the impairment in any of these securities. Because we believe these impairments are temporary, we have not realized any loss in our consolidated statement of income.

 

During the three months ended March 31, 2019, we received $3.4 million in proceeds from maturities and principal pay-downs on investment securities. The net proceeds of these transactions were used to purchase new investments. During the three months ended March 31, 2018, we received $6.2 million in proceeds from sales, maturities or calls of, and principal pay-downs on, investment securities and realized no gains or losses. The net proceeds of these transactions were used to pay down our Federal Home Loan Bank of Atlanta (“FHLB”) borrowings and purchase new investment securities.

 

Contractual maturities and pledged securities at March 31, 2019 are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. We classify mortgage-backed securities (“MBS”) based on contractual maturity date. However, we receive payments on a monthly basis.

 

		Available for Sale
March 31, 2019		Amortized cost				Fair value
Maturing
Within one year		$	6,275,457			$	6,267,466
Over one to five years			2,055,037				2,059,672
Over five to ten years			109,353,992				109,150,442
Over ten years			193,105,304				189,556,771
Total		$	310,789,790			$	307,034,351
Pledged securities		$	127,039,972			$	123,535,266

 

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4.

LOANS

 

Major classifications of loans held for investment are as follows:

 

		March 31, 2019												December 31, 2018
		Legacy (1)				Acquired				Total				Legacy (1)				Acquired				Total
Commercial Real Estate
Owner Occupied		$	300,801,706			$	138,198,872			$	439,000,578			$	299,266,275			$	140,892,706			$	440,158,981
Investment			582,015,759				191,197,053				773,212,812				592,529,807				195,883,002				788,412,809
Hospitality			180,062,301				13,451,634				193,513,935				172,189,046				13,134,019				185,323,065
Land and A&D			82,358,822				22,791,313				105,150,135				71,908,761				21,760,867				93,669,628
Residential Real Estate
First Lien-Investment			112,538,462				45,291,275				157,829,737				104,084,050				48,483,340				152,567,390
First Lien-Owner Occupied			108,852,047				136,182,761				245,034,808				108,696,078				140,221,589				248,917,667
Residential Land and A&D			44,332,786				15,842,288				60,175,074				42,639,161				16,828,434				59,467,595
HELOC and Jr. Liens			21,433,155				39,695,513				61,128,668				20,749,184				41,939,123				62,688,307
Commercial and Industrial			257,247,741				82,159,083				339,406,824				239,766,662				91,431,724				331,198,386
Consumer			15,270,415				31,814,054				47,084,469				16,289,147				34,919,111				51,208,258
Total loans			1,704,913,194				716,623,846				2,421,537,040				1,668,118,171				745,493,915				2,413,612,086
Allowance for loan losses			(7,449,768	)			(358,374	)			(7,808,142	)			(7,004,839	)			(466,184	)			(7,471,023	)
Deferred loan costs, net			3,457,262				—				3,457,262				3,086,635				—				3,086,635
Net loans		$	1,700,920,688			$	716,265,472			$	2,417,186,160			$	1,664,199,967			$	745,027,731			$	2,409,227,698

_______________________

(1)

As a result of the acquisitions of Maryland Bankcorp, Inc. (“Maryland Bankcorp”), the parent company of Maryland Bank & Trust Company, N.A. (“MB&T”), in April 2011, WSB Holdings Inc., the parent company of The Washington Savings Bank (“WSB”), in May 2013, Regal Bancorp, Inc. (“Regal”), the parent company of Regal Bank & Trust (“Regal Bank”), in December 2015, DCB Bancshares, Inc. (“DCB”), the parent company of Damascus Community Bank (“Damascus”), in July 2017, and BYBK, the parent company of Bay Bank, in April 2018, we have segmented the portfolio into two components, “Legacy” loans originated by Old Line Bank and “Acquired” loans acquired from MB&T, WSB, Regal Bank, Damascus and Bay Bank.

 

Credit Policies and Administration

 

We have adopted a comprehensive lending policy, which includes stringent underwriting standards for all types of loans. We have designed our underwriting standards to promote a complete banking relationship rather than a transactional relationship. Our lending staff follows pricing guidelines established periodically by our management team. In an effort to manage risk, prior to funding the loan committee, consisting of four non-employee members of the board of directors and four executive officers, must approve by majority vote all credit decisions in excess of a lending officer’s lending authority. Management believes that we employ experienced lending officers, secure appropriate collateral and carefully monitor the financial condition of our borrowers and the concentrations of loans in the portfolio.

 

In addition to the internal business processes employed in the credit administration area, Old Line Bank retains an outside independent firm to review the loan portfolio. This firm performs a detailed annual review and an interim update. We use the results of the firm’s report to validate our internal ratings and we review the commentary on specific loans and on our loan administration activities in order to improve our operations.

 

Commercial Real Estate Loans

 

We finance commercial real estate for our clients, for owner occupied and investment properties, hospitality and land acquisition and development. Commercial real estate loans totaled $1.51 billion at both March 31, 2019 and December 31, 2018. This lending has involved loans secured by owner-occupied commercial buildings for office, storage and warehouse space, as well as non-owner occupied commercial buildings. Our underwriting criteria for commercial real estate loans include maximum loan-to-value ratios, debt coverage ratios, secondary sources of repayments, guarantor requirements, net worth requirements and quality of cash flows. Loans secured by commercial real estate may be large in size and may involve a greater degree of risk than one-to-four family residential mortgage loans. Payments on such loans are often dependent on successful operation or management of the properties. We will generally finance owner occupied commercial real estate that does not exceed loan to value of 80% and investor real estate at a maximum loan to value of 75%.

 

 

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

 

At March 31, 2019, we had approximately $193.5 million of commercial real estate loans outstanding to the hospitality industry. An individual review of these loans indicates that they generally have a low loan to value, more than acceptable existing or projected cash flow, are to experienced operators and are generally dispersed throughout the region.

 

Residential Real Estate Loans

 

We offer a variety of consumer oriented residential real estate loans including home equity lines of credit, home improvement loans and first or second mortgages on owner occupied and investment properties. Our residential loan portfolio amounted to $524.2 million and $523.6 million at March 31, 2019 and December 31, 2018, respectively. Although most of these loans are in our market area, the diversity of the individual loans in the portfolio reduces our potential risk. Usually, we secure our residential real estate loans with a security interest in the borrower’s primary or secondary residence with a loan to value not exceeding 85%. Our initial underwriting includes an analysis of the borrower’s debt/income ratio which generally may not exceed 43%, collateral value, length of employment and prior credit history. A credit score of at least 640 is required, except for loans originated for sale in the secondary market, as discussed below. We do not originate any subprime residential real estate loans.

 

This segment of our portfolio also consists of funds advanced for construction of custom single family residences homes (where the home buyer is the borrower) and financing to builders for the construction of pre-sold homes and multi-family housing. These loans generally have short durations, meaning maturities typically of twelve months or less. Old Line Bank limits its construction lending risk through adherence to established underwriting procedures. These loans generally have short durations, meaning maturities typically of twelve months or less. Residential houses, multi-family dwellings and commercial buildings under construction and the underlying land for which the loan was obtained secure the construction loans. The vast majority of these loans are concentrated in our market area.

 

Construction lending also entails significant risk. These risks generally involve larger loan balances concentrated with single borrowers with funds advanced upon the security of the land or the project under construction. An appraisal of the property estimates the value of the project “as is and as if” completed. An appraisal of the property estimates the value of the project prior to completion of construction. Thus, initial funds are advanced based on the current value of the property with the remaining construction funds advanced under a budget sufficient to successfully complete the project within the “as completed” loan to value. To further mitigate the risks, we generally limit loan amounts to 80% or less of appraised values and obtain first lien positions on the property.

 

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

 

 

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

 

Under our loan approval policy, all residential real estate loans approved must comply with federal regulations. Generally, we will make residential mortgage loans in amounts up to the limits established by Fannie Mae and Freddie Mac for secondary market resale purposes. Currently this amount for single-family residential loans varies from $484,350 up to a maximum of $726,525 for certain high-cost designated areas. We also make residential mortgage loans up to limits established by the Federal Housing Administration, which currently is $726,525. The Washington, D.C. and Baltimore areas are both considered high-cost designated areas. We will, however, make loans in excess of these amounts if we believe that we can sell the loans in the secondary market or that the loans should be held in our portfolio. For loans we originate for sale in the secondary market, we typically require a credit score of 620 or higher, with some exceptions provided we receive an approval recommendation from FannieMae, FreddieMac or the Federal Housing Administration’s automated underwriting approval system.  Loans sold in the secondary market are sold to investors on a servicing released basis and recorded as loans as held for sale.  The premium is recorded in income on marketable loans in non-interest income, net of commissions paid to the loan officers.

 

Commercial and Industrial Lending

 

Our commercial and industrial lending consists of lines of credit, revolving credit facilities, accounts receivable financing, term loans, equipment loans, Small Business Administration loans, standby letters of credit and unsecured loans. We originate commercial loans for any business purpose including the financing of leasehold improvements and equipment, the carrying of accounts receivable, general working capital, and acquisition activities. We have a diverse client base and we do not have a concentration of these types of loans in any specific industry segment. We generally secure commercial business loans with accounts receivable, equipment, deeds of trust and other collateral such as marketable securities, cash value of life insurance and time deposits at Old Line Bank.

 

Commercial business loans have a higher degree of risk than residential mortgage loans because the availability of funds for repayment generally depends on the success of the business. They may also involve high average balances, increased difficulty monitoring and a high risk of default. To help manage this risk, we typically limit these loans to proven businesses and we generally obtain appropriate collateral and personal guarantees from the borrower’s principal owners and monitor the financial condition of the business. For loans in excess of $250,000, monitoring generally includes a review of the borrower’s annual tax returns and updated financial statements.

 

Consumer Installment Lending

 

We offer various types of secured and unsecured consumer loans. We make consumer loans for personal, family or household purposes as a convenience to our customer base. Consumer loans, however, are not a focus of our lending activities. The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of his or her ability to meet existing obligations and payments on the proposed loan. As a general guideline, a consumer’s total debt service should not exceed 40% of his or her gross income.

 

Our consumer loan portfolio includes indirect loans, which consists primarily of auto and RV loans. These loans are financed through dealers and the dealers receive a percentage of the finance charge, which varies depending on the terms of each loan. We use the same underwriting standards in originating these indirect loans as we do for consumer loans generally.

 

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

 

 

Concentrations of Credit

 

Most of our lending activity occurs within the state of Maryland within the suburban Washington, D.C. and Baltimore market areas in Baltimore City and Anne Arundel, Baltimore, Calvert, Carroll, Charles, Frederick, Harford, Howard, Montgomery, Prince George’s and St. Mary’s Counties. The majority of our loan portfolio consists of commercial real estate loans and residential real estate loans.

 

Non-Accrual and Past Due Loans

 

We consider loans past due if the borrower has not paid the required principal and interest payments when due under the original or modified terms of the promissory note and place a loan on non-accrual status when the payment of principal or interest has become 90 days past due. When we classify a loan as non-accrual, we no longer accrue interest on such loan and we reverse any interest previously accrued but not collected. We will generally restore a non-accrual loan to accrual status when the borrower brings delinquent principal and interest payments current and we expect to collect future monthly principal and interest payments. We recognize interest on non-accrual legacy loans only when received. We originally recorded purchased, credit-impaired loans at fair value upon acquisition, and an accretable yield is established and recognized as interest income on purchased loans to the extent subsequent cash flows support the estimated accretable yield. Purchased, credit-impaired loans that perform consistently with the accretable yield expectations are not reported as non-accrual or nonperforming. However, purchased, credit-impaired loans that do not continue to perform according to accretable yield expectations are considered impaired, and presented as non-accrual and nonperforming. Currently, management expects to fully collect the carrying value of acquired, credit-impaired loans.

 

 

 

 

 

 

 

 

The table below presents an age analysis of the loans held for investment portfolio at March 31, 2019 and December 31, 2018.

 

Age Analysis of Past Due Loans

 

		Age Analysis of Past Due Loans
		March 31, 2019												December 31, 2018
		Legacy				Acquired				Total				Legacy				Acquired				Total
Current		$	1,695,749,348			$	706,863,709			$	2,402,613,057			$	1,659,191,112			$	729,738,007			$	2,388,929,119
Accruing past due loans:
30 - 89 days past due
Commercial Real Estate:
Owner Occupied			3,958,783				—				3,958,783				3,990,558				—				3,990,558
Investment			66,753				1,908,182				1,974,935				1,729,404				3,849,944				5,579,348
Land and A&D			1,015,998				—				1,015,998				—				—				—
Residential Real Estate:
First Lien-Investment			178,881				589,787				768,668				179,701				896,227				1,075,928
First Lien-Owner Occupied			113,936				1,735,989				1,849,925				94,178				3,062,084				3,156,262
Land and A&D			464,649				338,036				802,685				883,460				413,191				1,296,651
HELOC and Jr. Liens			137,746				574,487				712,233				119,924				790,989				910,913
Commercial and Industrial			408,106				106,718				514,824				670,318				1,444,347				2,114,665
Consumer			109,122				664,188				773,310				320,071				1,338,813				1,658,884
Total 30 - 89 days past due			6,453,974				5,917,387				12,371,361				7,987,614				11,795,595				19,783,209
90 or more days past due
Commercial Real Estate:
Owner Occupied			1,050,000								1,050,000				—				—				—
Investment			—				—				—				—				139,247				139,247
Residential Real Estate:
First Lien-Owner Occupied			—				150,588				150,588				—				103,365				103,365
Commercial and Industrial			75,137				—				75,137				—				—				—
Consumer			—				—				—				—				54				54
Total 90 or more days past due			1,125,137				150,588				1,275,725				—				242,666				242,666
Total accruing past due loans			7,579,111				6,067,975				13,647,086				7,987,614				12,038,261				20,025,875
Recorded Investment Non-accruing loans:
Commercial Real Estate:
Owner Occupied			—				246,165				246,165				—				182,261				182,261
Investment			576,671				51,595				628,266				—				51,070				51,070
Land and A&D			—				45,000				45,000				—				45,000				45,000
Residential Real Estate:
First Lien-Investment			192,501				303,891				496,392				192,501				292,758				485,259
First Lien-Owner Occupied			257,059				1,991,129				2,248,188				262,194				2,027,974				2,290,168
Land and A&D			284,179				200,209				484,388				277,704				201,737				479,441
HELOC and Jr. Liens			—				653,634				653,634				—				690,732				690,732
Commercial and Industrial			250,247				45,294				295,541				191,388				45,269				236,657
Consumer			24,078				155,245				179,323				15,658				180,846				196,504
Non-accruing past due loans:			1,584,735				3,692,162				5,276,897				939,445				3,717,647				4,657,092
Total Loans		$	1,704,913,194			$	716,623,846			$	2,421,537,040			$	1,668,118,171			$	745,493,915			$	2,413,612,086

 

We consider all nonperforming loans and troubled debt restructurings (“TDRs”) to be impaired. We do not recognize interest income on nonperforming loans during the time period that the loans are nonperforming. We only recognize interest income on nonperforming loans when we receive payment in full for all amounts due of all contractually required principle and interest, and the loan is current with its contractual terms. The tables below present our impaired loans at and for the periods ended March 31, 2019 and December 31, 2018.

 

 

Impaired Loans

March 31, 2019

 

		Unpaid Principal Balance				Recorded Investment				Related Allowance				Average Recorded Investment				Interest Income Recognized
Legacy
With no related allowance recorded:
Commercial Real Estate:
Owner Occupied		$	1,726,708			$	1,726,708			$	—			$	1,735,411			$	13,300
Investment			1,673,721				1,673,721				—				1,681,508				21,024
Residential Real Estate:
First Lien-Owner Occupied			257,059				257,059				—				279,950				2,129
Commercial and Industrial			351,344				351,344				—				357,469				2,483
Consumer			12,081				12,081								12,081				—
With an allowance recorded:
Residential Real Estate:
First Lien-Investment			192,501				192,501				39,420				192,501				—
Land and A&D			284,179				284,179				25,000				282,613				—
Commercial and Industrial			241,972				241,972				76,307				242,610				—
Consumer			11,997				11,997				1,328				12,785				446
Total legacy impaired			4,751,562				4,751,562				142,055				4,796,928				39,382
Acquired(1)
With no related allowance recorded:
Commercial Real Estate:
Owner Occupied			267,231				267,231				—				267,012				—
Land and A&D
Residential Real Estate:
First Lien-Owner Occupied			2,362,303				2,234,524				—				2,422,433				20,169
First Lien-Investment
Land and A&D			56,939				56,939				—				61,289				1,061
HELOC and Jr. Lien			477,025				477,025				—				501,237				6,491
Commercial and Industrial			66,661				66,661				—				67,063				844
Consumer			74,762				74,762				—				89,750				1,289
With an allowance recorded:
Commercial Real Estate:
Investment			72,408				72,408				14,340				163,876				—
Land and A&D			328,851				45,000				45,000				328,851				—
Residential Real Estate:
First Lien-Owner Occupied			175,873				175,873				5,620				175,873				—
First Lien-Investment			309,170				309,170				85,653				315,785				—
Land and A&D			154,297				154,297				86,296				161,153				—
HELOC and Jr. Lien			187,136				187,136				53,711				187,136				—
Commercial and Industrial			48,750				48,750				48,750				48,750				—
Consumer			108,569				108,569				19,004				120,781				2,630
Total acquired impaired			4,689,975				4,278,345				358,374				4,910,989				32,484
Total impaired		$	9,441,537			$	9,029,907			$	500,429			$	9,707,917			$	71,866

_______________________

(1)

U.S. GAAP requires that we record acquired loans at fair value at acquisition, which includes a discount for loans with credit impairment. These purchased credit impaired loans are not performing according to their contractual terms and meet the definition of an impaired loan. Although we do not accrue interest income at the contractual rate on these loans, we do recognize an accretable yield as interest income to the extent such yield is supported by cash flow analysis of the underlying loans.

 

 

Impaired Loans

December 31, 2018

 

		Unpaid Principal Balance				Recorded Investment				Related Allowance				Average Recorded Investment				Interest Income Recognized
Legacy
With no related allowance recorded:
Commercial Real Estate:
Owner Occupied		$	1,737,394			$	1,737,394			$	—			$	1,766,117			$	74,203
Investment			1,688,661				1,688,661				—				1,716,183				88,410
Residential Real Estate:
First Lien-Owner Occupied			262,194				262,194				—				285,514				11,412
Land and A&D			277,704				277,704				—				277,704				—
Consumer			1,495				1,495				—				10,707				1,130
With an allowance recorded:
Residential Real Estate:
First Lien-Owner Occupied
First Lien-Investment			192,501				192,501				39,420				192,501				—
Commercial and Industrial			148,349				148,349				13,149				152,898				3,926
Consumer			14,163				14,163				1,416				27,217				1,129
Total legacy impaired			4,808,509				4,808,509				53,985				4,938,812				198,805
Acquired(1)
With no related allowance recorded:
Commercial Real Estate:
Owner Occupied			283,083				232,635				—				542,654				3,281
Residential Real Estate:
First Lien-Owner Occupied			2,127,854				2,011,286				—				2,159,327				38,636
Land and A&D			58,659				58,659				—				62,178				2,896
Consumer			22,139				22,139				—				26,027				364
With an allowance recorded:
Commercial Real Estate:
Owner Occupied
Investment			72,408				72,408				14,340				163,876				2,750
First Lien-Owner Occupied			459,033				459,033				98,008				482,422				7,695
First Lien-Investment			298,187				298,187				62,701				310,862				7,871
Land and A&D			154,297				154,297				99,517				159,819				—
HELOC and Jr. Lien			533,565				533,565				78,814				534,204				12,254
Commercial and Industrial			48,750				48,750				48,750				48,750				237
Consumer			188,102				188,102				19,053				231,978				11,619
Total acquired impaired			4,810,584				4,359,717				466,183				5,289,532				96,107
Total impaired		$	9,619,093			$	9,168,226			$	520,168			$	10,228,344			$	294,912

_______________________

(1)

U.S. GAAP requires that we record acquired loans at fair value at acquisition, which includes a discount for loans with credit impairment. These purchased credit impaired loans are not performing according to their contractual terms and meet the definition of an impaired loan. Although we do not accrue interest income at the contractual rate on these loans, we do recognize an accretable yield as interest income to the extent such yield is supported by cash flow analysis of the underlying loans.

 

We consider a loan a TDR when we conclude that both of the following conditions exist: the restructuring constitutes a concession and the debtor is experiencing financial difficulties. Restructured loans at March 31, 2019 consisted of seven loans for an aggregate of $2.3 million compared to seven loans for an aggregate of $2.4 million at December 31, 2018.

 

We had no loan modifications reported as TDRs during the three months ended March 31, 2019 or 2018. We had no loans that were modified as a TDR that defaulted during the three month period ended March 31, 2019 or 2018.

 

 

Acquired impaired loans

The following table documents changes in the accretable (premium) discount on acquired impaired loans during the three months ended March 31, 2019 and 2018, along with the outstanding balances and related carrying amounts for the beginning and end of those respective periods.

 

		March 31, 2019				March 31, 2018
Balance at beginning of period		$	124,090			$	115,066
Accretion of fair value discounts			(407,618	)			(27,770	)
Reclassification (to)/from non-accretable discount			375,326				23,195
Balance at end of period		$	91,798			$	110,491

 

		Contractually Required Payments Receivable				Carrying Amount
At March 31, 2019		$	10,994,414			$	9,627,828
At December 31, 2018			11,146,165				9,396,862
At March 31, 2018			8,421,446				6,799,657
At December 31, 2017			8,277,731				6,617,774

 

Credit Quality Indicators

 

We review the adequacy of the allowance for loan losses at least quarterly. We base the evaluation of the adequacy of the allowance for loan losses upon loan categories. We categorize loans as residential real estate loans, commercial real estate loans, commercial loans and consumer loans. We further divide commercial real estate loans by owner occupied, investment, hospitality and land acquisition and development. We also divide residential real estate by owner occupied, investment, land acquisition and development and junior liens. All categories are divided by risk rating and loss factors and weighed by risk rating to determine estimated loss amounts. We evaluate delinquent loans and loans for which management has knowledge about possible credit problems of the borrower or knowledge of problems with collateral separately and assign loss amounts based upon the evaluation.

 

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

 

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

 

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

 

 

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

 

		Account Balance
March 31, 2019		Legacy				Acquired				Total
Risk Rating
Pass(1 - 5)
Commercial Real Estate:
Owner Occupied		$	294,532,310			$	135,256,420			$	429,788,730
Investment			579,274,406				189,422,802				768,697,208
Hospitality			180,062,301				13,451,634				193,513,935
Land and A&D			82,358,822				22,550,396				104,909,218
Residential Real Estate:
First Lien-Investment			111,733,083				42,161,186				153,894,269
First Lien-Owner Occupied			108,534,276				130,794,217				239,328,493
Land and A&D			41,975,994				15,541,118				57,517,112
HELOC and Jr. Liens			21,433,155				38,992,054				60,425,209
Commercial			255,249,209				80,452,219				335,701,428
Consumer			15,246,337				31,603,019				46,849,356
			1,690,399,893				700,225,065				2,390,624,958
Special Mention(6)
Commercial Real Estate:
Owner Occupied			416,239				1,289,117				1,705,356
Investment			1,067,632				941,188				2,008,820
Land and A&D			—				195,917				195,917
Residential Real Estate:
First Lien-Investment			286,659				1,700,354				1,987,013
First Lien-Owner Occupied			60,712				1,506,258				1,566,970
Land and A&D			2,072,613				100,961				2,173,574
Commercial			322,215				1,584,961				1,907,176
Consumer			—				24,815				24,815
			4,226,070				7,343,571				11,569,641
Substandard(7)
Commercial Real Estate:
Owner Occupied			5,853,157				1,653,335				7,506,492
Investment			1,673,721				833,063				2,506,784
Land and A&D			—				45,000				45,000
Residential Real Estate:
First Lien-Investment			518,720				1,429,735				1,948,455
First Lien-Owner Occupied			257,059				3,882,286				4,139,345
Land and A&D			284,179				200,209				484,388
HELOC and Jr. Liens			—				703,459				703,459
Commercial			1,676,317				121,903				1,798,220
Consumer			24,078				186,220				210,298
			10,287,231				9,055,210				19,342,441
Doubtful(8)			—				—				—
Loss(9)			—				—				—
Total		$	1,704,913,194			$	716,623,846			$	2,421,537,040

 

 

 

		Account Balance
December 31, 2018		Legacy				Acquired				Total
Risk Rating
Pass(1 - 5)
Commercial Real Estate:
Owner Occupied		$	293,682,007			$	137,978,800			$	431,660,807
Investment			589,763,511				194,092,985				783,856,496
Hospitality			172,189,046				13,134,019				185,323,065
Land and A&D			71,908,761				21,514,420				93,423,181
Residential Real Estate:
First Lien-Investment			103,270,617				45,431,446				148,702,063
First Lien-Owner Occupied			108,371,748				134,959,907				243,331,655
Land and A&D			40,268,376				16,524,667				56,793,043
HELOC and Jr. Liens			20,749,184				41,196,500				61,945,684
Commercial			237,713,832				89,049,308				326,763,140
Consumer			16,273,489				34,674,679				50,948,168
			1,654,190,571				728,556,731				2,382,747,302
Special Mention(6)
Commercial Real Estate:
Owner Occupied			420,347				1,303,849				1,724,196
Investment			1,077,635				557,687				1,635,322
Land and A&D			—				201,447				201,447
Residential Real Estate:
First Lien-Investment			289,618				1,709,025				1,998,643
First Lien-Owner Occupied			62,136				1,522,737				1,584,873
Land and A&D			2,093,081				102,030				2,195,111
Commercial			174,729				174,429				349,158
Consumer			—				30,848				30,848
			4,117,546				5,602,052				9,719,598
Substandard(7)
Commercial Real Estate:
Owner Occupied			5,163,921				1,610,057				6,773,978
Investment			1,688,661				1,232,330				2,920,991
Land and A&D			—				45,000				45,000
Residential Real Estate:
First Lien-Investment			523,815				1,342,869				1,866,684
First Lien-Owner Occupied			262,194				3,738,945				4,001,139
Land and A&D			277,704				201,737				479,441
HELOC and Jr. Liens			—				742,623				742,623
Commercial			1,878,101				2,207,987				4,086,088
Consumer			15,658				213,584				229,242
			9,810,054				11,335,132				21,145,186
Doubtful(8)			—				—				—
Loss(9)			—				—				—
Total		$	1,668,118,171			$	745,493,915			$	2,413,612,086

 

The following table details activity in the allowance for loan losses by portfolio segment for the three month periods ended March 31, 2019 and 2018. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

 

March 31, 2019		Commercial and Industrial				Commercial Real Estate				Residential Real Estate				Consumer				Total
Beginning balance		$	1,562,740			$	4,728,694			$	1,081,394			$	98,195			$	7,471,023
Provision for loan losses			232,962				128,045				(4,002	)			57,170				414,175
Recoveries			10,753				417				3,119				27,552				41,841
Total			1,806,455				4,857,156				1,080,511				182,917				7,927,039
Loans charged off			(4,108	)			—				(1,028	)			(113,761	)			(118,897	)
Ending Balance		$	1,802,347			$	4,857,156			$	1,079,483			$	69,156			$	7,808,142
Amount allocated to:
Legacy Loans:
Individually evaluated for impairment		$	76,307			$	—			$	64,420			$	1,328			$	142,055
Other loans not individually evaluated			1,677,290				4,797,816				783,783				48,824				7,307,713
Acquired Loans:
Individually evaluated for impairment			48,750				59,340				231,280				19,004				358,374
Ending balance		$	1,802,347			$	4,857,156			$	1,079,483			$	69,156			$	7,808,142

 

March 31, 2018		Commercial and Industrial				Commercial Real Estate				Residential Real Estate				Consumer				Total
Beginning balance		$	1,262,030			$	3,783,735			$	844,355			$	30,466			$	5,920,586
Provision for loan losses			(50,372	)			527,631				(148,161	)			65,798				394,896
Recoveries			300				139				32				3,645				4,116
Total			1,211,958				4,311,505				696,226				99,909				6,319,598
Loans charged off			—				—				—				(62,079	)			(62,079	)
Ending Balance		$	1,211,958			$	4,311,505			$	696,226			$	37,830			$	6,257,519
Amount allocated to:
Legacy Loans:
Individually evaluated for impairment		$	95,431			$	69,903			$	76,496			$	—			$	241,830
Other loans not individually evaluated			1,092,011				4,161,530				542,266				37,830				5,833,637
Acquired Loans:
Individually evaluated for impairment			24,516				80,072				77,464				—				182,052
Ending balance		$	1,211,958			$	4,311,505			$	696,226			$	37,830			$	6,257,519

 

Our recorded investment in loans at March 31, 2019 and 2018 related to each balance in the allowance for probable loan losses by portfolio segment and disaggregated on the basis of our impairment methodology was as follows:

 

 

March 31, 2019		Commercial and Industrial				Commercial Real Estate				Residential Real Estate				Consumer				Total
Legacy loans:
Individually evaluated for impairment with specific reserve		$	241,972			$	—			$	476,680			$	11,997			$	730,649
Individually evaluated for impairment without specific reserve			351,344				3,400,429				257,059				12,081				4,020,913
Other loans not individually evaluated			256,654,426				1,141,838,159				286,422,712				15,246,338				1,700,161,633
Acquired loans:
Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition)			48,750				117,408				826,476				108,569				1,101,203
Individually evaluated for impairment without specific reserve (ASC 310-20 at acquisition)			66,661				267,231				2,768,488				74,762				3,177,142
Individually evaluated for impairment without specific reserve (ASC 310-30 at acquisition)			201,052				4,551,734				4,875,042				—				9,627,828
Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition)			81,842,619				360,702,499				228,541,830				31,630,722				702,717,672
Ending balance		$	339,406,823			$	1,510,877,460			$	524,168,286			$	47,084,471			$	2,421,537,040

 

March 31, 2018		Commercial and Industrial				Commercial Real Estate				Residential Real Estate				Consumer				Total
Legacy loans:
Individually evaluated for impairment with specific reserve		$	95,431			$	587,663			$	243,842			$	—			$	926,936
Individually evaluated for impairment without specific reserve			377,936				2,925,991				224,092				—				3,528,019
Other loans not individually evaluated			167,628,232				1,036,158,293				211,726,177				14,407,498				1,429,920,200
Acquired loans:
Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition)			71,049				154,297				250,194				—				475,540
Individually evaluated for impairment without specific reserve (ASC 310-20 at acquisition)			—				299,445				1,265,545				—				1,564,990
Individually evaluated for impairment without specific reserve (ASC 310-30 at acquisition)			—				3,434,002				3,351,654				14,000				6,799,656
Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition)			31,537,974				142,896,022				98,575,266				44,235,502				317,244,764
Ending balance		$	199,710,622			$	1,186,455,713			$	315,636,770			$	58,657,000			$	1,760,460,105