10-K 1 olbk-20141231x10k.htm 10-K olbk_Current folio_10K

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10‑K

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 000‑50345

Old Line Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

 

Maryland
State or other jurisdiction of
incorporation or organization

20‑0154352
(I.R.S. Employer
Identification No.)

1525 Pointer Ridge Place
Bowie, Maryland
(Address of principal executive offices)

20716
(Zip Code)

 

Registrants telephone number, including area code: (301) 430‑2500

Securities registered pursuant to Section 12(b) of the Act:

 

 

Common stock, par value $0.01 per share

Name of exchange on which registered

(Title of each class)

The NASDQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes   No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes   No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   No 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b‑2 of the Exchange Act.

 

 

 

 

Large accelerated filer 

Accelerated filer 

Non‑accelerated filer
(Do not check if a
smaller reporting company)

Smaller Reporting Company 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act).  Yes   No

The aggregate market value of the common equity held by non‑affiliates was $131.2 million as of June 30, 2014 based on a sales price of $15.76 per share of Common Stock, which is the sales price at which the Common Stock was last traded on June 30, 2014 as reported by the NASDAQ Stock Market LLC.

The number of shares outstanding of the issuers Common Stock was 10,810,930 as of March 1, 2015.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2015 Annual Meeting of Stockholders of Old Line Bancshares, Inc., to be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year, are incorporated by reference in Part III of this Annual Report on Form 10‑K.

 

 

 


 

OLD LINE BANCSHARES, INC.

ANNUAL REPORT ON FORM 10‑K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014

 

 

 

PART I 

 

Item 1. 

Business

Item 1A. 

Risk Factors

16

Item 1B. 

Unresolved Staff Comments

21

Item 2. 

Properties

22

Item 3. 

Legal Proceedings

23

Item 4. 

Mine Safety Disclosures

23

PART II 

 

Item 5. 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

24

Item 6. 

Selected Financial Data

26

Item 7. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 7A. 

Quantitative and Qualitative Disclosures About Market Risk

61

Item 8. 

Financial Statements and Supplementary Data

64

Item 9. 

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

122

Item 9A. 

Controls and Procedures

122

Item 9B. 

Other Information

122

PART III 

 

Item 10. 

Directors, Executive Officers and Corporate Governance

122

Item 11. 

Executive Compensation

123

Item 12. 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

123

Item 13. 

Certain Relationships and Related Transactions, and Director Independence

123

Item 14. 

Principal Accounting Fees and Services

123

PART IV 

 

Item 15. 

Exhibits, Financial Statement Schedules

125

 

 

 

 

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PART I

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. Risk Factors.”

Our actual results and the actual outcome of our expectations and strategies could differ materially from those anticipated or estimated because of these risks and uncertainties and you should not put undue reliance on any forward‑looking statements. All forward‑looking statements speak only as of the date of this filing, and we undertake no obligation to update the forward‑looking statements to reflect factual assumptions, circumstances or events that have changed after we have made the forward‑looking statements.

Business

Old Line Bancshares, Inc.  was incorporated under the laws of the State of Maryland on April 11, 2003 to serve as the holding company of Old Line Bank. The primary business of Old Line Bancshares, Inc. is to own all of the capital stock of Old Line Bank.

On May 22, 2003, the stockholders of Old Line Bank approved the reorganization of Old Line Bank into a holding company structure. The reorganization became effective on September 15, 2003. In connection with the reorganization, (i) Old Line Bank became our wholly‑owned subsidiary and (ii) each outstanding share (or fraction thereof) of Old Line Bank common stock was converted into one share (or fraction thereof) of Old Line Bancshares, Inc. common stock, and the former holders of Old Line Bank common stock became the holders of all our outstanding shares.

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Our primary business is to own all of the capital stock of Old Line Bank. We also have an investment in a real estate investment limited liability company named Pointer Ridge Office Investment, LLC (“Pointer Ridge”). We own 62.50% of Pointer Ridge.

Old Line Bank is a trust company chartered under Subtitle 2 of Title 3 of the Financial Institutions Article of the Annotated Code of Maryland. Old Line Bank was originally chartered in 1989 as a national bank under the title “Old Line National Bank.” In June 2002, Old Line Bank converted to a Maryland chartered trust company exercising the powers of a commercial bank, and received a Certificate of Authority to do business from the Maryland Commissioner of Financial Regulation.

Old Line Bank is a Maryland chartered trust company (with all of the powers of a commercial bank). Old Line Bank does not exercise trust powers and is regulators is the same as a Maryland Chartered commercial bank.  As of December 31, 2014, 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.  As a result, its primary regulator will be the Federal Deposit Insurance Corporation (“FDIC”) and as of that date it is subject to regulation, supervision and regular examination by the Maryland Commissioner of Financial Regulation (the “Commissioner”) and the FDIC. Deposits of Old Line Bank are insured to the maximum legal limits by the Deposit Insurance Fund of the FDIC.

The Bank is subject to regulation supervision and regular examination by the Maryland Commissioner of Financial Regulation and the Federal Deposit Insurance Corporation and our deposits insured by the FDIC..

We are headquartered in Bowie, Maryland, approximately 10 miles east of Andrews Air Force Base and 20 miles east of Washington, D.C. We engage in a general commercial banking business, making various types of loans and accepting deposits. We market our financial services to small to medium sized businesses, entrepreneurs, professionals, consumers and high net worth clients. Our current primary market area is the suburban Maryland (Washington, D.C. suburbs) counties of Anne Arundel, Calvert, Charles, Montgomery, Prince George’s and St. Mary’s. We also target customers throughout the greater Washington, D.C. metropolitan area.

Our principal source of revenue is interest income and fees generated by lending and investing funds on deposit. We typically balance the loan and investment portfolio towards loans. Generally speaking, loans earn more attractive returns than investments and are a key source of product cross sales and customer referrals. Our loan and investment strategies balance the need to maintain adequate liquidity via excess cash or federal funds sold with opportunities to leverage our capital appropriately.

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 maintaining credit quality, creating an attractive branch network, expanding fee income, generating extensions of core banking services and using technology to maximize stockholder value.

In June 2012, we established Old Line Financial Services as a division of Old Line Bank and hired an individual with over 25 years of experience to manage this division. Old Line Financial Services allows us to expand the services we provide our customers to include retirement planning and products. Additionally, this division offers investment services including investment management, estate and succession planning and allows our customers to directly purchase individual stocks, bonds and mutual funds. Through this division customers may also purchase life insurance, long term care insurance and key man/woman insurance.

Recent Mergers and Acquisitions

WSB Holdings, Inc.  On May 10, 2013, Old Line Bancshares acquired WSB Holdings, Inc. (“WSB Holdings”), the parent company of The Washington Savings Bank, F.S.B. (“WSB”). In connection with the acquisition, WSB was merged with and into Old Line Bank, with Old Line Bank the surviving bank. We acquired five WSB branches, its headquarters building and it’s established mortgage origination group in this acquisition.  The mortgage origination group

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originates residential real estate loans for our portfolio and loans classified as held for sale to be sold in the secondary market.  Two of the acquired branches were closed on December 31, 2014.

The acquisition increased Old Line Bancshares, Inc.’s total assets by more than $310 million immediately after closing. As a result of this acquisition, Old Line Bank is the fourth largest independent commercial bank based in Maryland, with assets of more than $1.2 billion and 19 full service branches serving five counties.

Maryland Bankcorp, Inc.  On April 1, 2011, Old Line Bancshares acquired Maryland Bankcorp, Inc. (“Maryland Bankcorp”), the parent company of Maryland Bank & Trust Company, N.A. (“MB&T”). In connection with the acquisition, MB&T was merged with and into Old Line Bank, with Old Line Bank the surviving bank. The acquisition of MB&T’s ten full‑service branches expanded our market presence in Calvert and St. Mary’s counties. The acquisition increased Old Line Bancshares, Inc.’s total assets by more than $349 million immediately after closing to approximately $750 million.  Two of the acquired branches were closed on December 31, 2014.

For more information regarding our mergers and acquisitions, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Mergers and Acquisitions” and Note 2—Acquisition of WSB Holdings, Inc. in the Notes to our Consolidated Financial Statements.

Location and Market Area

We consider our current primary market area to consist of the suburban Maryland (Washington, D.C. suburbs) Counties of Anne Arundel, Calvert, Charles, Prince George’s, Montgomery and St. Mary’s. The economy in our current primary market area has focused on real estate development, high technology, retail and the government sector.

Our headquarters and a branch are located at 1525 Pointer Ridge Place, Bowie, Prince George’s County, Maryland. A critical component of our strategic plan and future growth is Prince George’s County. We currently have eight branch locations and four loan production offices in Prince George’s County. Prince George’s County wraps around the eastern boundary of Washington, D.C. and offers urban, suburban and rural settings for employers and residents. There are several national and international airports less than an hour away, as is Baltimore. As a result of the acquisition of WSB, we acquired the building located at 4201 Mitchellville Road, Bowie, Maryland which houses a branch and our mortgage group.  This loan production office primarily originates loans sold in the secondary market and has expanded our presence in the surrounding counties of the Washington D.C. metro area.

We currently have four branch offices and a loan production office located in Charles County, Maryland. Just 15 miles south of the Washington Capital Beltway, Charles County is the gateway to Southern Maryland. The northern part of Charles County is the “development district” where the commercial, residential and business growth is focused. Waldorf, White Plains and the planned community of St. Charles are located here.

Four of our branch offices are located in Anne Arundel County, Maryland. We have one in Annapolis that we opened in September 2008 that we relocated and expanded to include a loan production office in 2011. We have another branch that we opened in Crofton in July 2009. We have two remaining branches that were acquired in the WSB acquisition, located in Millersville and Odenton.  Anne Arundel County borders the Chesapeake Bay and is situated in the high tech corridor between Baltimore and Washington, D.C. With over 534 miles of shoreline, it provides waterfront living to many residential communities. Annapolis, the State Capital and home to the United States Naval Academy, and Baltimore/Washington International Thurgood Marshal Airport (BWI) are located in Anne Arundel County. Anne Arundel County has one of the strongest economies in the State of Maryland and its unemployment rate is consistently below the national average.

We expanded our presence in Calvert and St. Mary’s  Counties in 2011 as a result of the MB&T acquisition. The unemployment rates in Calvert and St. Mary’s Counties are among the lowest in the state of Maryland and also consistently rank below the national average. Calvert County, located approximately 25 miles southeast of Washington, D.C., is one of several Maryland counties that comprise the Washington Metropolitan Area and is adjacent to Anne Arundel, Prince George’s, St. Mary’s and Charles Counties. Major employers in Calvert County include municipal and government agencies and Constellation Energy. We have two branches and a loan production office in Calvert County. In St. Mary’s

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County, we have two branch and one loan production office. St. Mary’s County is located approximately 35 miles southeast of Washington, D.C. It is adjacent to Charles and Calvert Counties and is home to the Patuxent River Naval Air Station, a major naval air testing facility on the east coast of the United States.

On September 26, 2014, we announced plans to realign branch offices within our footprint, which includes the closing and consolidation of four branches.  In this regard, we closed four branches closed  on December 31, 2014 which were our Crofton Centre, Lexington Park, Solomons and Waldorf Charles County Plaza.  All of these former branches had existing Old Line Bank branches within close proximity.  The closing of the branches will result in an estimate pre-tax cost savings of approximately $1.6 million in 2015.  These branches are excluded from the branch count above.

During the first quarter of 2013, we opened a loan production office located at 12501 Prosperity Drive, Suite 215, Silver Spring, in Montgomery County, Maryland. We have a Senior Vice President with over 30 years of banking experience leading this office. This office allows us to continue to expand our services to the Montgomery County market. We anticipate that the individuals in this office will continue to generate sufficient interest and non‑interest income to more than offset the cost associated with this office. Montgomery County is located just to the north of Washington, D.C., and is adjacent to Frederick, Howard and Prince George’s Counties in Maryland and Loudoun and Fairfax Counties in Virginia. Montgomery County is an important business and research center and is the third largest biotechnology cluster in the United States. The U.S. Department of Health and Human Services, the U.S. Department of Defense, and the U.S. Department of Commerce are among the top county employers. Several large firms are also based in the county, including Marriott International, Lockheed Martin, GEICO, Discovery Communications and the Travel Channel. Montgomery County has the eleventh highest median household income in the U.S., and the second highest in the state of Maryland.

Lending Activities

General.  Our primary market focus is on making loans to small and medium size businesses, entrepreneurs, professionals, consumers and high net worth clients in our primary market area. Our lending activities consist generally of short to medium term commercial business loans, commercial real estate loans, real estate construction loans, home equity loans and consumer installment loans, both secured and unsecured.  We also originate residential loans for sale in the secondary market in addition to originating residential loans we maintain in our portfolio.

Credit Policies and Administration.  We have adopted a comprehensive lending policy, which includes stringent underwriting standards for all types of loans. Our lending staff follows pricing guidelines established periodically by our management team. In an effort to manage risk, prior to funding, the loan committee consists of four independent members of the board of directors and three executive officers.  Approval by a majority vote of the loan committee is required for all credit decisions in excess of a lending officer’s lending authority. Management believes that we employ experienced lending officers, secure appropriate collateral and carefully monitor the financial condition of our borrowers and the concentrations of loans in the portfolio.

In addition to the normal repayment risks, all loans in the portfolio are subject to risks stemming from the state of the economy and the related effects on the borrower and/or the real estate market. With the exception of loans provided to finance luxury boats, which we originated prior to 2008, generally longer term loans have periodic interest rate adjustments and/or call provisions. Senior management monitors the loan portfolio closely to ensure that we minimize past due loans and that we swiftly deal with potential problem loans.

Old Line Bank also engages an outside, independent firm to review the loan portfolio. This firm performs a detailed annual review and an interim update at least once a year. We use the results of the firm’s report to validate our internal loan ratings and we review their commentary on specific loans and on our loan administration activities in order to improve our operations.

Commercial and Industrial Lending.  Our commercial and industrial lending consists of lines of credit, revolving credit facilities, accounts receivable financing, term loans, equipment loans, 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

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generally secure commercial business loans with accounts receivable, equipment, deeds of trust and other collateral such as marketable securities, cash value of life insurance, and time deposits at Old Line Bank.

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

Commercial Real Estate Lending.  We finance commercial real estate for our clients, usually for owner occupied properties. We generally will finance owner occupied commercial real estate at a loan to value that does not exceed  80%. Our underwriting policies and processes focus on the clients’ ability to repay the loan as well as an assessment of the underlying real estate. We originate commercial real estate loans on a fixed rate or adjustable rate basis. Usually, these rates adjust during a three, five or seven year time period based on the then current treasury or prime rate index. Repayment terms generally include amortization schedules ranging from three years to 25 years with principal and interest payments due monthly and with all remaining principal due at maturity. We also make commercial real estate construction loans, primarily for owner‑occupied properties.

Commercial real estate lending entails significant additional risks as compared with residential mortgage lending. Risks inherent in managing a commercial real estate portfolio relate to sudden or gradual drops in property values as well as changes in the economic climate that may detrimentally impact the borrower’s ability to repay. We attempt to mitigate these risks by carefully underwriting these loans. Our underwriting generally includes an analysis of the borrower’s capacity to repay, the current collateral value, a cash flow analysis and review of the character of the borrower and current and prospective conditions in the market. We generally limit loans in this category to 75%‑80% of the value of the property and require personal and/or corporate guarantees. For loans of this type in excess of $250,000, we monitor the financial condition and operating performance of the borrower through a review of annual tax returns and updated financial statements. In addition, we will meet with the borrower and/or perform site visits as required.

Hospitality loans are segregated into a separate category under commercial real estate.  An individual review of these loans indicate that they generally have a low loan to value, more than acceptable existing or projected cash flow, are to experienced operators and are generally dispersed throughout our market area.

Residential Real Estate Lending.  We offer a variety of consumer oriented residential real estate loans. A portion of our portfolio is made up of home equity loans to individuals with a loan to value not exceeding 80%. We also offer fixed rate home improvement loans. Our home equity and home improvement loan portfolio gives us a diverse client base. Although most of these loans are in our primary market area, the diversity of the individual loans in the portfolio reduces our potential risk. Usually, we secure our home equity loans and lines of credit with a security interest in the borrower’s primary or secondary residence. Our initial underwriting includes an analysis of the borrower’s debt/income ratio which generally may not exceed 43%. We also consider the borrower’s length of employment and prior credit history in the approval process. We require borrowers to have a credit score of 640. We do not have any subprime residential real estate loans.

We obtain detailed loan applications to determine a borrower’s ability to repay and verify the more significant items on these applications through credit reports, financial statements and confirmations. We also require appraisals of collateral and title insurance on secured real estate loans.

A portion of this segment of the loan portfolio consists of funds advanced for construction of custom single family residences, (where the home buyer is the borrower), financing to builders for the construction of pre‑sold homes, and loans for multi‑family housing. These loans generally have short durations, meaning maturities typically of 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.

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Construction lending entails significant risk. These risks generally involve larger loan balances concentrated with single borrowers with funds advanced upon the security of the land or the project under construction. An appraisal of the property estimates the value of the project “as is” and “as if” completed. Thus, initial funds are advanced based on the current value of the property, with the remaining construction funds advanced under a budget sufficient to successfully complete the project within the “as completed” loan to value. To further mitigate these risks, we generally limit loan amounts to 80% or less of appraised values, obtain first lien positions on the property securing the loan, and adhere to established underwriting procedures. In addition, we generally offer real estate construction financing only to experienced builders, commercial entities or individuals who have demonstrated the ability to obtain a permanent loan “take‑out” (conversion to a permanent mortgage upon completion of the project). We also perform a complete analysis of the borrower and the project 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.

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 or 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.

Land Acquisition and Development Lending.  These loans usually include funding for the acquisition and development of unimproved properties to be used for residential or non‑residential construction. We may provide permanent financing on the same projects for which we have provided the construction financing.

Land, acquisition and development lending, while providing higher yields, may also have greater risks of loss than long‑term residential mortgage loans on improved, owner‑occupied properties.

The Bank generally makes land acquisition loans with terms of up to three years and loan to value ratios of up to 65%, and land development loans with terms of up to two years and loan‑to value ratios of up to 75%.

The primary loan‑specific risk in land and land development are: unemployment: deterioration of the business and/or collateral values, deterioration of the financial condition of the borrowers and/or guarantors creates a risk of default, and that an appraisal on the collateral is not reflective of the true property value.  Portfolio risk includes condition of the economy, changing demand for these types of loans, large concentration of these types of loans, and geographic concentrations of these types of loans.

Consumer Installment Lending.  We offer various types of secured and unsecured consumer loans. We make consumer loans for personal, family or household purposes as a convenience to our customer base. This category includes our luxury boat loans, which we made prior to 2008 and that remain in our portfolio. Consumer loans, however, are not a focus of our lending activities. The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of his or her ability to meet existing obligations and payments on the proposed loan. As a general guideline, the borrower’s total debt service should not exceed 40% of his or her gross income.

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 loan may not be repaid. Also, various federal and state laws, including bankruptcy

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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.

Lending Limit.  As of December 31, 2014, our legal lending limit for loans to one borrower was approximately $17.4 million. As part of our risk management strategy, we may attempt to participate a portion of larger loans to other financial institutions. This strategy allows Old Line Bank to maintain customer relationships yet reduce credit exposure. However, this strategy may not always be available.

Investments and Funding

We balance our liquidity needs based on loan and deposit growth via the investment portfolio, purchased funds, and short term borrowings. It is our goal to provide adequate liquidity to support our loan growth. In the event we have excess liquidity, we use investments to generate positive earnings. In the event deposit growth does not fully support our loan growth, we can use a combination of investment sales, federal funds, other purchased funds and short term borrowings to augment our funding position.

We actively monitor our investment portfolio and we usually classify investments in the portfolio as “available for sale.” In general, under such a classification, we may sell investment instruments as management deems appropriate. On a monthly basis, we “mark to market” the investment portfolio through an adjustment to stockholders’ equity net of taxes. Additionally, we use the investment portfolio to balance our asset and liability position. We invest in fixed rate or floating rate instruments as necessary to reduce our interest rate risk exposure.

Other Banking Products

We offer our customers safe deposit boxes, wire transfer services, debit cards, prepaid cards, automated teller machines at all of our branch locations, investment services and credit cards through a third party processor. Additionally, we provide Internet and mobile banking capabilities to our customers. With our Internet banking service, our customers may view their accounts on line and electronically remit bill payments. Our commercial account services include direct deposit of payroll for our commercial clients’ employees, an overnight sweep service, lockbox services and remote deposit capture service. We also provide our customers investment services including investment management, estate and succession planning and brokerage services.

Deposit Activities

Deposits are the major source of our funding. We offer a broad array of deposit products that include demand, NOW, money market and savings accounts as well as certificates of deposit. We believe that we pay competitive rates on our interest bearing deposits. As a relationship oriented organization, we generally seek to obtain deposit relationships with our loan clients.

As our overall balance sheet position dictates, we may become more or less competitive in our interest rate structure. We do use brokered deposits as a funding mechanism. Our primary source of brokered deposits is the Promontory Interfinancial Network (Promontory). Through this deposit matching network and its certificate of deposit account and money market registry services, we have the ability to offer our customers access to FDIC insured deposit products in aggregate amounts exceeding current insurance limits. When we place funds through Promontory on behalf of a customer, we receive matching deposits through the network. At December 31, 2014, we also have $18.0 million in brokered deposits from the WSB acquisition.   We did not purchase brokered deposits from any other source during 2014.

Competition

We face intense competition both in making loans and attracting deposits. We compete with other commercial banks, savings associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating in our primary market area and elsewhere.

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We believe that we have effectively leveraged our talents, contacts and location to achieve a strong financial position. However, our primary market area is highly competitive and heavily branched. Competition in our primary market area for loans to small and medium sized businesses, entrepreneurs, professionals and high net worth clients is intense, and pricing is important. Many of our competitors have substantially greater resources and lending limits than we do and offer extensive and established branch networks and other services that we do not offer. Moreover, larger institutions operating in our primary market area have access to borrowed funds at a lower rate than is available to us. Deposit competition also is strong among institutions in our primary market area. As a result, it is possible that to remain competitive we may need to pay above market rates for deposits.

Employees

As of December 31, 2014, we had 213  full time and 15 part time employees. No collective bargaining unit represents any of our employees and we believe that relations with our employees are good.

Supervision and Regulation

Old Line Bancshares, Inc. and Old Line Bank are subject to extensive regulation under state and federal banking laws and regulations. These laws and regulations impose specific requirements and restrictions on virtually all aspects of operations and generally are intended to protect depositors, not stockholders. The following summary sets forth certain material elements of the regulatory framework applicable to Old Line Bancshares, Inc. and Old Line Bank. It does not describe all of the provisions of the statutes, regulations and policies that are identified. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by express reference to each of the particular statutory and regulatory provisions. A change in applicable statutes, regulations or regulatory policy may have a material effect on our business.

Old Line Bancshares, Inc.

Old Line Bancshares, Inc. is a Maryland corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). We are subject to regulation by the Board of Governors of the Federal Reserve Board (the “Federal Reserve Board”) and the Commissioner, and are required to file periodic reports and any additional information that the Federal Reserve Board and Commissioner may require. The Federal Reserve Board and the Commissioner regularly examine the operations and condition of Old Line Bancshares. In addition, the Federal Reserve Board and the Commissioner have enforcement authority over Old Line Bancshares, which includes the power to remove officers and directors and the authority to issue cease and desist orders to prevent Old Line Bancshares from engaging in unsafe or unsound practices or violating laws or regulations governing its business. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

Under the Bank Holding Company Act, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board regulations or both. This doctrine is commonly known as the “source of strength” doctrine. The Federal Reserve Board may require a bank holding company to terminate any activity or relinquish control of a non‑bank subsidiary (other than a non‑bank subsidiary of a bank) upon the Federal Reserve Board’s determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or non‑bank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.

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The Federal Reserve Board must approve, among other things, the acquisition by a bank holding company of control of more than 5% of the voting shares, or substantially all the assets, of any bank or bank holding company or the merger or consolidation by a bank holding company with another bank holding company. In general, the Bank Holding Company Act limits the business of bank holding companies to banking, managing or controlling banks, furnishing services for its authorized subsidiaries, and engaging in activities that the Federal Reserve Board has determined, by order or regulation, to be so closely related to banking and/or managing or controlling banks as to be properly incident thereto. Some of the activities that the Federal Reserve Board has determined by regulation to be closely related to banking include servicing loans, performing certain data processing services, acting as a fiduciary, investment or financial advisor, and making investments in corporations or projects designed primarily to promote community welfare.

The Change in Bank Control Act and the related regulations of the Federal Reserve Board require any person or persons acting in concert, to file a written notice with the Federal Reserve Board before the person or persons acquire direct or indirect “control” of a bank or bank holding company. As a general matter, a party is deemed to control a bank or bank holding company if the party owns or controls 25% or more of any class of voting stock. Subject to rebuttal, a party may be presumed to control a bank or bank holding company if the investor owns or controls 10% or more of any class of voting stock. Ownership by affiliated parties, or parties acting in concert, is typically aggregated for these purposes. If a party’s ownership of Old Line Bancshares, Inc. were to exceed the above thresholds, the investor could be deemed to “control” Old Line Bancshares, Inc. for regulatory purposes. This could subject the investor to regulatory filings or other regulatory consequences.

The Federal Reserve Board has adopted guidelines regarding the capital adequacy of bank holding companies, which require bank holding companies to maintain specified minimum ratios of capital to total assets and capital to risk‑weighted assets. See ““—Capital Adequacy Guidelines.” The Federal Reserve Board has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality, and overall financial condition.

The status of Old Line Bancshares, Inc. as a registered bank holding company under the Bank Holding Company Act does not exempt it from certain federal and state laws and regulations applicable to Maryland corporations generally, including, without limitation, certain provisions of the federal securities laws.

Old Line Bank

Old Line Bank is a Maryland chartered trust company (with all of the powers of a commercial bank). As of December 31, 2014, 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.  As a result, its primary regulator will be the Federal Deposit Insurance Corporation (“FDIC”) and as of that date it will be subject to regulation, supervision and regular examination by the Commissioner and the FDIC. Deposits of Old Line Bank are insured to the maximum legal limits by the Deposit Insurance Fund of the FDIC. The regulations of these various agencies govern most aspects of Old Line Bank’s business, including required reserves against deposits, lending, investments, mergers and acquisitions, borrowing, dividends and location and number of branch offices. In addition, Old Line Bank is subject to numerous federal, state and local laws and regulations that set forth specific requirements with respect to extensions of credit, credit practices, disclosure of credit terms, and discrimination in credit transactions.

The FDIC and the Commissioner regularly examine the operations and condition of Old Line Bank, including, but not limited to, its capital adequacy, reserves, loans, investments, and management practices. These examinations are for the protection of Old Line Bank’s depositors and the Deposit Insurance Fund. In addition, Old Line Bank is required to furnish quarterly and annual reports to the FDIC. The enforcement authority of the FDIC and Commissioner include the power to remove officers and directors and the authority to issue cease‑and‑desist orders to prevent a bank from engaging in unsafe or unsound practices or violating laws or regulations governing its business. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions

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or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

The FDIC has adopted regulations regarding capital adequacy, which require member banks to maintain specified minimum ratios of capital to total assets and capital to risk‑weighted assets. See “—Capital Adequacy Guidelines.” FDIC regulations and State law limit the amount of dividends that Old Line Bank may pay to Old Line Bancshares, Inc. See “—Dividends.”

Capital Adequacy Guidelines

The federal bank regulatory agencies have adopted risk based capital adequacy guidelines by which they assess the adequacy of capital in examining and supervising banks and bank holding companies and in analyzing bank regulatory applications. Risk based capital requirements determine the adequacy of capital based on the risk inherent in various classes of assets and off balance sheet items. Pursuant to the Federal Deposit Insurance Corporation Improvement Act the agencies have established five capital tiers for depository institutions: well‑capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Failure to meet minimum capital requirements can initiate certain discretionary, and under certain circumstances, mandatory, actions by regulators that could have a direct material adverse effect on Old Line Bank’s financial condition.

The federal bank regulatory agencies have established a minimum 3.0% leverage capital ratio (Tier 1 capital to total adjusted assets) requirement for the most highly rated banks and bank holding companies, with an additional cushion of at least 100 to 200 basis points for all other banks and bank holding companies, which effectively increases the minimum leverage capital ratio for such other banks to 4.0% - 5.0% or more. Under the applicable regulations, the highest rated banks and bank holding companies are those that the federal bank regulatory agencies determine are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, those that are considered a strong banking organization. 

There are two main categories of capital under the capital adequacy guidelines. Tier 1 capital generally consists of the sum of common stockholders’ equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stock) and, in certain circumstances and subject to certain limitations, minority investments in certain subsidiaries, less goodwill and other non-qualifying intangible assets, and certain other deductions. Tier 2 capital consists of perpetual preferred stock that is not otherwise eligible to be included as Tier 1 capital, hybrid capital instruments, term subordinated debt and intermediate‑term preferred stock and, subject to limitations, general allowances for credit losses. Tier 2 capital is limited to the amount of Tier 1 capital. Under rules that became effective January 1, 2015, accumulated other comprehensive income (positive or negative) must be reflected in regulatory capital; however, Old Line Bank may make a one-time, permanent election to continue to exclude accumulated other comprehensive income from regulatory capital. If Old Line Bank does not make this election, unrealized gains and losses, net of taxes, on certain financial instruments, including available-for-sale-securities, will be included in the calculation of Old Line Bank’s regulatory capital.  The permanent opt-out election must be made by Old Line Bank on its Call Report for the first reporting period after January 1, 2015 and Old Line Bancshares, Inc. must make the same election as Old Line Bank. Old Line Bank intends to make this election.

In addition to the minimum leverage requirements, banks and bank holding companies are expected to maintain minimum ratios of capital to risk-weighted assets, or “risk-based capital ratios.” Under the capital rules, risk-based capital ratios are calculated by dividing Tier 1 and total risk-based capital, respectively, by risk-weighted assets. Under rules in effect through December 31, 2014, banks and bank holding companies must maintain a minimum required Tier 1 risk-based capital ratio of 4% and a minimum required total risk-based capital ratio of 8%. Total capital consists of Tier 1 capital plus Tier 2 capital, less certain required deductions. In July 2013, the federal bank regulatory agencies issued a final rule implementing the capital standards of the Basel Committee on Banking Supervision and the minimum capital requirements and certain other provisions of the Dodd-Frank Act. The final rule, which became effective on January 1, 2015, applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more and top-tier savings and loan holding companies. Among other things, the rule establishes a new minimum common equity Tier 1 risk-based capital ratio requirement of 4.5%, a minimum Tier 1 risk-based capital ratio requirement of 6%, a minimum total risk-based capital ratio requirement of 8% and a minimum leverage ratio requirement of 4%. The new capital requirements also include changes in the risk-weights of certain assets to better reflect credit risk and other

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risk exposures. Additionally, subject to a transition schedule, the rule limits a banking organization’s ability to make capital distributions, engage in share repurchases and pay certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.

Under federal prompt corrective action regulations, the bank regulatory agencies are authorized and, under certain circumstances, required to take various “prompt corrective actions” to resolve the problems of any bank subject to their jurisdiction that is not adequately capitalized. Under these regulations, as in effect through December 31, 2014, a bank was considered to be: (i) “well capitalized” if it had total risk-based capital of 10% or more, Tier 1 risk-based capital of 6.0% or more, Tier I leverage capital of 5% or more, and was not subject to any written capital order or directive; (ii) “adequately capitalized” if it had total risk-based capital of 8% or more, Tier I risk-based capital of 4.0% or more and Tier I leverage capital of 4% or more (3% under certain circumstances), and does not meet the definition of “well capitalized”; (iii) “undercapitalized” if it had total risk-based capital of less than 8%, Tier I risk-based capital of less than 4% or Tier I leverage capital of less than 4% (3% under certain circumstances); (iv) “significantly undercapitalized” if it had total risk-based capital of less than 6%, Tier I risk-based capital less than 3%, or Tier I leverage capital of less than 3%; and (v) “critically undercapitalized” if its ratio of tangible equity to total assets was equal to or less than 2%. Under certain circumstances, the bank regulatory agency may reclassify a well capitalized institution as adequately capitalized, and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the bank regulatory agency may not reclassify a significantly undercapitalized institution as critically undercapitalized).  As of December 31, 2014, Old Line Bank was “well capitalized” for this purpose and its capital exceeded all applicable requirements.

Under the amended prompt corrective action regulations, effective January 1, 2015, a bank is considered “well capitalized” if it: (i) has a total risk-based capital ratio of 10.0% or greater; (ii) a Tier 1 risk-based capital ratio of 8.0% or greater; (iii) a common Tier 1 equity ratio of at least 6.5% or greater; (iv) a leverage capital ratio of 5.0% or greater; and (iv) is not subject to any written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. As of December 31, 2014, Old Line Bank remained “well capitalized” for this purpose and its capital exceeded all applicable requirements.

As an additional means to identify problems in the financial management of depository institutions, the Federal Deposit Insurance Act (“FDIA”) requires federal bank regulatory agencies to establish certain non‑capital safety and soundness standards for institutions for which they are the primary federal regulator. The standards relate generally to operations and management, asset quality, interest rate exposure and executive compensation. The agencies are authorized to take action against institutions that fail to meet such standards.

Deposit Insurance Assessments

The deposits of Old Line Bank are insured up to applicable limits per insured depositor by the FDIC. The Dodd‑Frank Act permanently increased the FDIC deposit insurance coverage per separately insured depositor for all account types to $250,000. The FDIC assesses deposit insurance premiums on all insured depository institutions. Under the FDIC’s risk‑based assessment system, insured institutions are assigned to risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by FDIC regulations, with institutions deemed less risky to the deposit insurance fund paying lower rates. Assessment rates (inclusive of possible adjustments) currently range from 2.5 to 45 basis points of each institution’s total assets less tangible capital. The FDIC may increase or decrease the range of assessments uniformly, except that no adjustment can deviate more than two basis points from the base assessment rate without notice and comment rulemaking, The FDIC’s current system represents a change, required by the Dodd‑Frank Act, from its prior practice of basing the assessment on an institution’s aggregate deposits. Under the FDIA, the FDIC may terminate insurance of deposits upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

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Maryland Regulatory Assessment

The Commissioner assesses state chartered banks to cover the expense of regulating banking institutions. Old Line Bank’s asset size determines the amount of the assessment. In 2014, we paid $115 thousand to the Commissioner.

Transactions with Affiliates and Insiders

Federal and Maryland law impose restrictions on certain transactions between Maryland commercial banks and their insiders and affiliates. Generally, under Maryland law, a director, officer or employee of a commercial bank may not borrow, directly or indirectly, any money from the bank, unless the loan has been approved by a resolution adopted by and recorded in the minutes of the board of directors of the bank, or the executive committee of the bank, if that committee is authorized to make loans. If the executive committee approves such a loan, the loan approval must be reported to the board of directors at its next meeting. Certain commercial loans made to directors of a bank and certain consumer loans made to non‑officer employees of the bank are exempt from the law’s coverage. Under federal law, section 22(h) of the Federal Reserve Act and the Federal Reserve Board’s Regulation O govern extensions of credit made by a bank to its directors, executive officers, and principal stockholders (“insiders”). Among other things, these provisions require that extensions of credit to insiders be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features. Further, such extensions may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank’s capital. Extensions of credit in excess of certain limits must be also be approved by the board of directors. All of Old Line Bank’s loans to its and Old Line Bancshares’ executive officers, directors and greater than 10% stockholders, and affiliated interests of such persons, comply with the requirements of Regulation O.

Section 23A of the Federal Reserve Act and the Federal Reserve Board’s Regulation W limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such bank’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such bank’s capital stock and surplus. An affiliate of a bank is generally any company or entity that controls, is controlled by, or is under common control with the bank. In a holding company context, the parent bank holding company and any companies which are controlled by such parent holding company are affiliates of the bank. The term “covered transaction” includes the making of loans, purchase of assets, issuance of guarantees, and other similar transactions. In addition, loans or other extensions of credit by a bank to an affiliate are required to be collateralized in accordance with regulatory requirements and the bank’s transactions with affiliates must be consistent with safe and sound banking practices and may not involve the purchase by the bank of any low‑quality asset from an affiliate. Section 23B of the Federal Reserve Act applies to covered transactions as well as certain other transactions between a bank and its affiliates and Section 23B and Regulation W require that all such transactions be on terms substantially the same, or at least as favorable, to the bank as those provided to non‑affiliates. Regulation W generally excludes a bank subsidiary from treatment as an affiliate unless the subsidiary is a depository institution, a financial subsidiary, directly controlled by an affiliate or controlling shareholder of the bank, or unless the Federal Reserve Board or other appropriate federal regulator determines by regulation or order to treat the subsidiary as a bank affiliate. All of Old Line Bank’s transactions with its affiliates comply with the applicable provisions of Sections 23A and 23B and Regulation W.

We have entered into banking transactions with our directors and executive officers and the business and professional organizations in which they are associated in the ordinary course of business. We make such loans and loan commitments in accordance with all applicable laws.

Loans to One Borrower

Old Line Bank is subject to statutory and regulatory limits on the amount that it may lend to a single borrower or group of related borrowers. Generally, the maximum amount of total outstanding loans that Old Line Bank may have to any one borrower at any one time is 15% of Old Line Bank’s unimpaired capital and unimpaired surplus. Old Line Bank may lend an additional amount, equal to 10% of its unimpaired capital and surplus, if such loan is secured by readily marketable collateral, which is defined to include certain securities and bullion, but generally does not include real estate.

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Liquidity

Old Line Bank is subject to the reserve requirements imposed by the State of Maryland. A Maryland commercial bank is required to have at all times a reserve equaled to at least 15% of its demand deposits. Old Line Bank is also subject to the reserve requirements of Federal Reserve Board’s Regulation D, which applies to all depository institutions. Beginning on January 1, 2014, amounts in transaction accounts above $13.3 million and up to $89.0 million must have reserves held against them in the ratio of 3% of the amount. Amounts above $89.0 million require reserves of $2,013,000 plus 10 percent of the amount in excess of $89.0 million. Beginning in January 2015, amounts in transaction accounts above $14.5 million and up to $103.6 million must have reserves held against them in the ratio of 3% of the amount. Amounts above $103.6 million require reserves of $2,673,000 plus 10 percent of the amount in excess of $103.6 million. Old Line Bank is in compliance with its reserve requirements currently and at December 31, 2014.

Dividends

Old Line Bancshares, Inc. is a legal entity separate and distinct from Old Line Bank. Virtually all of Old Line Bancshares, Inc.’s revenue available for the payment of dividends on its common stock results from dividends paid to Old Line Bancshares, Inc. by Old Line Bank. Under Maryland law, Old Line Bank may declare a cash dividend, after providing for due or accrued expenses, losses, interest, and taxes, from its undivided profits or, with the prior approval of the Maryland Commissioner of Financial Regulation, from its surplus in excess of 100% of its required capital stock. Also, if Old Line Bank’s surplus is less than 100% of its required capital stock, cash dividends may not be paid in excess of 90% of net earnings. In addition to these specific restrictions, the FDIC have the ability to prohibit or limit proposed dividends if such regulatory agencies determine the payment of such dividends would result in Old Line Bank being in an unsafe and unsound condition.

Community Reinvestment Act

Old Line Bank is required to comply with the Community Reinvestment Act (“CRA”) regardless of its capital condition. The CRA requires that, in connection with its examinations of Old Line Bank, the FDIC evaluates the record of Old Line Bank in meeting the credit needs of its local community, including low and moderate income neighborhoods, consistent with the safe and sound operation of the institution. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. These factors are considered in, among other things, evaluating mergers, acquisitions and applications to open a branch or facility. The CRA also requires all institutions to make public disclosure of their CRA ratings. Old Line Bank received a “Satisfactory” rating in its latest CRA examination.

Standards for Safety and Soundness

Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.

Anti‑Money Laundering and OFAC

Under federal law, financial institutions must maintain anti‑money laundering programs that include established internal policies, procedures and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification in their dealings with foreign financial institutions and foreign customers. Financial institutions

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must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and law enforcement authorities have been granted increased access to financial information maintained by financial institutions. Bank regulators routinely examine institutions for compliance with these obligations, and they must consider an institution’s compliance in connection with the regulatory review of applications, including applications for banking mergers and acquisitions. The regulatory authorities have imposed “cease and desist” orders and civil money penalty sanctions against institutions found to be violating these obligations.

The Office of Foreign Assets Control, or OFAC, is responsible for helping to insure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC sends bank regulatory agencies lists of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. If Old Line Bancshares or Old Line Bank finds a name on any transaction, account, or wire transfer that is on an OFAC list, they must freeze such account, file a suspicious activity report, and notify the appropriate authorities.

Consumer Protection Laws

Old Line Bank is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy. These laws include the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, the Fair and Accurate Credit Transactions Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, and the Real Estate Settlement Procedures Act, and various state law counterparts. Further, the Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”), which has the responsibility for making rules and regulations under the federal consumer protection laws relating to financial products and services. The CFPB also has a broad mandate to prohibit unfair or deceptive acts and practices and is specifically empowered to require certain disclosures to consumers and draft model disclosure forms. Failure to comply with consumer protection laws and regulations can subject financial institutions to enforcement actions, fines and other penalties. The FDIC will examine Old Line Bank for compliance with CFPB rules and will enforce CFPB rules with respect to Old Line Bank.

In addition, federal law currently contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. These provisions also provide that, except for certain limited exceptions, a financial institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. Further, under the “Interagency Guidelines Establishing Information Security Standards,” banks must implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer information. Federal law makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.

Sarbanes‑Oxley Act of 2002

The Sarbanes‑Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. We have prepared policies, procedures and systems designed to ensure compliance with the Sarbanes‑Oxley Act and related regulations.

Other Legislative and Regulatory Initiatives

In addition to the Dodd‑Frank Act and the regulations that have been or will be promulgated thereunder, new proposals may be introduced in the United States Congress and in the Maryland Legislature and before various bank regulatory authorities that would alter the powers of, and restrictions on, different types of banking organizations and which would restructure part or all of the existing regulatory framework for banks, bank holding companies and other providers of financial services. Moreover, other bills may be introduced in Congress which would further regulate, deregulate or restructure the financial services industry, including proposals to substantially reform the regulatory framework. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which any new regulation or statute may affect our business.

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Effect of Governmental Monetary Policies

Domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies affect our earnings. The Federal Reserve Board’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of financial institutions through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board affect the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.

 

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

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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

17


 

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

18


 

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

19


 

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.

20


 

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.  Unresolved Staff Comments

None.

21


 

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legacy Properties

Location

    

Address

    

Opened
Date

    

Square

Feet

    

Monthly
Lease
Amount

    

Term

    

Renewal
Option

Accokeek

 

15808 Livingston Road

Accokeek, Maryland

 

12/1995

 

1,218 

 

 

Owned

 

 

 

 

Annapolis

 

2530 Riva Road        
Annapolis, Maryland

 

9/2011

 

3,899 

 

$

16,079 

 

10yrs 7mos

 

(2) 5 years

Bowie               
Suite 100

 

1525 Pointer Ridge Place
Bowie, Maryland

 

6/2006

 

2,557 

 

$

7,603 

 

13 years

 

(2) 5years

Bowie               
Suite 101

 

1525 Pointer Ridge Place
Bowie, Maryland

 

1/2012

 

2,282 

 

$

3,228 

 

8yrs 5 mos

 

(2) 5years

Bowie               
Suite 201B & 202

 

1525 Pointer Ridge Place
Bowie, Maryland

 

7/2014

 

1,875 

 

$

3,282 

 

4yrs  10mos

 

(2) 5years

Bowie               
Suite 201A & 204

 

1525 Pointer Ridge Place
Bowie, Maryland

 

12/2014

 

1,692 

 

$

2,961 

 

4yrs  6mos

 

(2) 5years

Bowie                 
Suite 300

 

1525 Pointer Ridge Place
Bowie, Maryland

 

6/2006

 

5,449 

 

$

17,043 

 

13 years

 

(2) 5years

Bowie                 
Suite 301

 

1525 Pointer Ridge Place
Bowie, Maryland

 

1/2012

 

1,732 

 

$

2,450 

 

8yrs 5mos

 

(2) 5years

Bowie                 
Suite 302, 303, 303a, 304 & 305

 

1525 Pointer Ridge Place
Bowie, Maryland

 

12/2012

 

2,896 

 

$

6,640 

 

6yrs 6mos

 

(2) 5years

Bowie               
Suite 400

 

1525 Pointer Ridge Place
Bowie, Maryland

 

6/2006

 

11,053 

 

$

34,571 

 

13 years

 

(2) 5years

Clinton

 

7801 Old Branch Avenue
Clinton, Maryland

 

9/2002

 

2,550 

 

$

6,429 

 

5 years

 

(2) 5years

College Park         
1st Floor

 

9658 Baltimore Avenue 
College Park, Maryland

 

3/2008

 

1,916 

 

$

5,970 

 

10 years

 

(2) 5 years

College Park         
4th Floor

 

9658 Baltimore Avenue 
College Park, Maryland

 

7/2005

 

2,230 

 

$

4,996 

 

10 years

 

(2) 5 years

Crain Highway

 

2995 Crain Highway     
Waldorf, Maryland

 

6/1999

 

8,044 

 

 

Owned

 

 

 

 

Crofton

 

1641 Maryland Route 3 North
Crofton, Maryland

 

7/2009

 

2,420 

 

$

7,711 

 

10 years

 

(3) 5 years

Fairwood

 

12100 Annapolis Road
Glen Dale, Maryland

 

10/2009

 

2,863 

 

 

Owned

 

 

 

 

Greenbelt

 

6421 Ivy Lane       
Greenbelt, Maryland

 

9/2009

 

33,000 

 

$

8,825 

 

30 years

 

(2) 10 years

Old Line Centre

 

12080 Old Line Centre
Waldorf, Maryland

 

11/1989

 

2,048 

 

$

5,377 

 

10 years

 

(1) 5 years

Silver Spring

 

12501 Prosperity Drive
Silver Spring, Maryland

 

3/2013

 

2,131 

 

$

4,024 

 

3 years 2 mos

 

(1) 3 years

 

22


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties Acquired April 1, 2011

Location

    

Address

    

Opened
Date

    

Square
Feet

    

Monthly
Lease
Amount

    

Term

    

Renewal
Option

Bryans Road

 

7175 Indian Head Highway
Bryans Road, Maryland

 

5/1964

 

3,711 

 

 

Owned

 

 

 

 

California

 

22741 Three Notch Road
California, Maryland

 

4/1985

 

3,366 

 

$

6,429 

 

5 years

 

(2) 5 years

Callaway

 

20990 Point Lookout Road
Callaway, Maryland

 

8/2005

 

1,795 

 

 

Owned

 

 

 

 

Fort Washington

 

12740 Old Fort Road         
Fort Washington, Maryland

 

2/1973

 

2,800 

 

$

6,892 

 

5 years

 

(1) 5 years

La Plata

 

101 Charles Street                
La Plata, Maryland

 

4/1974

 

2,910 

 

$

8,841 

 

15 years

 

(3) 10 years

Leonardtown Road

 

3135 Leonardtown Road
Waldorf, Maryland

 

6/1963

 

7,076 

 

 

Owned

 

 

 

 

Lexington Park (1)

 

46930 South Shangri La Drive
Lexington Park, Maryland

 

6/1959

 

7,763 

 

$

11,766 

 

20 years

 

N/A

Prince Frederick

 

691 Prince Frederick Blvd.
Prince Frederick, Maryland

 

8/1999

 

3,400 

 

$

9,970 

 

20 years

 

N/A

Solomons (1)

 

80 Holiday Drive        
Solomons, Maryland

 

2/1998

 

2,194 

 

$

4,692 

 

20 years

 

N/A

Waldorf Operations

 

3220 Old Washington Road
Waldorf, Maryland

 

12/1988

 

21,064 

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties Acquired May 10, 2013

Location

    

Address

    

Opened
Date

    

Square
Feet

    

Monthly
Lease
Amount

    

Term

    

Renewal
Option

Bowie

 

4201 Mitchellville Road
Bowie, Maryland

 

4/1997

 

43,600 

 

 

Owned

 

 

 

 

Crofton (1)

 

1669 Crofton Centre
Crofton, Maryland

 

4/1985

 

3,366 

 

 

Owned

 

 

 

 

Millersville

 

676 Old Mill Road
Millersville, Maryland

 

8/2005

 

1,795 

 

$

7,500 

 

5 years

 

(2) 5 years

Odenton

 

1161 Annapolis Road
Odenton, Maryland

 

2/1973

 

2,800 

 

$

10,417 

 

5 years

 

(1) 5 years

Waldorf (1)

 

3225 Crain Highway
Waldorf, Maryland

 

4/1974

 

2,910 

 

$

6,750 

 

15 years

 

(3) 10 years

 

(1)

Closed offices effective December 31, 2014.

 

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.  Mine Safety Disclosures

Not applicable.

 

 

23


 

PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock Prices

Our common stock trades on the Nasdaq Capital Market (“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.

 

 

 

 

 

 

 

 

 

 

Sale Price Range

 

2014

    

High

    

Low

 

First Quarter

 

$

18.00 

 

$

14.25 

 

Second Quarter

 

 

17.75 

 

 

15.01 

 

Third Quarter

 

 

15.87 

 

 

13.58 

 

Fourth Quarter

 

 

16.21 

 

 

13.96 

 

2013

 

 

 

 

 

 

 

First Quarter

 

$

12.42 

 

$

10.90 

 

Second Quarter

 

 

13.35 

 

 

11.93 

 

Third Quarter

 

 

13.50 

 

 

12.74 

 

Fourth Quarter

 

 

15.35 

 

 

13.16 

 

 

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:

 

 

 

 

Date Exercisable

    

# of Shares

 

2/26/2015

 

11,313 

 

2/27/2015

 

10,330 

 

9/10/2015

 

5,000 

 

2/26/2016

 

11,313 

 

2/27/2016

 

10,330 

 

9/10/2016

 

5,001 

 

10/22/2016

 

1,667 

 

2/26/2017

 

11,313 

 

10/22/2017

 

1,667 

 

10/22/2018

 

1,666 

 

Total

 

69,600 

 

 

Dividends

We have paid the following dividends on our common stock during the years indicated:

 

 

 

 

 

 

 

 

 

    

2014

    

2013

 

March

 

$

0.04 

 

$

0.04 

 

June

 

 

0.04 

 

 

0.04 

 

September

 

 

0.05 

 

 

0.04 

 

December

 

 

0.05 

 

 

0.04 

 

Total

 

$

0.18 

 

$

0.16 

 

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.

24


 

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.

 

 

25


 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

2014

 

2013

 

2012

 

2011

 

2010

 

 

 

(Dollars in thousands except per share data)

 

 

 

 

 

 

 

Earnings and dividends:

    

 

    

    

 

    

    

 

    

 

 

    

 

 

    

 

Interest income

 

$

45,603 

 

$

44,263 

 

$

38,222 

 

$

32,321 

 

$

18,509 

 

Interest expense

 

 

3,900 

 

 

4,202 

 

 

5,058 

 

 

5,219 

 

 

4,943 

 

Net interest income

 

 

41,703 

 

 

40,061 

 

 

33,164 

 

 

27,101 

 

 

13,566 

 

Provision for loan losses

 

 

2,827 

 

 

1,504 

 

 

1,525 

 

 

1,800 

 

 

1,082 

 

Non-interest income

 

 

5,957 

 

 

8,870 

 

 

3,708 

 

 

2,741 

 

 

1,352 

 

Non-interest expense

 

 

35,046 

 

 

36,077 

 

 

25,162 

 

 

20,884 

 

 

11,409 

 

Income taxes

 

 

2,694 

 

 

3,602 

 

 

2,720 

 

 

1,927 

 

 

997 

 

Net income

 

 

7,093 

 

 

7,747 

 

 

7,465 

 

 

5,232 

 

 

1,430 

 

Less: Net loss attributable to the non-controlling interest

 

 

(37)

 

 

(92)

 

 

(65)

 

 

(148)

 

 

(73)

 

Net income available to common stockholders

 

 

7,130 

 

 

7,839 

 

 

7,530 

 

 

5,380 

 

 

1,503 

 

Per common share data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings

 

$

0.66 

 

$

0.87 

 

$

1.10 

 

$

0.86 

 

$

0.39 

 

Diluted earnings

 

 

0.65 

 

 

0.86 

 

 

1.09 

 

 

0.86 

 

 

0.38 

 

Dividends paid

 

 

0.18 

 

 

0.16 

 

 

0.16 

 

 

0.13 

 

 

0.12 

 

Common stockholders book value, period end

 

 

12.51 

 

 

11.71 

 

 

10.94 

 

 

9.98 

 

 

9.52 

 

Common stockholders tangible book value, period end

 

 

11.38 

 

 

10.50 

 

 

10.30 

 

 

9.28 

 

 

9.52 

 

Average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

10,786,017 

 

 

9,044,844 

 

 

6,828,512 

 

 

6,223,057 

 

 

3,880,060 

 

Diluted

 

 

10,935,182 

 

 

9,149,200 

 

 

6,893,645 

 

 

6,253,898 

 

 

3,903,577 

 

Common shares outstanding, period end

 

 

10,810,930 

 

 

10,777,113 

 

 

6,845,432 

 

 

6,817,694 

 

 

3,891,705 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,227,519 

 

$

1,167,223 

 

$

861,856 

 

$

811,042 

 

$

401,910 

 

Total loans, less allowance for loan losses

 

 

931,121 

 

 

849,263 

 

 

595,145 

 

 

539,298 

 

 

299,606 

 

Total investment securities

 

 

161,680 

 

 

172,170 

 

 

171,541 

 

 

161,785 

 

 

54,786 

 

Total deposits

 

 

1,015,739 

 

 

974,359 

 

 

735,458 

 

 

690,768 

 

 

340,527 

 

Stockholders’ equity

 

 

135,264 

 

 

126,249 

 

 

74,862 

 

 

68,040 

 

 

37,054 

 

Performance Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

0.60 

%  

 

0.74 

%  

 

0.90 

%  

 

0.79 

%  

 

0.38 

%  

Return on average stockholders’ equity

 

 

5.45 

%  

 

7.80 

%  

 

11.17 

%  

 

9.37 

%  

 

4.14 

%  

Total ending equity to total ending assets

 

 

11.02 

%  

 

10.82 

%  

 

8.69 

%  

 

8.39 

%  

 

9.22 

%  

Net interest margin(1)

 

 

4.15 

%  

 

4.53 

%  

 

4.65 

%  

 

4.61 

%  

 

3.86 

%  

Dividend payout ratio for period

 

 

27.23 

%  

 

19.02 

%  

 

14.51 

%  

 

15.30 

%  

 

31.00 

%  

Asset Quality Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance to period-end loans

 

 

0.46 

%  

 

0.58 

%  

 

0.66 

%  

 

0.69 

%  

 

0.82 

%  

Non-performing assets to total assets

 

 

0.65 

%  

 

1.27 

%  

 

1.12 

%  

 

1.22 

%  

 

0.96 

%  

Non-performing loans to allowance for loan losses

 

 

121.61 

%  

 

178.91 

%  

 

149.04 

%  

 

155.84 

%  

 

109.81 

%  

Capital Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk-based capital

 

 

12.3 

%  

 

12.0 

%  

 

10.8 

%  

 

10.6 

%  

 

11.6 

%  

Total risk-based capital

 

 

12.7 

%  

 

12.5 

%  

 

11.4 

%  

 

11.3 

%  

 

12.4 

%  

Leverage capital ratio

 

 

9.9 

%  

 

9.3 

%  

 

7.9 

%  

 

7.8 

%  

 

9.2 

%  


(1)

See “Management’s Discussion and Analysis of Financial Condition and Results of Operating—Reconciliation of Non‑GAAP Measures.”

 

 

26


 

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,

27


 

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 marketsWhile 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

28


 

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

29


 

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

30


 

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

31


 

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.

32


 

Average Balances, Interest and Yields

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2012

 

 

 

Average

 

 

 

 

 

 

Average

 

 

 

 

 

 

Average

 

 

 

 

 

 

Twelve Months Ended December 31,

 

balance

 

Interest

 

Yield

 

balance

 

Interest

 

Yield

 

balance

 

Interest

 

Yield

 

Assets:

    

 

    

    

 

    

    

    

    

 

    

    

 

    

    

    

    

 

    

    

 

    

    

    

 

Federal funds sold(1)

 

$

2,868,076 

 

$

4,690 

 

0.16 

%  

$

3,582,839 

 

$

3,851 

 

0.11 

%  

$

4,160,808 

 

$

6,028 

 

0.14 

%  

Interest bearing deposits

 

 

182,435 

 

 

26 

 

0.01 

 

 

105,513 

 

 

184 

 

0.17 

 

 

4,366,490 

 

 

10,957 

 

0.25 

 

Investment securities(1)(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

 

2,573,685 

 

 

22,241 

 

0.86 

 

 

1,279,948 

 

 

3,218 

 

0.25 

 

 

1,248,731 

 

 

10,202 

 

0.82 

 

U.S. government agency

 

 

37,714,591 

 

 

600,513 

 

1.59 

 

 

39,298,327 

 

 

569,019 

 

1.45 

 

 

27,322,439 

 

 

383,208 

 

1.40 

 

Mortgage backed securities

 

 

72,303,901 

 

 

1,498,353 

 

2.07 

 

 

72,334,100 

 

 

1,464,994 

 

2.03 

 

 

88,403,848 

 

 

2,243,209 

 

2.54 

 

Municipal securities

 

 

50,726,625 

 

 

2,381,496 

 

4.69 

 

 

62,484,076 

 

 

2,896,472 

 

4.64 

 

 

48,479,618 

 

 

2,465,949 

 

5.09 

 

Other equity securities

 

 

4,621,253 

 

 

321,113 

 

6.95 

 

 

4,297,264 

 

 

259,738 

 

6.04 

 

 

3,879,785 

 

 

193,516 

 

4.99 

 

Total investment securities

 

 

167,940,055 

 

 

4,823,716 

 

2.87 

 

 

179,693,715 

 

 

5,193,441 

 

2.89 

 

 

169,334,421 

 

 

5,296,084 

 

3.13 

 

Loans:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

128,569,150 

 

 

5,307,598 

 

4.13 

 

 

110,993,664 

 

 

5,222,223 

 

4.70 

 

 

99,059,441 

 

 

4,861,281 

 

4.91 

 

Mortgage real estate

 

 

741,096,563 

 

 

36,586,500 

 

4.94 

 

 

626,060,637 

 

 

34,980,352 

 

5.59 

 

 

456,291,701 

 

 

28,637,163 

 

6.28 

 

Consumer

 

 

10,805,560 

 

 

612,991 

 

5.67 

 

 

9,982,711 

 

 

678,167 

 

6.79 

 

 

12,800,542 

 

 

775,485 

 

6.06 

 

Total loans

 

 

880,471,273 

 

 

42,507,089 

 

4.83 

 

 

747,037,012 

 

 

40,880,742 

 

5.47 

 

 

568,151,684 

 

 

34,273,929 

 

6.03 

 

Allowance for loan losses

 

 

5,181,900 

 

 

 

 

 

 

5,021,045 

 

 

 

 

 

 

4,061,789 

 

 

 

 

 

Total loans, net of allowance

 

 

875,289,373 

 

 

42,507,089 

 

4.86 

 

 

742,015,967 

 

 

40,880,742 

 

5.51 

 

 

564,089,895 

 

 

34,273,929 

 

6.08 

 

Total interest earning assets(1)

 

 

1,046,279,939 

 

 

47,335,521 

 

4.52 

 

 

925,398,034 

 

 

46,078,218 

 

4.98 

 

 

741,951,614 

 

 

39,586,998 

 

5.34 

 

Non-interest bearing cash

 

 

39,170,242 

 

 

 

 

 

 

 

38,323,683 

 

 

 

 

 

 

 

35,687,747 

 

 

 

 

 

 

Premises and equipment

 

 

34,637,245 

 

 

 

 

 

 

 

31,797,485 

 

 

 

 

 

 

 

23,829,393 

 

 

 

 

 

 

Other assets

 

 

74,338,941 

 

 

 

 

 

 

 

62,398,528 

 

 

 

 

 

 

 

38,164,921 

 

 

 

 

 

 

Total assets(1)

 

 

1,194,426,367 

 

 

 

 

 

 

 

1,057,917,730 

 

 

 

 

 

 

 

839,633,675 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings

 

 

89,318,027 

 

 

137,903 

 

0.15 

 

 

113,376,972 

 

 

137,293 

 

0.12 

 

 

62,581,038 

 

 

193,036 

 

0.31 

 

Money market and NOW

 

 

318,892,874 

 

 

715,626 

 

0.22 

 

 

221,007,993 

 

 

614,402 

 

0.28 

 

 

154,154,792 

 

 

549,235