10-K 1 olbk-20161231x10k.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, 2016

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)

 

Registrant’s 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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, 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 $145.3 million as of June 30, 2016 based on a sales price of $18.00 per share of Common Stock, which is the sales price at which the Common Stock was last traded on June 30, 2016 as reported by the NASDAQ Stock Market LLC.

The number of shares outstanding of the issuer’s Common Stock was 10,940,330 as of March 1, 2017.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2017 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, 2016

 

 

 

PART I 

 

Item 1. 

Business

Item 1A. 

Risk Factors

16 

Item 1B. 

Unresolved Staff Comments

25 

Item 2. 

Properties

25 

Item 3. 

Legal Proceedings

27 

Item 4. 

Mine Safety Disclosures

27 

PART II 

 

Item 5. 

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

28 

Item 6. 

Selected Financial Data

30 

Item 7. 

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

31 

Item 7A. 

Quantitative and Qualitative Disclosures About Market Risk

66 

Item 8. 

Financial Statements and Supplementary Data

69 

Item 9. 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

125 

Item 9A. 

Controls and Procedures

125 

Item 9B. 

Other Information

125 

PART III 

 

Item 10. 

Directors, Executive Officers and Corporate Governance

125 

Item 11. 

Executive Compensation

126 

Item 12. 

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

126 

Item 13. 

Certain Relationships and Related Transactions, and Director Independence

126 

Item 14. 

Principal Accounting Fees and Services

127 

PART IV 

 

Item 15. 

Exhibits, Financial Statement Schedules

128 

Item 16. 

Form 10-K Summary

128 

 

 

 

 

 


 

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,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this annual report constitute forward looking statements. These forward‑looking statements include: (a) our objectives, expectations and intentions, including (i) market expansion and growth in particular geographic areas, (ii) statements regarding anticipated changes in certain non‑interest expenses and that net interest income will continue to increase during 2017, (iii) maintenance of the net interest margin, (iv) our belief that we have identified any problem assets and that our borrowers will continue to remain current on their loans, (v) expected losses on and our intentions with respect to our investment securities, (vi) earnings on bank owned life insurance, and (vii) the anticipated timing of, impact of and opportunities resulting from our pending acquisition of DCB Bancshares, Inc. (“DCB”); (b) sources of and sufficiency of liquidity; (c) the adequacy of the allowance for loan losses; (d) expected loan, deposit, asset, balance sheet and earnings growth; (e) expectations with respect to the impact of pending legal proceedings; (f) improving earnings per share and stockholder value; (g) realization of the deferred tax asset; and (h) financial and other goals and plans.

Old Line Bancshares bases these statements on our beliefs, assumptions and on information available to us as of the date of this filing, which involves risks and uncertainties. These risks and uncertainties include, among others: our ability to retain key personnel; our ability to successfully implement our growth and expansion strategy; risk of loan losses; that the allowance for loan losses may not be sufficient; that changes in interest rates and monetary policy could adversely affect Old Line Bancshares; that changes in regulatory requirements and/or restrictive banking legislation may adversely affect Old Line Bancshares; that the market value of our investments could negatively impact stockholders’ equity; risks associated with our lending limit; expenses associated with operating as a public company; potential conflicts of interest associated with the interest in Pointer Ridge; deterioration in general economic conditions or a return to recessionary conditions; and changes in competitive, governmental, regulatory, technological and other factors which may affect us specifically or the banking industry generally; and other risks otherwise discussed in this report, including under “Item 1A. Risk Factors.”

In addition, our statements with respect to the timing of anticipated effects of and opportunities resulting from the DCB acquisition are subject to the following additional risks and uncertainties: DCB’s business may not be integrated successfully with ours or such integration may be more difficult, time consuming or costly than expected; expected revenue synergies and cost savings from the merger may not be fully realized or realized within the expected timeframe; revenues following the merger may be lower than expected; customer and employee relationships and business operations may be disrupted by the merger, the announcement of the merger or the pendency of the merger; the ability to obtain required regulatory and stockholder approvals; and the ability to complete the merger in the expected timeframe may be more difficult, time consuming or costly than expected, or the merger may not be completed at all.

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

Business

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

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We also have an investment in a real estate investment limited liability company named Pointer Ridge Office Investment, LLC (“Pointer Ridge”). We currently own 100% of Pointer Ridge and we have consolidated its results of operations from the date of acquisition.  In August 2016, Old Line Bank purchased the aggregate 37.5% minority interest in Pointer Ridge not held by Old Line Bancshares and on September 2, 2016, we paid off the entire $5.8 million principal amount of a promissory note previously issued by Pointer Ridge.  Pointer Ridge owns our headquarters building located at 1525 Pointer Ridge Place, Bowie, Maryland, containing approximately 40,000 square feet.  We occupy 98% of this building for our main office and operate a branch of Old Line Bank from this address.  Prior to this purchase, we owned 62.5% 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 name “Old Line National Bank.” In June 2002, Old Line Bank converted to a Maryland chartered trust company exercising the powers of a commercial bank, and received a Certificate of Authority to do business from the Maryland Commissioner of Financial Regulation (the “Commissioner”).

Old Line Bank is a Maryland chartered trust company (with all of the powers of a commercial bank). Old Line Bank does not exercise trust powers and its regulatory structure is the same as a Maryland chartered commercial bank.  Old Line Bank’s primary regulator is the Federal Deposit Insurance Corporation (“FDIC”) and it is subject to regulation, supervision and regular examination by the Commissioner and the FDIC.  Old Line Bank’s deposits are insured to the maximum legal limits by the FDIC.

We are headquartered in Bowie, Maryland, approximately 10 miles east of Andrews Air Force Base and 20 miles east of Washington, D.C. We 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 market area consists of the suburban Maryland counties of counties of Anne Arundel, Calvert, Charles, Montgomery, Prince George’s and St. Mary’s (Washington, D.C. suburbs) and Baltimore and Carroll (Baltimore City suburbs).

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

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

Completed Mergers and Acquisitions

Regal Bancorp, Inc.  On December 4, 2015, Old Line Bancshares completed its acquisition of Regal Bancorp, Inc. (“Regal Bancorp”), the parent company of Regal Bank & Trust (“Regal Bank”).  Immediately thereafter Regal Bank was merged with and into Old Line Bank, with Old Line Bank the surviving bank.  We acquired Regal Bank’s three branches in the merger, facilitating Old Line Bank’s entry into the Baltimore County and Carroll County, Maryland markets.  The merger strengthened Old Line Bank’s status as the third largest independent commercial bank based in Maryland, with assets of more than $1.5 billion at closing and 23 full service branches serving eight Maryland counties.

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

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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.  We closed two of the acquired branches on December 31, 2014 and an additional two branches on September 30, 2016.  This acquisition increased Old Line Bancshares, Inc.’s total assets by more than $310 million immediately after closing.

Maryland Bankcorp, Inc.  On April 1, 2011, Old Line Bancshares acquired Maryland Bankcorp, Inc. (“Maryland Bankcorp”), the parent company of Maryland Bank & Trust Company, N.A. (“MB&T”). In connection with the acquisition, MB&T was merged with and into Old Line Bank, with Old Line Bank the surviving bank. The acquisition of MB&T’s ten full‑service branches expanded our market presence in Calvert and St. Mary’s Counties. The acquisition increased Old Line Bancshares’ total assets by more than $345 million immediately after closing to approximately $750 million.  We closed two of the acquired branches on December 31, 2014. 

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

Pending Acquisition

DCB Bancshares, Inc.  On February 1, 2017, Old Line Bancshares entered into an Agreement and Plan of Merger with DCB, the parent company of Damascus Community Bank.  Pursuant to the terms of the Agreement and Plan of Merger, upon the consummation of the merger, all outstanding shares of DCB common stock will be exchanged for shares of common stock of Old Line Bancshares.  Consummation of the merger is contingent upon the approval of DCB’s stockholders as well as receipt of all necessary regulatory and third party approvals and consents.  We expect the merger to close during the second quarter of 2017.  At December 31, 2016, DCB Bancshares has consolidated assets of approximately $311 million.  DCB has six banking locations located in its primary market areas of Montgomery, Frederick and Carroll Counties.

 

Location and Market Area

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

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

We opened a loan production office in Silver Spring, in Montgomery County, Maryland in 2013. We opened our first branch in Rockville, Maryland, in Montgomery County on November 10, 2015 and a second location, located in the Rockville Town Center, in June 2016.  Montgomery County is located just to the north of Washington, D.C., and is adjacent to Frederick, Howard and Prince George’s Counties in Maryland and Loudoun and Fairfax Counties in Virginia. Montgomery County is an important business and research center and is the third largest biotechnology cluster in the United States. The U.S. Department of Health and Human Services, the U.S. Department of Defense, and the U.S. Department of Commerce are among the top county employers. Several large firms are also based in the county, including Marriott International, Lockheed Martin, GEICO, Discovery Communications and the Travel Channel. Montgomery County has the 11th highest median household income in the U.S., and the second highest in the state of Maryland.  1 


1 As reported by Wikipedia according to the 2012 American Community Survey prepared by the U.S. Census Bureau.

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

Three of our branch offices, one of which includes a loan production office, are located in Anne Arundel County, Maryland. Anne Arundel County borders the Chesapeake Bay and is situated in the high tech corridor between Baltimore and Washington, D.C. With over 534 miles of shoreline, it provides waterfront living for many residential communities. Annapolis, the State Capital and home to the United States Naval Academy, and Baltimore/Washington International Thurgood Marshal Airport (BWI) are located in Anne Arundel County. Anne Arundel County has one of the strongest economies in the State of Maryland and its unemployment rate is consistently below the national average.

We have two branches and a loan production office in St. Mary’s County and one branch and loan production office in Calvert County.  On January 23, 2017, we celebrated the opening of our newest branch located in Leonardtown, Maryland.  The town of Leonardtown is centrally located in St. Mary’s County.  Leonardtown is home to the county courthouse, hospital, community college and governmental center.  This office replaced the previous branch located in Callaway, Maryland. The unemployment rates in Calvert and St. Mary’s Counties are among the lowest in the state of Maryland and also consistently rank below the national average. Calvert County, located approximately 25 miles southeast of Washington, D.C., is one of several Maryland counties that comprise the Washington Metropolitan Area and is adjacent to Anne Arundel, Prince George’s, St. Mary’s and Charles Counties. Major employers in Calvert County include municipal and government agencies and Constellation Energy. St. Mary’s County is located approximately 35 miles southeast of Washington, D.C. It is adjacent to Charles and Calvert Counties and is home to the Patuxent River Naval Air Station, a major naval air testing facility on the east coast of the United States. Calvert and St. Mary’s Counties have the 19th and 21st highest median household income in the U.S., respectively.

We have two branches in Baltimore County and one branch in Carroll County that we acquired in the Regal Bancorp acquisition. The market area with respect to these three branches consists of the Baltimore metropolitan statistical area, which comprises Baltimore City and Baltimore, Carroll, Howard, Harford, Anne Arundel, and Queen Anne Counties. The economy of the Baltimore metropolitan area constitutes a diverse cross-section of employment sectors, with a mix of services, manufacturing, wholesale/retail trade, federal and local government, health care facilities and finance related employment.  The largest employers in the Baltimore area include University System of Maryland, Johns Hopkins Hospital and Fort Meade.  The Baltimore region is the 20th most populous area in the United States.  

The pending acquisition of DCB will expand our presence further into northern Montgomery County, southern Carroll County and eastern Frederick County, Maryland.  Damascus Community Band has six branch locations located in Damascus, Frederick, Gaithersburg, Mount Airy, Clarksburg and Monrovia, Maryland. 

Lending Activities

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

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

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

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

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

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

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

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

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

Residential Real Estate Lending.  We offer a variety of consumer-oriented residential real estate loans. A portion of our portfolio is made up of home equity loans to individuals with a loan to value not exceeding 80%. We also offer fixed rate home improvement loans. Our home equity and home improvement loan portfolio gives us a diverse client base. Although most of these loans are in our market area, the diversity of the individual loans in the portfolio reduces our

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potential risk. Usually, we secure our home equity loans and lines of credit with a security interest in the borrower’s primary or secondary residence. Our initial underwriting includes an analysis of the borrower’s debt/income ratio which generally may not exceed 43%. We also consider the borrower’s length of employment and prior credit history in the approval process. Typically, we require borrowers to have a credit score of 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 verifications. We also require appraisals of collateral and title insurance on secured real estate loans.

A portion of this segment of the loan portfolio consists of funds advanced for construction of custom single family residences, (where the home buyer is the borrower), financing to builders for the construction of pre‑sold homes, and loans for multi‑family housing. These loans generally have short durations, meaning maturities typically of 12 months or less. Residential houses, multi‑family dwellings and commercial buildings under construction and the underlying land for which the loan was obtained secure the construction loans. The vast majority of these loans are concentrated in our market area.

Construction lending entails significant risk. These risks generally involve larger loan balances concentrated with single borrowers with funds advanced upon the security of the land or the project under construction. An appraisal of the property estimates the value of the project “as is” and “as if completed.”  Thus, initial funds are advanced based on the current value of the property, with the remaining construction funds advanced under a budget sufficient to successfully complete the project within the “as completed” loan to value.  To further mitigate these risks, we generally limit loan amounts to 80% or less of appraised values, obtain first lien positions on the property securing the loan, and adhere to established underwriting procedures. In addition, we generally offer real estate construction financing only to experienced builders, commercial entities or individuals who have demonstrated the ability to obtain a permanent loan “take‑out” (conversion to a permanent mortgage upon completion of the project). We also perform a complete analysis of the borrower and the project prior to construction. This analysis includes a review of the cost to construct, the borrower’s ability to obtain a permanent “take‑out,” the cash flow available to support the debt payments and construction costs in excess of loan proceeds, and the value of the collateral. During construction, we advance funds on these loans on a percentage of completion basis. We inspect each project as needed prior to advancing funds during the term of the construction loan.  We may provide permanent financing on the same projects for which we have provided the construction financing.

Under our loan approval policy, all residential real estate loans approved must comply with federal regulations. Generally, we will make residential mortgage loans in amounts up to the limits established by Fannie Mae and Freddie Mac for secondary market resale purposes. Currently this amount for single‑family residential loans currently varies from $424,100 up to a maximum of $636,150 for certain high‑cost designated areas. We also make residential mortgage loans up to limits established by the Federal Housing Administration, which currently is $636,150. 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 typically require a credit score or 640, with some exceptions provided we receive approval recommendations from FannieMae, FreddieMac or FHA’s automated underwriting approval system.  For Veteran Administration loans, we require a minimum score of 620.  Loans sold in the secondary market are sold to investors on a servicing released basis and recorded as loans as held‑for‑sale.  The premium is recorded in income on marketable loans in non‑interest income, net of commissions paid to the loan officers.

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

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

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

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

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

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

Lending Limit.  As of December 31, 2016, our legal lending limit for loans to one borrower was approximately $25.6 million. As part of our risk management strategy, we may attempt to participate a portion of larger loans to other financial institutions. This strategy allows Old Line Bank to maintain customer relationships yet reduce its credit exposure. However, this strategy may not always be available.

Investments and Funding

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

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

Other Banking Products

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

Deposit Activities

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

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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, 2016, we also have $4.0 million in brokered deposits acquired in the WSB acquisition.  We did not purchase brokered deposits during 2016.

Competition

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

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

Employees

As of December 31, 2016, we had 221 full time and 13 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 regularly examines the operations and condition of Old Line Bancshares. In addition, the Federal Reserve Board has enforcement authority over Old Line Bancshares, which includes the power to remove officers and directors and the authority to issue cease and desist orders to prevent Old Line Bancshares from engaging in unsafe or unsound practices or violating laws or regulations governing its business. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

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

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

The Change in Bank Control Act and the related regulations of the Federal Reserve Board require any person, or persons acting in concert, to file a written notice with the Federal Reserve Board before the person or persons acquire direct or indirect “control” of a bank or bank holding company. As a general matter, a party is deemed to control a bank or bank holding company if the party owns or controls 25% or more of any class of voting stock. Subject to rebuttal, a party may be presumed to control a bank or bank holding company if the investor owns or controls 10% or more of any class of voting stock and (i) the institution has registered securities under Section 12 of the Securities Exchange Act of 1934 and (ii) no other person owns, controls or has the power to vote a greater percentage of that class of voting stock. Ownership by affiliated parties, or parties acting in concert, is typically aggregated for these purposes. If a party’s ownership of Old Line Bancshares, Inc. were to exceed the above thresholds, the investor could be deemed to “control” Old Line Bancshares, Inc. for regulatory purposes. This could subject the investor to regulatory filings or other regulatory consequences.

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

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

Old Line Bank

Old Line Bank is a Maryland chartered trust company (with all of the powers of a commercial bank).  Its primary federal regulator is the FDIC and it is subject to regulation, supervision and regular examination by the Commissioner and

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by the FDIC. The regulations of these agencies govern most aspects of Old Line Bank’s business, including required reserves against deposits, lending, investments, mergers and acquisitions, borrowing, dividends and location and number of branch offices. In addition, Old Line Bank is subject to numerous federal, state and local laws and regulations that set forth specific requirements with respect to extensions of credit, credit practices, disclosure of credit terms, and discrimination in credit transactions.

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

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

Capital Adequacy Guidelines

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 could cause regulators to 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 capital adequacy guidelines include a minimum leverage ratio (tier 1 capital to average total assets) for banks and bank holding companies of not less than 4%.  In addition to the minimum leverage capital requirements, banks must maintain certain ratios of capital to regulatory risk-weighted assets, or “risk-based capital ratios.”  Risk-based capital ratios are determined by dividing common equity Tier 1, Tier 1 and total risk-based capital, respectively, by risk-weighted assets.  

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. Accumulated other comprehensive income (positive or negative) must be reflected in regulatory capital.

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. 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 Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd‑Frank Act”). The rule, which became effective on January 1, 2015, applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $1 billion or more and top-tier savings and loan holding companies. Among other things, the rule established 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 6.0%, a

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minimum total risk-based capital ratio requirement of 8.0% and a minimum leverage ratio requirement of 4.0%. The capital requirements also include changes in the risk-weights of certain assets to better reflect credit risk and other 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.  Implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will increase ratably each subsequent January 1, until it reaches 2.5% on January 1, 2019.

Under federal prompt corrective action regulations, the bank regulatory agencies are authorized and, under certain circumstances, required to take various “prompt corrective actions” to resolve the problems of any bank subject to their jurisdiction that is not adequately capitalized. Under these regulations, a bank is considered to be: (i) “well capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 risk-based capital ratio of 6.5% or greater, and a Tier 1 leverage capital ratio of 5% or greater, and was not subject to any written capital order or directive; (ii) “adequately capitalized” if it had a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater,  a common equity Tier 1 risk-based capital ratio of 4.5% or greater, and a Tier 1 leverage capital ratio of 4% or more (3% under certain circumstances), and does not meet the definition of “well capitalized”; (iii) “undercapitalized” if it had a total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than 6.0%,  a common equity Tier 1 risk-based capital ratio of less than 4.5%, or a Tier 1 leverage capital ratio of less than 4.0% (3.0% under certain circumstances); (iv) “significantly undercapitalized” if it had a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a common equity Tier 1 risk-based capital ratio of less than 3.0%, or a Tier 1 leverage capital ratio of less than 3.0%; and (v) “critically undercapitalized” if its ratio of tangible equity to total assets was equal to or less than 2.0%. Under certain circumstances, a bank regulatory agency may reclassify a well capitalized institution as adequately capitalized, and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the bank regulatory agency may not reclassify a significantly undercapitalized institution as critically undercapitalized). As of December 31, 2016, Old Line Bank was “well capitalized” for this purpose and its capital exceeded all applicable requirements.

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

Deposit Insurance Assessments

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 1.5 to 30 basis points of each institution’s total assets less tangible capital. The FDIC may increase or decrease the range of assessments uniformly, except that no adjustment can deviate more than two basis points from the base assessment rate without notice and comment rulemaking. The FDIC’s current system represents a change, required by the Dodd‑Frank Act, from its prior practice of basing the assessment on an institution’s aggregate deposits. Under the FDIA, the FDIC may terminate insurance of deposits upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

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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 2016, we paid $142 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.  During 2016, amounts in transaction accounts above $15.2 million and up to $56.8 million were required to have reserves held against them in the ratio of 3% of such amounts. Amounts above $56.8 million required reserves of 10% of the amount in excess of $56.8 million. The Federal Reserve Board changes its reserve requirements on an annual basis and Old Line Bank is subject to new requirements for 2017. Old Line Bank was in compliance with its reserve requirements at December 31, 2016 and is in compliance with its current reserve requirements.

Dividends

Old Line Bancshares, Inc. is a legal entity separate and distinct from Old Line Bank. Virtually all of Old Line Bancshares, Inc.’s revenue available for the payment of dividends on its common stock results from dividends paid to Old Line Bancshares, Inc. by Old Line Bank. Under Maryland law, Old Line Bank may declare a cash dividend, after providing for due or accrued expenses, losses, interest, and taxes, from its undivided profits or, with the prior approval of the Maryland Commissioner of Financial Regulation, from its surplus in excess of 100% of its required capital stock. Also, if Old Line Bank’s surplus is less than 100% of its required capital stock, then, until its surplus is 100% of its capital stock, Old Line Bank must transfer to its surplus annually at least 10% of its net earnings and may not declare or pay any cash dividends that exceed 90% of its net earnings. In addition to these specific restrictions, the FDIC have the ability to prohibit or limit proposed dividends if such regulatory agencies determine the payment of such dividends would result in Old Line Bank being in an unsafe and unsound condition.

Community Reinvestment Act

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

Standards for Safety and Soundness

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

Anti‑Money Laundering and OFAC

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

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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.

Risk Factors Related to the Pending Merger with DCB Bancshares, Inc.

We may fail to realize all of the anticipated benefits of the merger.    The success of the pending merger with DCB, as discussed above under “Item 1 – Business,” will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining our business with DCB’s.  To realize these anticipated benefits and cost savings, however, we must successfully combine the businesses of Old Line Bancshares and DCB.  If we are unable to do so, the anticipated benefits and cost savings of the merger may not be realized fully or at all or may take longer to realize than expected.

Old Line Bancshares and DCB have operated and, until the completion of the merger, will continue to operate, independently.  It is possible that the integration process could result in the loss of key employees, the loss of key depositors or other bank customers and the disruption of DCB’s ongoing business, as well as or inconsistencies in standards, controls, procedures and policies that adversely affect DCB’s ability to maintain its relationships with its clients, customers, depositors and employees, which could have a negative impact on our ability to achieve the anticipated benefits of the merger.  Integration efforts between the two companies may, to some extent, also divert management’s attention and resources.  These integration matters could have an adverse effect on each of Old Line Bancshares and DCB during such transition period.

The market price of Old Line Bancshares common stock after the merger may be affected by factors different from those affecting our shares currently.  The businesses of Old Line Bancshares and DCB differ and, accordingly, the results of operations of the combined company and the market price of the combined company’s shares of common stock may be affected by factors different from those currently affecting the independent results of operations and market prices of our common stock.

We will be subject to business uncertainties while the merger is pending.  Uncertainty about the effect of the merger on employees, customers, suppliers and vendors may have an adverse effect on the business, financial condition and results of operations of Old Line Bancshares and DCB.  These uncertainties may impair Old Line Bancshares’ and DCB’s ability to attract, retain and motivate key personnel, depositors and borrowers pending the consummation of the merger, as such personnel, depositors and borrowers may experience uncertainty about their future roles following the consummation of the merger.  Additionally, these uncertainties could cause customers (including depositors and borrowers), suppliers, vendors and others who deal with Old Line Bancshares or DCB to seek to change existing business relationships with Old Line Bancshares or DCB or fail to extend an existing relationship.  In addition, competitors may target each party’s existing customers by highlighting potential uncertainties and integration difficulties that may result from the merger.

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Further, the pursuit of the merger and the preparation for the integration in connection therewith may place a burden on each of Old Line Bancshares’ and DCB’s management and internal resources.  Any significant diversion of management attention away from ongoing business concerns and any difficulties encountered in the transition and integration process could have a material adverse effect on our business, financial condition and results of operations both before and after consummation of the merger.

If the merger is not completed, Old Line Bancshares will have incurred substantial expenses without realizing the expected benefits.    Old Line Bancshares has incurred substantial expenses in connection with the execution of the merger agreement and the merger.  The completion of the merger depends on the satisfaction of specified conditions, including regulatory approvals and the requisite approval of DCB’s stockholders.  There is no guarantee that these conditions will be met.  If the merger is not completed, these expenses could have a material adverse impact on our financial condition because we would not have realized the expected benefits for which these expenses were incurred.

Regulatory approvals may not be received, may take longer than expected or impose conditions that are not presently anticipated.    Before the merger may be completed, we must obtain various regulatory approvals. These regulatory approvals may not be received at all, may not be received in a timely fashion, and may contain conditions on the completion of the merger or require changes to the terms of the merger that are not anticipated or that have a material adverse effect.  Although we do not currently expect that any such conditions or changes would be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying completion of the merger or imposing additional costs on or limiting our revenues following the merger, any of which might have a material adverse effect on us following the merger.  If the consummation of the merger is delayed, including by a delay in receipt of necessary regulatory approvals, our business, financial condition and results of operations may also be materially adversely affected. 

Failure to complete the merger could negatively impact our stock price and future business and financial results.  If the merger is not completed, our ongoing business may be adversely affected and we will be subject to several risks, including the following:

·

We may be required, under certain circumstances, to pay DCB a termination fee of approximately $1.3 million under the merger agreement;

·

We will be required to pay certain costs relating to the merger, whether or not the merger is completed, such as legal, accounting, financial advisor and printing fees; and

·

Matters relating to the merger may require substantial commitments of management time and resources that could otherwise have been devoted to other opportunities that may have been beneficial to Old Line Bancshares as an independent company.

In addition, if the merger is not completed, we may experience negative reactions from the financial markets and from our customers and employees.  We also could be subject to litigation related to any failure to complete the merger or to enforcement proceedings commenced against us to perform our obligations under the merger agreement. 

If the merger is not completed, we cannot assure you that the risks described above will not materialize and will not materially affect our business, financial results and stock price.

Risk Factors Related to Old Line Bancshares’ Business

System failure or cybersecurity breaches of our network security could subject us to increased operating costs as well as litigation and other potential losses.  We 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

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our Internet banking activities, against damage from physical break‑ins, cybersecurity breaches and other disruptive problems caused by Internet problems, other users or unrelated third parties. Such computer break‑ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us, subject us to additional regulatory scrutiny, damage our reputation, result in a loss of customers, and inhibit current and potential customers from using our Internet banking services, any or all of which could have a material adverse effect on our results of operations and financial condition. We periodically review our security protocols and, as necessary, add additional security measures to our computer systems and network infrastructure to mitigate the possibility of cybersecurity breaches, including firewalls and penetration testing.  These precautions may not, however, be effective in preventing such breaches, damage or failures. We continue to monitor developments in this area and consider whether additional protective measures are necessary or appropriate, and we have obtained insurance protection intended to cover losses due to network security breaches; there is no guarantee, however, that such insurance, would cover all costs associated with any breach, damage or failure of our computer systems and network infrastructure.

We may fail to realize all of the anticipated benefits of the merger with DCB Bancshares.  In February 2017, we announced execution of merger agreement with DCB Bancshares, Inc. (DCB) the parent company of Damascus Community Bank.  The ultimate success of the merger will depend, in part, on our ability to realize the anticipated benefits from combining our business with DCB.  It is possible that the continuing integration process could result in the loss of key employees, the loss of key depositors or other bank customers, the disruption of our ongoing businesses or inconsistencies in standard controls, procedures and policies that adversely affect our ability to maintain our relationships with our clients, customers, depositors and employees or to achieve the anticipated benefits of the merger.

We rely on certain external vendors. Our business is dependent on the use of outside service providers that support our day-to-day operations including data processing and electronic communications.  Our operations are exposed to the risk that a service provider may not perform in accordance with established performance standards required in our agreements for any number of reasons including equipment or network failure, a change in their senior management, their financial condition, their product line or mix and how they support existing customers, or a simple change in their strategic focus.  While we have comprehensive policies and procedures in place to mitigate risk at all phases of service provider management from selection to performance monitoring and renewals, the failure of a service provider to perform in accordance with contractual agreements could be disruptive to our business, which could have a material adverse effect on our financial conditions and results of our operations. 

A worsening of 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. We continue to operate in a challenging and uncertain economic environment.  Economic growth continues to be slow and uneven. A return to recessionary conditions or prolonged stagnant or deteriorating economic conditions could significantly affect the markets in which we do business, the demand for our products and services, the value of our loans and investments, and our ongoing operations, costs and profitability.  In any case, we expect that the business environment in the State of Maryland and the entire United States will continue to present challenges for the foreseeable future. Further continuing economic uncertainty, including regarding concerns about U.S. debt levels and related governmental actions, including potential tariffs on imports into the United States and cuts in government spending, may 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.

Furthermore, the Federal Reserve Board, in an attempt to help the overall economy, has among other things kept interest rates low through its targeted federal funds rate and the purchase of U.S. Treasury and mortgage-backed securities. 

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If the Federal Reserve Board continues to increase the federal funds rate in the near term, as is expected, overall interest rates will likely rise, which may negatively impact the housing markets and the U.S. economic growth.  In addition, deflationary pressures, while possibly lowering our operating costs, could have a negative impact on our borrowers, especially our business borrowers, and the values of collateral securing our loans, which could negatively affect our financial performance.

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 last U.S. recession, including government sponsored entities and investment banks. These investment write downs caused financial institutions to seek additional capital. Should we experience a substantial deterioration in our financial condition or should disruptions in the financial markets restrict our funding, it would negatively impact our liquidity. To mitigate this risk, we closely monitor our liquidity and maintain a line of credit with the 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 last recession have not caused the collateral securing our loans to exceed acceptable loan to value ratios, a deterioration in the commercial real estate market could cause deterioration in the collateral securing these loans and/or a decline in our customers’ earning capacity. This could negatively impact us. Although we have made a large portion of our hospitality loans to long-term, well-established operators in strategic locations, a decline in the occupancy rate in these facilities could negatively impact their earnings. This could adversely impact 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, and we may be adversely affected by changes in laws and regulations.  The banking industry is subject to extensive regulation by state and federal banking authorities. Many of these regulations are intended to protect depositors, the public or the FDIC insurance funds, not stockholders. Regulatory requirements affect our lending practices, capital structure, investment practices, dividend policy, ability to attract and retain personnel and many other aspects of our business. These requirements may constrain our rate of growth and changes in regulations could adversely affect us. The cost of compliance with regulatory requirements could adversely affect our ability to operate profitably.  Further, if we are not in compliance with such requirements, we could be subject to fines or other regulatory action that could restrict our ability to operate or otherwise have a material adverse effect on our business and financial condition.  Although we believe we are material compliance with all applicable regulations, it is possible there are violations of which we are unaware that could be discovered by our regulators in the course of an examination or otherwise, which could trigger such fines or other adverse consequences.

In addition, because regulation of financial institutions changes regularly and is the subject of constant legislative debate, we cannot forecast how federal or state regulation of financial institutions may change in the future and impact our operations. In light of the performance of and government intervention in the financial sector, there may be significant changes to the banking and financial institutions’ regulatory agencies in the future.  Changes in regulation and oversight, including in the form of changes to statutes, regulations or regulatory policies or changes in interpretation or implementation of statutes, regulations or policies, could affect the 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.

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Non-Compliance with the USA PATRIOT Act, the Bank Secrecy Act or other laws and regulations could result in fines or sanctions.  Financial institutions are required under the USA PATRIOT and Bank Secrecy Acts to develop programs to prevent financial institutions from being used for money-laundering and terrorist activities.  Financial institutions are also obligated to file suspicious activity reports with the U.S. Treasury Department's Office of Financial Crimes Enforcement Network if such activities are detected.  These rules also require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts.  Failure or the inability to comply with these regulations could result in fines or penalties, curtailment of expansion opportunities, intervention or sanctions by regulators and costly litigation or expensive additional controls and systems.  During the last few years, several banking institutions have received large fines for non-compliance with these laws and regulations.  In addition, the U.S. Government has previously imposed laws and regulations relating to residential and consumer lending activities that create significant new compliance burdens and financial risks. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations

Requirements to hold more capital could have a material adverse impact on us. The impact of the revised capital rules on our financial condition and operations is uncertain but could be materially adverse.  In July 2013, the Federal Reserve Board adopted a final rule for the Basel III capital framework. These rules substantially amended the regulatory risk-based capital rules applicable to us and increased the minimum levels of capital we are required to hold, as discussed in “Item 1. Business – Supervision and Regulation – Capital Adequacy Guidelines.” The rules apply to Old Line Bancshares as well as to the Bank. These rules include a capital conservation buffer that phases in over a period of years that began in 2016 and will become fully effective in 2019. Failure to satisfy the additional capital requirements of the capital conservation buffer will result in limits on paying dividends, engaging in share repurchases and paying discretionary bonuses. The rules establish a maximum percentage of eligible retained income that may be utilized for such actions if the capital requirements of the buffer are not fully satisfied. Beginning January 1, 2017, our capital requirements with the applicable capital conservation buffer are (i) a common equity Tier 1 risk-based capital ratio of 5.75%, (ii) a Tier 1 risk-based capital (common Tier 1 capital plus Additional Tier 1 capital) ratio of 7.25% and (iii) a total risk-based capital ratio of 9.25%. The capital conservation buffer does not apply to our leverage ratio requirement, which will remain at 4.0%. Once the capital conservation buffer is fully phased in, the resulting requirements will be a common equity Tier 1 risk-based capital ratio of 7%, a Tier 1 risk-based capital ratio of 8.5%, and a total risk-based capital ratio of 10.5%.  These increased capital requirements may have a material adverse impact on our liquidity and results of operations, or the failure to satisfy such requirements may result in our inability to pay dividends on or repurchase shares of our common stock, which could also negatively impact the market price for our stock, and may negatively impact our ability to retain personnel if our ability to pay retention bonuses is compromised.

 

Our internal controls and procedures may fail or be circumvented. Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well-designed and operated, is based in part on certain assumptions and can provide only reasonable assurances that the objectives of the system are met. Any (a) failure or circumvention of our controls and procedures, (b) failure to adequately address any internal control deficiencies, or (c) failure to comply with regulations related to controls and procedures could have a material effect on our business, consolidated financial condition and results of operations.

Our business may be adversely affected by increasing prevalence of fraud and other financial crimes.  As a financial institution, we are subject to risk of loss due to fraud and other financial crimes. Nationally, reported incidents of fraud and other financial crimes have increased.  We believe we have controls in place to detect and prevent such losses, but in some cases multi-party collusion or other sophisticated methods of hiding fraud may not be readily detected or detectable, and could result in losses that affect our financial condition and results of operations.

Financial crime is not limited to the financial services industry.  Our customers could experience fraud in their businesses, which could materially impact their ability to repay their loans, and deposit customers in all financial institutions are constantly and unwittingly solicited by others in fraud schemes that vary from easily detectable and obvious attempts to high-level and very complex international schemes that could drain an account of millions of dollars and require detailed financial forensics to unravel.  While we have controls in place, contractual agreements with our customers partitioning liability, and insurance to help mitigate the risk, none of these are guarantees that we will not experience a

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loss, potentially a loss that could have a material adverse effect on our financial condition, reputation and results of operations.

The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.  The FDIC, the Federal Reserve Board and the Office of the Comptroller of the Currency have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending.  Under this guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations.  A financial institution may have a concentration in commercial real estate lending if, among other factors (i) total reported loans for construction, land development and other land represent 100% or more of total capital, or (ii) total reported loans secured by multi-family and non-farm non-residential properties, loans for construction, land development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. The particular focus of the guidance is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution).  The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations.  The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. We have concluded that we have a concentration in commercial real estate lending under the foregoing standards because our balance in commercial real estate loans at December 31, 2016 represents more than 300% of total capital. While we believe we have implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us. 

We depend on the accuracy and completeness of information about clients and counterparties and our financial condition could be adversely affected if it relies on misleading information. In deciding whether to extend credit or to enter into other transactions with clients and counterparties, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information, which we do not independently verify as a matter of course. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to customers, we may assume that a customer’s audited financial statements conform with GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer.  Our financial condition and results of operations could be negatively impacted to the extent we rely on financial statements that do not comply with GAAP or are materially misleading.

We may be adversely affected by the soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by the Bank cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the Bank. Any such losses could have a material adverse effect on our financial condition and results of operations.

 

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 required the CFPB and other federal agencies to issue 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 fully adopted and implemented and we will not know the full impact of the Dodd‑Frank Act on our business until such regulations are fully implemented. 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

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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 market area consists of the suburban Maryland counties of Anne Arundel, Baltimore, Calvert, Carroll, Charles, Montgomery, Prince George’s and St. Mary’s. If the pending merger with DCB is consummated this market area will expand into Frederick County, Maryland, and we may expand in contiguous northern and western Counties, such as Howard County, Maryland. Broad geographic diversification, however, 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 market area to Washington, D.C., decreases in spending by the Federal government or threatened cuts to Federal government employment could impact us to a greater degree than banking companies that serve a larger or a different geographical area. Our larger competitors, for example, serve more geographically diverse market areas, parts of which may not be affected by the same economic conditions that may exist in our market area. Further, unexpected changes in the national and local economy may adversely affect our ability to attract deposits and to make loans. Such risks are beyond our control and may have a material adverse effect on our financial condition and results of operations and, in turn, the value of our securities.

We originate and retain in our portfolio residential mortgage loans. A downturn in the local real estate market and economy could adversely affect earnings.  Our loan portfolio includes residential mortgage loans that we originate. Although the local real estate market and economy in our market areas have performed better than many other markets during the past few years, a downturn could cause higher unemployment; and more delinquencies, and could adversely affect the value of properties securing 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.

Recent regulations may negatively impact our origination of mortgage loans for sale into the secondary market.  The Dodd‑Frank Act required the regulatory agencies to issue regulations that require securitizers of loans retain “not less than 5% of the credit risk for any asset that is not a qualified residential mortgage.”  The rule, issued in 2014, aligns the definition of “qualified residential mortgage” with the definition of “qualified mortgage” as defined by the CFPB for purposes of its regulations.  The final rule became effective on February 23, 2015.  Compliance with the final rule was required beginning December 24, 2015 with respect to asset-backed securities collateralized by residential mortgages, and is required beginning December 24, 2016 with respect to all other classes of asset-backed securities. 

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 will continue to be due to the relationships maintained by our banking executives with our customers. The loss of services of one or more of these executives or of other key employees could have a material adverse effect on our operations and our business could suffer. The experienced commercial lenders that we have hired are not a party to any employment agreement with us and they could terminate their employment with us at any time and for any reason.

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Our growth and expansion strategy may not be successful.  Our ability to grow depends upon our ability to attract new deposits, identify loan and investment opportunities and maintain adequate capital levels. We may also grow through acquisitions of existing financial institutions or branches thereof, as we are doing with the pending merger with DCB. There are no guarantees that our expansion strategies will be successful. Also, in order to effectively manage our anticipated and/or actual loan growth we have made and may continue to make additional investments in equipment and personnel, which could increase our non‑interest expense. If we grow too quickly and are not able to control costs and maintain asset quality, such growth could materially and adversely affect our financial performance.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.  We maintain an allowance for loan losses that we believe is adequate for absorbing any potential losses in our loan portfolio. 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, 2016, commercial and industrial and commercial real estate mortgage loans comprise approximately 80.22% 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. Interest rate fluctuations, loan prepayments, loan production and deposit flows, however, are constantly changing and influence our ability to maintain this neutral position. Generally speaking, our earnings are more sensitive to fluctuations in interest rates the greater the variance in the volume of assets and liabilities that mature and reprice in any period. The extent and duration of the sensitivity will depend on the cumulative variance over time, the velocity and direction of interest rates, and whether we are more asset than liability sensitive. Accordingly, we may not be successful in maintaining this neutral position and, as a result, our net interest margin may suffer.

We face substantial competition that could adversely affect our growth and operating results.  We operate in a competitive market for financial services and face intense competition from other financial institutions both in making loans and in attracting deposits. Many of these financial institutions have been in business for many years, are significantly larger, and have established customer bases and greater financial resources and lending limits than we do, and are able to offer certain services that we are not able to offer. There are also a number of smaller community-based banks that pursue operating strategies similar to ours.  Competitive pressures will also likely continue to build as the financial services industry continues to consolidate and as additional non-bank investment and financial services options for consumers

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become available and consumers become increasingly comfortable using such alternatives. 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, which may increase as consumers become more comfortable with these new technologies and offerings, could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.

 

We continually encounter technological change.  The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology driven by new or modified products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs.  Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations.  Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on our business and, in turn, our financial condition and results of operations.

 

The market value of our investments could negatively impact stockholders’ equity.  We have designated all of our investment securities portfolio (or 11.6% of total assets) at December 31, 2016 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, 2016, we had temporary unrealized losses in our available for sale portfolio of $5.0 million (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.

Our future acquisitions, if any, may cause us to become more susceptible to adverse economic events.  While we currently have no agreements to acquire additional financial institutions, other than DCB, 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, 2016, we were able to lend approximately $25.6 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

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conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control. Conditions in the capital markets may be such that traditional sources of capital may not be available to us on reasonable terms if we needed to raise additional capital. Accordingly, we may not be able to raise additional capital if needed or on terms that are favorable or otherwise not dilutive to existing stockholders. If we cannot raise additional capital when needed, or on desirable terms, it may have a material adverse effect on our financial condition, results of operations and prospects.

We may not have adequately assessed the fair value of acquired assets and liabilities.  Current accounting guidance requires that we record assets and liabilities at their estimated fair values on the purchase date. The determination of fair value requires that we consider a number of factors including the remaining life of the acquired loans and deposits, estimated prepayments or withdrawals, estimated loss ratios, estimated value of the underlying collateral, and the net present value of expected cash flows. Actual deviations from these predicted cash flows, maturities or repayments or the underlying value of the collateral may mean that our present value determination is inaccurate. This may cause fluctuations in interest income, non‑interest income, provision expense, interest expense and non‑interest expense and negatively impact our results of operations.

 

Item 1B.  Unresolved Staff Comments

None.

 

Item 2.  Properties

As of December 31, 2016, we operate a total of 21 branch locations and nine loan production offices. Our headquarters, which as discussed above is located at 1525 Pointer Ridge Place, Bowie, Maryland in Prince George’s County.  We also own the property and building located at 4201 Mitchellville Road, Bowie, Maryland, which we acquired in the acquisition of WSB Holdings. The net book value of the land, buildings, furniture, fixtures and equipment owned by us was $35.7 million at December 31, 2016.

During the second quarter of 2016, we opened our second branch in Montgomery County, Maryland.  On July 5, 2016, we announced plans to realign Old Line Bank’s branch offices within our market area, which included the closing and consolidation of three branches.  In that regard, we closed our Accokeek, Bowie-Mitchellville Road and Odenton branches on September 30, 2016. On January 23, 2017, we opened our newest branch, located in Leonardtown, Maryland, which replaced the previous branch located in Callaway, Maryland

 

25


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legacy Properties

Location

    

Address

    

Opened
Date

    

Square
Feet

    

Monthly
Lease
Amount

    

Term

    

Renewal
Option

Accokeek (2)

 

15808 Livingston Road,        
Accokeek, Maryland

 

12/1995

 

1,218

 

 

Owned

 

 

 

 

Annapolis
Suite 100

 

2530 Riva Road,        
Annapolis, Maryland

 

9/2011

 

3,899

 

$

12,798

 

10yrs 7mos

 

(2) 5 years

Annapolis
Suite 404

 

2530 Riva Road, 
Annapolis, Maryland

 

6/2015

 

2,394

 

$

5,841

 

6yrs 1mos

 

n/a

Bowie               

 

1525 Pointer Ridge Place
Bowie, Maryland

 

6/2006

 

38,631

 

 

Owned

 

 

 

 

Clinton

 

7801 Old Branch Avenue
Clinton, Maryland

 

9/2002

 

2,550

 

$

2,935

 

10 years

 

(3) 5years

College Park         
Suite 101

 

9658 Baltimore Avenue 
College Park, Maryland

 

3/2008

 

1,916

 

$

6,524

 

10 years

 

(2) 5 years

College Park         
Suite 450

 

9658 Baltimore Avenue 
College Park, Maryland

 

7/2005

 

2,230

 

$

5,327

 

10 years

 

(2) 5 years

Waldorf - Crain Highway

 

2995 Crain Highway     
Waldorf, Maryland

 

6/1999

 

8,044

 

 

Owned

 

 

 

 

Crofton

 

1641 Maryland Route 3 North
Crofton, Maryland

 

7/2009

 

2,420

 

$

8,102

 

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

 

$

10,063

 

30 years

 

(2) 10 years

Leonardtown

 

23152 Newtowne Neck Road
Leonardtown, Maryland

 

1/2017

 

2,505

 

 

Owned

 

 

 

 

Rockville Pike     
Suite 100

 

1801 Rockville Pike   
Rockville, Maryland

 

11/2015

 

3,251

 

$

9,767

 

5 years

 

(3) 5 years

Rockville Town Center

 

196A East Montgomery Avenue
Rockville, Maryland

 

6/2016

 

2,142

 

 

9,193

 

10 years

 

(2) 5 years

Silver Spring
Suite 215

 

12501 Prosperity Drive
Silver Spring, Maryland

 

3/2013

 

2,131

 

$

4,271

 

3 years 2 mos

 

(1) 3 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 (3)

 

20990 Point Lookout Road
Callaway, Maryland

 

8/2005

 

1,795

 

 

Owned

 

 

 

 

Fort Washington

 

12740 Old Fort Road         
Fort Washington, Maryland

 

2/1973

 

2,800

 

$

7,004

 

5 years

 

(1) 5 years

La Plata

 

101 Charles Street                
La Plata, Maryland

 

4/1974

 

2,910

 

$

7,990

 

15 years

 

(3) 10 years

Waldorf - 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

 

$

12,482

 

20 years

 

N/A

Prince Frederick

 

691 Prince Frederick Boulevard

Prince Frederick, Maryland

 

8/1999

 

3,400

 

$

10,577

 

20 years

 

N/A

Solomons (1)

 

80 Holiday Drive        
Solomons, Maryland

 

2/1998

 

2,194

 

$

4,978

 

20 years

 

N/A

Waldorf Operations

 

3220 Old Washington Road
Waldorf, Maryland

 

12/1988

 

21,064

 

 

Owned

 

 

 

 

 

26


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties Acquired May 10, 2013

Location

    

Address

    

Opened
Date

    

Square
Feet

    

Monthly
Lease
Amount

    

Term

    

Renewal
Option

Bowie

 

4201 Mitchellville Road
Bowie, Maryland

 

4/1997

 

43,600

 

 

Owned

 

 

 

 

Millersville

 

676 Old Mill Road
Millersville, Maryland

 

8/2005

 

1,795

 

$

7,500

 

5 years

 

(2) 5 years

Odenton (2)

 

1161 Annapolis Road
Odenton, Maryland

 

2/1973

 

2,800

 

$

11,956

 

5 years

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties Acquired December 4, 2015

Location

    

Address

    

Opened
Date

    

Square
Feet

    

Monthly
Lease
Amount

    

Term

    

Renewal
Option

Hunt Valley

 

10620 York Road
Hunt Valley, Maryland

 

6/2005

 

6,160

 

$

13,999

 

20 years

 

(4) 5 years

Owings Mills           
Suite 10

 

25 Crossroads Drive
Owings Mills, Maryland

 

8/2011

 

1,500

 

 

4,373

 

5 years

 

(3) 5 years

Owings Mills           
Unit 1

 

11436 Cronhill Drive
Owings Mills, Maryland

 

5/2007

 

7,612

 

 

8,317

 

3 years

 

N/A

Westminster

 

1046 Baltimore Boulevard
Westminster, Maryland

 

12/2001

 

3,391

 

 

7,290

 

20 years

 

(1) 10 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Locations closed effective December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

(2) Location closed effective September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

(3) Location closed effective January 20, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

 

27


 

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

 

2016

    

High

    

Low

 

First Quarter

 

$

18.98

 

$

16.75

 

Second Quarter

 

 

19.64

 

 

17.11

 

Third Quarter

 

 

20.09

 

 

17.75

 

Fourth Quarter

 

 

25.99

 

 

18.91

 

2015

 

 

 

 

 

 

 

First Quarter

 

$

16.04

 

$

14.31

 

Second Quarter

 

 

16.63

 

 

14.71

 

Third Quarter

 

 

17.00

 

 

15.24

 

Fourth Quarter

 

 

18.33

 

 

15.85

 

 

At December 31, 2016, there were 10,910,915 shares of our common stock issued and outstanding held by approximately 1,525 stockholders of record. There were 360,988 shares of common stock issuable on the exercise of outstanding stock options, 264,882 of which were issuable pursuant to options currently exercisable. The remaining shares are issuable pursuant to options that are exercisable as follows:

 

 

 

 

Date Exercisable

    

# of Shares

 

2/24/2017

 

30,840

 

2/25/2017

 

11,265

 

2/26/2017

 

11,315

 

10/22/2017

 

1,667

 

2/24/2018

 

14,043

 

2/25/2018

 

11,266

 

10/22/2018

 

1,667

 

2/24/2019

 

14,043

 

Total

 

96,106

 

 

Dividends

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

 

 

 

 

 

 

 

 

 

    

2016

    

2015

 

March

 

$

0.06

 

$

0.05

 

June

 

 

0.06

 

 

0.05

 

September

 

 

0.06

 

 

0.05

 

December

 

 

0.06

 

 

0.06

 

Total

 

$

0.24

 

$

0.21

 

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.

28


 

In addition, we will consider a number of other factors, including our income and financial condition, tax considerations, and general business conditions before deciding to pay additional dividends in the future. We can provide no assurance that we will continue to pay dividends to our stockholders.

Issuer Purchases of Equity Securities

As reflected in the following table there were no share repurchases by Old Line Bancshares during the quarter ended December 31, 2016:

 

 

 

 

 

 

 

 

 

Shares Purchased during the period:

    

Total number of
shares repurchased

    

Average Price
paid per share

    

Total number of
share purchased as
part of publicly
announced program(1)

    

Maximum number of
shares that may yet be
purchased under the
program (1)

 

 

 

 

 

 

 

 

 

October 1 - December 31, 2016

 

 —

 

 —

 

339,237

 

160,763

__________________________

(1)

On February 25, 2015, Old Line Bancshares’ board of directors approved the repurchase of up to 500,000 shares of our outstanding common stock.  As of December 31, 2016, 339,237 shares had been repurchased at an average price of $15.77 per share or a total cost of approximately $5.3 million.

 

 

 

 

 

 

 

 

29


 

Item 6.  Selected Financial Data

The following table summarizes Old Line Bancshares, Inc.’s selected financial information and other financial data. The selected balance sheet and statement of income data are derived from our audited financial statements. You should read this information together with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Mergers and Acquisitions” and our financial statements and the related notes included elsewhere in this report. Results for past periods are not necessarily indicative of results that may be expected for any future period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

2016

 

2015

 

2014

 

2013

 

2012

 

 

 

(Dollars in thousands except per share data)

 

 

 

 

 

 

 

Earnings and dividends:

    

 

    

    

 

    

    

 

    

 

 

    

 

 

    

 

Interest income

 

$

60,465

 

$

51,453

 

$

45,603

 

$

44,263

 

$

38,222

 

Interest expense

 

 

7,525

 

 

4,864

 

 

3,900

 

 

4,202

 

 

5,058

 

Net interest income

 

 

52,940

 

 

46,589

 

 

41,703

 

 

40,061

 

 

33,164

 

Provision for loan losses

 

 

1,585

 

 

1,311

 

 

2,827

 

 

1,504

 

 

1,525

 

Non-interest income

 

 

8,256

 

 

6,845

 

 

5,957

 

 

8,870

 

 

3,708

 

Non-interest expense

 

 

39,643

 

 

36,276

 

 

35,046

 

 

36,077

 

 

25,162

 

Income taxes

 

 

6,813

 

 

5,382

 

 

2,694

 

 

3,602

 

 

2,720

 

Net income

 

 

13,155

 

 

10,464

 

 

7,093

 

 

7,747

 

 

7,465

 

Less: Net loss attributable to the non-controlling interest

 

 

 —

 

 

(4)

 

 

(37)

 

 

(92)

 

 

(65)

 

Net income available to common stockholders

 

 

13,155

 

 

10,468

 

 

7,130

 

 

7,839

 

 

7,530

 

Per common share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings

 

$

1.21

 

$

0.98

 

$

0.66

 

$

0.87

 

$

1.10

 

Diluted earnings

 

 

1.20

 

 

0.97

 

 

0.65

 

 

0.86

 

 

1.09

 

Dividends paid

 

 

0.24

 

 

0.21

 

 

0.18

 

 

0.16

 

 

0.16

 

Common stockholders book value, period end

 

 

13.81

 

 

13.31

 

 

12.51

 

 

11.71

 

 

10.94

 

Common stockholders tangible book value, period end

 

 

12.59

 

 

12.00

 

 

11.38

 

 

10.50

 

 

10.30

 

Average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

10,837,939

 

 

10,647,986

 

 

10,786,017

 

 

9,044,844

 

 

6,828,512

 

Diluted

 

 

10,997,485

 

 

10,784,323

 

 

10,935,182

 

 

9,149,200

 

 

6,893,645

 

Common shares outstanding, period end

 

 

10,910,915

 

 

10,802,560

 

 

10,810,930

 

 

10,777,113

 

 

6,845,432

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,709,020

 

$

1,510,089

 

$

1,227,519

 

$

1,167,223

 

$

861,856

 

Total loans, less allowance for loan losses

 

 

1,369,594

 

 

1,155,147

 

 

931,121

 

 

849,263

 

 

595,145

 

Total investment securities

 

 

199,505

 

 

194,706

 

 

161,680

 

 

172,170

 

 

171,541

 

Total deposits

 

 

1,325,881

 

 

1,235,880

 

 

1,015,739

 

 

974,359

 

 

735,458

 

Stockholders’ equity

 

 

150,667

 

 

143,989

 

 

135,264

 

 

126,249

 

 

74,862

 

Performance Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

0.83

%  

 

0.79

%  

 

0.60

%  

 

0.74

%  

 

0.90

%  

Return on average stockholders’ equity

 

 

8.83

%  

 

7.54

%  

 

5.45

%  

 

7.80

%  

 

11.17

%  

Total ending equity to total ending assets

 

 

8.82

%  

 

9.54

%  

 

11.02

%  

 

10.82

%  

 

8.69

%  

Net interest margin(1)

 

 

3.79

%  

 

4.08

%  

 

4.15

%  

 

4.53

%  

 

4.65

%  

Dividend payout ratio for period

 

 

19.79

%  

 

21.47

%  

 

27.23

%  

 

19.02

%  

 

14.51

%  

Asset Quality Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance to period-end loans

 

 

0.45

%  

 

0.43

%  

 

0.46

%  

 

0.58

%  

 

0.66

%  

Non-performing assets to total assets

 

 

0.59

%  

 

0.56

%  

 

0.65

%  

 

1.27

%  

 

1.12

%  

Non-performing loans to allowance for loan losses

 

 

103.04

%  

 

120.04

%  

 

121.61

%  

 

178.91

%  

 

149.04

%  

Capital Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk-based capital

 

 

9.5

%  

 

10.7

%  

 

12.3

%  

 

12.0

%  

 

10.8

%  

Total risk-based capital

 

 

12.3

%  

 

11.1

%  

 

12.7

%  

 

12.5

%  

 

11.4

%  

Leverage capital ratio

 

 

8.6

%  

 

9.1

%  

 

9.9

%  

 

9.3

%  

 

7.9

%  

Common Equity Tier 1

 

 

9.2

%  

 

10.7

%  

 

 

 

 

 

 

 

 

 


(1)

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

 

 

 

30


 

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We operate a general commercial banking business, accepting deposits and making loans and investments.

The following highlights contain financial data and events that have occurred during 2016:

·

Total assets at December 31, 2016 increased $198.9 million, or 13.18%, since December 31, 2015.

·

Net income available to common stockholders increased $2.7 million, or 25.66% to $13.2 million, or $1.21 per basic and $1.20 per diluted share, for the twelve month period ending December 31, 2016, from $10.5 million, or $0.98 per basic and $0.97 per diluted share, for the twelve months ending December 31, 2015.

·

Net loans held-for-investment grew $214.1 million, or 18.67%, during the twelve months ended December 31, 2016, to $1.4 billion at December 31, 2016, compared to $1.1 billion at December 31, 2015, as a result of organic growth within our market area. 

·

Average gross loans increased $226.3 million, or 22.17%, to $1.2 billion for the twelve month period ending December 31, 2016 compared to $1.0 billion during the twelve months ended December 31, 2015. The growth in average loans outstanding for the twelve month period ending December 31, 2016 as compared to the same period of 2015 includes approximately $91.4 million in loans from the acquisition of Regal Bank in December 2015. 

·

Non-performing assets increased to 0.59% of total assets at December 31, 2016 compared to 0.56% at December 31, 2015. 

·

Return on Average Assets (ROAA) and Return on Average Equity (ROAE) were 0.83% and 8.83%, respectively, for the twelve months ended December 31, 2016 compared to ROAA and ROAE of 0.79% and 7.54%, respectively, for the twelve months ending December 31, 2015.

·

Total deposits increased $90.0 million, or 7.28%, since December 31, 2015.

·

The net interest margin during the year ended December 31, 2016 was 3.79% compared to 4.08% for 2015.  Total yield on interest earning assets decreased to 4.31% for the year ending December 31, 2016, compared to 4.49% for 2015.  Interest expense as a percentage of total interest-bearing liabilities was 0.68% for the year ended December 31, 2016 compared to 0.54% for 2015.

·

We ended 2016 with a book value of $13.81 per common share and a tangible book value of $12.59 per common share compared to $13.31 and $12.00, respectively, at December 31, 2015.

·

We maintained appropriate levels of liquidity and by all regulatory measures remained “well capitalized.”

·

On August 15, 2016, we completed the sale of $35 million aggregate principal amount of our 5.625% Fixed-to-Floating Rate Subordinated Notes due in 2026 (the “Notes”).  The Notes were issued pursuant to an indenture and a supplemental indenture, each dated as of August 15, 2016, between Old Line Bancshares and U.S. Bank National Association as Trustee. The Notes are unsecured subordinated obligations of Old Line Bancshares and rank equally with all other unsecured subordinated indebtedness currently outstanding or issued in the future. The Notes are subordinated in right of payment of all senior indebtedness.

·

On August 19, 2016, Old Line Bank purchased the aggregate 37.5% interest in Pointer Ridge not held by Old Line Bancshares for an aggregate of $280,139 pursuant to Agreements of Purchase and Sale of Membership Interests that the Bank entered into with each of the prior owners of the remaining (in aggregate) 37.5% interest in Pointer Ridge.   

31


 

Additionally, the following branch developments occurred during 2016:

·

In June 2016, we opened our second branch in Rockville, Maryland, located in Montgomery County.

·

On September 30, 2016, we closed three branches that have existing branches close to their proximity.

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 and, pursuant to the Regal Bancorp merger, by acquisition into Baltimore and Carroll Counties, 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 continue to take advantage of strategic opportunities presented to us via mergers occurring in our marketplace. For example, we may purchase branches that other banks close or lease branch space from other banks or hire additional loan officers. We also continually evaluate and consider opportunities with financial services companies or institutions with which we may become a strategic partner, merge or acquire such as we have done with Maryland Bankcorp, WSB Holdings and Regal Bancorp and are doing pursuant to the pending merger with DCB.  We believe the DCB acquisition is a great opportunity to generate increased earnings and to increase returns for the stockholders of both companies. 

Although the current economic, interest rate and regulatory climate continues to present challenges for our industry, we have worked diligently towards our goal of becoming the premier community bank in Maryland, resulting in increased penetration in Montgomery County market with the opening of the second Rockville branch and further expansion in Montgomery and Carroll counties and entry in to Frederick County through the planned DCB merger.  While we are uncertain about the pace of economic growth or the impact of the current political environment, and the growing national debt, we remain cautiously optimistic that we have identified any problem assets, that our remaining borrowers will stay current on their loans and that we can continue to grow our balance sheet and earnings.

Although the Federal Reserve raised the federal funds rate during 2016, the rates are still at historically low levels, and if the economy remains stable, we believe that we can continue to grow total loans and deposits during 2017, even with additional, expected incremental increases in the federal funds rate.  We also believe that we will be able to maintain a strong net interest margin during 2017.  As a result of this growth and expected continued strength in the net interest margin, we expect that net interest income will increase during 2017, although there can be no guarantee that this will be the case.

We also expect that salaries and benefits expenses and other operating expenses may be higher in 2017 than they were in 2016 as we integrate DCB and selectively take the opportunity to add more business development talent.  We will continue to look for opportunities to reduce expenses as we did with the closing of three branches in 2016.  We believe with our existing and planned branches, our lending staff, our corporate infrastructure and our solid balance sheet and strong capital position, we can continue to focus our efforts on improving earnings per share and enhancing stockholder value.

Recent and Pending Mergers and Acquisitions

Regal Bancorp, Inc.  On December 4, 2015, Old Line Bancshares acquired Regal Bancorp, the parent company of Regal Bank.  Pursuant to the merger, each outstanding share of Regal Bancorp’s preferred stock was converted into the right to receive $2.00 in cash, and each outstanding share of Regal Bancorp’s common stock was converted into the right to receive, at the holder’s election, $12.68 in cash or 0.7718 shares of our common stock, with cash paid in lieu of fractional shares of our

32


 

common stock. The total merger consideration was approximately $7.0 million, including the issuance of 230,633 shares of our common stock. 

In accordance with accounting for business combinations, we recorded the acquired assets and liabilities of Regal Bank at their estimated fair value on December 4, 2015, 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 $1.0 million for the twelve months ended December 31, 2016.

In conjunction with the merger, we also recorded the deposits acquired at their fair value and recorded a core deposit intangible of $723 thousand.  The amortization of this intangible asset decreased net income by $104 thousand for the year ended December 31, 2016.

The former Regal Bank franchise is currently operating under the Old Line Bank name.

DCB Bancshares, Inc.  On February 1, 2017, Old Line Bancshares entered into an Agreement and Plan of Merger with DCB, the parent company of Damascus Community Bank.  Pursuant to the terms of the Agreement and Plan of Merger, upon the consummation of the merger, all outstanding shares of DCB common stock will be exchanged for shares of common stock of Old Line Bancshares.  Pursuant to a separate agreement entered into between Old Line Bank and Damascus Community Bank, immediately after the merger Damascus Community Bank will merger into Old Line Bank.  Consummation of the merger and the bank merger is contingent upon DCB stockholders’ approval as well as required regulatory and third party approvals and consents.  We expect the merger to close during the second quarter of 2017. We expect merger and integration expenses to be higher during 2017 than they were during 2016 as a result of the pending DCB merger.

 

Critical Accounting Policies and Estimates

Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. They require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. The following are the accounting policies that we believe are critical. For a discussion of recent accounting pronouncements, see Note 1—Summary of Significant Accounting Policies in the Notes to our Consolidated Financial Statements.

We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America and follow general practices within the industry in which we operate. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. We base these estimates, assumptions, and judgments on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third party sources, when available.

The most significant accounting policies that we follow are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how we value significant assets and liabilities in the financial statements and how we determine those values. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods,

33


 

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, WSB Holdings and Regal Bancorp. Core deposit intangibles represent the estimated value of long‑term deposit relationships acquired in these transactions. The core deposit intangible is being amortized over 18 years for Maryland Bankcorp, ten years for WSB Holdings, and eight years for Regal Bancorp, and 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.

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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, 2016, our annual test date, and determined that no impairment charge was necessary for our goodwill at that date. Fair value of the reporting unit in 2016 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, 2016 evaluation that caused us to perform an interim review of the carrying value of goodwill.

Business Combinations— Accounting principles generally accepted in the United States (U.S. GAAP) requires that the acquisition method of accounting, formerly referred to as purchase method, be used for all business combinations and that an acquirer be identified for each business combination. Under U.S. GAAP, the acquirer is the entity that obtains control of one or more businesses in the business combination, and the acquisition date is the date the acquirer achieves control. U.S. GAAP requires that the acquirer recognize the fair value of assets acquired, liabilities assumed, and any non‑controlling interest in the acquiree at the acquisition date.

Acquired Loans—These loans are recorded at fair value at the date of acquisition, and accordingly no allowance for loan losses is transferred to the acquiring entity in connection with purchase accounting. The fair values of loans with evidence of credit deterioration (purchased, credit‑impaired loans) are initially recorded at fair value, but thereafter accounted for differently than purchased, non‑credit‑impaired loans. For purchased, credit‑impaired loans, the excess of all cash flows estimated to be collectable at the date of acquisition over the purchase price of the purchase credit‑impaired loan is recognized as interest income, using a level‑yield basis over the life of the loan. This amount is referred to as the accretable yield. The purchased credit‑impaired loan’s contractually‑required payments receivable estimated to be in excess of the amount of its future cash flows expected at the date of acquisition is referred to as the non‑accretable difference, and is not reflected as an adjustment to the yield, in the form of a loss accrual or a valuation allowance.

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

 

Subsequent to the acquisition date, management continues to monitor cash flows on a quarterly basis, to determine the performance of each purchased, credit‑impaired loan in comparison to management’s initial performance expectations.

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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.

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Average Balances, Yields and Accretion of Fair Value Adjustments Impact

The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, stockholders’ equity and related income, expense and corresponding weighted average yields and rates. Non‑accrual loans are included in total loan balances lowering the effective yield for the portfolio in the aggregate. The average balances used in this table and other statistical data were calculated using average daily balances.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

2015

 

2014

 

Twelve months ended

 

Average

 

 

Yield or

 

 

Average

 

 

Yield or

 

 

Average

 

 

Yield or

 

December 31,

 

Balance

Interest

Rate Paid

 

 

Balance

Interest

Rate Paid

 

 

Balance

Interest

Rate Paid

 

Assets:

 

    

 

    

    

    

 

    

 

    

    

    

 

    

 

    

    

 

Federal funds sold(1)

$

490,653

$

2,350
0.48

%  

$

365,198

$

1,027
0.28

%  

$

2,868,076

$

4,690
0.16

%  

Interest bearing deposits

 

1,350,471

 

429
0.03

 

 

1,322,436

 

19
0.01

 

 

182,435

 

26
0.01

 

Investment securities(1)(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

3,002,860

 

19,929
0.66

 

 

3,000,357

 

11,195
0.37

 

 

2,573,685

 

22,241
0.86

 

U.S. government agency

 

17,576,233

 

281,652
1.60

 

 

38,414,019

 

552,033
1.44

 

 

37,714,591

 

600,513
1.59

 

Corporate bonds

 

2,562,022

 

130,374
5.09

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage backed securities

 

111,803,259

 

2,060,415
1.84

 

 

78,253,923

 

1,502,468
1.92

 

 

72,303,901

 

1,498,353
2.07

 

Municipal securities

 

60,152,096

 

2,506,943
4.17

 

 

41,869,571

 

1,991,942
4.76

 

 

50,726,625

 

2,381,496
4.69

 

Other equity securities

 

6,408,092

 

383,296
5.98

 

 

4,807,916

 

238,859
4.97

 

 

4,621,253

 

321,113
6.95

 

Total investment securities

 

201,504,562

 

5,382,609
2.67

 

 

166,345,786

 

4,296,497
2.58

 

 

167,940,055

 

4,823,716
2.87

 

Loans:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

151,539,645

 

5,998,257
3.96

 

 

138,609,896

 

5,351,764
3.86

 

 

128,569,150

 

5,307,598
4.13

 

Mortgage real estate

 

1,089,605,816

 

50,554,758
4.64

 

 

874,089,522

 

43,089,824
4.93

 

 

741,096,563

 

36,586,500
4.94

 

Consumer

 

6,300,586

 

400,245
6.35

 

 

8,442,865

 

456,501
5.41

 

 

10,805,560

 

612,991
5.67

 

Total loans

 

1,247,446,047

 

56,953,260
4.57

 

 

1,021,142,283

 

48,898,089
4.79

 

 

880,471,273

 

42,507,089
4.83

 

Allowance for loan losses

 

5,867,612

 

 —

 

 

 

4,648,177

 

 —

 

 

 

5,181,900