Bay Bancorp shareholders can expect a higher payout from the company’s pending sale to Old Line Bancshares — thanks to a pair of contingencies included in their merger agreement.

Old Line, a $2.1 billion-asset company in Bowie, Md., agreed in September to pay $129 million for the $652 million-asset Bay, which is based in Columbia, Md. The consideration, however, can increase by nearly $2 million if Bay settles a lawsuit and works through some classified assets.

Bay’s executive team is on track to meet both conditions, according to a recent filing tied to the merger.

Such contingencies are designed to benefit both parties in the all-stock deal. For Old Line, it increases the odds that some of Bay’s problems will be resolved prior to closing. At Bay, there was an incentive to aggressively tackle those issues.

The legal settlement is tied to a dispute over client funds that were allegedly embezzled by an employee of a bank that Bay later bought. Bay is set to recognize nearly $1 million in after-tax income from insurance proceeds tied to the settlement.

Bay also expects to record a net recovery of nearly $600,000 from loans flagged in the merger agreement.

The disclosures were among the many pieces of new information revealed in the companies’ recent filing.

Bay began to mull selling late last year, forming a special committee and vetting three investment banks: Hovde Group; Keefe, Bruyette & Woods; and RP Financial. Bay retained Hovde Group on June 22.

Hovde was founded by Eric Hovde, Bay’s chairman, and Steven Hovde, who is on Bay’s board and is the investment bank’s CEO. The brothers are tied to H Bancorp — Eric Hovde is its CEO and Steven Hovde is an investor — which owns more than a quarter of Bay’s stock, according to regulatory filings. Joseph Thomas, Bay’s president and CEO, is a former H Bancorp president.

Those connections spurred Bay to later hire RP Financial to provide a separate fairness opinion.

Bay’s talks with Old Line began on June 26 when James Cornelsen, Old Line’s president and CEO, met with Thomas at a conference in Nashville, Tenn., hosted by FIG Partners.

Hovde Group contacted 17 other banks in June and July, though the investment bank didn’t disclose Bay’s identity at that time. Five of the institutions eventually entered into confidentiality agreements.

Old Line made an all-stock offer on July 28 that valued Bay at $122.6 million, or $11.40 a share. Four other banks submitted letters of interest, though the filing didn’t share the financial terms.

Bay’s board decided to deal exclusively with Old Line after an Aug. 3 meeting, the filing said. A day later, Old Line increased its bid by 3.5%, to $126.9 million, and offered to boost the payout if Bay could resolve the lawsuit and classified credits. The revised offer also agreed to honor Bay’s existing severance policy for workers displaced by the merger.

Formal due diligence began after the companies executed the final letter of intent on Aug. 4. The due diligence revealed no items that would threaten to derail the deal, the filing said.

One of the unnamed banks that had expressed an interest in Bay contacted Hovde Group twice in September in hopes of working on a deal. The investment bank did not hold discussions with the bank due to Bay’s exclusivity agreement with Old Line. Bay’s board also determined that Old Line's offer was superior.

Old Line’s board unanimously approved the merger on Sept. 26; Bay’s directors did the same a day later. The deal, which is expected to be completed in the second quarter, priced Bay at 191.9% of its tangible book value.

Old Line said when it announced the deal that it should be immediately accretive to its earnings, excluding $9 million in total merger-related expenses. It should take less than two years to earn back any dilution to Old Line’s tangible book value.

Old Line plans to cut nearly $10 million in annual expenses, closing at least three branches.

“This partnership expands and strengthens our presence in the Baltimore market following on our initial entry in December 2015,” Cornelsen said in a press release at the time. “We look forward to building a strong and lasting partnership that will make Old Line … the premier bank in the Baltimore-Washington corridor.”

The recent filing disclosed that Thomas will receive $650,000 in compensation tied to his change-in-control agreement. Larry Pickett, Bay’s chief financial officer, is expected to receive $247,000.

While Thomas isn’t expected to join Old Line’s management team, he is set to serve as a director. Eric Hovde will also join Old Line’s board. A third Bay director will also be selected.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.