Edgar Filing: OLD LINE BANCSHARES INC

olb10q.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

	For the quarterly period ended September 30, 2012

£	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		20-0154352
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)
	1525 Pointer Ridge Place	20716
	Bowie, Maryland	(Zip Code)
	(Address of principal executive offices)

Registrant’s telephone number, including area code: (301) 430-2500

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

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

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 o	Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

As of October 31, 2012, the registrant had 6,830,832 shares of common stock outstanding.

Part 1. Financial Information

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Balance Sheets


	September 30, 2012		December 31, 2011
	(Unaudited)
Assets
Cash and due from banks	$	43,813,588	$	43,434,375
Interest bearing accounts		26,137		119,235
Federal funds sold		908,495		83,114
Total cash and cash equivalents		44,748,220		43,636,724
Investment securities available for sale		180,363,532		161,784,835
Loans, less allowance for loan losses		573,147,401		539,297,666
Equity securities		3,828,237		3,946,042
Premises and equipment		23,883,734		23,215,429
Accrued interest receivable		2,606,790		2,448,542
Deferred income taxes		6,791,483		7,244,029
Bank owned life insurance		16,757,707		16,416,566
Prepaid pension		1,030,551		1,030,551
Other real estate owned		3,231,449		4,004,609
Goodwill		633,790		633,790
Core deposit intangible		3,869,054		4,418,892
Other assets		2,990,530		2,964,626
Total assets	$	863,882,478	$	811,042,301
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing	$	185,347,907	$	170,138,329
Interest bearing		545,730,571		520,629,456
Total deposits		731,078,478		690,767,785
Short term borrowings		44,544,608		38,672,657
Long term borrowings		6,216,463		6,284,479
Accrued interest payable		341,494		397,211
Income taxes payable		623,701		475,687
Accrued pension		4,570,725		4,342,664
Other liabilities		2,133,414		1,605,180
Total liabilities		789,508,883		742,545,663
Stockholders' equity
Common stock, par value $0.01 per share; authorized 15,000,000 shares;
issued and outstanding 6,830,832 in 2012 and 6,817,694 in 2011		68,308		68,177
Additional paid-in capital		53,647,456		53,489,075
Retained earnings		17,087,831		12,093,742
Accumulated other comprehensive income		3,171,006		2,388,972
Total Old Line Bancshares, Inc. stockholders' equity		73,974,601		68,039,966
Non-controlling interest		398,994		456,672
Total stockholders' equity		74,373,595		68,496,638
Total liabilities and stockholders' equity	$	863,882,478	$	811,042,301

The accompanying notes are an integral part of these consolidated financial statements

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Income

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Interest revenue
Loans, including fees	$	8,702,142		$	8,573,052		$	25,287,273		$	20,510,217
U.S. treasury securities		2,420			2,413			7,198			4,820
U.S. government agency securities		81,936			111,428			274,534			231,056
Mortgage backed securities		540,022			782,903			1,798,763			1,924,401
Municipal securities		414,656			221,272			1,144,483			464,083
Federal funds sold		1,696			994			4,658			5,159
Other		57,701			45,042			149,648			119,202
Total interest revenue		9,800,573			9,737,104			28,666,557			23,258,938
Interest expense
Deposits		1,057,075			1,175,773			3,271,773			3,243,461
Borrowed funds		206,721			216,756			632,208			612,465
Total interest expense		1,263,796			1,392,529			3,903,981			3,855,926
Net interest income		8,536,777			8,344,575			24,762,576			19,403,012
Provision for loan losses		375,000			800,000			1,125,000			1,000,000
Net interest income after provision for loan losses		8,161,777			7,544,575			23,637,576			18,403,012
Non-interest revenue
Service charges on deposit accounts		315,468			380,065			962,937			859,300
Gain on sales or calls of investment securities		289,511			72,252			849,539			112,811
Other than temporary impairment on equity securities		-			-			-			(122,500	)
Earnings on bank owned life insurance		137,082			356,281			412,283			557,669
Gain (loss) on sales of other real estate owned		(48,509	)		45,595			110,704			48,580
Gain (loss) on disposal of assets		-			8,995			9,365			(5,160	)
Other fees and commissions		146,550			152,613			529,873			407,312
Total non-interest revenue		840,102			1,015,801			2,874,701			1,858,012
Non-interest expense
Salaries and benefits		3,016,334			3,030,508			8,850,143			7,504,953
Occupancy and equipment		933,775			916,610			2,756,222			2,233,905
Data processing		214,187			232,530			631,154			595,612
FDIC insurance and State of Maryland assessments		157,206			143,680			435,851			462,496
Merger and integration		49,290			77,880			107,624			545,154
Core deposit premium		177,582			194,674			549,839			389,349
Other operating		1,533,384			1,557,284			4,686,267			3,514,313
Total non-interest expense		6,081,758			6,153,166			18,017,100			15,245,782

Income before income taxes		2,920,121			2,407,210			8,495,177			5,015,242
Income taxes		912,490			737,405			2,739,254			1,729,005
Net income		2,007,631			1,669,805			5,755,923			3,286,237
Less: Net loss attributable to the non-controlling interest		(20,664	)		(37,688	)		(57,678	)		(126,883	)
Net income available to common stockholders	$	2,028,295		$	1,707,493		$	5,813,601		$	3,413,120

Basic earnings per common share	$	0.30		$	0.25		$	0.85		$	0.56
Diluted earnings per common share	$	0.29		$	0.25		$	0.84		$	0.56
Dividend per common share	$	0.04		$	0.03		$	0.12		$	0.09

The accompanying notes are an integral part of these consolidated financial statements

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)



Nine Months ended September 30,	2012		2011

Net income available to common stockholders	$	5,813,601	$	3,413,120

Gross unrealized gain (loss)		782,034		1,625,371
Income tax (benefit)
Net unrealized gain (loss) on securities available for sale		782,034		1,625,371
Comprehensive net income available to common stockholders	$	6,595,635	$	5,038,491

Comprehensive earnings per share	$	0.97	$	0.74
Diluted earnings per share	$	0.96	$	0.73

The accompanying notes are an integral part of these consolidated financial statements

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)




	Common stock				Additional paid-in			Retained			Accumulated other comprehensive		Non- controlling
	Shares		Par value		capital			earnings			income		Interest

Balance, December 31, 2011		6,817,694	$	68,177	$	53,489,075		$	12,093,742		$	2,388,972	$	456,672

Net income attributable to Old Line Bancshares, Inc.		-		-		-			5,813,601			-		-

Unrealized gain on securities available for sale, net of income tax benefit of $509,409		-		-		-			-			782,034		-

Net income attributable to non-controlling interest		-		-		-			-			-		(57,678	)

Stock options exercised, including tax benefit of $2,430		2,900		29		23,102			-			-		-

Stock based compensation awards		-		-		135,381			-			-		-

Restricted stock issued		10,238		102		(102	)		-			-		-
Common stock cash dividend $0.12 per share		-		-		-			(819,512	)		-		-

Balance, September 30, 2012		6,830,832	$	68,308	$	53,647,456		$	17,087,831		$	3,171,006	$	398,994

The accompanying notes are an integral part of these consolidated financial statements

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)



Nine Months Ended September 30,	2012			2011
Cash flows from operating activities
Interest received	$	29,092,041		$	23,621,865
Fees and commissions received		1,573,317			1,654,345
Interest paid		(3,959,698	)		(3,959,024	)
Cash paid to suppliers and employees		(15,432,704	)		(12,842,458	)
Income taxes paid		(2,657,389	)		(226,596	)
		8,615,567			8,248,132
Cash flows from investing activities
Cash and cash equivalents of acquired bank		-			41,967,182
Net change in time deposits in other banks		-			297,000
Purchase of investment securities available for sale		(81,559,306	)		(57,888,014	)
Proceeds from disposal of investment securities
Held to maturity sold		-			488,457
Gain on sales of held to maturity		-			25,622
Available for sale at maturity or call		38,772,596			11,182,450
Available for sale sold		24,723,270			17,296,682
Gain on sales of available for sale		849,539			87,189
Loans made, net of principal collected		(34,950,662	)		(27,224,201	)
Proceeds from sale of other real estate owned		810,310			77,171
Improvements to other real estate owned		(15,525	)		(53,245	)
Redemption of equity securities		103,550			208,952
Purchase of premises, equipment and software		(1,556,090	)		(2,199,933	)
		(52,822,318	)		(15,734,688	)
Cash flows from financing activities
Net increase (decrease) in
Time deposits		(24,899,126	)		(28,084,844	)
Other deposits		65,209,819			54,043,969
Short term borrowings		5,871,951			7,542,275
Long term borrowings		(68,016	)		(64,801	)
Acquisition cash consideration		-			(1,022,161	)
Private placement - common stock		-			6,332,592
Stock options exercised		23,131			-
Cash dividends paid-common stock		(819,512	)		(548,897	)
		45,318,247			38,198,133

Net increase (decrease) in cash and cash equivalents		1,111,496			30,711,577

Cash and cash equivalents at beginning of period		43,636,724			14,614,972
Cash and cash equivalents at end of period	$	44,748,220		$	45,326,549

The accompanying notes are an integral part of these consolidated financial statements

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)


Nine Months Ended September 30,	2012			2011
Reconciliation of net income to net cash
provided by operating activities
Net income	$	5,755,923		$	3,286,237

Adjustments to reconcile net income to net
cash provided by operating activities

Depreciation and amortization		897,150			771,372
Provision for loan losses		1,125,000			1,000,000
Change in deferred loan fees net of costs		(215,995	)		(196,415	)
Gain on sales or calls of securities		(849,539	)		(112,811	)
Amortization of premiums and discounts		799,727			527,132
Permanent impairment on equity securities		-			122,500
Gain on sales of other real estate owned		(110,704	)		(48,580	)
Write down of other real estate owned		281,000			-
Gain on sale of fixed assets		(9,365	)		5,160
Amortization of intangible		549,839			389,349
Deferred income taxes		(66,149	)		243,900
Stock based compensation awards		135,381			106,118
Increase (decrease) in
Accrued interest payable		(55,717	)		(103,098	)
Income tax payable		148,014			-
Accrued pension		228,061			550,847
Other liabilities		528,234			(246,024	)
Decrease (increase) in
Accrued interest receivable		(158,248	)		32,210
Bank owned life insurance		(341,141	)		(90,856	)
Prepaid income taxes		-			1,258,509
Other assets		(25,904	)		752,582
	$	8,615,567		$	8,248,132

The accompanying notes are an integral part of these consolidated financial statements

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)



Nine Months Ended September 30,	2012		2011

Supplemental Disclosure:
Loans transferred to other real estate owned	$	191,921	$	1,114,290

Fair value of assets and liabilities from acquisition:
Cash	$	-	$	41,967,182
Investments		-		71,434,005
Loans		-		190,826,040
Restricted stock		-		1,575,184
Premises and equipment		-		4,457,086
Accrued interest		-		1,128,988
Prepaid assets		-		1,231,029
Deferred tax		-		7,865,514
Bank owned life insurance		-		7,504,351
Prepaid pension costs		-		1,315,642
Other real estate owned		-		1,834,451
Core deposit intangible		-		5,002,917
Other assets		-		3,397,552
Deposits		-		(297,506,000	)
Short term borrowings		-		(19,394,000	)
Accrued interest payable		-		(60,782	)
Accrued pension acquired		-		(3,330,390	)
Other liabilities		-		(1,563,745	)
Purchase price in excess of net assets acquired	$	-	$	141,723

The accompanying notes are an integral part of these consolidated financial statements

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

We report the non-controlling interests in Pointer Ridge separately in the consolidated balance sheet. We report the income of Pointer Ridge attributable to Old Line Bancshares on the consolidated statement of income.

The foregoing consolidated financial statements for the periods ended September 30, 2011 and 2012 are unaudited; however, in the opinion of management we have included all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of the results of the interim period. We derived the balances as of December 31, 2011 from audited financial statements. These statements should be read in conjunction with Old Line Bancshares’ financial statements and accompanying notes included in Old Line Bancshares’ Form 10-K for the year ended December 31, 2011. We have made no significant changes to Old Line Bancshares’ accounting policies as disclosed in the Form 10-K.

The accounting and reporting policies of Old Line Bancshares conform to accounting principles generally accepted in the United States of America.

Acquisition of 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). We converted each share of common stock of Maryland Bankcorp into the right to receive, at the holder’s election, $29.11 in cash or 3.4826 shares of Old Line Bancshares’ common stock. We paid cash for any fractional shares of Old Line Bancshares’ common stock and an aggregate cash consideration of $1.0 million. The total merger consideration was $18.8 million.

In connection with the acquisition, MB&T was merged with and into Old Line Bank, with Old Line Bank the surviving bank.

In accordance with accounting for business combinations, we included the credit losses evident in the loans in the determination of the fair value of loans at the date of acquisition and eliminated the allowance for loan losses maintained by MB&T at acquisition date.

Core Deposit Intangible

Of the total estimated purchase price, we have allocated an estimate of $12.2 million to net tangible assets acquired and we have allocated $5.0 million to the core deposit intangible which is a definite lived intangible asset. We will amortize the core deposit intangible on an accelerated basis over its estimated useful life of 18 years. During the three months ended September 30, 2012 and 2011, the core deposit intangible amortization was $177,582 and $194,674, respectively. During the nine months ended September 30, 2012 and 2011, the core deposit intangible amortization was $549,839 and $389,349, respectively.

Goodwill

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

we received a valuation of the pension plan asset at acquisition date and at December 31, 2011. As a result of this valuation, in the fourth quarter of 2011, we recorded a $492,067 increase to goodwill to reflect the costs incurred by the pension plan as of the acquisition date.

During the third quarter of 2012, we evaluated goodwill for impairment as required by the accounting guidance and there was no impairment.

Reclassifications-We have made certain reclassifications to the 2011 financial presentation to conform to the 2012 presentation.

Subsequent Events-We evaluated subsequent events after September 30, 2012, through October 31, 2012, the date this report was available to be issued. No significant subsequent events were identified which would affect the presentation of the financial statements.

As outlined in Footnote 8-Retirement and Employee Stock Ownership Plans, we anticipate that we will complete the termination of the MB& T pension plan by December 31, 2012. On October 1, 2012, we purchased an annuity contract to transfer the remaining $2,116,489 pension liability, effective November 1, 2012. We expect to recognize an approximately $930,000 periodic pension expense to eliminate the prepaid pension asset on our balance sheet and reverse a deferred tax liability with a credit to income tax expense in the amount of $406,000 during the fourth quarter of 2012. We plan to transfer any remaining pension plan assets to the employee 401(k) plan once we have recorded all remaining expenses associated with audits, actuarial and consulting fees to the plan.

As outlined in Footnote 4-Income Taxes, we also anticipate that we will reverse the $545,939 valuation allowance for deferred tax asset that we recorded at the acquisition of Maryland Bankcorp due to uncertainties about the status of the tax return filings and related accounting for income taxes at the April 1, 2011 combination. During the fourth quarter of 2012, we expect to receive acknowledgement from the Internal Revenue Service of the final amended tax returns filed for Maryland Bankcorp during the third quarter of 2012. The completion of the tax returns and our profitability in 2012 provides sufficient evidence to support the use of the remaining net operating loss.

As we have previously announced, Old Line Bancshares entered into an agreement and plan of merger with WSB Holdings, Inc. (“WSB”) on September 10, 2012. On October 24, 2012, we were served with a complaint filed on September 27, 2012, in the Circuit Court for Prince George’s County, Maryland, against WSB and its directors and Old Line Bancshares. The complaint seeks to enjoin the proposed merger and alleges, among other things, that the members of WSB’s board of directors breached their fiduciary duties by agreeing to sell WSB for inadequate and unfair consideration and pursuant to an unfair process. The complaint also alleges that the directors agreed to provisions in the merger agreement that constitute “onerous and preclusive deal protection devices,” and that certain officers and directors of WSB will receive personal benefits from the merger not shared in by other WSB stockholders. The complaint further alleges that WSB and Old Line Bancshares aided and abetted such alleged breaches.

We have not yet responded to the complaint, but intend to vigorously defend this lawsuit.

2. INVESTMENT SECURITIES

As Old Line Bank purchases securities, management determines if we should classify the securities as held to maturity, available for sale or trading. We record the securities which management has the intent and ability to hold to maturity at amortized cost which is cost adjusted for amortization of premiums and accretion of discounts to maturity. We classify securities which we may sell before maturity as available for sale and carry these securities at fair value with unrealized gains and losses included in stockholders' equity on an after tax basis. Management has not identified any investment securities as trading.

We record gains and losses on the sale of securities on the trade date and determine these gains or losses using the specific identification method. We amortize premiums and accrete discounts using the interest method. Presented below is a summary of the amortized cost and estimated fair value of securities.


September 30, 2012	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
Available for sale
U. S. treasury	$	1,249,246	$	3,254	$	-		$	1,252,500
U.S. government agency		32,674,164		129,782		(7,325	)		32,796,621
Municipal securities		55,120,456		2,389,663		(115,307	)		57,394,812
Mortgage backed		86,022,663		2,898,978		(2,042	)		88,919,599
	$	175,066,529	$	5,421,677	$	(124,674	)	$	180,363,532

December 31, 2011
Available for sale
U. S. treasury	$	1,247,889	$	8,361	$	-		$	1,256,250
U.S. government agency		25,998,568		112,040		(19,537	)		26,091,071
Municipal securities		33,753,049		1,396,859		(7,915	)		35,141,993
Mortgage backed		96,803,309		2,557,430		(65,218	)		99,295,521
	$	157,802,815	$	4,074,690	$	(92,670	)	$	161,784,835

2. INVESTMENT SECURITIES (Continued)

As of September 30, 2012, securities with unrealized losses segregated by length of impairment were as follows:


September 30, 2012	Fair value		Unrealized losses
Unrealized losses less than 12 months
U.S. treasury	$	-	$	-
U.S. government agency		4,494,900		7,325
Municipal securities		5,979,738		115,307
Mortgage backed		1,544,460		2,042
Total unrealized losses less than 12 months		12,019,098		124,674

Unrealized losses greater than 12 months
U.S. treasury		-		-
U.S. government agency		-		-
Municipal securities		-		-
Mortgage backed		-		-
Total unrealized losses greater than 12 months		-		-

Total unrealized losses
U.S. treasury		-		-
U.S. government agency		4,494,900		7,325
Municipal securities		5,979,738		115,307
Mortgage backed		1,544,460		2,042
Total unrealized losses	$	12,019,098	$	124,674

We consider all unrealized losses on securities as of September 30, 2012 to be temporary losses because we will redeem each security at face value at or prior to maturity. We have the ability and intent to hold these securities until recovery or maturity. As of September 30, 2012, we do not have the intent to sell any of the securities classified as available for sale and believe that it is more likely than not that we will not have to sell any such securities before a recovery of cost. In most cases, market interest rate fluctuations cause a temporary impairment in value. We expect the fair value to recover as the investments approach their maturity date or repricing date or if market yields for these investments decline. We do not believe that credit quality caused the impairment in any of these securities. Because we believe these impairments are temporary, we have not realized any loss in our consolidated statement of income.

In the three month periods ended September 30, 2012 and 2011, we recorded gross realized gains of $289,511 and $72,252 respectively, from the sale or call of investment securities. During the nine month periods ended September 30, 2012 and 2011, we received $64,345,405 and $29,080,400, respectively, in proceeds from sales or calls of investment securities resulting in realized gains of $849,539 and $112,811, respectively, from the sale or call of securities.

2. INVESTMENT SECURITIES (Continued)

Contractual maturities and pledged securities at September 30, 2012 are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. We classify mortgage backed securities based on maturity date. However, we receive payments on a monthly basis.

Available for Sale


September 30, 2012	Amortized cost		Fair value

Maturing
Within one year	$	1,423,071	$	1,426,965
Over one to five years		15,919,114		16,053,085
Over five to ten years		33,286,866		34,083,489
Over ten years		124,437,478		128,799,993
	$	175,066,529	$	180,363,532
Pledged securities	$	36,618,131	$	37,677,667

3. POINTER RIDGE OFFICE INVESTMENT, LLC

On November 17, 2008, we purchased Chesapeake Custom Homes, L.L.C.’s 12.5% membership interest in Pointer Ridge. The effective date of the purchase was November 1, 2008. As a result of this purchase, we own 62.5% of Pointer Ridge and we have consolidated its results of operations from the date of acquisition.

The following table summarizes the condensed Balance Sheets and Statements of Income information for Pointer Ridge.

Pointer Ridge Office Investment, LLC


Balance Sheets	September 30,			December 31,
	2012			2011

Current assets	$	309,404		$	429,611
Non-current assets		6,987,772			7,088,001
Liabilities		6,233,193			6,299,819
Equity		1,063,983			1,217,793

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
		2012			2011			2012			2011
Statements of Income
Revenue	$	213,415		$	187,285		$	624,669		$	576,407
Expenses		268,519			287,788			778,478			914,763
Net loss	$	(55,104	)	$	(100,503	)	$	(153,809	)	$	(338,356	)

4. 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. We allocate tax expense and tax benefits to Old Line Bank and Old Line Bancshares based on their proportional share of taxable income.

During the fourth quarter of 2012, we anticipate that we will reverse the $545,939 valuation allowance for deferred tax asset that we recorded at the acquisition of Maryland Bankcorp due to uncertainties about the status of the tax return filings and related accounting for income taxes at the April 1, 2011 combination. During the fourth quarter of 2012, we expect to receive acknowledgement from the Internal Revenue Service of the final amended tax returns filed for Maryland Bankcorp during the third quarter of 2012. The completion of the tax returns and our profitability in 2012 provides sufficient evidence to support the use of the remaining net operating loss.

5. LOANS

Major classifications of loans are as follows:


	September 30, 2012									December 31, 2011
	Legacy			Acquired			Total			Legacy			Acquired			Total

Real estate
Commercial	$	257,162,870		$	67,222,413		$	324,385,283		$	200,955,448		$	72,145,634		$	273,101,082
Construction		47,596,991			4,500,629			52,097,620			42,665,407			8,997,131			51,662,538
Residential		36,592,811			55,404,030			91,996,841			31,083,835			65,639,873			96,723,708
Commercial		85,323,845			10,622,298			95,946,143			90,795,904			16,329,991			107,125,895
Consumer		11,029,790			1,217,787			12,247,577			11,652,628			2,021,397			13,674,025
		437,706,307			138,967,157			576,673,464			377,153,222			165,134,026			542,287,248
Allowance for loan losses		(3,673,611	)		(819,867	)		(4,493,748	)		(3,693,636	)		(47,635	)		(3,741,271	)
Deferred loan costs, net		967,685			-			967,685			751,689			-			751,689
	$	435,000,381		$	138,147,290		$	573,147,401		$	374,211,275		$	165,086,391		$	539,297,666

Credit policies and Administration

We have adopted a comprehensive lending policy, which includes stringent underwriting standards for all types of loans. We have designed our underwriting standards to promote a complete banking relationship rather than a transactional relationship. In an effort to manage risk, prior to funding, the loan committee consisting of the Executive Officers and seven members of the Board of Directors must approve by a majority vote all credit decisions in excess of a lending officer’s lending authority. Management believes that it employs experienced lending officers, secures appropriate collateral and carefully monitors the financial condition of its borrowers and loan concentrations.

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

5. LOANS (Continued)

Commercial Real Estate Loans

Commercial real estate lending entails significant risks. Risks inherent in managing our commercial real estate portfolio relate to sudden or gradual drops in property values as well as changes in the economic climate that may detrimentally impact the borrower’s ability to repay. We attempt to mitigate these risks by carefully underwriting these loans. We also generally require the personal or corporate guarantee(s) of the owners and/or occupant(s) of the property. 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 meet with the borrower and/or perform site visits as required. Many of the loans acquired do not comply with underwriting standards that we maintain. Accordingly, during our due diligence process, we evaluated these loans using our underwriting standards and discounted the book value of these loans. We subsequently incorporated this discounted book value into our initial purchase price.

Management tracks all loans secured by commercial real estate. With the exception of loans to the hospitality industry, the properties secured by commercial real estate are diverse in terms of type. This diversity helps to reduce our exposure to economic events that affect any single market or industry. As a general rule, we avoid financing single purpose properties unless other underwriting factors are present to help mitigate the risk. As previously mentioned, we do have a concentration in the hospitality industry. At September 30, 2012 and December 31, 2011, we had approximately $57.4 million and $54.0 million, respectively, of commercial real estate loans to the hospitality industry. An individual review of these loans indicates that they generally have a low loan to value, more than acceptable existing or projected cash flow, are to experienced operators and are generally dispersed throughout the region.

Real Estate Construction Loans

This segment of our portfolio consists of funds advanced for construction of single family residences, multi-family housing and commercial buildings. These loans generally have short durations, meaning maturities typically of nine months or less. Residential houses, multi-family dwellings and commercial buildings under construction and the underlying land for which the loan was obtained secure the construction loans. All of these loans are concentrated in our primary market area.

Construction lending also entails significant risk. These risks 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 prior to completion of construction. Thus, it is more difficult to accurately evaluate the total loan funds required to complete a project and related loan to value ratios. To mitigate the risks, we generally limit loan amounts to 80% of appraised values and obtain first lien positions on the property. We generally only offer real estate construction financing to experienced builders, commercial entities or individuals who have demonstrated the ability to obtain a permanent loan “take-out.” We also perform a complete analysis of the borrower and the project under construction. This analysis includes a review of the cost to construct, the borrower’s ability to obtain a permanent “take-out”, the cash flow available to support the debt payments and construction costs in excess of loan proceeds, and the value of the collateral. During construction, we advance funds on these loans on a percentage of completion basis. We inspect each project as needed prior to advancing funds during the term of the construction loan.

Residential Real Estate Loans

We offer a variety of consumer oriented residential real estate loans including home equity lines of credit, home improvement loans and first or second mortgages on investment properties. Our residential loan portfolio consists of a diverse client base. Although most of these loans are in our primary market area, the diversity of the individual loans in the portfolio reduces our potential risk. Usually, we secure our residential real estate loans with a security interest in the borrower’s primary or secondary residence with a loan to value not exceeding 85%. Our initial underwriting includes an analysis of the borrower’s debt/income ratio which generally may not exceed 40%, collateral value, length of employment and prior credit history. We do not originate any subprime residential real estate loans.

5. LOANS (Continued)

Commercial Business Lending

Our commercial business lending consists of lines of credit, revolving credit facilities, accounts receivable financing, term loans, equipment loans, SBA loans, standby letters of credit and unsecured loans. We originate commercial business 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 generally depend on the success of the business for repayment. They may also involve high average balances, increased difficulty monitoring and a high risk of default. To help manage this risk, we typically limit these loans to proven businesses and we generally obtain appropriate collateral and personal guarantees from the borrower’s principal owners and monitor the financial condition of the business. For loans in excess of $250,000, monitoring generally includes a review of the borrower’s annual tax returns and updated financial statements.

Consumer Installment Lending

We offer various types of secured and unsecured consumer loans. We make consumer loans for personal, family or household purposes as a convenience to our customer base. However, these loans are not a focus of our lending activities. As a general guideline, a consumer’s total debt service should not exceed 40% of his or her gross income. 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.

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

Concentrations of Credit

Most of our lending activity occurs within the state of Maryland within the suburban Washington D.C. market area in Anne Arundel, Calvert, Charles, Prince George’s and St. Mary’s counties. The majority of our loan portfolio consists of commercial real estate loans and commercial and industrial loans. As of September 30, 2012 and December 31, 2011, the only industry in which we had a concentration of loans was the hospitality industry, as previously mentioned.

Non-Accrual and Past Due Loans

As a result of the acquisition of Maryland Bankcorp, we have segmented the portfolio into two components, loans originated by Old Line Bank (legacy) and loans acquired from MB&T (acquired). We consider all loans past due if the borrower has not paid the required principal and interest payments when due under the original or modified terms of the promissory note or payment of principal or interest has become 90 days past due. When we classify a loan as non-accrual, we no longer accrue interest on such loan and we reverse any interest previously accrued but not collected. We will generally restore a non-accrual loan to accrual status when the borrower brings delinquent principal and interest payments current and we expect to collect future monthly principal and interest payments. We recognize interest on non-accrual legacy loans only when received. We originally recorded acquired non-accrual loans at fair value upon acquisition. We expect to fully collect the carrying value of these loans. Therefore, as provided for under ASC 310-30, we recognize interest income on acquired non-accrual loans through the accretion of the difference between the carrying value of these loans and expected cash flows.

We consider a loan a troubled debt restructuring when we conclude that both of the following conditions exist: the restructuring constitutes a concession and the debtor is experiencing financial difficulties.

5. LOANS (Continued)

The table below presents an aging analysis of the loan portfolio at September 30, 2012 and December 31, 2011.



Age Analysis of Past Due Financing Receivables (Loans)
	September 30, 2012						December 31, 2011
	Legacy		Acquired		Total		Legacy		Acquired		Total
Current	$	431,491,549	$	134,761,534	$	566,253,083	$	375,126,930	$	159,711,725	$	534,838,655
Accruing past due loans:
30-59 days past due
Real estate		-		-		-		421,805		474,651		896,456
Commercial		-		-		-		-		-		-
Consumer		780,323		21,273		801,596		-		22,698		22,698
Total 30-59 days past due		780,323		21,273		801,596		421,805		497,349		919,154
60-89 days past due
Real estate		-		-		-		311,762		338,431		650,193
Commercial		-		-		-		11,043		-		11,043
Consumer		1,568,020		3,062		1,571,082		-		3,494		3,494
Total 60-89 days past due		1,568,020		3,062		1,571,082		322,805		341,925		664,730
90 or more days past due
Real estate		2,064		81,486		83,550
Consumer		-		-		-		34,370		-		34,370
Total 90 or more days past due		2,064		81,486		83,550		34,370		-		34,370
Total accruing past due loans		2,350,407		105,821		2,456,228		778,980		839,274		1,618,254
Recorded Investment Non-accruing past due loans 90 or more days past due:
Real estate:
Commercial		2,425,846		1,704,191		4,130,037		-		2,288,900		2,288,900
Construction		969,337		100,000		1,069,337		1,169,337		1,184,146		2,353,483
Residential		469,168		2,295,610		2,764,778		-		1,019,942		1,019,942
Commercial		-		-		-		77,975		90,039		168,014
Consumer		-		-		-		-		-		-
Total Recorded Investment Non-accruing past due loans 90 or more days past due:		3,864,351		4,099,801		7,964,152		1,247,312		4,583,027		5,830,339
Total Financing Receivables (Loans)		437,706,307		138,967,157		576,673,464		377,153,222		165,134,026		542,287,248

5. LOANS (Continued)

We consider all non-performing loans and troubled debt restructurings (TDRs) impaired. We do not recognize interest income on non-performing loans during the time period that the loans are non-performing on either a cash or accrual basis. We only recognize interest income on non-performing loans when we receive payment in full for all amounts due of all contractually required principle and interest, and the loan is current with its contractual terms. The accrued interest on impaired loans was immaterial during the nine months ended September 30, 2012.

The table below presents our impaired loans at September 30, 2012.



Impaired Loans
For the nine months ended September 30, 2012
Legacy	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
With no related allowance recorded:
Real Estate
Commercial	$	886,735	$	886,735	$	-	$	210,755
Construction		1,616,317		969,337		-		1,013,782
Residential		469,168		469,168		-		161,557
Commercial		8,819		8,819		-		980
Consumer		-		-		-		-
With an allowance recorded:
Real Estate
Commercial		1,316,578		1,315,642		284,967		912,436
Construction		-		-		-		-
Residential		-		-		-		-
Commercial		-		-		-		-
Consumer		-		-		-		-
Total legacy impaired		4,297,617		3,649,701		284,967		2,299,510

Acquired (1)
With no related allowance recorded:
Real Estate
Commercial		3,228,631		1,468,222		-		1,808,544
Construction		2,638,683		100,000		-		827,778
Residential		4,257,819		2,448,453		-		1,426,915
Commercial		240,901		128,697		-		39,483
Consumer		1,346		90		-		645

With an allowance recorded:
Real Estate
Commercial		2,344,156		957,624		599,624		636,445
Construction		-		-		-		-
Residential		-		-		-		-
Commercial		220,243		220,243		220,243		195,771
Consumer		-		-		-		-
Total acquired impaired		12,931,779		5,323,329		819,867		4,935,581
Total all impaired	$	17,229,396	$	8,973,030	$	1,104,834	$	7,235,091

(1)

Generally accepted accounting principles require that we record acquired loans at fair value which includes a discount for loans with credit impairment. These loans are not performing according to their contractual terms and meet our definition of an impaired loan. The discounts that arise from recording these loans at fair value were due to credit quality. Although we do not accrue interest income at the contractual rate on these loans, we may accrete these discounts to interest income as a result of pre-payments that exceeds our cash flow expectations or payment in full of amounts due even though we classify them as non-accrual.

5. LOANS (Continued)

The table below presents the contract amount due and recorded book balance of the non-accrual loans at September 30, 2012 and December 31, 2011.

Loans on Non-accrual Status
	September 30,2012								December 31, 2011
	# of Contracts		Unpaid Principal Balance		Recorded Investment		Interest Not Accrued		# of Contracts		Unpaid Principal Balance		Recorded Investment		Interest Not Accrued
Legacy
Real Estate
Commercial		3		1,704,191		1,704,191	$	91,684		-	$	-	$	-	$	-
Construction		1		1,616,317		969,337		295,523		1		1,616,317		1,169,337		212,484
Residential		1		469,168		469,168		14,743		-		-		-		-
Commercial		1		8,819		8,819		110		1		77,975		77,975		1,735
Consumer		-		-		-		-		-		-		-		-
Total non-accrual loans		6		3,798,495		3,151,515		402,060		2		1,694,292		1,247,312		214,219

Acquired (1)
Real Estate
Commercial		10		5,572,787		2,425,846		956,852		9		6,417,444		2,288,900		1,164,630
Construction		4		2,638,683		100,000		547,556		4		2,815,452		1,184,146		255,560
Residential		9		4,104,971		2,295,610		464,764		9		2,606,151		1,019,942		241,093
Commercial		4		369,592		257,388		58,636		4		327,414		90,039		33,041
Consumer		-		-		-		-		-		-		-		-
Total non-accrual loans		27		12,686,033		5,078,844		2,027,808		26		12,166,461		4,583,027		1,694,324
Total all non-accrual loans		33	$	16,484,528		8,230,359	$	2,429,868		28	$	13,860,753		5,830,339	$	1,908,543

Non-accrual legacy loans

At September 30, 2012, we had six non-accrual legacy loans with a total recorded book balance of $3,151,515. The first non-accrual loan has a contractual balance of $1,616,317. The borrower and guarantor on this loan have filed bankruptcy. During the first quarter of 2011, we charged $446,980 to the allowance for loan losses to reduce the balance on this loan from $1,616,317 to $969,377. We had identified a potential buyer for this note who had agreed to purchase it at a price slightly lower than the current carrying value. In October of 2011, the prospective purchaser of the promissory note rescinded his offer. In February 2012, we sold at foreclosure the property that secured the promissory note on this loan and expected to receive ratification of the foreclosure and proceeds from the sale of approximately $970,000 during the first quarter of 2012. Therefore, during the first quarter of 2012, we charged an additional $200,000 to the allowance for loan losses to properly reflect the net sales proceeds that we expected to receive. The courts rejected the initial foreclosure. We have subsequently re-foreclosed on the property. We have received ratification of the sale in the third quarter of 2012 and we expect settlement of sale of the property during the fourth quarter of 2012. The non-accrued interest on this loan is $295,523.

5. LOANS (Continued)

the value of our interest in the property is higher than our loan balance. At this point, we are unable to ascertain the potential loss on this loan. We have allocated $232,489 of the allowance for loan losses for this loan. The non-accrued interest on this loan is $20,082.

The third non-accrual legacy loan is a commercial real estate loan in the amount of $886,735. The borrower’s business has insufficient cash flow to make payments on this loan. We also transferred this loan to non-accrual status during the first quarter of 2012. A current appraisal indicates that the value of the real estate that is the collateral for this loan is sufficient to provide payment in full. We have not allocated any of the allowance for loan losses for this loan. The non-accrued interest on this loan is $44,948.

During the third quarter of 2012, we transferred a legacy commercial real estate loan in the amount of $352,478 to non-accrual status. The borrower is delinquent with payments and would not provide current financial information. A current appraisal indicates that the value of the real estate that is the collateral for this loan is sufficient to provide payment in full. We have not allocated any of the allowance for loan losses for this loan. The non-accrued interest on this loan is $26,654.

During the third quarter of 2012, we also transferred a legacy residential real estate loan in the amount of $469,168 to non-accrual status. The borrower is delinquent with payments and is experiencing financial difficulties. A current appraisal indicates that the value of the real estate that is the collateral for this loan is sufficient to provide payment in full. We have not allocated any of the allowance for loan losses for this loan. The non-accrued interest on this loan is $14,743.

At December 31, 2011, two non-accrual legacy loans totaling $1,247,312 were past due and classified as non-accrual. The first loan in the amount of $1,169,337 is a residential land acquisition and development loan secured by real estate and described above.

The second loan is a commercial loan secured by a blanket lien on the borrower’s assets and a second deed of trust on the guarantors’ personal residence. The borrower has ceased operations and the collateral has no value. In the first quarter of 2012, we charged the entire balance due to the allowance for loan losses and have filed a judgment against the guarantors. At December 31, 2011, we had allocated the entire loan balance to the allowance for loan losses.

Acquired impaired loans

Loans acquired in an acquisition are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan and lease losses. In determining the estimated fair value of these loans, we considered a number of factors including the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, net present value of cash flows we expect to receive, among others. As required, we accounted for these acquired loans in accordance with guidance for certain loans acquired in a transfer (ASC 310-30), when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments. The difference between contractually required payments and cash flows we expect to collect is the non-accretable difference. Subsequent negative differences to the expected cash flows will generally result in an increase in the non-accretable difference which would increase our provision for loan losses and decrease net interest income after provision for loan losses. Subsequent collection of payments on these loans will cause an increase in cash flows that will result in a reduction to the non-accretable difference, which would increase interest revenue. Because we carry these loans at their fair value, subsequent to acquisition, we do not consider these loans impaired unless we categorize them as non-performing (non-accrual) or as a TDR. At September 30, 2012, the contract value of the acquired loans accounted for under ASC 310-30 (including non-accrual loans) was $27,280,565. The fair value adjustments applied to these loans was $13,057,192.

The fair value of these loans (recorded book value) was $14,223,374. At December 31, 2011, the contract value of the acquired impaired loans (including non-accrual loans) was $31,927,256. The fair value adjustments applied to these loans was $15,589,151. The fair value of these loans (recorded book value) was $16,338,105.

5. LOANS (Continued)

Non-accrual acquired loans

At September 30, 2012, we had 27 non-accrual acquired loans with a recorded investment of $5,078,844 and a total contract amount due of $12,686,033. The non-accrued interest on these loans at September 30, 2012 was $2,027,808. At December 31, 2011, we had 26 non-accrual acquired loans with a recorded total fair value of $4,583,027 and a total contract amount due of $12,166,461. The non-accrued interest on these loans at December 31, 2011 was $1,694,324. As outlined above, at acquisition, we marked these loans to fair value and carry no related allowance for loan losses.

Credit Quality Indicators

We review the adequacy of the allowance for loan losses at least quarterly. Our review includes evaluation of impaired loans as required by ASC Topic 310 Receivables, and ASC Topic 450 Contingencies. Also, incorporated in determining the adequacy of the allowance is guidance contained in the SEC’s SAB No. 102, Loan Loss Allowance Methodology and Documentation; the Federal Financial Institutions Examination Council’s Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions, and the Interagency Policy Statement on the Allowance for Loan and Lease Losses provided by the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration and Office of Thrift Supervision.

We base the evaluation of the adequacy of the allowance for loan losses upon loan categories. We categorize loans as installment and other consumer loans (other than boat loans), boat loans, real estate loans and commercial loans. We further divide commercial and real estate loans by risk rating and apply loss ratios by risk rating, to determine estimated loss amounts. We evaluate delinquent loans and loans for which management has knowledge about possible credit problems of the borrower or knowledge of problems with collateral separately and assign loss amounts based upon the evaluation.

We determine loss ratios for installment and other consumer loans based upon a review of prior 18 months delinquency trends for the category, the three year loss ratio for the category, peer group loss ratios and industry standards.

With respect to commercial loans, management assigns a risk rating of one through eight as follows:

Risk rating 1 (Highest Quality) is normally assigned to investment grade risks, meaning that level of risk is associated with entities having access (or capable of access) to the public capital markets and the loan underwriting in question conforms to the standards of institutional credit providers. We also include in this category loans with a perfected security interest in U.S. government securities, investment grade government sponsored entities’ bonds, investment grade municipal bonds, insured savings accounts, and insured certificates of deposits drawn on high quality financial institutions.

Risk rating 2 (Good Quality) is normally assigned to a loan with a sound primary and secondary source of repayment. The borrower may have access to alternative sources of financing. This loan carries a normal level of risk, with minimal loss exposure. The borrower has the ability to perform according to the terms of the credit facility. Cash flow coverage is greater than 1.25:1 but may be vulnerable to more rapid deterioration than the higher quality loans. We may also include loans secured by high quality traded stocks, lower grade municipal bonds and uninsured certificates of deposit.

Characteristics of such credits should include: (a) sound primary and secondary repayment sources; (b) strong debt capacity and coverage; (c) good management in all key positions. A credit secured by a properly margined portfolio of marketable securities, but with some portfolio concentration, also would qualify for this risk rating. Additionally, individuals with significant liquidity, low leverage and a defined source of repayment would fall within this risk rating.

5. LOANS (Continued)

Risk rating 3 (Acceptable Quality) is normally assigned when the borrower is a reasonable credit risk and demonstrates the ability to repay the debt from normal business operations. Risk factors may include reliability of margins and cash flows, liquidity, dependence on a single product or industry, cyclical trends, depth of management, or limited access to alternative financing sources. Historic financial information may indicate erratic performance, but current trends are positive. Quality of financial information is adequate, but is not as detailed and sophisticated as information found on higher graded loans. If adverse circumstances arise, the impact on the borrower may be significant. We classify many small business loans in this category unless deterioration occurs or we believe the loan requires additional monitoring, such as construction loans, asset based (accounts receivable/inventory) loans, and Small Business Administration (SBA) loans.

Risk rating 4 (Pass/Watch) loans exhibit all the characteristics of a loan graded as a “3” with the exception that there is a greater than normal concern that an external factor may impact the viability of the borrower at some later date; or that the Bank is uncertain because of the lack of financial information available. We will generally grant this risk rating to credits that require additional monitoring such as construction loans, SBA loans and other loans deemed in need of additional monitoring.

Risk rating 5 (Special Mention) is assigned to risks in need of close monitoring. These are defined as classified assets. Loans generally in this category may have either inadequate information, lack sufficient cash flow or some other problem that requires close scrutiny. The current worth and debt service capacity of the borrower or of any pledged collateral are insufficient to ensure repayment of the loan. These risk ratings may also apply to an improving credit previously criticized but some risk factors remain. All loans in this classification or below should have an action plan.

Risk rating 6 (Substandard) is assigned to loans where there is insufficient debt service capacity. These obligations, even if appropriately protected by collateral value, have well defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that have clearly jeopardized repayment of principal and interest as originally intended. There is also the possibility that we will sustain some future loss if the weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual loan we may classify as substandard.

Risk rating 7 (Doubtful) corresponds to the doubtful asset categories defined by regulatory authorities. A loan classified as doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to strengthening of the asset we have deferred its classification as loss until we may determine a more exact status and estimation of the potential loss.

Risk rating 8 (Loss) is assigned to charged off loans. We consider assets classified as loss as uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has no recovery value, but that it is not practical to defer writing off the worthless assets, even though partial recoveries may occur in the future. We charge off assets in this category. We consider suggestions from our external loan review firm and bank examiners when determining which loans to charge off. We automatically charge off consumer loan accounts based on regulatory requirements. We have not allocated any portion of the allowance to loan losses for acquired loans except to the extent that we have not received the projected cash flows.

5. LOANS (Continued)

The following table outlines the allocation of allowance for loan losses by risk rating.



September 30, 2012	Account Balance						Allocation of Allowance for Loan Losses
Risk Rating	Legacy		Acquired		Total		Legacy		Acquired		Total
Pass (1-4)	$	416,275,438	$	127,191,466	$	543,466,904	$	2,967,590	$	-	$	2,967,590
Special Mention (5)		14,561,148		3,016,429		17,577,577		396,324		-		396,324
Substandard (6)		6,869,721		8,759,262		15,628,983		309,697		819,867		1,129,564
Doubtful (7)		-		-		-		-		-		-
Loss (8)		-		-		-		-		-		-
Total	$	437,706,307	$	138,967,157	$	576,673,464	$	3,673,611	$	819,867	$	4,493,748

December 31, 2011	Account Balance						Allocation of Allowance for Loan Losses
Risk Rating	Legacy		Acquired		Total		Legacy		Acquired		Total
Pass (1-4)		362,692,415	$	154,318,106	$	517,010,521		3,219,376	$	-	$	3,219,376
Special Mention (5)		8,982,637		2,107,707		11,090,344		272,606		47,635		320,241
Substandard (6)		5,478,169		8,708,214		14,186,383		201,654		-		201,654
Doubtful (7)		-		-		-		-		-		-
Loss (8)		-		-		-		-		-		-
Total		377,153,221	$	165,134,027	$	542,287,248		3,693,636	$	47,635	$	3,741,271

5. LOANS (Continued)

The following table details activity in the allowance for loan losses by portfolio segment for the periods ended September 30, 2012 and December 31, 2011. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.


September 30, 2012	Real Estate			Commercial			Boats			Other Consumer			Total
Beginning balance	$	2,123,068		$	922,310		$	565,240		$	130,653		$	3,741,271
Provision for loan losses		681,096			(122,412	)		(281,440	)		27,889			305,133
Provision for loan losses for loans acquired with deteriorated credit quality		599,624			220,243			-			-			819,867
Recoveries		63,557			20,258			-			70,268			154,083
		3,467,345			1,040,399			283,800			228,810			5,020,354
Loans charged off		(348,150	)		(87,691	)		-			(90,765	)		(526,606	)
Ending Balance	$	3,119,195		$	952,708		$	283,800		$	138,045		$	4,493,748
Amount allocated to:
Legacy Loans:
Individually evaluated for impairment	$	309,967		$	-		$	-		$	-		$	309,967
Collectively evaluated for impairment		2,209,604			732,465			283,800			138,045			3,363,914
Acquired Loans:
Individually evaluated for impairment		599,624			220,243			-			-			819,867
Ending balance	$	3,119,195		$	952,708		$	283,800		$	138,045		$	4,493,748

December 31, 2011	Real Estate			Commercial			Boats			Other Consumer			Total
Beginning balance	$	1,748,122		$	417,198		$	294,723		$	8,433		$	2,468,476
Provision for loan losses		967,036			337,007			317,778			130,544			1,752,365
Provision for loan losses for loans acquired with deteriorated credit quality		-			47,635			-			-			47,635
Recoveries		13,701			154,523			-			66,834			235,058
		2,728,859			956,363			612,501			205,811			4,503,534
Loans charged off		(605,791	)		(34,053	)		(47,261	)		(75,158	)		(762,263	)
Ending Balance	$	2,123,068		$	922,310		$	565,240		$	130,653		$	3,741,271
Amount allocated to:
Legacy Loans:
Individually evaluated for impairment	$	175,117		$	89,019		$	70,000		$	-		$	334,136
Collectively evaluated for impairment		1,947,951			785,656			495,240			130,653			3,359,500
Acquired Loans:
Individually evaluated for impairment		-			47,635			-			-			47,635
Ending balance	$	2,123,068		$	922,310		$	565,240		$	130,653		$	3,741,271

5. LOANS (Continued)

We individually evaluate all legacy substandard loans risk rated six, certain legacy special mention loans risk rated five and all legacy TDRs, for impairment. We individually evaluate all acquired loans that we risk rated substandard six subsequent to the acquisition, certain acquired special mention loans risk rated five and all acquired TDRs for impairment. We also evaluate all loans acquired and recorded at fair value under ASC 310-30 for impairment.

Our recorded investment in loans as of September 30, 2012 and December 31, 2011 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of our impairment methodology was as follows:


September 30, 2012	Real Estate		Commercial		Boats		Other Consumer		Total
Legacy loans:
Individually evaluated for impairment with specific reserve	$	1,315,642	$	-	$	-	$	-	$	1,315,642
Individually evaluated for impairment without specific reserve		3,652,420		1,901,658		-		-		5,554,078
Collectively evaluated for impairment with reserve		336,384,610		83,422,187		8,036,872		2,992,918		430,836,587
Acquired loans:
Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition)		957,624		220,243		-		-		1,177,867
Individually evaluated for impairment without specific reserve (ASC 310-30 at acquisition)		12,954,203		1,269,171		-		-		14,223,374
Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition)		113,215,245		9,132,884		-		1,217,787		123,565,916
Ending balance	$	468,479,744	$	95,946,143	$	8,036,872	$	4,210,705	$	576,673,464

5. LOANS (Continued)


December 31, 2011	Real Estate		Commercial		Boats		Other Consumer		Total
Legacy loans:
Individually evaluated for impairment with specific reserve	$	5,924,354	$	89,019	$	142,671	$	-	$	6,156,044
Individually evaluated for impairment without specific reserve		1,720,458		1,887,986		-		-		3,608,444
Collectively evaluated for impairment with reserve		267,059,878		88,818,899		8,717,775		2,792,182		367,388,734
Acquired loans:
Individually evaluated for impairment with specific reserve (ASC 310-30)		-		47,635		-		-		47,635
Individually evaluated for impairment without specific reserve (ASC 310-20)		14,830,285		1,460,185		-		-		16,290,470
Collectively evaluated for impairment without reserve (ASC 310-20)		131,952,352		14,822,172		-		2,021,397		148,795,921
Ending balance	$	421,487,328	$	107,125,895	$	8,860,446	$	4,813,579	$	542,287,248

6.	EARNINGS PER COMMON SHARE

We calculate diluted earnings per common share by including the average dilutive common stock equivalents outstanding during the period. Dilutive common equivalent shares consist of stock options, calculated using the treasury stock method.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Weighted average number of shares		6,829,785		6,809,594		6,826,390		6,024,660
Dilutive average number of shares		79,362		24,990		59,757		32,293

7.	STOCK BASED COMPENSATION

We account for stock options and restricted stock awards under the fair value method of accounting using a Black-Scholes valuation model to measure stock based compensation expense at the date of grant. We recognize compensation expense related to stock based compensation awards in our income statements over the period during which we require an individual to provide service in exchange for such award. For the nine months ended September 30, 2012 and 2011, we recorded stock-based compensation expense of $135,381 and $106,118, respectively. For the three months ended September 30, 2012 and 2011, we recorded stock-based compensation expense of $49,521 and $31,302, respectively.

7.	STOCK BASED COMPENSATION (CONTINUED)

We only recognize tax benefits for options that ordinarily will result in a tax deduction when the grant is exercised (non-qualified options). For the nine months ended September 30, 2012, we recognized a $15,097 of tax benefits associated with the portion of the expense that was related to the issuance of non-qualified options. There were no

non-qualified options included in the expense calculation for the three months ended September 30, 2012 and the three and nine months ended September 30, 2011.

We have two equity incentive plans under which we may issue stock options and restricted stock, the 2010 Equity Incentive Plan, approved at the 2010 Annual Meeting of stockholders and the 2004 Equity Incentive Plan. Our Compensation Committee administers the equity incentive plans. As the plans outline, the Compensation Committee approves stock option and restricted stock grants to directors and employees, determines the number of shares, the type of award, the option or share price, the term (not to exceed 10 years from the date of issuance), the restrictions, and the vesting period of options and restricted stock issued. The Compensation Committee has approved and we have granted options vesting immediately as well as over periods of two, three and five years and restricted stock awards that vest over periods of twelve months to three years. We recognize the compensation expense associated with these grants over their respective vesting periods. At September 30, 2012, there was $188,917 of total unrecognized compensation cost related to non-vested stock options and restricted stock awards that we expect to realize over the next 2.25 years. As of September 30, 2012, there were 145,917 shares remaining available for future issuance under the equity incentive plans. Directors and officers exercised options to purchase 2,900 shares of common stock during the nine month period ended September 30, 2012 and did not exercise any options during the nine month period ended September 30, 2011.

A summary of the stock option activity during the nine month periods follows:

	September 30,
	2012				2011
		Weighted				Weighted
	Number	average			Number	average
	of shares	exercise price			of shares	exercise price

Outstanding, beginning of period	325,331		$	8.65	310,151	$	8.60
Options granted	94,627			8.47	23,280		7.82
Options exercised	(2,900)			6.40	-		-
Options forfeited	(2,000)			8.00	-		-
Outstanding, end of period	415,058		$	8.62	333,431	$	8.54

7.	STOCK BASED COMPENSATION (CONTINUED)

Information related to options as of September 30, 2012 follows:


		Outstanding options						Exercisable options

Exercise price		Number of shares at September 30, 2012		Weighted average remaining term		Weighted average exercise price		Number of shares at September 30, 2012		Weighted average exercise price
$	4.94-$7.64		93,231		5.98	$	6.37		93,231	$	6.36
$	7.65-$8.65		137,207		8.04		7.90		53,986		7.77
$	8.66-$10.00		46,620		1.89		9.74		46,620		9.74
$	10.01-$11.31		138,000		4.25		10.49		123,000		10.43
			415,058		5.63	$	8.62		316,837	$	8.68
Intrinsic value of outstanding options where the market value exceeds the exercise price.				$	990,504

Intrinsic value of exercisable options where the market value exceeds the exercise price				$	738,102

During the nine months ended September 30, 2012 and 2011, we granted 10,947 and 8,786 restricted common stock awards, respectively. During the period ended September 30, 2012, there were 189 restricted shares that had previously vested and 520 non-vested restricted shares that were forfeited. The following table provides a summary of the restricted stock awards during the nine month periods and their vesting schedule.


	September 30,						September 30,
	2012						2011
	Number			Weighted			Number			Weighted
	of shares			average			of shares			average
				grant date						grant date
				fair value						fair value
Nonvested, beginning of period		15,691			$	7.41		17,641			$	7.13
Restricted stock granted		10,947				8.00		8,786				7.82
Restricted stock vested		(6,788	)			7.34		(8,279	)			7.13
Restricted stock forfeited		(520	)			8.00		-				-
Nonvested, end of period		19,330			$	7.75		18,148			$	7.46

Total fair value of shares vested	$	49,853					$	59,029

Intrinsic value of outstanding restricted stock awards where the market value exceeds the exercise price					$	212,823					$	180,497

Intrinsic value of vested restricted stock awards where the market value exceeds the exercise price					$	74,736					$	56,546

7.	STOCK BASED COMPENSATION (CONTINUED)

The following table outlines the vesting schedule of the unvested restricted stock awards.

Vesting Schedule

Unvested Restricted Stock Awards

September 30, 2012


Grant Date	Vesting Date	# of Restricted Shares
1/28/2010	1/28/2013	4,682
1/27/2011	1/27/2013	2,110
1/27/2011	1/27/2014	2,111
3/5/2012	12/31/2012	3,120
3/5/2012	1/26/2013	2,435
3/5/2012	1/26/2014	2,436
3/5/2012	1/26/2015	2,436
Total Issued		19,330

8. RETIREMENT AND EMPLOYEE STOCK OWNERSHIP PLANS

Eligible employees, including those who joined us as part of the MB&T acquisition, participate in a profit sharing plan that qualifies under Section 401(k) of the Internal Revenue Code. The plan allows for elective employee deferrals and the Bank makes matching contributions of up to 4% of eligible employee compensation. Our contributions to the plan included in salaries and benefits expense, for the three months ended September 30, 2012 and 2011 were $78,820 and $84,060, respectively. The Bank’s contributions to the plan for the nine months ended September 30, 2012 and 2011 were $226,237 and $218,991, respectively.

The Bank also offers Supplemental Executive Retirement Plans (SERPs) to its executive officers providing for retirement income benefits. MB&T also offered SERPs to selected officers and we have assumed that liability at acquisition and all subsequent expenses. We accrue the present value of the SERPs over the remaining number of years to the executives’ retirement dates. Old Line Bank’s expenses for the SERPs for the nine month periods ended September 30, 2012 and 2011 were $349,636 and $131,345, respectively. The SERP expense for the three month periods ended September 30, 2012 and 2011 were $116,545 and $38,605, respectively. The SERPs are non-qualified defined benefit pension plans that we have not funded.

MB&T had an employee benefit plan entitled the Maryland Bankcorp, N.A. KSOP (KSOP). The KSOP included a profit sharing plan that qualified under section 401(k) of the Internal Revenue Code and an employee stock ownership plan. We have discontinued any future contributions to the employee stock ownership plan. At September 30, 2012, the KSOP owned 184,360 shares of Bancshares’ stock, had $19,000 invested in Old Line Bank Certificates of Deposit, and $312,978 in Old Line Bank accounts. We have transferred the MB&T 401(k) assets into the Old Line 401(k) plan discussed above.

MB&T had an employee pension plan that was frozen on June 9, 2003 and no additional benefits accrued subsequent to that date. We notified all plan participants that we have terminated this plan effective August 1, 2011. As of December 31, 2011, expected future benefit payments to be paid in 2012 were $2.1 million. The plan assets at September 30, 2012 consisted of $5,754 in cash deposited in a demand deposit account and $2,316,313 cash deposited in an interest bearing money market account. During the nine month period ended September 30, 2012, we distributed $496,859 to participants who elected a lump sum payment in settlement of their liability. At September 30, 2012, the value of the expected future benefits (liability) was $2,116,489. As outlined in the subsequent events section of the Summary of Significant Accounting Policies footnote, on October 1, 2012, we purchased an annuity contract to transfer the remaining $2,116,489 liability, effective November 1, 2012. We did recognize a $100,000 net periodic pension expense during the three months and nine months ended September 30, 2012. We expect to recognize an approximately $930,000 periodic pension expense to eliminate the prepaid

8.	RETIREMENT AND EMPLOYEE STOCK OWNERSHIP PLANS (Continued)

pension asset on our balance sheet and reverse a deferred tax liability with a credit to income tax expense in the amount of $406,000 during the fourth quarter of 2012. We plan to transfer any remaining pension plan assets to the employee 401(k) plan once we have recorded all remaining expenses associated with audits, actuarial and consulting fees to the plan. We anticipate that we will complete termination of the plan by December 31, 2012.

9. FAIR VALUE MEASUREMENTS

On January 1, 2008, we adopted FASB ASC Topic 820 Fair Value Measurements and Disclosures which defines fair value as the price that participants would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability, or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

We value investment securities classified as available for sale at fair value.

The fair value hierarchy established in FASB ASC Topic 820 defines three input levels for fair value measurement. Level 1 is based on quoted market prices in active markets for identical assets. Level 2 is based on significant observable inputs other than those in Level 1. Level 3 is based on significant unobservable inputs.

We value investment securities classified as available for sale and Sallie Mae (SLMA) equity securities (included in equity securities) at fair value on a recurring basis. We value treasury securities and SLMA equity securities under Level 1, and collateralized mortgage obligations, agency securities, government sponsored entity securities, and some agency securities under Level 2. At September 30, 2012 and December 31, 2011, we established values for available for sale investment securities as follows (000’s);


	September 30, 2012		December 31, 2011
Investment securities available for sale:
Level 1 inputs	$	1,253	$	24,450
Level 2 inputs		179,111		137,335
Level 3 inputs		-		-
Investment securities available for sale	$	180,364	$	161,785

SLMA stock:
Level 1 inputs	$	247	$	262
SLMA stock	$	247	$	262

Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes our methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value. Furthermore, we have not comprehensively revalued the fair value amounts since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the above presented amounts.

We also measure certain non-financial assets such as other real estate owned and repossessed or foreclosed property at fair value on a non-recurring basis. Generally, we estimate the fair value of these items using Level 2 inputs based on observable market data or Level 3 inputs based on discounting criteria.

9. FAIR VALUE MEASUREMENTS (Continued)

As of September 30, 2012 and December 31, 2011, we estimated the fair value of foreclosed assets using Level 2 inputs to be $3,231,449 and $4,004,609, respectively. We determined these Level 2 inputs based on appraisal evaluations, offers to purchase and/or appraisals that we obtained from an outside third party during the preceding twelve months. As a result of the acquisition of Maryland Bankcorp, we have segmented the other real estate owned into two components, real estate obtained as a result of loans originated by Old Line Bank (legacy) and other real estate acquired from MB&T or obtained as a result of loans originated by MB&T (acquired).

The following outlines the transactions in other real estate owned:

Other Real Estate Owned


Nine months ended September 30, 2012	Legacy			Acquired			Total
Beginning balance	$	1,871,832		$	2,132,777		$	4,004,609
Transferred in		-			191,921			191,921
Investment in improvements		-			15,525			15,525
Write down in value		(220,000	)		(61,000	)		(281,000	)
Sales/deposits on sales		(604	)		(699,002	)		(699,606	)
Total end of period	$	1,651,228		$	1,580,221		$	3,231,449

We use the following methodologies for estimating fair values of financial instruments that we do not measure on a recurring basis. The estimated fair values of financial instruments equal the carrying value of the instruments except as noted.

Investment Securities-We base the fair values of investment securities upon quoted market prices or dealer quotes.

Loans-We estimate the fair value of loans by discounting future cash flows using current rates for which we would make similar loans to borrowers with similar credit histories. We then adjust this calculated amount for any credit impairment.

Interest bearing deposits-The fair value of demand deposits and savings accounts is the amount payable on demand. We estimate the fair value of fixed maturity certificates of deposit using the rates currently offered for deposits of similar remaining maturities.

Long and short term borrowings-The fair value of long and short term fixed rate borrowings is estimated by discounting the value of contractual cash flows using rates currently offered for advances with similar terms and remaining maturities.

Loan Commitments, Standby and Commercial Letters of Credit-Lending commitments have variable interest rates and “escape” clauses if the customer’s credit quality deteriorates. Therefore, the fair value of these items is insignificant and we have not included these in the following table.

9. FAIR VALUE MEASUREMENTS (Continued)


	September 30, 2012				December 31, 2011
	Carrying		Fair		Carrying		Fair
	amount		value		amount		value
Financial assets:
Level 1 inputs:
Investment securities	$	1,249,246	$	1,252,500	$	24,450,070	$	24,450,070
Level 2 inputs:
Investment securities		179,114,286		179,111,032		137,334,765		137,334,765
Level 3 inputs:
Loans, net		573,147,401		577,722,605		539,297,666		547,218,763

Financial liabilities
Level 3 inputs:
Interest bearing deposits	$	545,730,571	$	546,344,318	$	520,629,456	$	522,248,781
Short term borrowings		44,544,608		44,608,198		38,672,657		38,967,244
Long term borrowings		6,216,463		6,424,952		6,284,479		6,452,391

Under ASC Topic 825, entities may choose to measure eligible financial instruments at fair value at specified election dates. The fair value measurement option (i) may be applied instrument by instrument, with certain exceptions (ii) is generally irrevocable and (iii) is applied only to entire instruments and not to portions of instruments. We must report in earnings unrealized gains and losses on items for which we have elected the fair value measurement option at each subsequent reporting date. We measure certain financial assets and financial liabilities at fair value on a non-recurring basis. These assets and liabilities are subject to fair value adjustments in certain circumstances such as when there is evidence of impairment. We did not have any financial assets or liabilities measured at fair value on a non-recurring basis during the nine months ended September 30, 2012 or year ended December 31, 2011.

10. ACCOUNTING STANDARDS UPDATES

ASU No. 2011-02 “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” amends FASB ASC 310-40 “Troubled Debt Restructurings by Creditors”. The amendments specify that in evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following conditions exist: the restructuring constitutes a concession and the debtor is experiencing financial difficulties. The amendments clarify the guidance on these points and give examples of both conditions. This update became effective for interim or annual reporting periods beginning on or after June 15, 2011. We have included the required disclosures in Note 5.

ASU No. 2011-03 “Reconsideration of Effective Control for Repurchase Agreements amends FASB ASC 860-10, “Transfers and Servicing-Overall”. The amendments remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial asset on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. This update became effective for interim and annual reporting periods beginning on or after December 15, 2011 and it did not have a material impact on our consolidated financial statements or results of operations.

ASU No. 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” amends FASB ASC 820 “Fair Value Measurement”. The amendments will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRS”). Among the many areas affected by this update are the concept of highest and best use, the fair value of an instrument included in stockholder’s equity and disclosures about fair value measurement, particularly disclosures about fair value measurements categorized within Level 3 of the fair value hierarchy. This update became effective for the interim and annual reporting periods beginning after December 15, 2011 and it did not have a material impact on our consolidated financial statements or results of operations.

ASU No. 2011-05 “Presentation of Comprehensive Income” amends FASB ASC 220 “Comprehensive Income”. The amendments in this update eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. An entity will have the option to present the total comprehensive income as part of the statement of changes in stockholders’ equity. An entity will have the option to present the total comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. An entity will be required to present the face of financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income. This update becomes effective for interim and annual reporting periods beginning after December 15, 2011. Included in our consolidated financial statements is a separate statement that outlines the components of comprehensive income.

ASU No. 2011-08 “Intangibles-Goodwill and Other Testing Goodwill for Impairment” amends Topic 350 “Intangibles-Goodwill and Other” to give entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two step impairment test by calculating the fair value of the reporting unit comparing the fair value with the carrying amount of the reporting unit. This amendment is effective for annual and interim impairment tests beginning after December 15, 2011 and did not have a material impact on our consolidated financial statements or results of operations.

ASU 2011-11 “Balance Sheet-Disclosures about Offering Assets and Liabilities” amends Topic 210 “Balance Sheet” to require an entity to disclose both gross and net information about financial instruments such as sales and repurchase agreements and reverse sale and repurchase agreement and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and we do not expect that it will have a material impact on our consolidated financial statements or results of operations.

ASU 2011-12 “Comprehensive Income-Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update 2011-05” defers changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments to allow the

10. ACCOUNTING STANDARDS UPDATES (Continued)

FASB time to re-deliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of the reclassification out of accumulated other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12. ASU 2011-12 is effective for annual and interim periods beginning after December 15, 2011 and it did not have a material impact on our consolidated financial statements or results of operations.

ASU 2012-2 “Testing Indefinite-Lived Intangible Assets for Improvement” amends Topic 350 “Intangible-Goodwill and Other” provides an entity the option not to calculate annually the fair value of an indefinite-lived intangible asset if the entity determines that it is not more likely than not that the asset is impaired. ASU 2012-2 is effective for annual and interim periods beginning after July 27, 2012 and it did not have a material impact on our consolidated financial statements or results of operations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Some of the matters discussed below include forward-looking statements. Forward-looking statements often use words such as “believe,” “expect,” “plan,” “may,” “will,” “should,” “project,” “contemplate,” “anticipate,” “forecast,” “intend” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. Our actual results and the actual outcome of our expectations and strategies could be different from those anticipated or estimated for the reasons discussed below and under the heading “Information Regarding Forward Looking Statements.”

Overview

Old Line Bancshares was incorporated under the laws of the State of Maryland on April 11, 2003 to serve as the holding company of Old Line Bank.

Our primary business is to own all of the capital stock of Old Line Bank. We also have an approximately $699,500 investment in a real estate investment limited liability company named Pointer Ridge Office Investment, LLC (Pointer Ridge). We own 62.5% of Pointer Ridge. Frank Lucente, one of our directors and a director of Old Line Bank, controls 12.5% of Pointer Ridge and controls the manager of Pointer Ridge. The purpose of Pointer Ridge is to acquire, own, hold for profit, sell, assign, transfer, operate, lease, develop, mortgage, refinance, pledge and otherwise deal with real property located at the intersection of Pointer Ridge Road and Route 301 in Bowie, Maryland. Pointer Ridge owns a commercial office building containing approximately 40,000 square feet and leases this space to tenants. We lease approximately 65% of this building for our main office and operate a branch of Old Line Bank from this address.

On April 1, 2011, we acquired Maryland Bankcorp, Inc. (Maryland Bankcorp), the parent company of Maryland Bank & Trust Company, N.A (MB&T). This acquisition created the sixth largest independent commercial bank based in Maryland, with assets of more than $750 million and with 19 full service branches serving five counties.

Summary of Recent Performance and Other Activities

In a continually challenging economic environment, we are pleased to report continued profitability for the third quarter of 2012. Net income available to common stockholders was $2.0 million or $0.30 per basic and $0.29 per diluted common share for the three month period ended September 30, 2012. This was $320,802 or 18.79% higher than net income available to common stockholders of $1.7 million or $0.25 per basic and diluted common share for the same period in 2011. Net income available to common stockholders was $5.8 million or $0.85 per basic and $0.84 per diluted common share for the nine month period ending September 30, 2012. This was $2.4 million or 70.33% higher than net income available to common stockholders of $3.4 million or $0.56 per basic and diluted common share for the nine months ended September 30, 2011.

The following highlights certain financial data and events that have occurred during the first nine months and third quarter of 2012:

·	On September 10, 2012, we announced that we had executed a merger agreement that provided for the acquisition of WSB Holdings, Inc. (“WSB”).

·	As a result of our business development efforts, expanded market area and increased name recognition:

Ø	Average total loans grew approximately $69.0 million or 13.59% for the three months ended September 30, 2012 compared to the three months ended September 30, 2011.

Ø	Average non-interest bearing deposits grew $23.8 million or 14.67% for the three months ended September 30, 2012 relative to the same period in 2011.

Ø	Average total loans grew approximately $125.1 million or 28.64% for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. Our acquisition of Maryland Bankcorp also contributed to our growth in the nine month period.

Ø	Average non-interest bearing deposits grew $53.5 million or 43.16% for the nine months ended September 30, 2012 relative to the same period in 2011.

Our asset quality remained strong:

Ø	At September 30, 2012, we had six legacy loans (loans originated by Old Line Bank) on non-accrual status in the amount of $3.2 million.

Ø	At September 30, 2012, we had 27 acquired loans (loans acquired from MB&T pursuant to the merger) on non-accrual status totaling $5.1 million compared to 26 acquired non-accrual loans totaling $4.6 million at December 31, 2011.

Ø	At third quarter end 2012, we had accruing legacy loans past due between 30 and 89 days in the amount of $2.3 million and $2,064 accruing legacy loans 90 or more days past due.

Ø	At September 30, 2012, we had accruing acquired loans totaling $24,335 past due between 30 and 89 days and $81,486 accruing acquired loans 90 or more days past due.

·	We ended the third quarter of 2012 with a book value of $10.83 per common share and a tangible book value of $10.17 per common share.

·	We maintained liquidity and by all regulatory measures remained “well capitalized”.

·	We decreased the provision for loan losses by $425,000 during the three month period and increased it by $125,000 for the nine month period ended September 30, 2012 compared to September 30, 2011.

·	As a result of the provision discussed above, and net charge offs for the nine month period of $372,523, the allowance for loan losses increased to $4.5 million at September 30, 2012 compared to $3.7 million at December 31, 2011.

·	We recognized a loss, net of taxes, on our investment in Pointer Ridge of approximately $34,000 and $96,000, respectively, for the three and nine months ended September 30, 2012.

As noted above, on September 10, 2012, we announced that we had executed a merger agreement that provided for the acquisition of WSB Holdings, Inc. (WSB). We plan to complete the merger by the second quarter of 2013. This combination will create a $1.2 billion banking institution and will allow us to expand our financial services with the addition of a successful and growing mortgage origination team. We also anticipate that the acquisition and integration of WSB will enhance the liquidity of our stock as well as our overall financial condition and operating performance.

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 to include 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.

On April 1, 2011, all MB&T branches were rebranded as Old Line Bank branches and all data processing and accounting systems were consolidated. As discussed below, during the second quarter of 2011, we also substantially completed the assessment and recordation on our financial statements of MB&T’s assets and liabilities at fair value as required by current accounting guidance. With the exception of the closing of one MB&T branch, which MB&T had previously designated for closure, we have also retained, and expect to continue to retain, all of MB&T’s branches, and the branch personnel with severance of employees occurring only at MB&T’s operations, accounting and executive offices.

In accordance with accounting for business combinations, we recorded the acquired assets and liabilities at their estimated fair value on April 1, 2011, the acquisition date. The determination of the fair value of the loans caused a significant write down in the value of certain loans, which we assigned to an accretable or non-accretable balance. We will recognize the accretable balance as interest income over the remaining term of the loan. We will recognize the non-accretable balance as the borrower repays the loan. The accretion of the loan marks, along with other fair value adjustments, favorably impacted our net interest income by $876,046 and $2.5 million for the three and nine months ended September 30, 2012, respectively. We based the determination of fair value on cash flow expectations and/or collateral values. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change. Change in our cash flow expectations could impact net interest income after provision for loan losses. We will recognize any decline in expected cash flows as impairment and record a provision for loan losses during the period. We will recognize any improvement in expected cash flows as an adjustment to interest income.

In conjunction with the merger, we also recorded the deposits acquired at their fair value and recorded a core deposit intangible of $5.0 million. The amortization of this intangible asset was $177,582 for the three month period and $549,839 for the nine month period ended September 30, 2012.

The following summarizes the highlights of our financial performance for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2011 (figures in the table may not match those discussed in the balance of this section due to rounding).

Three Months ended September 30,

(Dollars in thousands)


	2012			2011			$ Change			% Change

Net income available to common stockholders	$	2,028		$	1,707		$	321			18.80	%
Interest revenue		9,801			9,737			64			0.66
Interest expense		1,264			1,393			(129	)		(9.26	)
Net interest income after provision for loan losses		8,162			7,545			617			8.18
Non-interest revenue		840			1,016			(176	)		(17.32	)
Non-interest expense		6,082			6,153			(71	)		(1.15	)
Average total loans		576,428			507,472			68,956			13.59
Average interest earning assets		752,858			674,069			78,789			11.69
Average total interest bearing deposits		553,524			486,889			66,635			13.69
Average non-interest bearing deposits		186,319			162,479			23,840			14.67
Net interest margin (1)		4.72	%		5.01	%
Return on average equity		11.83	%		11.02	%
Basic earnings per common share	$	0.30		$	0.25		$	0.05			20.00
Diluted earnings per common share		0.29			0.25			0.04			16.00

(1) See “Reconciliation of Non-GAAP Measures”

The following summarizes the highlights of our financial performance for the nine month period ended September 30, 2012 compared to the nine month period ended September 30, 2011 (figures in the table may not match those discussed in the balance of this section due to rounding).

Nine Months ended September 30,

(Dollars in thousands)



	2012			2011			$ Change		% Change

Net income available to common stockholders	$	5,814		$	3,413		$	2,401		70.34	%
Interest revenue		28,667			23,259			5,408		23.25
Interest expense		3,904			3,856			48		1.24
Net interest income after provision for loan losses		23,638			18,403			5,235		28.44
Non-interest revenue		2,875			1,858			1,017		54.72
Non-interest expense		18,017			15,246			2,771		18.18
Average total loans		561,681			436,629			125,052		28.64
Average interest earning assets		732,230			566,912			165,318		29.16
Average total interest bearing deposits		533,303			414,114			119,189		28.78
Average non-interest bearing deposits		177,349			123,886			53,463		43.16
Net interest margin (1)		4.69	%		4.66	%
Return on average equity		11.67	%		8.25	%
Basic earnings per common share	$	0.85		$	0.56		$	0.29		52.08	%
Diluted earnings per common share		0.84			0.56			0.28		50.00

(1)	See “Reconciliation of Non-GAAP Measures”

Growth Strategy

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 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 two years, we have expanded in Prince George’s County and Anne Arundel County, Maryland and the acquisition of Maryland Bankcorp has expanded our operations in Charles County and into St. Mary’s and Calvert Counties, Maryland. We anticipate that the acquisition of WSB will further enhance our presence in Charles, Prince George’s and Anne Arundel counties.

Other Opportunities

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 payer service. We provide selected commercial customers the ability to remotely capture their deposits and electronically transmit them to us. We will continue to evaluate cost effective ways that technology can enhance our management capabilities, products and services.

We may take advantage of strategic opportunities presented to us via mergers occurring in our marketplace. For example, we may purchase branches that other banks close or lease branch space from other banks or hire additional loan officers. We also continually evaluate and consider opportunities with financial services companies or institutions with which we may become a strategic partner, merge or acquire such as we have done with WSB and MB&T.

Although the current economic climate continues to present significant challenges for our industry, we have worked diligently towards our goal of becoming the premier community bank in the Washington, D.C. market. While we are uncertain whether the economy will remain at its current anemic growth or if the high unemployment rate, soaring national debt and high gas prices will continue to dampen the economic climate, we continue to remain cautiously optimistic that we

have identified any problem assets and our remaining borrowers will continue to stay current on their loans and that we can continue to grow our balance sheet and earnings. Now that we have substantially completed our branch expansion, enhanced our data processing capabilities and expanded our commercial lending team, we believe that we are well positioned to capitalize on the opportunities that may become available in a healthy economy as we did with the Maryland Bankcorp and pending WSB acquisitions.

We anticipate that as a result of the Maryland Bankcorp acquisition, salaries and benefits expenses and other operating expenses will be higher the remainder of 2012 than they were in 2011. As previously reported, we have identified several areas within the former MB&T non-interest expense structure that we expected would provide expense reductions from those incurred since the acquisition date of April 1, 2011. We realized these expense reductions during the fourth quarter of 2011 and the first quarter of 2012 and will continue to benefit from them for the remainder of 2012. If the WSB acquisition is completed as anticipated, then we expect that salaries and benefits expenses and other operating expenses will be higher in 2013 than they were in 2012. We believe with our 19 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. Until completion of the merger with WSB, we anticipate that merger related expenses may cause earnings to be slightly lower than would otherwise be expected. However, we anticipate that the WSB merger will be accretive to earnings within three quarters of closing.

Results of Operations

Net Interest Income

Net interest income is the difference between income on interest earning assets and the cost of funds supporting those assets. Earning assets are comprised primarily of loans, investments, interest bearing deposits and federal funds sold. Cost of funds consists of interest bearing deposits and other borrowings. Non-interest bearing deposits and capital are also funding sources. Changes in the volume and mix of earning assets and funding sources along with changes in associated interest rates determine changes in net interest income.

Three months ended September 30, 2012 compared to three months ended September 30, 2011

Net interest income after provision for loan losses for the three months ended September 30, 2012 increased $617,202 or 8.18% to $8.2 million from $7.5 million for the same period in 2011. As discussed below and outlined in detail in the Rate/Volume Analysis, these changes were the result of growth in average interest earning assets and the change in the composition of average interest earning assets that occurred with the movement of funds from lower yielding interest bearing deposits into higher yielding loans and investment securities. A decline in interest paid on interest bearing liabilities also contributed to the improvement in net interest income. The accretion of the fair value adjustments positively impacted net interest income after provision for loan losses as did the $425,000 decrease in the provision for loan losses. The faster than expected repayment of impaired loans that we acquired from MB&T was the most significant factor that caused these changes and the improvement in net interest margin as discussed below.

Although a competitive rate environment and a low prime rate cause low market yields that continue to negatively impact net interest income, the relatively stable rate environment has allowed us to adjust the mix and volume of interest earning assets and liabilities on the balance sheet. This contributed to the improvement in the net interest margin.

We offset the effect on net income caused by the low rate environment primarily by growing total average interest earning assets by $78.8 million or 11.69% to $752.8 million for the three months ended September 30, 2012 from $674.1 million for the three months ended September 30, 2011. The growth in net interest income that derived from the increase in total average interest earning assets was partially offset by growth in average interest bearing liabilities. Average interest bearing deposits which increased to $553.5 million for the three months ended September 30, 2012 from $486.9 million for the three months ended September 30, 2011 was the primary cause of the growth in interest bearing liabilities. The growth in average interest earning assets and interest bearing deposits was primarily a result of increased name recognition in our market place and our business development efforts, particularly our increased business development efforts in our new market area resulting from our acquisition of Maryland Bankcorp.

Non-interest bearing deposits allow us to fund growth in interest earning assets at minimal cost. As a result of growth generated from our branch network, our average non-interest bearing deposits increased $23.8 million to $186.3 million. This was also a significant contributor to the improvement in the net interest margin.

Our net interest margin was 4.72% for the three months ended September 30, 2012 as compared to 5.01% for the three months ended September 30, 2011. The yield on average interest earning assets decreased forty four basis points during the period from 5.83% for the quarter ended September 30, 2011 to 5.39% for the quarter ended September 30, 2012. Twenty one basis points of this decrease was primarily because during the three month period we had a lower dollar value of impaired loans that we acquired from MB&T repaid this quarter relative to the same quarter last year which caused a lower accretion of fair value adjustments as outlined below. This coupled with re-pricing in the loan portfolio caused the average loan yield to decline.

During three months ended September 30, 2012 and 2011, we continued to successfully collect payments on acquired loans that we had recorded at fair value according to ASC 310-20 and ASC 310-30, albeit at a lower dollar value during the 2012 period than we accomplished during the same period last year. These payments were a direct result of our efforts to negotiate payments, sell notes or foreclose on and sell collateral after the acquisition date. The accretion of the fair value adjustments positively impacted the yield on loans and increased the net interest margin as follows:


	Three Months Ended September 30,
	2012					2011

	Fair Value Accretion Dollars		% Impact on Net Interest Margin			Fair Value Accretion Dollars		% Impact on Net Interest Margin
Commercial loans	$	64,142		0.03	%	$	60,855		0.04	%
Mortgage loans		776,089		0.41			1,042,789		0.61
Consumer loans		1,968		0.01			1,226		0.00
Interest bearing deposits		33,847		0.01			108,469		0.06
Total Fair Value Accretion	$	876,046		0.46	%	$	1,213,339		0.71	%

The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the three months ended September 30, 2012 and 2011, showing the average distribution of assets, liabilities, stockholders’ equity and related income, expense and corresponding weighted average yields and rates. The average balances used in this table and other statistical data were calculated using average daily balances.


	Average Balances, Interest and Yields
Three Months Ended September 30,	2012							2011
	Average							Average
	balance		Interest		Yield			balance		Interest		Yield
Assets:
Federal funds sold(1)	$	4,357,802		1,696		0.15	%	$	4,334,556	$	994		0.09	%
Interest bearing deposits		5,251,808		3,313		0.25			14,238,260		11,237		0.31
Investment securities(1)(2)
U.S. treasury		1,248,954		2,638		0.84			1,247,141		2,552		0.81
U.S. government agency		27,035,518		86,660		1.28			22,611,220		117,850		2.07
Mortgage backed securities		86,500,675		540,022		2.48			100,121,572		782,903		3.10
Municipal securities		52,440,302		649,970		4.93			22,537,921		330,861		5.82
Other		3,860,839		56,066		5.78			3,818,831		34,517		3.59
Total investment securities		171,086,288		1,335,356		3.11			150,336,685		1,268,683		3.35
Loans: (1) (3)
Commercial		96,685,151		1,257,295		5.17			98,799,462		1,376,251		5.53
Mortgage		467,135,047		7,422,503		6.32			393,694,344		7,030,619		7.08
Consumer		12,608,252		176,362		5.56			14,978,369		224,455		5.95
Total loans		576,428,450		8,856,160		6.11			507,472,175		8,631,325		6.75
Allowance for loan losses		4,266,214		-					2,313,027		-
Total loans, net of allowance		572,162,236		8,856,160		6.16			505,159,148		8,631,325		6.78
Total interest earning assets(1)		752,858,134		10,196,525		5.39			674,068,649		9,912,239		5.83
Non-interest bearing cash		50,174,932							29,110,472
Premises and equipment		23,921,637							22,634,871
Other assets		37,989,887							40,019,636
Total assets	$	864,944,590						$	765,833,628
Liabilities and Stockholders' Equity:
Interest bearing deposits
Savings	$	62,840,067		52,395		0.33		$	60,972,112		50,076		0.33
Money market and NOW		178,067,375		147,621		0.33			117,322,326		161,479		0.55
Other time deposits		312,616,815		857,059		1.09			308,594,165		964,218		1.24
Total interest bearing deposits		553,524,257		1,057,075		0.76			486,888,603		1,175,773		0.96
Borrowed funds		49,608,300		206,721		1.66			48,302,618		216,756		1.78
Total interest bearing liabilities		603,132,557		1,263,796		0.83			535,191,221		1,392,529		1.03
Non-interest bearing deposits		186,319,471							162,479,123
		789,452,028							697,670,344
Other liabilities		6,898,432							6,192,632
Non-controlling interest		406,102							484,851
Stockholders' equity		68,188,028							61,485,801
Total liabilities and stockholders' equity	$	864,944,590						$	765,833,628
Net interest spread(1)						4.55							4.80
Net interest income and Net interest margin(1)			$	8,932,729		4.72	%			$	8,519,710		5.01	%

(1)

Interest revenue is presented on a fully taxable equivalent (FTE) basis. The FTE basis adjusts for the tax favored status of these types of assets. Management believes providing this information on a FTE basis provides investors with a more accurate picture of our net interest spread and net interest income and we believe it to be the preferred industry measurement of these calculations. See “Reconciliation of Non-GAAP Measures.”

(2)	Available for sale investment securities are presented at amortized cost.

(3)	Average non-accruing loans for the three month periods ended September 30, 2012 and 2011 were $7,746,598 and $5,793,393, respectively. There was no non-accrual interest included in interest income.

Nine months ended September 30, 2012 compared to nine months ended September 30, 2011

Net interest income after provision for loan losses for the nine months ended September 30, 2012 increased $5.2 million or 28.44% to $23.6 million from $18.4 million for the same period in 2011. As discussed below and outlined in detail in the Rate/Volume Analysis, these changes were the result of growth in average interest earning assets and the change in the composition of average interest earning assets that occurred with the movement of funds from lower yielding interest bearing deposits into higher yielding loans and investment securities. A decline in interest paid on interest bearing liabilities also contributed to the improvement in net interest income. The accretion of the fair value adjustments positively impacted net interest income after provision for loan losses while the $125,000 increase in the provision for loan losses negatively impacted it. The acquisition of MB&T was the most significant factor that caused these changes and the improvement in net interest margin as discussed below.

Although a competitive rate environment and a low prime rate cause low market yields that continue to negatively impact net interest income, the relatively stable rate environment has allowed us to continue to adjust the mix and volume of interest earning assets and liabilities on the balance sheet. This also contributed to the improvement in the net interest margin.

We offset the effect on net interest income caused by the low rate environment primarily by growing total average interest earning assets $165.3 million or 29.16% to $732.2 million for the nine months ended September 30, 2012 from $566.9 million for the nine months ended September 30, 2011. The growth in net interest income that derived from the increase in total average interest earning assets was partially offset by growth in average interest bearing liabilities. Average interest bearing deposits which increased to $533.3 million for the nine months ended September 30, 2012 from $414.1 million for the nine months ended September 30, 2011 was the primary cause of the growth in interest bearing liabilities. The growth in average interest earning assets and interest bearing deposits was primarily a result of the acquisition of MB&T.

Non-interest bearing deposits allow us to fund growth in interest earning assets at minimal cost. As a result of the MB&T acquisition and growth generated from our branch network and lenders, our average non-interest bearing deposits increased $53.5 million to $177.3 million. This was also a significant contributor to the improvement in the net interest margin.

Our net interest margin was 4.69% for the nine months ended September 30, 2012 as compared to 4.66% for the nine months ended September 30, 2011. The yield on average interest earning assets declined 17 basis points during the period while the yield on interest bearing liabilities declined 23 basis points. The decline in the yield on interest earning assets was primarily attributable to re-pricing in the loan portfolio which was partially offset by our success in collecting payments on impaired loans acquired from MB&T at a faster rate than initially anticipated. The decline in the yield on interest bearing liabilities was the result of a decline in rates paid on money market, NOW and other time deposits. The accretion of fair value adjustments on certificates of deposits acquired from MB&T also reduced the yield paid on other time deposits.

With the branches acquired in the MB&T acquisition and increased recognition in Anne Arundel, Calvert, Charles, St. Mary’s and Prince George’s counties, the high level of non-interest bearing deposits and continued growth in these and interest bearing deposits, we anticipate that we will continue to grow earning assets during the remainder of 2012. If the Federal Reserve maintains the federal funds rate at current levels and the economy remains stable, we believe that we can continue to grow total loans and deposits during the remainder of 2012 and beyond. We also believe that we will maintain the net interest margin in the range of 4.50% for the remainder of 2012, although we will not be able to maintain this net interest margin if we fail to collect on a significant portion of impaired acquired loans. As a result of this growth and maintenance of the net interest margin, we expect that net interest income will continue to increase during the remainder of 2012, although there can be no guarantee that this will be the case.

One of our primary sources of funding loans, investments and interest bearing deposits is non-interest bearing demand deposits. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) depository institutions have been permitted to pay interest on business transaction and other accounts since July 21, 2011. Although, we have not yet experienced any impact from this provision of the legislation on our operations, it is possible that interest costs associated with deposits will increase.

During the nine months ended in September 30, 2012, we successfully collected payments on acquired loans that we had recorded at fair value according to ASC 310-20 and ASC 310-30. These payments were a direct result of our efforts to negotiate payments, sell notes, or foreclose on and sell collateral after the acquisition date. The accretion of the fair value adjustments positively impacted the yield on loans and increased the net interest margin as follows:


	Nine Months Ended September 30,
	2012					2011

	Fair Value Accretion Dollars		% Impact on Net Interest Margin			Fair Value Accretion Dollars		% Impact on Net Interest Margin
Commercial loans	$	148,611		0.03	%	$	97,554		0.03	%
Mortgage loans		2,207,176		0.41			1,394,888		0.32
Consumer loans		5,561		0.00			2,101		0.00
Interest bearing deposits		155,741		0.02			235,999		0.06
Total Fair Value Accretion	$	2,517,089		0.46	%	$	1,730,542		0.41	%

The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the nine months ended September 30, 2012 and 2011, showing the average distribution of assets, liabilities, stockholders’ equity and related income, expense and corresponding weighted average yields and rates. The average balances used in this table and other statistical data were calculated using average daily balances.

Average, Balances, Interest and Yields


Nine Months Ended September 30,	2012							2011
	Average							Average
	balance		Interest		Yield			balance		Interest		Yield
Assets:
Federal funds sold(1)	$	4,190,059		4,659		0.15	%	$	4,613,246	$	5,160		0.15	%
Interest bearing deposits		3,672,545		6,902		0.25			12,805,854		30,876		0.32
Investment securities(1)(2)
U.S. treasury		1,248,504		7,691		0.82			851,924		5,102		0.80
U.S. government agency		25,990,533		290,359		1.49			14,727,598		244,374		2.22
Mortgage backed securities		90,430,542		1,798,763		2.66			80,436,339		1,924,401		3.20
Municipal securities		45,123,609		1,765,865		5.23			15,916,429		697,963		5.86
Other		3,912,874		146,243		4.99			3,253,041		90,511		3.72
Total investment securities		166,706,062		4,008,921		3.21			115,185,331		2,962,351		3.44
Loans: (1) (3)
Commercial		99,867,476		3,739,986		5.00			95,338,358		3,802,025		5.33
Mortgage		448,698,037		21,256,318		6.33			326,448,900		16,152,486		6.62
Consumer		13,115,924		598,019		6.09			14,841,625		671,582		6.05
Total loans		561,681,437		25,594,323		6.09			436,628,883		20,626,093		6.32
Allowance for loan losses		4,020,080		-					2,320,835		-
Total loans, net of allowance		557,661,357		25,594,323		6.13			434,308,048		20,626,093		6.35
Total interest earning assets(1)		732,230,023		29,614,805		5.40			566,912,479		23,624,480		5.57
Non-interest bearing cash		37,387,894							22,886,823
Premises and equipment		23,765,305							20,264,015
Other assets		38,308,733							30,461,153
Total assets	$	831,691,955						$	640,524,470
Liabilities and Stockholders' Equity:
Interest bearing deposits
Savings	$	62,363,875		155,310		0.33		$	44,019,844		105,093		0.32
Money market and NOW		146,652,651		421,686		0.38			100,818,430		466,910		0.62
Other time deposits		324,286,588		2,694,777		1.11			269,275,797		2,671,458		1.33
Total interest bearing deposits		533,303,114		3,271,773		0.82			414,114,071		3,243,461		1.05
Borrowed funds		47,522,782		632,208		1.78			41,685,261		612,465		1.96
Total interest bearing liabilities		580,825,896		3,903,981		0.90			455,799,332		3,855,926		1.13
Non-interest bearing deposits		177,349,068							123,885,807
		758,174,964							579,685,139
Other liabilities		6,568,415							4,971,706
Non-controlling interest		424,515							536,006
Stockholders' equity		66,524,061							55,331,619
Total liabilities and stockholders' equity	$	831,691,955						$	640,524,470
Net interest spread(1)						4.50							4.44
Net interest income and Net interest margin(1)			$	25,710,824		4.69	%			$	19,768,554		4.66	%

(1)

(2)	Available for sale investment securities are presented at amortized cost.

(3)	Average non-accruing loans for the nine month periods ended September 30, 2012 and 2011 were $7,035,322 and $2,033,017, respectively. We did not record any non-accrual interest income during the nine months ended September 30, 2012 or 2011.

The following tables describe the impact on our interest revenue and expense resulting from changes in average balances and average rates for the periods indicated. We have allocated the change in interest revenue, interest expense and net interest income due to both volume and rate proportionately to the rate and volume variances.

Rate/Volume Variance Analysis



	Three months Ended September 30,
	2012 compared to 2011
	Variance due to:

	Total			Rate			Volume

Interest earning assets:
Federal funds sold(1)	$	702		$	701		$	1
Interest bearing deposits		(7,924	)		(4,420	)		(3,504	)
Investment Securities(1)
U.S. treasury		86			85			1
U.S. government agency		(31,190	)		(68,496	)		37,306
Mortgage backed securities		(242,881	)		(207,246	)		(35,635	)
Municipal securities		319,109			(175,724	)		494,833
Other		21,549			21,452			97
Loans:(1)
Commercial		(118,956	)		(109,696	)		(9,260	)
Mortgage		391,884			(1,553,537	)		1,945,421
Consumer		(48,093	)		(29,630	)		(18,463	)
Total interest revenue (1)		284,286			(2,126,511	)		2,410,797

Interest bearing liabilities
Savings		2,319			1,623			696
Money market and NOW		(13,858	)		(136,193	)		122,335
Other time deposits		(107,159	)		(128,776	)		21,617
Borrowed funds		(10,035	)		(19,795	)		9,760
Total interest expense		(128,733	)		(283,141	)		154,408

Net interest income(1)	$	413,019		$	(1,843,370	)	$	2,256,389

(1)

Interest revenue is presented on a fully taxable equivalent (FTE) basis. Management believes providing this information on a FTE basis provides investors with a more accurate picture of our net interest spread and net interest income and we believe it to be the preferred industry measurement of these calculations. See “Reconciliation of Non-GAAP Measures.”

Rate/Volume Variance Analysis

(2)



	Nine months Ended September 30,
	2012 compared to 2011
	Variance due to:

	Total			Rate			Volume

Interest earning assets:
Federal funds sold(1)	$	(501	)	$	(45	)	$	(456	)
Interest bearing deposits		(23,974	)		(7,010	)		(16,964	)
Investment Securities(1)
U.S. treasury		2,589			190			2,399
U.S. government agency		45,985			(119,527	)		165,512
Mortgage backed securities		(125,638	)		(390,522	)		264,884
Municipal securities		1,067,902			(109,654	)		1,177,556
Other		55,732			38,565			17,167
Loans:(1)
Commercial		(62,039	)		(269,223	)		207,184
Mortgage		5,103,832			(942,097	)		6,045,929
Consumer		(73,563	)		5,928			(79,491	)
Total interest revenue (1)		5,990,325			(1,793,396	)		7,783,721

Interest bearing liabilities
Savings		50,217			5,966			44,251
Money market and NOW		(45,224	)		(248,214	)		202,990
Other time deposits		23,319			(552,695	)		576,014
Borrowed funds		19,743			(72,513	)		92,256
Total interest expense		48,055			(867,455	)		915,510

Net interest income(1)	$	5,942,270		$	(925,941	)	$	6,868,211

(1)

Provision for Loan Losses

Originating loans involves a degree of risk that credit losses will occur in varying amounts according to, among other factors, the type of loans being made, the credit worthiness of the borrowers over the term of the loans, the quality of the collateral for the loan, if any, as well as general economic conditions. We charge the provision for loan losses to earnings to maintain the total allowance for loan losses at a level considered by management to represent its best estimate of the losses known and inherent in the portfolio that are both probable and reasonable to estimate, based on, among other factors, prior loss experience, volume and type of lending conducted, estimated value of any underlying collateral, economic conditions (particularly as such conditions relate to Old Line Bank’s market area), regulatory guidance, peer statistics, management’s judgment, past due loans in the loan portfolio, loan charge off experience and concentrations of risk (if any). We charge losses on loans against the allowance when we believe that collection of loan principal is unlikely. We add back recoveries on loans previously charged to the allowance.

The provision for loan losses was $375,000 for the three months ended September 30, 2012, as compared to $800,000 for the three months ended September 30, 2011, a decrease of $425,000 or 53.13%. After completing the analysis outlined below, we decreased the provision for loan losses. Our asset quality continues to remain relatively stable, and as a result of the receipt of approximately $20 million in payoffs on loans during the three month period we experienced minimal growth in the loan portfolio during the three months ended September 30, 2012. We have allocated a specific reserve for those loans where we consider it probable that we will incur a loss. Our non-performing assets remain statistically low at 1.34% of total assets and total past due accruing loans remained manageable at $2.5 million.

The provision for the nine month period was $1.1 million. This represented a $125,000 or 12.50% increase as compared to the nine months ended September 30, 2011. For the nine months ended September 30, 2012, we increased the provision for loan losses because we believe that the addition of several new lenders from the acquisition, the anemic economy and growth in our loan portfolio warranted an increased provision.

We review the adequacy of the allowance for loan losses at least quarterly. Our review includes evaluation of impaired loans as required by ASC Topic 310-Receivables, and ASC Topic 450-Contingencies. Also incorporated in determining the adequacy of the allowance is guidance contained in the Securities and Exchange Commission’s SAB No. 102, Loan Loss Allowance Methodology and Documentation, the Federal Financial Institutions Examination Council’s Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions and the Interagency Policy Statement on the Allowance for Loan and Lease Losses provided by the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration and Office of Thrift Supervision. We also continue to measure the credit impairment at each period end on all loans that have been classified as a TDR using the guidance in ASC 310-10-35.

We base the evaluation of the adequacy of the allowance for loan losses upon loan categories. We categorize loans as installment and other consumer loans (other than boat loans), boat loans, mortgage loans (commercial real estate, residential real estate and real estate construction) and commercial loans. We apply loss ratios to each category of loan other than commercial loans. We further divide commercial loans by risk rating and apply loss ratios by risk rating, to determine estimated loss amounts. We evaluate delinquent loans and loans for which management has knowledge about possible credit problems of the borrower or knowledge of problems with loan collateral separately and assign loss amounts based upon the evaluation.

We determine loss ratios for installment and other consumer loans, boat loans and mortgage loans (commercial real estate, residential real estate and real estate construction) based upon a review of prior 18 months delinquency trends for the category, the three year loss ratio for the category, peer group loss ratios, probability of loss factors and industry standards.

With respect to commercial loans, management assigns a risk rating of one through eight to each loan at inception, with a risk rating of one having the least amount of risk and a risk rating of eight having the greatest amount of risk. For commercial loans of less than $250,000, we may review the risk rating annually based on, among other things, the borrower’s financial condition, cash flow and ongoing financial viability; the collateral securing the loan; the borrower’s industry; and payment history. We review the risk rating for all commercial loans in excess of $250,000 at least annually. We evaluate loans with a risk rating of five or greater separately and allocate a portion of the allowance for loan losses based upon the evaluation. For loans with risk ratings between one and four, we determine loss ratios based upon a review of prior 18 months delinquency trends, the three year loss ratio, peer group loss ratios, probability of loss factors and industry standards. We have applied the same risk rating methodology to the acquired loans that we apply to legacy loans.

We also identify and make any necessary allocation adjustments for any specific concentrations of credit in a loan category that in management’s estimation increase the risk inherent in the category. If necessary, we will also make an adjustment within one or more loan categories for economic considerations in our market area that may impact the quality of the loans in the category. For all periods presented, there were no specific adjustments made for concentrations of credit. We consider qualitative or environmental factors that are likely to cause estimated credit losses associated with our existing portfolio to differ from historical loss experience. These factors include, but are not limited to, changes in lending policies and procedures, changes in the nature and volume of the loan portfolio, changes in the experience, ability and depth of lending management and the effect of other external factors such as economic factors, competition and legal and regulatory requirements on the level of estimated credit losses in our existing portfolio.

In the event that our review of the adequacy of the allowance results in any unallocated amounts, we reallocate such amounts to our loan categories based on the percentage that each category represents to total gross loans. We have risk management practices designed to ensure timely identification of changes in loan risk profiles. However, undetected losses inherently exist within the portfolio. We believe that the allocation of the unallocated portion of the reserve in the manner described above is appropriate. Although we may allocate specific portions of the allowance for specific credits or other factors, the entire allowance is available for any credit that we should charge off. We will not create a separate valuation allowance unless we consider a loan impaired.

As we reported in our Form 10-K for the year ended December 31, 2011 and as further outlined in Note 5. Loans and the “Non-Accrual Legacy Loans and Legacy Other Real Estate Owned” section of this report, at December 31, 2011, we had one legacy loan in the amount of $1,169,337 that is a residential land acquisition and development loan secured by real estate. In February 2012, we sold at foreclosure the property that secured the promissory note on this loan and expected to receive ratification of the foreclosure and proceeds from the sale of approximately $970,000 during the first quarter of 2012. Therefore, during the first quarter of 2012, we charged $200,000 to the allowance for loan losses to properly reflect the net sales proceeds that we expected to receive. The courts have rejected the foreclosure. We have subsequently re-foreclosed on the property. We received ratification of the sale in the third quarter and expect to complete settlement of the sale of the property in the fourth quarter of 2012.

During the nine months ended September 30, 2012, we also charged $335,539 to the allowance for loan losses for two legacy loans to one borrower that were secured by a blanket lien on the borrower’s assets and a second deed of trust on the guarantor’s personal residence. The borrower ceased operations, filed bankruptcy and the collateral has no value. We have filed judgment against the guarantors. We charged off an additional legacy loan in the amount of $46,511 during the second quarter of 2012. The borrower on this loan has filed bankruptcy.

The other significant charge offs during the period related to acquired non-accrual loans. During the second quarter of 2012, we charged off an acquired loan in the amount of $29,012. We have liquidated the assets of this borrower and received a nominal recovery. During the first quarter of 2012, we charged off a loan in the amount of $47,635. At December 31, 2011, we had considered this loan impaired and had allocated the entire balance of this loan in the allowance for loan losses. The remaining charge offs during the period related primarily to several acquired consumer loans and one acquired residential mortgage. The recoveries recorded to the allowance for loan losses were all substantially recovered from acquired loans that were charged to the allowance for loan losses at MB&T prior to the acquisition date of April 1, 2011.

Our policies require a review of assets on a regular basis and we believe that we appropriately classify loans as well as other assets if warranted. We believe that we use the best information available to make a determination with respect to the allowance for loan losses, recognizing that the determination is inherently subjective and that future adjustments may be necessary depending upon, among other factors, a change in economic conditions of specific borrowers or generally in the economy and new information that becomes available to us. However, there are no assurances that the allowance for loan losses will be sufficient to absorb losses on non-performing assets, or that the allowance will be sufficient to cover losses on non-performing assets in the future.

The allowance for loan losses represented 0.78% of gross loans at September 30, 2012 and 0.69% as of December 31, 2011. We have no exposure to foreign countries or foreign borrowers. Based on our analysis and the satisfactory historical performance of the loan portfolio, we believe this allowance appropriately reflects the inherent risk of loss in our portfolio.

The following tables provide an analysis of the allowance for loan losses for the periods indicated:


Allowance for Loan Losses
September 30, 2012
	Acquired			Legacy			Total

Balance, beginning of period	$	-		$	3,741,271		$	3,741,271
Provision for loan losses		856,861			268,139			1,125,000

Chargeoffs:
Commercial		(76,648	)		(11,043	)		(87,691	)
Mortgage		(23,664	)		(324,486	)		(348,150	)
Consumer		(90,764	)		-			(90,764	)
Total chargeoffs		(191,076	)		(335,529	)		(526,605	)
Recoveries:
Commercial		63,577			-			63,577
Mortgage		20,258			-			20,258
Consumer		70,247			-			70,247
Total recoveries		154,082			-			154,082
Net (chargeoffs) recoveries		(36,994	)		(335,529	)		(372,523	)
Balance, end of period	$	819,867		$	(67,390	)	$	4,493,748

Ratio of allowance for loan losses to:
Total gross loans								0.78	%
Non-accrual loans								54.60	%
Ratio of net-chargeoffs during period to
average total loans during period								0.07	%

Allowance for Loan Losses


September 30, 2011
	Acquired			Legacy			Total

Balance, beginning of period	$	-		$	2,468,476		$	2,468,476
Provision for loan losses		-			1,000,000			1,000,000

Chargeoffs:
Commercial		-			-			-
Mortgage		-			(446,980	)		(446,980	)
Consumer		(51,050	)		(51,461	)		(102,511	)
Total chargeoffs		(51,050	)		(498,441	)		(549,491	)
Recoveries:
Commercial		50,225			-			50,225
Mortgage		11,254			-			11,254
Consumer		45,466			265			45,731
Total recoveries		106,945			265			107,210
Net (chargeoffs) recoveries		55,895			(498,176	)		(442,281	)
Balance, end of period	$	55,895		$	2,970,300		$	3,026,195

Ratio of allowance for loan losses to:
Total gross loans								0.58	%
Non-accrual legacy loans								191.52	%
Ratio of net-chargeoffs during period to
average total loans during period								0.09	%

Allowance for Loan Losses


December 31, 2011
	Acquired			Legacy			Total

Balance, beginning of period	$	-		$	2,468,476		$	2,468,476
Provision for loan losses		-			1,800,000			1,800,000

Chargeoffs:
Commercial		(34,053	)		-			(34,053	)
Mortgage		(158,811	)		(446,980	)		(605,791	)
Consumer		(75,158	)		(47,261	)		(122,419	)
Total chargeoffs		(268,022	)		(494,241	)		(762,263	)
Recoveries:
Commercial		154,523			-			154,523
Mortgage		13,701			-			13,701
Consumer		66,630			204			66,834
Total recoveries		234,854			204			235,058
Net (chargeoffs) recoveries		(33,168	)		(494,037	)		(527,205	)
Balance, end of period	$	(33,168	)	$	3,774,439		$	3,741,271

Ratio of allowance for loan losses to:
Total gross loans								0.69	%
Non-accrual loans								64.17	%
Ratio of net-chargeoffs during period to
average total loans during period								0.12	%

Generally accepted accounting principles require that we record acquired loans at fair value which includes a discount for loans with credit impairment. These loans are not performing according to their contractual terms and meet our definition of a non-performing loan. The discounts that arise from recording these loans at fair value were due to credit quality. Although we do not accrue interest income at the contractual rate on these loans, we may accrete these discounts to interest income as a result of pre-payments that exceed our expectations or payment in full of amounts due even though we classify them as non-accrual.

In 2011, we recorded the loans acquired from MB&T at fair value. The fair value of the acquired loans includes expected loan losses, and there was no loan loss allowance recorded for acquired loans at the time of acquisition. Accordingly, the existence of the acquired loans reduces the ratios of the allowance for loan losses to total gross loans and the allowance for loan losses to non-accrual loans, and this measure is not directly comparable to prior periods. Similarly, net loan chargeoffs are normally reduced for acquired loans since we recorded these loans net of expected loan losses. Therefore, the ratio of net chargeoffs during the period to average loans outstanding is reduced as a result of the existence of acquired loans, and the measures are not directly comparable to prior periods. Other institutions may not have acquired loans, and therefore there may be no direct comparability of these ratios between and among other institutions.

The accounting guidance also requires that if we experience a decrease in the expected cash flows subsequent to the acquisition date, that we establish an allowance for loan losses for those acquired loans with decreased cash flows. At September 30, 2012 and December 31, 2011, there was an allowance of $819,867 and $47,635, respectively, as a result of a decrease in the expected cash flows subsequent to the acquisition date. Other institutions may not have acquired loans or they may not classify these loans as non-accrual and therefore there may be no direct comparability of these ratios between and among other institutions.

The following table provides a breakdown of the allowance for loan losses:

Allocation of Allowance for Loan Losses


	September 30,										December 31,
	2012					2011					2011
	Amount		% of Loans in Each Category			Amount		% of Loans in Each Category			Amount		% of Loans in Each Category


Other consumer	$	138,045		2.11	%	$	128,547		2.76	%	$	130,653		0.89	%
Boat		283,800		0.01			406,165		0.02			565,240		1.63
Mortgage		3,119,195		81.24			1,854,794		78.37			2,123,068		77.73
Commercial		952,708		16.64			636,689		18.85			922,310		19.75

Total	$	4,493,748		100.00	%	$	3,026,195		100.00	%	$	3,741,271		100.00	%

Non-interest Revenue

Three months ended September 30, 2012 compared to three months ended September 30, 2011

Non-interest revenue totaled $840,102 for the three months ended September 30, 2012, a decrease of $175,699 or 17.30% from the 2011 amount of $1.0 million. Non-interest revenue for the three months ended September 30, 2012 and September 30, 2011 included fee income from service charges on deposit accounts, gain on sales or calls of investment securities, earnings on bank owned life insurance, gains or losses on sales of other real estate owned and other fees and commissions including revenues with respect to Pointer Ridge. The primary cause of the decrease in non-interest revenue was declines in gain on sales of other real estate owned, service charge on deposit accounts, earnings on bank owned life insurance and other fees and commissions. Gain on sales of other real estate owned decreased because we sold two acquired properties and recorded a net loss during the third quarter and we sold one property in other real estate owned and recorded a gain during the three months ended September 30, 2011. Earnings on bank owned life insurance declined during the period because in 2011, we experienced the death of a colleague and recorded a gain on life insurance. Fees and commissions decreased during the 2012 period primarily as a result of a decline in letters of credit and loan fees. Service charges on deposit accounts decreased because we lowered our fees for these services and customers used fewer services. These declines were partially offset by an increase in the gain on sales of investments and an increase in Pointer Ridge rent and other revenue. Gain on sales or calls of investment securities increased during the period, because in order to reallocate our holdings in the investment portfolio and minimize future prepayment risk, we elected to sell a higher dollar amount of securities and as a result recognized a higher gain. Pointer Ridge rent and other revenues increased as a result of new tenants occupying vacant space in the building owned by Pointer Ridge.

The following table outlines the changes in non-interest revenue for the three month periods.


	September 30,
	2012			2011		$ Change			% Change
Service charges on deposit accounts	$	315,468		$	380,065	$	(64,597	)		(17.00	) %
Net gain on sales or calls of investment securities		289,511			72,252		217,259			300.70
Earnings on bank owned life insurance		137,082			356,281		(219,199	)		(61.52	)
Gain on sales of other real estate owned		(48,509	)		45,595		(94,104	)		(206.39	)
Pointer Ridge rent and other revenue		82,318			45,611		36,707			80.48
Gain (loss) on disposal of assets		-			8,995		(8,995	)		(100.00	)
Other fees and commissions		64,232			107,002		(42,770	)		(39.97	)
Total non-interest revenue	$	840,102		$	1,015,801	$	(175,699	)		(17.30	) %

Nine months ended September 30, 2012 compared to nine months ended September 30, 2011

Non-interest revenue totaled $2.9 million for the nine months ended September 30, 2012, an increase of $1.0 million or 54.72% from the 2011 amount of $1.9 million. Non-interest revenue for the nine months ended September 30, 2012 and September 30, 2011 included fee income from service charges on deposit accounts, gains on sales or calls of investment securities, earnings on bank owned life insurance, gain or losses on sales of other real estate owned and other fees and commissions including revenues with respect to Pointer Ridge. The primary causes of the increase in non-interest revenue were an increase in the gain on sales of investments and the acquisition of MB&T, which was supplemented by growth in legacy bank customers and services provided to both new and existing customers. The acquisition was the major contributor to the increases in service charges and other fees and commissions during the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. Gain on sales or calls of investment securities increased during the period, because in order to reallocate our holdings in the investment portfolio and minimize future prepayment risk, we elected to sell a higher dollar amount of securities and as a result recognized a higher net gain. Also contributing to the increase in non-interest revenues was an increase in gain on sales of other real estate owned, which increased because we sold acquired properties at a higher net gain during the nine months ended September 30, 2012 and had a decrease in the other than temporary impairment on equity securities charge, which decreased because in 2011 we recognized a permanent impairment of equity securities and we experienced no such impairment in 2012. Pointer Ridge rent and other revenues increased as a result of a decline in the vacancy in the building owned by Pointer Ridge. These increases were partially offset by a decrease in earnings on bank owned life insurance, which declined for the reasons outlined above.

The following table outlines the changes in non-interest revenue for the nine month periods.


	September 30,
	2012		2011			$ Change			% Change
Service charges on deposit accounts	$	962,937	$	859,300		$	103,637			12.06	%
Net gain on sales or calls of investment securities		849,539		112,811			736,728			653.06
Permanent impairment on equity securities		-		(122,500	)		122,500			(100.00	)
Earnings on bank owned life insurance		412,283		557,669			(145,386	)		(26.07	)
Gain on sales of other real estate owned		110,704		48,580			62,124			127.88
Pointer Ridge rent and other revenue		238,013		159,551			78,462			49.18
Gain (loss) on disposal of assets		9,365		(5,160	)		14,525			(281.49	)
Other fees and commissions		291,860		247,761			44,099			17.80
Total non-interest revenue	$	2,874,701	$	1,858,012		$	1,016,689			54.72	%

As a result of our expanded market presence, business development efforts and increased name recognition, we anticipate that we will continue to grow new and existing customer relationships. We expect that these expanded relationships will cause service charges on deposit accounts and other fees and commissions to continue to increase during the remainder of 2012. We also plan to continue to work to sell our other real estate owned and may realize additional gains from these sales.

Non-interest Expense

Three months ended September 30, 2012 compared to three months ended September 30, 2011

Non-interest expense remained relatively stable for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The following chart outlines the changes in non-interest expenses for the period.


	September 30,
	2012		2011		$ Change			% Change
Salaries and benefits	$	3,016,334	$	3,030,508	$	(14,174	)		(0.47	) %
Occupancy and equipment		933,775		916,610		17,165			1.87
Data processing		214,187		232,530		(18,343	)		(7.89	)
FDIC insurance and State of Maryland assessments		157,206		143,680		13,526			9.41
Merger and integration		49,290		77,880		(28,590	)		(36.71	)
Core deposit premium		177,582		194,674		(17,092	)		(8.78	)
Pointer Ridge other operating		119,734		134,526		(14,792	)		(11.00	)
Other operating		1,413,650		1,422,758		(9,108	)		(0.64	)
Total non-interest expenses	$	6,081,758	$	6,153,166	$	(71,408	)		(1.16	) %

Salaries, employee benefits, data processing, and other operating expenses decreased slightly during the period because we did not incur any severance cost as we did subsequent to the acquisition. This was partially offset with increased cost associated with enhancements to our personnel and infrastructure that we believe will allow us to efficiently operate a larger organization and continue to expand our service and market area, which was also responsible for the increase in occupancy and equipment costs. Merger and integration expenses decreased during the 2012 period because we completed substantially all of the activities associated with the merger during 2011 with the exception of the expenses associated with the two year non-compete agreements with former MB&T directors. These decreases were partially offset by approximately $15,000 in merger costs associated with the due diligence of WSB in connection with the pending merger with WSB. The core deposit premium decreased during the quarter because we amortize this premium on an accelerated basis which causes a reduction in the expense over the amortization period. The increase in FDIC insurance and State of Maryland assessments was a result of an increase in the deposit base on which the premium is calculated. Pointer Ridge other operating expense decreased because the vacancy rate in the building declined and the new tenants are paying a pro-rata share of the building’s operating expenses.

Nine months ended September 30, 2012 compared to nine months ended September 30, 2011

Non-interest expense increased $2.8 million for the nine months ended September 30, 2012. The following chart outlines the changes in non-interest expenses for the period.


	September 30,
	2012		2011		$ Change			% Change
Salaries and benefits	$	8,850,143	$	7,504,953	$	1,345,190			17.92	%
Occupancy and equipment		2,756,222		2,233,905		522,317			23.38
Data processing		631,154		595,612		35,542			5.97

FDIC insurance and State of Maryland assessments		435,851		462,496		(26,645	)		(5.76	)
Merger and integration		107,624		545,154		(437,530	)		(80.26	)
Core deposit premium		549,839		389,349		160,490			41.22
Pointer Ridge other operating		332,067		465,208		(133,141	)		(28.62	)
Other operating		4,354,200		3,049,105		1,305,095			42.80
Total non-interest expenses	$	18,017,100	$	15,245,782	$	2,771,318			18.18	%

Salaries and benefits, occupancy and equipment, data processing and other operating expenses increased primarily because of increased operating expenses resulting from the acquisition of MB&T and enhancements to our infrastructure. As a result of the acquisition, we increased our number of employees by 86 and our branch network by nine. During the first three months of 2011, we did not incur these expenses. The increase in the core deposit premium was the result of the acquisition of MB&T and subsequent amortization of the core deposit intangible. These increases were partially offset by a decline in merger and integration costs, FDIC insurance and State of Maryland assessments and Pointer Ridge other operating expenses. Merger and integration costs declined during the 2012 period because we have completed the merger with MB&T and previously expensed all costs associated with it, except for non-compete fees paid to former directors which we will continue to incur and approximately $15,000 in due diligence expense associated with the pending acquisition of WSB. The decrease in FDIC insurance and State of Maryland assessments was a result of lower FDIC assessments as a result of the change in the base and rate calculation as required by the Dodd-Frank Act which was partially offset by an increase in the deposit base. Pointer Ridge other operating expense decreased because the vacancy rate in the building declined and the new tenants are paying a pro-rata share of the buildings operating expenses.

For the remainder of 2012, we anticipate that non-interest expenses will remain relatively comparable to those incurred during the third quarter of 2012.

Income Taxes

Three months ended September 30, 2012 compared to three months ended September 30, 2011

Income tax expense was $912,490 (31.25% of pre-tax income) for the three months ended September 30, 2012 as compared to $737,405 (30.63% of pre-tax income) for the same period in 2011. The dollar amount of the taxes was higher because net income was significantly higher than in the three months ended September 30, 2011. The tax rate was higher for the three month period ended September 30, 2012, primarily because expenses that were non-deductible for tax purposes were lower than during the three months ended September 30, 2011.

Nine months ended September 30, 2012 compared to nine months ended September 30, 2011

Income tax expense was $2.7 million (32.25% of pre-tax income) for the nine months ended September 30, 2012 as compared to $1.7 million (34.48% of pre-tax income) for the same period in 2011. The dollar amount of the taxes was higher because net income was significantly higher than in the nine months ended September 30, 2011. The tax rate was lower for the nine month period ended September 30, 2012 because during the nine months ended September 30, 2012 tax exempt income was lower and expenses that were non-deductible for tax purposes were higher than during the same period of 2011.

Net Income Available to Common Stockholders

Three months ended September 30, 2012 compared to three months ended September 30, 2011

Net income available to common stockholders was $2.0 million or $0.30 per basic and $0.29 per diluted common share for the three month period ending September 30, 2012 compared to net income available to common stockholders of $1.7 million or $0.25 per basic and diluted common share for the same period in 2011. The increase in net income attributable to Old Line Bancshares for the 2012 period was primarily the result of a $192,202 increase in net interest income, a $425,000 decrease in the provision for loan losses, and a $71,408 decrease in non-interest expense. These increases were partially offset by a $175,699 decrease in non-interest revenue, and a $175,085 increase in taxes.

Nine months ended September 30, 2012 compared to nine months ended September 30, 2011

Net income available to common stockholders was $5.8 million or $0.85 per basic and $0.84 per diluted common share for the nine month period ending September 30, 2012 compared to net income available to common stockholders of $3.4 million or $0.56 per basic and diluted common share for the same period in 2011. The increase in net income attributable to Old Line Bancshares for the 2012 period was primarily the result of a $5.4 million increase in net interest income and $1.0 million increase in non-interest revenue. These increases were partially offset by a $125,000 increase in the provision for loan losses, a $2.8 million increase in non-interest expense and a $1.0 million increase in taxes.

Analysis of Financial Condition

Investment Securities

Our portfolio consists primarily of time deposits in other banks, investment grade securities including U.S. treasury securities, U.S. government agency securities, U.S. government sponsored entity securities, securities issued by states, counties and municipalities, mortgage backed securities, and certain equity securities, including Federal Reserve Bank stock, Federal Home Loan Bank stock, Maryland Financial Bank stock and Atlantic Central Bankers Bank stock. With the acquisition of MB&T, we acquired approximately $262,000 of Student Loan Marketing Association (SLMA) stock. We have prudently managed our investment portfolio to maintain liquidity and safety. The portfolio provides a source of liquidity, collateral for borrowings as well as a means of diversifying our earning asset portfolio. While we usually intend to hold the investment securities until maturity, currently we classify all of our investment securities as available for sale. This classification provides us the opportunity to divest of securities that may no longer meet our liquidity objectives. We account for investment securities so classified at fair value and report the unrealized appreciation and depreciation as a separate component of stockholders’ equity, net of income tax effects. We account for investment securities when classified in the held to maturity category at amortized cost. Although we will occasionally sell a security, generally, we invest in securities for the yield they produce and not to profit from trading the securities. As a result of the acquisition of Maryland Bankcorp, we evaluated the investment portfolio to ensure that the securities acquired in the acquisition met our investment criteria and provide adequate liquidity, and that there is adequate diversity in the investment portfolio. We continually evaluate the investment portfolio to ensure the portfolio is adequately diversified, provides sufficient cash flow and does not subject us to undue interest rate risk. There are no trading securities in the portfolio.

The investment securities at September 30, 2012 amounted to $180.4 million, an increase of $18.6 million, or 11.48%, from the December 31, 2011 amount of $161.8 million. As outlined above, at September 30, 2012, all securities are classified as available for sale.

The fair value of available for sale securities included net unrealized gains of $5.3 million at September 30, 2012 (reflected as unrealized gains of $3.2 million in stockholders’ equity after deferred taxes) as compared to net unrealized gains of $3.9 million ($2.4 million net of taxes) as of December 31, 2011. In general, the increase in fair value was a result of changes in the duration or maturity of the portfolio and decreasing market rates. We have evaluated securities with unrealized losses for an extended period of time and determined that these losses are temporary because, at this point in time, we expect to hold them until maturity. We have no intent or plan to sell these securities, it is not likely that we will have to sell these securities and we have not identified any portion of the loss that is a result of credit deterioration in the issuer of the security. As the maturity date moves closer and/or interest rates decline, any unrealized losses in the portfolio will decline or dissipate.

Loan Portfolio

Commercial loans and loans secured by real estate comprise the majority of the loan portfolio. Old Line Bank’s loan customers are generally located in the greater Washington, D.C. metropolitan area

At our acquisition of Maryland Bankcorp, we recorded all loans acquired at the estimated fair value on their purchase date with no carryover of the related allowance for loan and lease losses. On the acquisition date, we segregated the loan portfolio into two loan pools, performing and non-performing.

We had an independent third party determine the price that we could receive to sell approximately 1,400 performing loans totaling $178.1 million in an orderly transaction between market participants as of the measurement date (fair value). These performing loans were segregated into five individual pools, personal loans, credit lines, business loans and real estate loans. This valuation also assumed that the sale occurred in the principal or most advantageous market for the loan. Market participants were assumed to have reasonable knowledge of the relevant facts of the asset or liability as it relates to its value between buyers and sellers with neither under any compulsion to buy, sell or liquidate. The effect of this fair valuation process was a net premium of $3.1 million at acquisition. We then adjusted these values on a level yield basis for inherent credit risk within each pool which resulted in a total non-accretable credit adjustment of $2.0 million. During the valuation process, we also determined that eight business loans totaling $1.8 million and 13 real estate loans totaling $3.8 million, all of which were risk rated four at the acquisition date, were also impaired and required an additional non-accretable credit adjustment of $279,348 and $510,064, respectively.

We also individually evaluated nine impaired business loans totaling $536,144 and 53 real estate loans totaling $30.1 million to determine the fair value as of the April 1, 2011 measurement date. In determining the fair value for each individually evaluated impaired loan, we considered a number of factors including the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral and net present value of cash flows we respect to receive, among others. As required, we accounted for these acquired loans in accordance with guidance for certain loans acquired in a transfer when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments. The difference between contractually required payments and cash flows we expect to collect is the non-accretable difference. Subsequent negative differences to the expected cash flows will generally result in an increase in the non-accretable difference which would increase our provision expense and decrease net interest income after provision expense. Subsequent collection of payments on these loans that exceeds our expected cash flows will cause an increase in cash flows that will result in a reduction to the non-accretable difference, which would increase interest revenue.

In general, for the impaired business loans, we determined that the fair value was equivalent to the current contract value adjusted for credit impairment. We estimated this credit impairment based on the prior portfolio experience, repayment history of the individual loan, strength of the guarantor(s) and other factors. We applied this adjustment on a level yield basis to the respective pools of loans. Subsequent negative differences to the expected cash flows will generally result in an increase in the non-accretable difference which would increase our provision expense and decrease net interest income after provision expense. Subsequent collection of payments on these loans that exceeds our expected cash flows will cause an increase in cash flows that will result in a reduction to the non-accretable difference, which would increase interest revenue. In specific instances, we determined that the loan had no value due to its prior prepayment history, lack of collateral or other factors. In these cases, we accrete any payments received to interest income.

In general, for the impaired real estate loans, we determined that the fair value was equivalent to our cash flow expectations related to the sale of the loan or the underlying collateral. In order to determine the fair value, we estimated the value of the underlying collateral based on appraisals, evaluations, site visits and tax assessments. We then determined the estimated expenses to foreclose on the property and subsequently sell it. We then determined the fair value of the loan using a discounted cash flow calculation. We evaluate these loans quarterly to ensure that in no instances does the carrying value of the loan exceed our initial investment or that there is no decrease or increase in our expectations regarding cash flows.

Subsequent negative differences to the expected cash flows will generally result in an increase in the non-accretable difference which would increase our provision expense and decrease net interest income after provision expense. Subsequent collection of payments on these loans that exceeds our expected cash flows will cause an increase in cash flows that will result in a reduction to the non-accretable difference, which would increase interest revenue. In specific instances, we determined that the loan had no value due to its prior payment history, lack of collateral or other factors. In these cases, we reclass any payments received to accretable yield and accrete these payments to income. We also reclass amounts to accretable yield when we receive payment in full on a loan.

The following table outlines the contractually required payments receivable, cash flows we expect to receive, non-accretable credit adjustments and the accretable yield for all acquired impaired loans as of the acquisition date.

April 1, 2011	Contractually Required Payments Receivable		Non-Accretable Credit Adjustments		Cash Flows Expected To Be Collected		Loans Receivable
Impaired Individually Evaluated (1)
Business Loans Risk Rated 4 at acquisition	$	1,847,413	$	279,348	$	1,568,065	$	1,568,065
Business Loans Risk Rated 5 at acquisition		330,822		259,422		71,400		71,400
Business Loans Risk Rated 6 at acquisition		205,322		120,710		84,612		84,612
Total Business Loans Individually Evaluated		2,383,557		659,480		1,724,077		1,724,077
Real Estate Loans Risk Rated 4 at acquisition		3,787,171		510,064		3,277,107		3,277,107
Real Estate Loans Risk Rated 5 at acquisition		4,596,338		2,242,513		2,353,825		2,353,825
Real Estate Loans Risk Rated 6 at acquisition		25,503,757		15,328,826		10,174,931		10,174,931
Total Real Estate Loans Individually Evaluated		33,887,266		18,081,403		15,805,863		15,805,863
Total Impaired Loans Individually Evaluated	$	36,270,823	$	18,740,883	$	17,529,940	$	17,529,940

Initial Calculation of Nonaccretable Difference
Contractually required payments receivable	$	36,270,823
Less: Cash flows expected to be collected		(17,529,940	)
Non-accretable difference	$	18,740,883

Initial Calculation of Accretable Yield
Cash flows expected to be collected	$	17,529,940
Less: Initial investment		(17,529,940	)
Accretable yield	$	-

December 31, 2011	Contractually Required Payments Receivable		Non-Accretable Credit Adjustments		Cash Flows Expected To Be Collected		Loans Receivable
Impaired Individually Evaluated
Business Loans Risk Rated 4 at acquisition	$	1,617,100	$	242,565	$	1,374,535	$	1,374,535
Business Loans Risk Rated 5 at acquisition		246,775		186,166		60,609		60,609
Business Loans Risk Rated 6 at acquisition		165,839		93,163		72,676		72,676
Total Business Loans Individually Evaluated		2,029,714		521,894		1,507,820		1,507,820
Real Estate Loans Risk Rated 4 at acquisition		3,642,173		494,524		3,147,649		3,147,649
Real Estate Loans Risk Rated 5 at acquisition		4,196,976		2,073,878		2,123,098		2,123,098
Real Estate Loans Risk Rated 6 at acquisition		22,058,392		12,498,854		9,559,538		9,559,538
Total Real Estate Loans Individually Evaluated		29,897,541		15,067,256		14,830,285		14,830,285
Total Impaired Loans Individually Evaluated	$	31,927,255	$	15,589,150	$	16,338,105	$	16,338,105

Accretable Yield
Beginning Balance April 1, 2011	$	-
Accreted to income		(2,060,770	)
Reclassification from non-accretable(1)		2,060,770
Ending Balance December 31, 2011	$	-

Non-Accretable Yield Discount
Beginning Balance April 1, 2011	$	18,740,883
Reclassification to accretable (1)		(2,060,770	)
Charged off		(73,653	)
Transferred to OREO		(1,017,310	)
Ending Balance December 31, 2011	$	15,589,150

(1)	Represents amounts paid in full on loans, payments on loans with zero balances and an increase in cash flows expected to be collected.

September 30, 2012	Contractually Required Payments Receivable		Non-Accretable Credit Adjustments		Cash Flows Expected To Be Collected		Loans Receivable
Impaired Individually Evaluated (ASC 310-30)
Business Loans Risk Rated 4 at acquisition	$	1,439,120	$	215,868	$	1,223,252	$	1,223,252
Business Loans Risk Rated 5 at acquisition		73,907		65,133		8,774		8,774
Business Loans Risk Rated 6 at acquisition		91,978		54,833		37,145		37,145
Total Business Loans Individually Evaluated		1,605,005		335,834		1,269,171		1,269,171
Real Estate Loans Risk Rated 4 at acquisition		3,552,219		484,792		3,067,427		3,067,427
Real Estate Loans Risk Rated 5 at acquisition		4,032,965		2,012,204		2,020,761		2,020,761
Real Estate Loans Risk Rated 6 at acquisition		18,090,377		10,224,362		7,866,015		7,866,015
Total Real Estate Loans Individually Evaluated		25,675,561		12,721,358		12,954,203		12,954,203
Total Impaired Loans Individually Evaluated	$	27,280,566	$	13,057,192	$	14,223,374	$	14,223,374

Accretable Yield
Beginning Balance December 31, 2011	$	-
Transferred from non-accretable(1)		2,455,311
Accreted to income		(2,455,311	)
Ending Balance June 30, 2012	$	-

Non-Accretable Yield Discount
Beginning Balance December 31, 2011	$	15,589,150
Reclassification to accretable(1)		2,455,311
Transferred to OREO		(4,987,269	)
Ending Balance September 30, 2012	$	13,057,192

(1) Represents amounts paid in full on loans, payments on loans with zero balances and an increase in cash flows expected to be collected.

The loan portfolio, net of allowance, unearned fees and origination costs, increased $33.8 million or 6.28% to $573.1 million at September 30, 2012 from $539.3 million at December 31, 2011. Commercial business loans decreased by $11.2 million (10.44%), commercial real estate loans increased by $51.3 million (18.79%), residential real estate loans decreased by $4.7 million (4.89%), real estate construction loans (primarily commercial real estate construction) increased by $435,082 (0.84%) and consumer loans decreased by $1.4 million (11.65%) from their respective balances at December 31, 2011. During the three month period ended September 30, 2012, loan growth was weaker than normal because we received approximately $20 million in payoffs in loans during the period which was approximately equivalent to the dollar amount of new loans generated during the period. The loan growth during the nine month period was a direct result of our business development efforts as well as our enhanced presence in our market area. We saw loan and deposit growth generated from our entire team of lenders, branch personnel and board of directors. We anticipate the entire team will continue to focus their efforts on business development during the remainder of 2012 and during 2013 and continue to grow the loan portfolio. However, the current economic climate may cause slower loan growth.

The following table summarizes the composition of the loan portfolio by dollar amount and percentages:



	September 30, 2012											December 31, 2011
	Legacy			Acquired			Total					Legacy			Acquired			Total

Real estate
Commercial	$	257,162,870		$	67,222,413		$	324,385,283		56.25	%	$	200,955,448		$	72,145,634		$	273,101,082		50.36	%
Construction		47,596,991			4,500,629			52,097,620		9.03			42,665,407			8,997,131			51,662,538		9.53
Residential		36,592,811			55,404,030			91,996,841		15.95			31,083,835			65,639,873			96,723,708		17.84
Commercial		85,323,845			10,622,298			95,946,143		16.64			90,795,904			16,329,991			107,125,895		19.75
Consumer		11,029,790			1,217,787			12,247,577		2.12			11,652,628			2,021,397			13,674,025		2.52
Gross loans		437,706,307			138,967,157			576,673,464		100.00	%		377,153,222			165,134,026			542,287,248		100.00	%
Allowance for loan losses		(4,469,166	)		(24,582	)		(4,493,748	)				(3,693,636	)		(47,635	)		(3,741,271	)
Deferred loan costs, net		967,685			-			967,685					751,689			-			751,689
Net loans	$	434,204,826		$	138,942,575		$	573,147,401				$	374,211,275		$	165,086,391		$	539,297,666

Asset Quality

Management performs reviews of all delinquent loans and directs relationship officers to work with customers to resolve potential credit issues in a timely manner.

As outlined below, we have only one construction loan that has an interest reserve included in the commitment amount and where advances on the loan currently pay the interest due.

Loans with Interest Paid From Loan Advances

(Dollars in thousands)


	September 30, 2012				December 31, 2011
	# of Borrowers		(000's)		# of Borrowers		(000's)
Hotels		1	$	4,718		1	$	2,093
Single family acquisition & development		-		-		1		1,418
		1	$	4,718		2	$	3,511

Management has identified additional potential problem loans totaling $13.2 million that are complying with their repayment terms. Management has concerns either about the ability of the borrower to continue to comply with repayment terms because of the borrower’s potential operating or financial difficulties or the underlying collateral has experienced a decline in value. These weaknesses have caused management to heighten the attention given to these credits.

Management generally classifies loans as non-accrual when it does not expect collection of full principal and interest under the original terms of the loan or payment of principal or interest has become 90 days past due. Classifying a loan as non-accrual results in our no longer accruing interest on such loan and reversing any interest previously accrued but not collected. We will generally restore a non-accrual loan to accrual status when the borrower brings delinquent principal and interest payments current and we expect to collect future monthly principal and interest payments. We recognize interest on non-accrual loans only when received.

At September 30, 2012, we had two consumer loans past due 90 or more days, with loans totaling $83,550 that we have not classified as non-accrual. The borrower on the first loan in the amount of $81,486 continues to pay the loan payments on a monthly basis. We are currently in process of restructuring this loan. The second loan is a credit card in the amount of $2,307 that we charged off in the fourth quarter. We do not anticipate that we will incur losses on these loans.

At September 30, 2012, we had six non-accrual legacy loans with a total balance of $3.2 million compared to two legacy loans totaling $1.2 million at December 31, 2011. At September 30, 2012, we also had a total of $2.3 million of legacy loans past due 30-89 days.

At September 30, 2012, we had 27 non-accrual acquired loans totaling $5.1 million compared to 17 non-accrual acquired loans totaling $4.6 million at December 31, 2011. At September 30, 2012, we also had a total of $24,355 acquired loans on accrual status 30-89 days past due.

The table below outlines the transfer of loans from and to non-accrual status for the nine month period:


Non-Accrual Loans (Dollars in thousands)
	Legacy Loans						Acquired Loans						Total
	# of Contracts			Loan Balance			# of Contracts			Loan Balance			Loan Balance

Beginning Balance, December 31, 2011		2		$	1,247			26		$	4,583		$	5,830
Transferred in		5			2,182			5			2,239			4,421
Payments received		-			-			(4	)		(1,494	)		(1,494	)
Repossessed		-			-			-			-			-
Charged off		(1	)		(278	)		-			(249	)		(527	)
Transferred to other real estate owned		-			-			-			-			-
Ending balance, September 30, 2012		6		$	3,151			27		$	5,079		$	8,230

Non-Accrual Legacy Loans and Legacy Other Real Estate Owned

At September 30, 2012, we had six non-accrual legacy loans with a total recorded book balance of $3.2 million. The first non-accrual legacy loan is a residential land acquisition and development loan secured by real estate. The borrower and guarantor on this loan have filed bankruptcy. During the first quarter of 2011, we charged $446,980 to the allowance for loan losses and reduced the balance on this loan from $1,616,317 to $1,169,337. We subsequently identified a potential buyer for this note who had agreed to purchase it at a price slightly lower than the carrying value. In October of 2011, the prospective purchaser of the promissory note rescinded his offer. In February 2012, we sold at foreclosure the property that secured the promissory note on this loan and expected to receive ratification of the foreclosure and proceeds from the sale of approximately $970,000 during the first quarter of 2012. Therefore, during the first quarter of 2012, we charged an additional $200,000 to the allowance for loan losses to properly reflect the net sales proceeds that we expected to receive. At September 30, 2012, the balance on this loan was $969,337 and the non-accrued interest was $295,523, none of which was included in interest income. The courts rejected the initial foreclosure. We have subsequently re-foreclosed on the property and received ratification of the sale in the third quarter. We anticipate that we will settle on this sale during the fourth quarter of 2012.

The second non-accrual legacy loan is a commercial real estate loan in the amount of $464,978. The original purpose of this loan was to purchase a building for use as a fast food franchise. The borrower on this loan executed a lease on land on which the building that secures this loan was built. The borrower has closed this facility and has no other available assets. We transferred this loan to non-accrual status during the first quarter of 2012. We are currently in negotiations with the landlord of the land and the borrower. We have received an appraisal that indicates the value of our interest in the property is higher than our loan balance. At this point, we are unable to ascertain the potential loss on this loan. We have allocated $232,489 of the allowance for loan losses for this loan. The non-accrued interest on this loan is $20,082.

During the third quarter of 2012, we transferred a legacy commercial real estate loan in the amount of $352,478 to non-accrual status. The borrower is delinquent with payments and would not provide current financial information. A current appraisal indicates that the value of the real estate that is collateral for this loan is sufficient to provide payment in full and we expect to foreclose on this property. We have not allocated any of the allowance for loan losses for this loan. The non-accrued interest on this loan is $26,654.

During the third quarter of 2012, we also transferred a legacy residential real estate loan in the amount of $469,168 to non-accrual status. The borrower is delinquent with payments and is experiencing financial difficulties. A current appraisal indicates that the value of the real estate that is collateral for this loan is sufficient to provide payment in full and we plan to foreclose on this property. We have not allocated any of the allowance for loan losses for this loan. The non-accrued interest on this loan is $26,645.

The third loan that we transferred to non-accrual status in the third quarter is a commercial loan in the amount of $8,819. The borrower is experiencing cash flow problems. We have not allocated any of the allowance for loan losses to this loan. The non-accrued interest on this loan is $110.

At December 31, 2011, we had two non-accrual legacy loans totaling $1,247,312 past due and classified as non-accrual. The first loan in the amount of $1,169,337 is a residential land acquisition and development loan secured by real estate and described above. At December 31, 2011, the non-accrued interest on this loan was $212,484, none of which was included in interest income.

The second loan was a commercial loan secured by a blanket lien on the borrower’s assets and a second deed of trust on the guarantors’ personal residence. The borrower has ceased operations and the collateral has no value. In the first quarter of 2012, we charged the entire balance due to the allowance for loan losses and have filed a judgment against the guarantors. At December 31, 2011, we had allocated the entire loan balance to the allowance for loan losses.

Non-Accrual Acquired Loans and Other Real Estate Owned

At September 30, 2012, we had 27 non-accrual acquired loans totaling $5.0 million compared to 26 non-accrual acquired loans totaling $4.6 million at December 31, 2011. Of these, the borrowers on 14 loans totaling $1.7 million are current according to their contractual terms and are generally making monthly payments, albeit in a slow manner. The loans were placed on non-accrual by MB&T because of their slow payment history and/or the industry was significantly impacted by the weaknesses in the economy.

At December 31, 2011 and September 30, 2012, we had two borrowers owned by the same individual who had four loans totaling $775,000. The borrower paid the fair value of these four loans during the first quarter of 2012 and there is no balance remaining in non-accrual. However, there is still a contractual amount remaining on these loans. We continue to work with the borrower for full repayment of the contractual amount.

At December 31, 2011 and September 30, 2012, we had one borrower with one note secured by commercial real estate and the fair value of the loan is $300,000. We plan to foreclose on this property during the fourth quarter of 2012. The fair value is equivalent to our assessment of the current value of the real estate less any carrying costs or expenses to sell.

At December 31, 2011 and September 30, 2012, we had one borrower with a loan secured by commercial real estate and the fair value of the loan is $250,000. The borrower has filed a new bankruptcy plan and we are receiving payments from the bankruptcy court. The fair value is equivalent to our assessment of the current value of the real estate less any carrying costs or expenses to sell.

At December 31, 2011, we had a loan in the amount of $347,474 that was transferred to non-accrual during the fourth quarter of 2011. Commercial real estate secures this loan and the fair value of the loan, as of September 30, 2012, is $316,973. We were awarded a confess judgment against the borrower and are working towards foreclosure of the property. The fair value is equivalent to our assessment of the current value of the real estate less any carrying cost or expenses to sell.

We transferred another loan to non-accrual status during the fourth quarter of 2011. This loan was unsecured and the fair value of the loan was $47,635. We charged this loan to the allowance for loan losses during the first quarter of 2012.

During the first quarter of 2012, we transferred three acquired loans totaling $1.2 million for two borrowers to non-accrual status. The first acquired loan is to one borrower who had two loans totaling $936,243. This borrower is the same borrower discussed above in the legacy non-accrual loans. The original purpose of the loans was to purchase and equip a building for use as a fast food franchise. The borrower on these loans executed a lease on land on which the building that secures this loan was built. The borrower has closed this facility and has no other available assets. We have completed negotiations with the landlord and are attempting to locate a tenant to occupy this facility. We have received an appraisal that indicates the value of our interest is greater than the book value of the loan. At this point, we are unable to ascertain the potential loss on this loan. We have allocated $578,243 of the allowance for loan losses for these loans. The non-accrued interest on these loans is $63,464.

The borrower on the third loan transferred during the first quarter of 2012 to non-accrual status is a loan secured by commercial real estate and four residential lots with a fair value of $241,624. This loan has matured. We are in litigation with the borrower. Assuming we prevail in litigation, we anticipate we will receive payment in full either by foreclosing on the collateral and selling the properties or through receipt of payment from the borrower. The non-accrued interest on this loan is $40,284

During the second quarter of 2012, we transferred an acquired loan in the amount of $23,669 to non-accrual status. The borrower has filed for bankruptcy and we have charged this loan off.

During the third quarter of 2012, we transferred an acquired loan in the amount of $1.0 million to non-accrual status. The borrower on this loan is experiencing marital and financial difficulties. A residential property is collateral on this loan. Unless the borrower resolves these problems, we anticipate we will foreclose on this loan. We are currently in the process of obtaining an appraisal of the property and have not allocated any of the allowance for loan loss. The non-accrued interest on this loan is $27,440.

We classify any property acquired as a result of foreclosure on a mortgage loan as “other real estate owned” and record it at the lower of the unpaid principal balance or fair value at the date of acquisition and subsequently carry the property at the lower of cost or net realizable value. We charge any required write down of the loan to its net realizable value against the allowance for loan losses at the time of foreclosure. We charge to expense any subsequent adjustments to net realizable value. Upon foreclosure, Old Line Bank generally requires an appraisal of the property and, thereafter, appraisals of the property generally on an annual basis and external inspections on at least a quarterly basis.

As required by ASC Topic 310-Receivables and ASC Topic 450-Contingencies, we measure all impaired loans, which consist of all modified loans (TDRs) and other loans for which collection of all contractual principal and interest is not probable, based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, we recognize impairment through a valuation allowance and corresponding provision for loan losses. Old Line Bank considers consumer loans as homogenous loans and thus does not apply the impairment test to these loans. We write off impaired loans when collection of the loan is doubtful.

The table below presents a breakdown of the recorded book balance of non-accruing loans at September 30, 2012 and December 31, 2011.



Loans on Non-accrual Status
	September 30, 2012								December 31, 2011
	# of Contracts		Unpaid Principal Balance		Recorded Investment		Interest Not Accrued		# of Contracts		Unpaid Principal Balance		Recorded Investment		Interest Not Accrued
Legacy
Real Estate
Commercial		3	$	1,704,191	$	1,704,191	$	91,684		-	$	-	$	-	$	-
Construction		1		1,616,317		969,337		295,523		1		1,616,317		1,169,337		212,484
Residential		1		469,168		469,168		14,743		-		-		-		-
Commercial		1		8,819		8,819		110		1		77,975		77,975		1,735
Consumer		-		-		-		-		-		-		-		-
Total non-accrual loans		6		3,798,495		3,151,515		402,060		2		1,694,292		1,247,312		214,219

Acquired (1)
Real Estate
Commercial		10		5,572,787		2,425,846		956,852		7		6,417,444		2,288,900		1,164,630
Construction		4		2,638,683		100,000		547,556		2		2,815,452		1,184,146		255,560
Residential		9		4,104,971		2,295,610		464,764		4		2,606,151		1,019,942		241,093
Commercial		4		369,592		257,388		58,636		4		327,414		90,039		33,041
Consumer		-		-		-		-		-		-		-		-
Total non-accrual loans		27		12,686,033		5,078,844		2,027,808		17		12,166,461		4,583,027		1,694,324
Total all non-accrual loans		33	$	16,484,528	$	8,230,359	$	2,429,868		19	$	13,860,753	$	5,830,339	$	1,908,543

(1)

Generally accepted accounting principles require that we record acquired loans at fair value which includes a discount for loans with credit impairment. These loans are not performing according to their contractual terms and meet our definition of a non-performing loan. The discounts that arise from recording these loans at fair value were due to credit quality. Although we do not accrue interest income at the contractual rate on these loans, we may accrete these discounts to interest income as a result of pre-payments that exceed our cash flow expectations or payment in full of amounts due even though we classify them as non-accrual.

We do not recognize interest income on non-performing loans during the time period that the loans are non-performing on either a cash or accrual basis. We only recognize interest income on non-performing loans when we receive payment in full for all amounts due of all contractually required principal and interest and the loan is current with its contractual terms.

The table below outlines our TDRs at September 30, 2012 and December 31, 2011.



Troubled Debt Restructurings
	September 30, 2012						December 31, 2011

Accruing Troubled Debt Restructurings	# of Contracts		Pre-Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment		# of Contracts		Pre-Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment
Legacy
Real Estate		1	$	499,122	$	498,186		3	$	5,037,879	$	5,037,879
Consumer		-		-		-		1		142,671		142,671
Acquired
Real Estate		1		152,848		152,843		1		152,848		152,848
Commercial		1		91,552		91,552		-		-		-
Consumer		1		1,346		90		1		1,346		1,240
Total Troubled Debt Restructurings		4	$	744,868	$	742,671		6	$	5,334,744	$	5,334,638

At December 31, 2011, we had four legacy accruing TDRs totaling $5.2 million and two acquired TDRs totaling $154,088. Three of the legacy accruing TDRs became TDRs during the twelve month period ended December 31, 2011. Two of these legacy TDRs were the result of providing the borrower with payment of interest only for a period of time at the end of which they would return to their original contractually required payments. One of the TDRs was the result of reduction in the interest rate assessed on the loan. The acquired TDRs occurred as a result of the acquisition of MB&T on April 1, 2011, and were both provided deferrals by MB&T.

At September 30, 2012, we had one legacy TDR totaling $499,122. During the nine month period, we received payment in full on one TDR totaling $282,862. Two TDRs totaling $4.4 million had returned to their contractually required payments of principal and interest. The borrower had paid as agreed for nine months and we removed them from TDR status. We received payments of $1,150 on the acquired TDRs during the nine month period. There were no other changes to TDRs for the nine month period.

We factor our TDRs into our allowance for loan losses by individually evaluating each TDR for impairment and including any required amounts in the respective portfolio’s segment for the allowance for loan losses. At December 31, 2011, $334,137 of the allowance for loan losses was attributed to TDRs. As a result of the reduction in TDRs at September 30, 2012, we had reduced the allocation for TDRs included in the allowance for loan losses to $25,000.

Bank owned life insurance

We have invested $16.8 million in life insurance policies on our executive officers, other officers of the Bank, and retired officers of MB&T. We anticipate the earnings on these policies will contribute to our employee benefit expenses as well as our obligations under our Salary Continuation Agreements and Supplemental Life Insurance Agreements that we entered into with our executive officers in January 2006 as well as that MB&T had entered into with its executive officers. During the first nine months of 2012, the cash surrender value of the insurance policies increased by $341,141 as a result of earnings on these policies. There are no post retirement death benefits associated with the BOLI policies owned by Old Line Bank prior to the acquisition of MB&T. We have accrued a $219,439 liability associated with the post retirement death benefits of the BOLI policies acquired from MB&T.

Goodwill

During the second quarter of 2011, we recorded goodwill of $116,723 associated with the acquisition of Maryland Bankcorp. This amount represented the difference between the estimated fair value of tangible and intangible assets acquired and liabilities assumed at acquisition date. During the third quarter of 2011, the goodwill increased $25,000 as a result of additional liabilities that we identified during the period. During the fourth quarter of 2011, we received a valuation of the pension plan asset at acquisition date and at December 31, 2011. As a result of this valuation, in the fourth quarter of 2011, we recorded a $492,067 increase to goodwill to reflect the costs incurred by the pension plan as of the acquisition date. During the third quarter of 2012, we evaluated goodwill for impairment as required by the accounting guidance and there was no impairment.

Core deposit intangible

As a result of the acquisition of Maryland Bankcorp, during the second quarter of 2011, we recorded a core deposit intangible of $5.0 million. This amount represented the premium that we paid to acquire MB&T’s core deposits over the fair value of such deposits. We will amortize the core deposit intangible on an accelerated basis over its estimated useful life of 18 years. At September 30, 2012, the core deposit intangible was $3.9 million.

Deposits

We seek deposits within our market area by paying competitive interest rates, offering high quality customer service and using technology to deliver deposit services effectively.

At September 30, 2012, the deposit portfolio had increased to $731.1 million, a $40.3 million or 5.84% increase over the December 31, 2011 level of $690.8 million. Non-interest bearing deposits increased $15.2 million during the period to $185.3 million from $170.1 million primarily because we established new relationships during the period and expanded upon existing ones. Interest-bearing deposits rose $25.1 million to $545.7 million from $520.6 million. The increase in interest bearing deposits was primarily the result of increased depository relationships with local municipalities and state organizations, with the vast majority placed in reciprocal deposits obtained through the Promontory Interfinancial Network. The following table outlines the increase in interest bearing deposits:


	September 30,		December 31,
	2012		2011		$ Change			% Change
	(Dollars in thousands)
Certificates of deposit	$	310,756	$	336,068	$	(25,312	)		(7.53	) %
Interest bearing checking		172,881		123,907		48,974			39.52
Savings		62,094		60,654		1,440			2.37
Total	$	545,731	$	520,629	$	25,102			4.82	%

We acquire brokered certificate of deposits through the Promontory Interfinancial Network (Promontory). Through this deposit matching network and its certificate of deposit account registry service (CDARS) and money market account service, we have the ability to offer our customers access to FDIC insured deposit products in aggregate amounts exceeding current insurance limits. When we place funds through Promontory on behalf of a customer, we receive matching deposits through the network’s reciprocal deposit program. We can also place deposits through this network without receiving matching deposits. At September 30, 2012, we had $53.0 million in CDARS and $63.5 million in money market accounts through Promontory’s reciprocal deposit program compared to $24.8 million and $14.1 million, respectively, at December 31, 2011. At September 30, 2012, we had received $30.2 million in deposits through the Promontory network that were not reciprocal deposits compared to $52.0 million at December 31, 2011. We had no other brokered certificates of deposit as of September 30, 2012 and December 31, 2011. We expect that we will continue to use brokered deposits as an element of our funding strategy when required to maintain an acceptable loan to deposit ratio.

Borrowings

Old Line Bancshares has available a $3 million unsecured line of credit. Old Line Bank has available lines of credit, including overnight federal funds and repurchase agreements from its correspondent banks totaling $24.5 million as of September 30, 2012 and December 31, 2011. Old Line Bank has an additional secured line of credit from the Federal Home Loan Bank of Atlanta (FHLB) of $241.7 million at September 30, 2012. As a condition of obtaining the line of credit from the FHLB, the FHLB requires that Old Line Bank purchase shares of capital stock in the FHLB. Prior to allowing Old Line Bank to borrow under the line of credit, the FHLB also requires that Old Line Bank provide collateral to support borrowings. Therefore, we have provided collateral to support up to $88.8 million of borrowings. Of this, we had borrowed $10.0 million at September 30, 2012. We may increase availability by providing additional collateral.

Short-term borrowings consisted of short-term promissory notes issued to Old Line Bank’s customers. Old Line Bank offers its commercial customers an enhancement to the basic non-interest bearing demand deposit account. This service electronically sweeps excess funds from the customer’s account into a short term promissory note with Old Line Bank. These obligations are payable on demand, are secured by investments or are unsecured, re-price daily and have maturities of one to 270 days. At December 31, 2011, Old Line Bank had $7.7 million outstanding in these short term unsecured promissory notes with an average interest rate of 0.20% and $20.9 million outstanding in secured promissory notes with an average interest rate of 0.50%. We recorded these secured promissory notes with the acquisition of MB&T. At September 30, 2012, Old Line Bank had $7.9 million outstanding in short term unsecured promissory notes with an average interest rate of 0.20% and $26.6 million in secured promissory notes with an average interest rate of 0.40%.

At September 30, 2012 and December 31, 2011, Old Line Bank had two advances in the amount of $5.0 million each, from the FHLB totaling $10.0 million.

On December 12, 2007, Old Line Bank borrowed $5.0 million from the FHLB. The interest rate on this advance is 3.3575% and interest is payable on the 12th day of each March, June, September and December, commencing on March 12, 2008. On December 12, 2008, or any interest payment date thereafter, the FHLB has the option to convert the interest rate on this advance to a fixed rate three (3) month LIBOR. The maturity date on this advance is December 12, 2012.

On December 19, 2007, Old Line Bank borrowed an additional $5.0 million from the FHLB. The interest rate on this borrowing is 3.119% and is payable on the 19th day of each month. On January 22, 2008 or any interest payment date thereafter, the FHLB has the option to convert the interest rate on this advance from a fixed rate to a one (1) month LIBOR based variable rate. This borrowing matures on December 19, 2012.

The following table outlines our borrowings as of September 30, 2012 and December 31, 2011.



	Borrowings
	September 30, 2012							December 31, 2011
	Amount		Rate			Maximum Amount Borrowed During Any Month End Period		Amount		Rate			Maximum Amount Borrowed During Any Month End Period
Short term promissory notes	$	7,955,759		0.20	%	$	9,003,445	$	7,784,561		0.20	%	$	12,271,568
Repurchase agreements		26,588,849		0.40	%		27,535,986		20,888,096		0.50	%		22,979,870
FHLB advance due Dec. 2012		5,000,000		3.36	%		5,000,000		5,000,000		3.36	%		5,000,000
FHLB advance due Dec. 2012		5,000,000		3.12	%		5,000,000		5,000,000		3.12	%		5,000,000
Total short term borrowings	$	44,544,608				$	46,539,431	$	38,672,657				$	45,251,438

Senior note, fixed at 6.28%		6,216,463		6.28	%				6,284,479		6.28	%
Total long term borrowings	$	6,216,463						$	6,284,479

On August 25, 2006, Pointer Ridge entered into an Amended and Restated Promissory Note in the principal amount of $6.6 million. This loan accrues interest at a rate of 6.28% through September 5, 2016. After September 5, 2016, the rate adjusts to the greater of (i) 6.28% plus 200 basis points or (ii) the Treasury Rate (as defined in the Amended Promissory Note) plus 200 basis points. At September 30, 2012 and December 31, 2011, Pointer Ridge had borrowed $6.2 million under the Amended Promissory Note. We have guaranteed to the lender payment of up to 62.50% of the loan payment plus any costs the lender incurs resulting from any omissions or alleged acts or omissions by Pointer Ridge arising out of or relating to misapplication or misappropriation of money, rents received after an event of default, waste or damage to the property, failure to maintain insurance, fraud or material misrepresentation, filing of bankruptcy or Pointer Ridge’s failure to maintain its status as a single purpose entity.

Interest Rate Sensitivity Analysis and Interest Rate Risk Management

A principal objective of Old Line Bank’s asset/liability management policy is to minimize exposure to changes in interest rates by an ongoing review of the maturity and re-pricing of interest earning assets and interest bearing liabilities. The Asset and Liability Committee of the Board of Directors oversees this review.

The Asset and Liability Committee establishes policies to control interest rate sensitivity. Interest rate sensitivity is the volatility of a bank’s earnings resulting from movements in market interest rates. Management monitors rate sensitivity in order to reduce vulnerability to interest rate fluctuations while maintaining adequate capital levels and acceptable levels of liquidity. Monthly financial reports supply management with information to evaluate and manage rate sensitivity and adherence to policy. Old Line Bank’s asset/liability policy’s goal is to manage assets and liabilities in a manner that stabilizes net interest income and net economic value within a broad range of interest rate environments. Management makes adjustments to the mix of assets and liabilities periodically in an effort to achieve dependable, steady growth in net interest income regardless of the behavior of interest rates in general.

As part of the interest rate risk sensitivity analysis, the Asset and Liability Committee examines the extent to which Old Line Bank’s assets and liabilities are interest rate sensitive and monitors the interest rate sensitivity gap. An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market rates. The interest rate sensitivity gap is the difference between interest earning assets and interest bearing liabilities scheduled to mature or re-price within such time period. A positive gap occurs when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A negative gap occurs when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap tends to adversely affect net interest income, while a positive gap tends to result in an increase in net interest income. During a period of declining interest rates, a negative gap tends to result in an increase in net interest income, while a positive gap tends to adversely affect net interest income. If re-pricing of assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal.

Old Line Bank currently has a positive gap over the short term, which suggests that the net yield on interest earning assets may increase during periods of rising interest rates. However, a simple interest rate “gap” analysis by itself may not be an accurate indicator of how changes in interest rates will affect net interest income. Changes in interest rates may not uniformly affect income associated with interest earning assets and costs associated with interest bearing liabilities. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. Although certain assets and liabilities may have similar maturities or periods of re-pricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market interest rates, while interest rates on other types may lag behind changes in general market rates. In the event of a change in interest rates, prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the interest rate gap. The ability of many borrowers to service their debts also may decrease in the event of an interest rate increase.

Liquidity

Our overall asset/liability strategy takes into account our need to maintain adequate liquidity to fund asset growth and deposit runoff. Our management monitors the liquidity position daily in conjunction with Federal Reserve guidelines. As outlined in the Borrowings section of this report, we have credit lines, unsecured and secured, available from several correspondent banks totaling $27.5 million. Additionally, we may borrow funds from the FHLB and the Federal Reserve Bank of Richmond. We can use these credit facilities in conjunction with the normal deposit strategies, which include pricing changes to increase deposits as necessary. We can also sell available for sale investment securities or pledge investment securities as collateral to create additional liquidity. From time to time we may sell or participate out loans to create additional liquidity as required. Additional sources of liquidity include funds held in time deposits and cash from the investment and loan portfolios.

Our immediate sources of liquidity are cash and due from banks, federal funds sold and time deposits in other banks. On September 30, 2012, we had $43.8 million in cash and due from banks, $26,137 in interest bearing accounts, and $908,495 in federal funds sold. As of December 31, 2011, we had $43.4 million in cash and due from banks, $119,235 in interest bearing accounts and $83,114 in federal funds sold.

Old Line Bank has sufficient liquidity to meet its loan commitments as well as fluctuations in deposits. We usually retain maturing certificates of deposit as we offer competitive rates on certificates of deposit. Management is not aware of any demands, trends, commitments, or events that would result in Old Line Bank’s inability to meet anticipated or unexpected liquidity needs.

During the recent period of turmoil in the financial markets, some institutions experienced large deposit withdrawals that caused liquidity problems. We did not have any significant withdrawals of deposits or any liquidity issues. Although we plan for various liquidity scenarios, if there is turmoil in the financial markets or our depositors lose confidence in us, we could experience liquidity issues.

Capital

Our stockholders’ equity amounted to $74.4 million at September 30, 2012 and $68.5 million at December 31, 2011. We are considered “well capitalized” under the risk-based capital guidelines adopted by the Federal Reserve. Stockholders’ equity increased during the nine month period primarily because of net income available to common stockholders of $5.8 million, the $782,034 after tax unrealized gains on available for sale securities, the $135,381 adjustment for stock based compensation awards, and $23,132 in proceeds from stock options exercised. These items were partially offset by the $819,512 common stock cash dividend.

Contractual Obligations, Commitments, Contingent Liabilities, and Off-balance Sheet Arrangements

Old Line Bancshares is a party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments primarily include commitments to extend credit, lines of credit and standby letters of credit. Old Line Bancshares uses these financial instruments to meet the financing needs of its customers. These financial instruments involve, to varying degrees, elements of credit, interest rate, and liquidity risk. These commitments do not represent unusual risks and management does not anticipate any losses which would have a material effect on Old Line Bancshares. Old Line Bancshares also has operating lease obligations.

Outstanding loan commitments and lines and letters of credit at September 30, 2012 and December 31, 2011, are as follows:


	September 30,		December 31,
	2012		2011
	(Dollars in thousands)

Commitments to extend credit and available credit lines:
Commercial	$	45,516	$	46,966
Real estate-undisbursed development and construction		32,200		21,398
Consumer		13,871		13,195
	$	91,587	$	81,559
Standby letters of credit	$	11,368	$	8,226

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Old Line Bancshares generally requires collateral to support financial instruments with credit risk on the same basis as it does for on balance sheet instruments. The collateral is based on management's credit evaluation of the counter party. Commitments generally have interest rates fixed at current market rates, expiration dates or other termination clauses and may require payment of a fee. Available credit lines represent the unused portion of lines of credit previously extended and available to the customer so long as there is no violation of any contractual condition. These lines generally have variable interest rates. Since many of the commitments are expected to expire without being drawn upon, and since it is unlikely that all customers will draw upon their lines of credit in full at any time, the total commitment amount or line of credit amount does not necessarily represent future cash requirements. We evaluate each customer's credit worthiness on a case by case basis. We regularly reevaluate many of our commitments to extend credit. Because we conservatively underwrite these facilities at inception, we generally do not have to withdraw any commitments. We are not aware of any loss that we would incur by funding our commitments or lines of credit.

Commitments for real estate development and construction, which totaled $32.2 million, or 35.16% of the $91.6 million of outstanding commitments at September 30, 2012, are generally short term and turn over rapidly with principal repayment from permanent financing arrangements upon completion of construction or from sales of the properties financed.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Our exposure to credit loss in the event of non-performance by the customer is the contract amount of the commitment. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In general, loan commitments, credit lines and letters of credit are made on the same terms, including with respect to collateral, as outstanding loans. We evaluate each customer’s credit worthiness and the collateral required on a case by case basis.

Reconciliation of Non-GAAP Measures

Below is a reconciliation of the fully tax equivalent adjustments and the GAAP basis information presented in this report:

Three months ended September 30, 2012


	Net Interest Income		Yield			Net Interest Spread
GAAP net interest income	$	8,536,777		4.51	%		4.35	%
Tax equivalent adjustment
Federal funds sold		-		-			-
Investment securities		241,934		0.13			0.13
Loans		154,018		0.08			0.08
Total tax equivalent adjustment		395,952		0.21			0.21
Tax equivalent interest yield	$	8,932,729		4.72	%		4.56	%

Three months ended September 30, 2011


	Net Interest Income		Yield			Net Interest Spread
GAAP net interest income	$	8,344,575		4.91	%		4.70	%
Tax equivalent adjustment
Federal funds sold		-		-			-
Investment securities		116,863		0.07			0.07
Loans		58,273		0.03			0.03
Total tax equivalent adjustment		175,136		0.10			0.10
Tax equivalent interest yield	$	8,519,711		5.01	%		4.80	%

Nine months ended September 30, 2012


	Net Interest Income		Yield			Net Interest Spread
GAAP net interest income	$	24,762,576		4.52	%		4.33	%
Tax equivalent adjustment
Federal funds sold		1		-			-
Investment securities		641,197		0.12			0.12
Loans		307,050		0.05			0.05
Total tax equivalent adjustment		948,248		0.17			0.17
Tax equivalent interest yield	$	25,710,824		4.69	%		4.50	%

Nine months ended September 30, 2011


	Net Interest Income		Yield			Net Interest Spread
GAAP net interest income	$	19,403,012		4.58	%		4.36	%
Tax equivalent adjustment
Federal funds sold		-		-			-
Investment securities		249,666		0.05			0.05
Loans		115,876		0.03			0.03
Total tax equivalent adjustment		365,542		0.08			0.08
Tax equivalent interest yield	$	19,768,554		4.66	%		4.44	%

Impact of Inflation and Changing Prices

Management has prepared the financial statements and related data presented herein in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.

Unlike industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, and may frequently reflect government policy initiatives or economic factors not measured by a price index. As discussed above, we strive to manage our interest sensitive assets and liabilities in order to offset the effects of rate changes and inflation.

Application of Critical Accounting Policies

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. We base the fair values and the information used to record valuation adjustments for certain assets and liabilities on quoted market prices or from information other third party sources provide, when available.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the provision 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.

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 “Provision for Loan Losses”.

Information Regarding Forward-Looking Statements

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We may also include forward-looking statements in other statements that we make. All statements that are not descriptions of historical facts are forward-looking statements. Forward-looking statements often use words such as “believe,” “expect,” “plan,” “may,” “will,” “should,” “project,” “contemplate,” “anticipate,” “forecast,” “intend” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.

The statements presented herein with respect to, among other things, Old Line Bancshares’ plans, objectives, expectations and intentions, including anticipated expenses in connection with termination of the MB&T employee pension plan, reversing the valuation allowance for the deferred tax asset recorded at the acquisition of Maryland Bankcorp, our pending merger with WSB and the anticipated timing of and impact on Old Line Bancshares of such acquisition, including our expectation that the merger will be accretive to earnings within three quarters of closing, branch retention and expansion intentions, continued expansion of our service and market area, retention of former MB&T personnel, anticipated non-interest expenses in future periods (including changes as a result of the merger with Maryland Bankcorp and the pending merger with WSB), changes in earnings, impact of new accounting guidance, continued increases in net interest income, hiring and acquisition possibilities, maintenance of our net interest margin, our belief that we have identified any problem assets and that our borrowers will continue to remain current on their loans, being well positioned to capitalize on potential opportunities in a healthy economy, impact of outstanding off-balance sheet commitments, sources of liquidity and that we have sufficient liquidity, the sufficiency of the allowance for loan losses, expected loan, deposit, asset, balance sheet and earnings growth, growth in new and existing customer relationships, potential increases in certain components of non-interest income, sale of existing other real estate owned and anticipated gains from such sales, expected losses on and our intentions with respect to our investment securities, anticipated losses on potential problem loans, expected settlement of property during the fourth quarter of 2012 for which we received ratification of our re-foreclosure in the third quarter with respect to one non-accrual loan, our anticipated foreclosure on properties securing other non-accrual loans and anticipated losses (or lack thereof) on other non-accrual loans, earnings on BOLI, continued use of brokered deposits for funding, expectations with respect to the impact of pending legal proceedings, improving earnings per share and stockholder value, and financial and other goals and plans are forward looking. 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: those discussed in this report; the risk that necessary stockholder and regulatory approvals for the pending merger with WSB will not be obtained; the risk that the pending lawsuit regarding the merger will delay or preclude the merger; the risk that Old Line Bancshares may fail to realize all of the anticipated benefits of the merger; the ability of Old Line Bancshares to retain key personnel; the ability of Old Line Bancshares to successfully implement its growth and expansion strategy; risk of loan losses; that the allowance for loan losses may not be sufficient; that changes in interest rates and monetary policy could adversely affect Old Line Bancshares; that changes in regulatory requirements and/or restrictive banking legislation may adversely affect Old Line Bancshares, including regulations adopted pursuant to the Dodd-Frank Act; that the market value of investments could negatively impact stockholders’ equity; risks associated with Old Line Bancshares’ lending limit; increased expenses due to stock benefit plans; expenses associated with operating as a public company; potential conflicts of interest associated with the interest in Pointer Ridge; further deterioration in general economic conditions, continued slow growth during the recovery or another recession; and changes in competitive, governmental, regulatory, technological and other factors which may affect Old Line Bancshares specifically or the banking industry generally. For a more complete discussion of some of these risks and uncertainties see “Risk Factors” in Old Line Bancshares’ Registration Statement on Form S-4 filed with the Securities and Exchange Commission on November 13, 2012.

Old Line Bancshares’ 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 Old Line Bancshares undertakes 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. Due to the nature of our operations, only interest rate risk is significant to our consolidated results of operations or financial position. For information regarding our Quantitative and Qualitative Disclosure about Market Risk, see “Interest Rate Sensitivity Analysis and Interest Rate Risk Management” in Part I, Item 2 of this Form 10-Q.

Item 4. Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, Old Line Bancshares’ Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of Old Line Bancshares’ disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based upon that evaluation, Old Line Bancshares’ Chief Executive Officer and Chief Financial Officer concluded that Old Line Bancshares’ disclosure controls and procedures are effective as of September 30, 2012. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by Old Line Bancshares in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

In addition, there were no changes in Old Line Bancshares’ internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2012, that have materially affected, or are reasonably likely to materially affect, Old Line Bancshares’ internal control over financial reporting.

PART II-OTHER INFORMATION

Item 1. Legal Proceedings

On September 27, 2012, a complaint was filed by Rosalie Jones both individually and on behalf of a putative class of WSB stockholders, in the Circuit Court for Prince George’s County, Maryland, against WSB and its Directors and Old Line Bancshares. The complaint seeks to enjoin the pending merger between Old Line Bancshares and WSB and alleges, among other things, that the members of WSB’s Board of Directors breached their fiduciary duties by agreeing to sell WSB for inadequate and unfair consideration and pursuant to an unfair process and that WSB and Old Line Bancshares aided and abetted such breaches. Please refer to our Current Report on Form 8-K filed October 26, 2012 for further information relating to the lawsuit.

At September 30, 2012, we were not involved in any legal proceedings, other than as discussed above, the outcome of which, in management’s opinion, would be material to our financial condition or results of operations.

Item 1A. Risk Factors

There have been no material changes in the risk factors from those disclosed in our Registration on Form S-4 filed with the Securities and Exchange Commission on November 9, 2012.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

Item 6. Exhibits

2.1

Agreement and Plan of Merger, dated as of September 10, 2012, by and between Old Line Bancshares, Inc. and WSB Holdings, Inc., and Amendment No 1 thereto (Incorporated by reference from Annex A of Old Line Bancshares’ Registration Statement on Form S-4 filed with the Securities and Exchange Commission on November 13, 2012).

31.1 Rule 13a-14(a) Certification of Chief Executive Officer

31.2

Rule 13a-14(a) Certification of Chief Financial Officer

Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

101

Interactive Data Files pursuant to Rule 405 of Regulation S-T.*

* Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Old Line Bancshares, Inc.


Date: November 14, 2012	By:	/s/ James W. Cornelsen
		James W. Cornelsen, President and Chief Executive Officer
		(Principal Executive Officer)


Date: November 14, 2012	By:	/s/ Christine M. Rush
		Christine M. Rush, Executive Vice President and Chief Financial Officer
		(Principal Accounting and Financial Officer)