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 March 31, 2013

£	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 April 30, 2013, the registrant had 6,853,814 shares of common stock outstanding.

Part 1. Financial Information

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Balance Sheets


	March 31, 2013		December 31, 2012
	(Unaudited)
Assets
Cash and due from banks	$	37,651,112	$	28,332,456
Interest bearing accounts		30,291		130,192
Federal funds sold		331,153		228,113
Total cash and cash equivalents		38,012,556		28,690,761
Investment securities available for sale		154,081,188		171,541,222
Loans, less allowance for loan losses		611,850,594		595,144,928
Equity securities		3,174,220		3,615,444
Premises and equipment		24,912,937		25,133,013
Accrued interest receivable		2,511,753		2,639,483
Deferred income taxes		8,015,351		7,139,545
Bank owned life insurance		16,977,347		16,869,307
Other real estate owned		2,726,910		3,719,449
Goodwill		633,790		633,790
Core deposit intangible		3,513,889		3,691,471
Other assets		2,575,612		3,038,064
Total assets	$	868,986,147	$	861,856,477
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing	$	188,172,189	$	188,895,263
Interest bearing		560,330,114		546,562,555
Total deposits		748,502,303		735,457,818
Short term borrowings		31,510,107		37,905,467
Long term borrowings		6,166,788		6,192,350
Accrued interest payable		279,907		311,735
Income taxes payable		784,512		235,323
Accrued pension		4,690,584		4,615,699
Other liabilities		1,965,195		1,884,924
Total liabilities		793,899,396		786,603,316
Stockholders' equity
Common stock, par value $0.01 per share; authorized 15,000,000 shares;
issued and outstanding 6,853,814 in 2013 and 6,845,432 in 2012		68,538		68,454
Additional paid-in capital		53,875,593		53,792,015
Retained earnings		19,543,682		18,531,387
Accumulated other comprehensive income		1,220,486		2,469,758
Total Old Line Bancshares, Inc. stockholders' equity		74,708,299		74,861,614
Non-controlling interest		378,452		391,547
Total stockholders' equity		75,086,751		75,253,161
Total liabilities and stockholders' equity	$	868,986,147	$	861,856,477

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 March 31,
	2013			2012
Interest revenue
Loans, including fees	$	7,831,823		$	7,952,835
U.S. treasury securities		1,754			2,397
U.S. government agency securities		82,430			101,434
Mortgage backed securities		388,256			666,016
Municipal securities		469,668			332,724
Federal funds sold		601			1,071
Other		42,544			45,809
Total interest revenue		8,817,076			9,102,286
Interest expense
Deposits		857,139			1,127,498
Borrowed funds		112,487			212,376
Total interest expense		969,626			1,339,874
Net interest income		7,847,450			7,762,412
Provision for loan losses		200,000			375,000
Net interest income after provision for loan losses		7,647,450			7,387,412
Non-interest revenue
Service charges on deposit accounts		300,741			319,327
Gain on sales or calls of investment securities		631,429			277,170
Earnings on bank owned life insurance		133,228			136,705
Gain (loss) on sales of other real estate owned		(200,454	)		(31,988	)
Gain (loss) on disposal of assets		(85,561	)		-
Other fees and commissions		247,683			177,599
Total non-interest revenue		1,027,066			878,813
Non-interest expense
Salaries and benefits		3,232,677			2,808,994
Occupancy and equipment		1,068,867			907,871
Data processing		239,057			224,735
FDIC insurance and State of Maryland assessments		155,243			129,724
Merger and integration		240,485			29,167
Core deposit premium		177,582			194,675
Other operating		1,765,530			1,391,007
Total non-interest expense		6,879,441			5,686,173

Income before income taxes		1,795,075			2,580,052
Income taxes		521,722			844,005
Net income		1,273,353			1,736,047
Less: Net loss attributable to the non-controlling interest		(13,095	)		(19,947	)
Net income available to common stockholders	$	1,286,448		$	1,755,994

Basic earnings per common share	$	0.19		$	0.26
Diluted earnings per common share	$	0.19		$	0.26
Dividend per common share	$	0.04		$	0.04

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

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)



Years Ended March 31,	2013			2012
Net income available to common stockholders	$	1,286,448		$	1,755,994

Other comprehensive income
Unrealized gain (loss) on securities available for sale		(1,431,608	)		148,456
Reclassification adjustment for realized gain on securities available for sale included in net income		(631,429	)		(277,170	)
Income tax relating to securities available for sale		813,765			50,772
Other comprehensive income		(1,249,272	)		(77,942	)
Total comprehensive income	$	37,176		$	1,678,052

Comprehensive earnings per share	$	0.19		$	0.25
Diluted earnings per share	$	0.19		$	0.24

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, 2012		6,845,432	$	68,454	$	53,792,015		$	18,531,387		$	2,469,758		$	391,547
Net income attributable to Old Line Bancshares, Inc.		-		-		-			1,286,448			-			-
Unrealized gain on securities available for sale, net of income tax benefit of $813,765		-		-		-			-			(1,249,272	)		-
Net income attributable to non-controlling interest		-		-		-			-			-			(13,095	)
Stock based compensation awards		-		-		83,662			-			-			-
Restricted stock issued		8,382		84		(84	)		-			-			-
Common stock cash dividend $0.04 per share		-		-		-			(274,153	)		-			-
Balance, March 31, 2013		6,853,814	$	68,538	$	53,875,593		$	19,543,682		$	1,220,486		$	378,452

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

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)



Three Months Ended March 31,	2013			2012
Cash flows from operating activities
Interest received	$	9,287,947		$	9,213,450
Fees and commissions received		488,051			488,004
Interest paid		(1,001,454	)		(1,366,373	)
Cash paid to suppliers and employees		(5,450,138	)		(5,707,758	)
Income taxes paid		-			(1,369,705	)
		3,324,406			1,257,618
Cash flows from investing activities
Purchase of investment securities available for sale		(7,691,835	)		(22,483,748	)
Proceeds from disposal of investment securities
Available for sale at maturity or call		9,387,687			13,167,722
Available for sale sold		13,939,926			7,796,150
Loans made, net of principal collected		(16,943,810	)		(14,073,970	)
Proceeds from sale of other real estate owned		725,485			240,607
Improvements to other real estate owned		-			(15,525	)
Redemption of equity securities		494,301			(35,099	)
Purchase of premises, equipment and software		(263,775	)		(773,693	)
		(352,021	)		(16,177,556	)
Cash flows from financing activities
Net increase (decrease) in
Time deposits		6,336,720			(13,260,645	)
Other deposits		6,707,765			9,140,518
Short term borrowings		(6,395,360	)		1,833,125
Long term borrowings		(25,562	)		(23,050	)
Cash dividends paid-common stock		(274,153	)		(273,140	)
		6,349,410			(2,583,192	)

Net increase (decrease) in cash and cash equivalents		9,321,795			(17,503,130	)

Cash and cash equivalents at beginning of period		28,690,761			43,636,724
Cash and cash equivalents at end of period	$	38,012,556		$	26,133,594

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

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)


Three Months Ended March 31,	2013			2012
Reconciliation of net income to net cash
provided by operating activities
Net income	$	1,273,353		$	1,736,047

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

Depreciation and amortization		398,291			337,440
Provision for loan losses		200,000			375,000
Change in deferred loan fees net of costs		38,145			(45,552	)
(Gain)/loss on sales or calls of securities		(631,429	)		(277,170	)
Amortization of premiums and discounts		304,996			270,947
(Gain)/loss on sales of other real estate owned		200,454			31,988
Write down of other real estate owned		66,600			-
(Gain)/loss on sale of fixed assets		85,561			-
Amortization of intangible		177,582			194,675
Deferred income taxes		(27,467	)		(22,050	)
Stock based compensation awards		83,662			30,229
Increase (decrease) in
Accrued interest payable		(31,828	)		(26,499	)
Income tax payable		549,189			(475,687	)
Accrued pension		74,885			68,798
Other liabilities		80,270			(22,274	)
Decrease (increase) in
Accrued interest receivable		127,730			(114,231	)
Bank owned life insurance		(108,040	)		(113,639	)
Prepaid income taxes		-			(27,964	)
Other assets		462,452			(662,440	)
	$	3,324,406		$	1,257,618

Supplemental Disclosure:
Loans transferred to other real estate owned	$	-		$	191,921

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 March 31, 2012 and 2013 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, 2012 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, 2012. 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 March 31, 2013 and 2012, the core deposit intangible amortization was $177,582 and $194,675, 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 first quarter of 2013, we evaluated goodwill for impairment as required by the accounting guidance and there was no impairment.

Reclassifications-We have made certain reclassifications to the 2012 financial presentation to conform to the 2013 presentation.

Subsequent Events-We evaluated subsequent events after March 31, 2013, through April 30, 2013, the date this report was available to be issued. No significant subsequent events were identified which would affect the presentation of the financial statements.

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.


March 31, 2013	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
Available for sale
U. S. treasury	$	1,248,542	$	58	$	-		$	1,248,600
U.S. government agency		26,510,040		70,924		(31,178	)		26,549,786
Municipal securities		63,465,567		1,730,108		(743,953	)		64,451,722
Mortgage backed		60,942,326		1,007,962		(119,208	)		61,831,080
	$	152,166,475	$	2,809,052	$	(894,339	)	$	154,081,188

December 31, 2012
Available for sale
U. S. treasury	$	1,249,708	$	1,542	$	-		$	1,251,250
U.S. government agency		29,591,994		110,814		(27,505	)		29,675,303
Municipal securities		61,670,324		2,453,427		(270,102	)		63,853,649
Mortgage backed		74,963,794		1,804,783		(7,557	)		76,761,020
	$	167,475,820	$	4,370,566	$	(305,164	)	$	171,541,222

2. INVESTMENT SECURITIES (Continued)

As of March 31, 2013, securities with unrealized losses segregated by length of impairment were as follows:


March 31, 2013	Fair value		Unrealized losses
Unrealized losses less than 12 months
U.S. treasury	$	-	$	-
U.S. government agency		4,490,850		31,178
Municipal securities		22,447,390		743,953
Mortgage backed		15,168,299		119,208
Total unrealized losses less than 12 months		42,106,539		894,339

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		4,490,850		31,178
Municipal securities		22,447,390		743,953
Mortgage backed		15,168,299		119,208
Total unrealized losses	$	42,106,539	$	894,339

We consider all unrealized losses on securities as of March 31, 2013 to be temporary losses because we will redeem each security at face value at or prior to maturity. We have the ability and intent to hold these securities until recovery or maturity. As of March 31, 2013, 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 March 31, 2013 and 2012, we recorded gross realized gains of $631,429 and $277,170, respectively, from the sale or call of investment securities. During the three month periods ended March 31, 2013 and 2012, we received $23,327,613 and $20,963,872, respectively, in proceeds from sales or calls of investment securities.

2. INVESTMENT SECURITIES (Continued)

Contractual maturities and pledged securities at March 31, 2013 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


March 31, 2013	Amortized cost		Fair value

Maturing
Within one year	$	1,248,542	$	1,248,600
Over one to five years		12,447,858		12,538,380
Over five to ten years		30,435,087		31,072,635
Over ten years		108,034,988		109,221,573
	$	152,166,475	$	154,081,188
Pledged securities	$	35,763,647	$	36,342,208

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	March 31,			December 31,
	2013			2012

Current assets	$	297,905		$	313,165
Non-current assets		6,903,541			6,938,990
Liabilities		6,192,239			6,208,029
Equity		1,009,207			1,044,126

	Three Months Ended
	March 31,
		2013			2012
Statements of Income
Revenue	$	224,367		$	205,736
Expenses		259,286			258,929
Net loss	$	(34,919	)	$	(53,193	)

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.

5. LOANS

Major classifications of loans are as follows:


	March 31, 2013									December 31, 2012
	Legacy			Acquired			Total			Legacy			Acquired			Total

Real estate
Commercial	$	277,296,212		$	64,157,685		$	341,453,897		$	279,489,013		$	65,396,469		$	344,885,482
Construction		57,720,969			4,819,812			62,540,781			48,603,640			4,174,751			52,778,391
Residential		47,123,408			49,570,571			96,693,979			38,901,489			52,069,937			90,971,426
Commercial		92,926,974			10,422,695			103,349,669			88,306,302			10,070,234			98,376,536
Consumer		9,872,706			936,671			10,809,377			9,944,466			1,059,991			11,004,457
		484,940,269			129,907,434			614,847,703			465,244,910			132,771,382			598,016,292
Allowance for loan losses		(3,661,323	)		(391,624	)		(4,052,947	)		(3,648,723	)		(316,624	)		(3,965,347	)
Deferred loan costs, net		1,055,838			-			1,055,838			1,093,983			-			1,093,983
	$	482,334,784		$	129,515,810		$	611,850,594		$	462,690,170		$	132,454,758		$	595,144,928

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.

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.

5. LOANS (Continued)

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 March 31, 2013 and December 31, 2012, we had approximately $62.4 million and $61.3 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.

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

5. LOANS (Continued)

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 March 31, 2013 and December 31, 2012, 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 March 31, 2013 and December 31, 2012.



Age Analysis of Past Due Financing Receivables (Loans)
	March 31, 2013						December 31, 2012
	Legacy		Acquired		Total		Legacy		Acquired		Total
Current	$	481,474,764	$	125,040,968	$	606,515,732	$	461,628,288	$	128,070,641	$	589,698,929
Accruing past due loans:
30-59 days past due
Real estate		1,028,201		562,279		1,590,480		218,700		447,399		666,099
Commercial		-		109,587		109,587		436,806		36,923		473,729
Consumer		76,016		122,543		198,559		-		45,322		45,322
Total 30-59 days past due		1,104,217		794,409		1,898,626		655,506		529,644		1,185,150
60-89 days past due
Real estate		823,782		-		823,782		1,141,779		62,852		1,204,631
Commercial		149,205		-		149,205		-		-		-
Consumer		-		8,056		8,056		1,453		9,882		11,335
Total 60-89 days past due		972,987		8,056		981,043		1,143,232		72,734		1,215,966
90 or more days past due
Consumer		-		-		-		-		6,410		6,410
Total 90 or more days past due		-		-		-		-		6,410		6,410
Total accruing past due loans		2,077,204		802,465		2,879,669		1,798,738		608,788		2,407,526
Recorded Investment Non-accruing past due loans 90 or more days past due:
Real estate:
Commercial		821,841		1,393,383		2,215,224		1,226,011		1,401,187		2,627,198
Construction		-		100,000		100,000		-		100,000		100,000
Residential		566,460		2,536,979		3,103,439		591,873		2,555,374		3,147,247
Commercial		-		33,639		33,639		-		35,392		35,392
Total Recorded Investment Non-accruing past due loans 90 or more days past due:		1,388,301		4,064,001		5,452,302		1,817,884		4,091,953		5,909,837
Total Financing Receivables (Loans)	$	484,940,269	$	129,907,434	$	614,847,703	$	465,244,910	$	132,771,382	$	598,016,292

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 three months ended March 31, 2013.

The tables below present our impaired loans at March 31, 2013 and December 31, 2012.



Impaired Loans
At March 31, 2013
Legacy	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment
With no related allowance recorded:
Real Estate
Commercial	$	821,841	$	821,841	$	-	$	1,061,830
Construction		-		-		-		-
Residential		566,460		566,460		-		576,363
Commercial		-		-		-		-
Consumer		-		-		-		-
With an allowance recorded:
Real Estate
Commercial		499,122		499,122		25,000		733,306
Construction		-		-		-		-
Residential		-		-		-		-
Commercial		-		-		-		-
Consumer		-		-		-		-
Total legacy impaired		1,887,423		1,887,423		25,000		2,371,499

Acquired (1)
With no related allowance recorded:
Real Estate
Commercial		2,103,117		1,151,759		-		1,315,900
Construction		2,526,247		100,000		-		100,000
Residential		3,309,821		1,776,717		-		1,785,395
Commercial		195,055		123,546		-		124,416
Consumer		-		-		-		-

With an allowance recorded:
Real Estate
Commercial		1,628,156		241,624		241,624		241,624
Construction		-		-		-		-
Residential		1,620,660		1,361,520		150,000		1,361,520
Commercial		-		-		-		-
Consumer		-		-		-		-
Total acquired impaired		11,383,056		4,755,166		391,624		4,928,855
Total all impaired	$	13,270,479	$	6,642,589	$	416,624	$	7,300,354

(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 exceed our cash flow expectations or payment in full of amounts due even though we classify them as non-accrual.

5. LOANS (Continued)



Impaired Loans
At December 31, 2012
Legacy	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment
With no related allowance recorded:
Real Estate
Commercial	$	874,735	$	874,735	$	-	$	686,724
Construction		-		-		-		727,003
Residential		591,873		591,873		-		353,680
Commercial		-		-		-		145,841
Consumer		-		-		-		-
With an allowance recorded:
Real Estate
Commercial		849,462		849,462		125,000		1,769,664
Construction		-		-		-		-
Residential		-		-		-		-
Commercial		-		-		-		77,976
Consumer		-		-		-		142,671
Total legacy impaired		2,316,070		2,316,070		125,000		3,903,559

Acquired (1)
With no related allowance recorded:
Real Estate
Commercial		2,180,807		1,159,563		-		1,664,384
Construction		2,538,565		100,000		-		683,201
Residential		3,371,582		1,798,180		-		1,567,514
Commercial		214,697		126,140		-		172,982
Consumer		-		-		-		51,540

With an allowance recorded:
Real Estate
Commercial		1,628,156		241,624		241,624		657,812
Construction		-		-		-		-
Residential		-		-		-		-
Commercial		1,620,660		1,361,520		75,000		543,133
Consumer		-		-		-		-
Total acquired impaired		11,554,467		4,787,027		316,624		5,340,566
Total all impaired	$	13,870,537	$	7,103,097	$	441,624	$	9,244,125

(1)

5. LOANS (Continued)

The table below presents the contract amount due and recorded book balance of the non-accrual loans at March 31, 2013 and December 31, 2012.



Loans on Non-accrual Status
	March 31, 2013								December 31, 2012

	# of Contracts		Unpaid Principal Balance		Recorded Investment		Interest Not Accrued		# of Contracts		Unpaid Principal Balance		Recorded Investment		Interest Not Accrued
Legacy
Real Estate
Commercial		1	$	821,841	$	821,841	$	58,789		2	$	1,226,011	$	1,226,011	$	103,529
Construction		-		-		-		-		-		-		-		-
Residential		2		566,460		566,460		33,226		2		591,873		591,873		25,449
Total non-accrual loans		3		1,388,301		1,388,301		92,015		4		1,817,884		1,817,884		128,978

Acquired (1)
Real Estate
Commercial		8		3,731,273		1,393,383		700,084		8		3,808,963		1,401,187		649,266
Construction		4		2,526,247		100,000		635,570		4		2,538,565		100,000		592,476
Residential		10		4,287,907		2,536,979		603,101		10		4,346,364		2,555,374		526,669
Commercial		3		105,148		33,639		47,842		3		123,949		35,392		45,787
Total non-accrual loans		25		10,650,575		4,064,001		1,986,597		25		10,817,841		4,091,953		1,814,198
Total all non-accrual loans		28	$	12,038,876	$	5,452,302	$	2,078,612		29	$	12,635,725	$	5,909,837	$	1,943,176

(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 breakdown of the troubled debt restructured loans at March 31, 2013 and December 31, 2012.



Troubled Debt Restructurings
	March 31, 2013						December 31, 2012
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	$	499,122		1	$	499,122	$	498,186
Acquired
Real Estate		3		642,574		601,258		3		645,878		604,326
Commercial		1		89,908		89,908		1		90,748		90,748
Total Troubled Debt Restructurings		5	$	1,231,604	$	1,190,288		5	$	1,235,748	$	1,193,260

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, and 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 March 31, 2013, the contract value of the acquired loans accounted for under ASC 310-30 (including non-accrual loans) was $24,536,848. The fair value adjustments applied to these loans was $11,362,662. The fair value of these loans (recorded book value) was $13,174,186.

At December 31, 2012, the contract value of the acquired impaired loans (including non-accrual loans) was $24,930,742. The fair value adjustments applied to these loans was $11,566,860. The fair value of these loans (recorded book value) was $13,363,882.

Non-accrual acquired loans

At March 31, 2013, we had 25 non-accrual acquired loans with a recorded total fair value of $4,064,001 and a total unpaid principal balance due of $10,650,575. At December 31, 2012, we had 25 non-accrual acquired loans with a recorded total fair value of $4,091,953 and a total unpaid principal balance due of $10,817,841. The non-accrued interest on these loans at December 31, 2012 and 2011was $1,814,198 and $1,694,324, respectively. As outlined above, at acquisition, we marked these loans to fair value and carry no related allowance for loan losses.

5. LOANS (Continued)

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 and real estate 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.

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, they may significantly impact the borrower. 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.

5. LOANS (Continued)

Risk rating 4 (Pass/Watch) these 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 apparently 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 the Bank 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.

5. LOANS (Continued)

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



March 31, 2013	Account Balance						Allocation of Allowance for Loan Losses
Risk Rating	Legacy		Acquired		Total		Legacy		Acquired		Total
Pass (1-4)	$	463,742,597	$	115,686,760	$	579,429,357	$	3,201,661	$	-	$	3,201,661
Special Mention (5)		16,194,021		6,406,262		22,600,283		434,662		-		434,662
Substandard (6)		5,003,651		7,814,412		12,818,063		25,000		391,624		416,624
Doubtful (7)		-		-		-		-		-		-
Loss (8)		-		-		-		-		-		-
Total	$	484,940,269	$	129,907,434	$	614,847,703	$	3,661,323	$	391,624	$	4,052,947

December 31, 2012	Account Balance						Allocation of Allowance for Loan Losses
Risk Rating	Legacy		Acquired		Total		Legacy		Acquired		Total
Pass (1-4)	$	445,568,013	$	121,201,919	$	566,769,932	$	3,131,046	$	-	$	3,131,046
Special Mention (5)		14,182,357		3,716,126		17,898,483		392,677		-		392,677
Substandard (6)		5,494,540		7,853,337		13,347,877		125,000		316,624		441,624
Doubtful (7)		-		-		-		-		-		-
Loss (8)		-		-		-		-		-		-
Total	$	465,244,910	$	132,771,382	$	598,016,292	$	3,648,723	$	316,624	$	3,965,347

5. LOANS (Continued)

The following table details activity in the allowance for loan losses by portfolio segment for the periods ended March 31, 2013 and December 31, 2012. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.


March 31, 2013	Real Estate			Commercial			Boats			Other Consumer			Total
Beginning balance	$	2,826,584		$	755,954		$	248,928		$	133,881		$	3,965,347
Provision for loan losses		22,653			113,670			(7,969	)		(3,354	)		125,000
Provision for loan losses for loans acquired with deteriorated credit quality		75,000			-			-			-			75,000
Recoveries		31,383			16,996			-			22,674			71,053
		2,955,620			886,620			240,959			153,201			4,236,400
Loans charged off		(67,851	)		(102,596	)		-			(13,006	)		(183,453	)
Ending Balance	$	2,887,769		$	784,024		$	240,959		$	140,195		$	4,052,947
Amount allocated to:
Legacy Loans:
Individually evaluated for impairment	$	25,000		$	-		$	-		$	-		$	25,000
Collectively evaluated for impairment		2,471,145			784,024			240,959			140,195			3,636,323
Acquired Loans:
Individually evaluated for impairment		391,624			-			-			-			391,624
Ending balance	$	2,887,769		$	784,024		$	240,959		$	140,195		$	4,052,947

December 31, 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		1,056,287			(181,118	)		(224,359	)		40,007			690,817
Provision for loan losses for loans acquired with deteriorated credit quality		584,928			249,255			-			-			834,183
Recoveries		32,636			82,260			-			107,260			222,156
		3,796,919			1,072,707			340,881			277,920			5,488,427
Loans charged off		(970,335	)		(316,753	)		(91,953	)		(144,039	)		(1,523,080	)
Ending Balance	$	2,826,584		$	755,954		$	248,928		$	133,881		$	3,965,347
Amount allocated to:
Legacy Loans:
Individually evaluated for impairment	$	125,000		$	-		$	-		$	-		$	125,000
Collectively evaluated for impairment		2,384,960			755,954			248,928			133,881			3,523,723
Acquired Loans:
Individually evaluated for impairment		316,624			-			-			-			316,624
Ending balance	$	2,826,584		$	755,954		$	248,928		$	133,881		$	3,965,347

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 March 31, 2013 and December 31, 2012 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:


March 31, 2013	Real Estate		Commercial		Boats		Other Consumer		Total
Legacy loans:
Individually evaluated for impairment with specific reserve	$	499,122	$	-	$	-	$	-	$	499,122
Individually evaluated for impairment without specific reserve		2,783,091		1,721,438		-		-		4,504,529
Collectively evaluated for impairment with reserve		378,858,376		91,205,536		6,813,884		3,058,822		479,936,618
Acquired loans:
Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition)		1,603,144		-		-		-		1,603,144
Individually evaluated for impairment without specific reserve (ASC 310-30 at acquisition)		12,887,376		286,810		-		-		13,174,186
Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition)		104,057,548		10,135,885		-		936,671		115,130,104
Ending balance	$	500,688,657	$	103,349,669	$	6,813,884	$	3,995,493	$	614,847,703

5. LOANS (Continued)


December 31, 2012	Real Estate		Commercial		Boats		Other Consumer		Total
Legacy loans:
Individually evaluated for impairment with specific reserve	$	849,462	$	-	$	-	$	-	$	849,462
Individually evaluated for impairment without specific reserve		2,780,419		1,864,659		-		-		4,645,078
Collectively evaluated for impairment with reserve		363,364,261		86,441,643		7,029,940		2,914,526		459,750,370
Acquired loans:
Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition)		1,603,144		-		-		-		1,603,144
Individually evaluated for impairment without specific reserve (ASC 310-30 at acquisition)		13,029,718		334,164		-		-		13,363,882
Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition)		107,008,295		9,736,070		-		1,059,991		117,804,356
Ending balance	$	488,635,299	$	98,376,536	$	7,029,940	$	3,974,517	$	598,016,292

6.	EARNINGS PER COMMON SHARE

We determine basic earnings per common share by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding giving retroactive effect to stock dividends.

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
	March 31,
	2013		2012
Weighted average number of shares		6,848,505		6,820,894
Dilutive average number of shares		102,244		34,674

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 three months ended March 31, 2013 and 2012, we recorded stock-based compensation expense of $83,662 and $30,229, respectively.

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 three months ended March 31, 2013 and 2012, we recognized $22,725 and $1,151, respectively, of tax benefits associated with the portion of the expense that was related to the issuance of non-qualified options.

7.	STOCK BASED COMPENSATION (CONTINUED)

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 March 31, 2013, there was $335,163 of total unrecognized compensation cost related to non-vested stock options and restricted stock awards that we expect to realize over the next 1.75 years. As of March 31, 2013, there were 86,583 shares remaining available for future issuance under the equity incentive plans. Directors and officers did not exercise any options during the three month periods ended March 31, 2013 and 2012.

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


	March 31,
	2013					2012
			Weighted					Weighted
	Number		average			Number		average
	of shares		exercise price			of shares		exercise price

Outstanding, beginning of period		398,958		$	8.71		325,331		$	8.65
Options granted		52,712			12.04		79,627			8.00
Outstanding, end of period		451,670		$	9.09		404,958		$	8.52

7.	STOCK BASED COMPENSATION (CONTINUED)

Information related to options as of March 31, 2013 follows:


		Outstanding options						Exercisable options

Exercise price		Number of shares at March 31, 2013		Weighted average remaining term		Weighted average exercise price		Number of shares at March 31, 2013		Weighted average exercise price
$	6.30-$7.50		82,231		6.10	$	6.53		82,231	$	6.53
$	7.51-$8.75		136,207		7.63		7.90		92,455		7.86
$	8.76-$9.95		44,520		1.39		9.74		44,520		9.74
$	9.96-$12.04		188,712		5.48		10.92		136,600		10.61
			451,670		5.84	$	9.09		355,806	$	8.84
Intrinsic value of outstanding options where the market value exceeds the exercise price.				$	1,502,059
Intrinsic value of exercisable options where the market value exceeds the exercise price				$	1,272,523

During the three months ended March 31, 2013 and 2012, we granted 8,382 and 10,947 restricted common stock awards, respectively. During the period ended March 31, 2013, there were not any restricted shares or non-vested restricted shares that were forfeited. The following table provides a summary of the restricted stock awards during the three month periods and their vesting schedule.



	March 31,						March 31,
	2013						2012
	Number			Weighted			Number			Weighted
	of shares			average			of shares			average
				grant date						grant date
				fair value						fair value
Nonvested, beginning of period		16,210			$	7.70		15,691			$	7.41
Restricted stock granted		8,382				12.04		10,947				8.00
Restricted stock vested		(9,225	)			7.52		(6,788	)			7.34
Nonvested, end of period		15,367			$	10.18		19,850			$	7.76

Total fair value of shares vested	$	69,347					$	49,853

Intrinsic value of outstanding restricted stock awards where the market value exceeds the exercise price					$	190,858					$	110,269
Intrinsic value of vested restricted stock awards where the market value exceeds the exercise price					$	114,575					$	57,698

7.	STOCK BASED COMPENSATION (CONTINUED)

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

Vesting Schedule

Unvested Restricted Stock Awards

March 31, 2013


Vesting Date	# of Restricted Shares
12/31/2013	3,900
1/27/2014	6,042
1/26/2015	3,931
2/27/2016	1,494
Total Issued	15,367

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 March 31, 2013 and 2012 were $86,272 and $70,874, 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. The SERP expense for the three month periods ended March 31, 2013 and 2012 were $150,724 and $116,545, 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 March 31, 2013, the KSOP owned 148,863 shares of Bancshares’ stock, had $19,000 invested in Old Line Bank Certificates of Deposit, and $26,877 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 (MB&T 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 terminated this plan effective August 1, 2011. We liquidated the securities the plan held, and deposited the proceeds into interest bearing certificates of deposit and a money market account. On October 1, 2012, we purchased an annuity contract to transfer the remaining $2,116,489 pension liability, effective November 1, 2012 and expensed $700,884 in pension expense to recognize the final cost associated with termination of the pension plan. We transferred the remaining pension plan assets to the employee 401(k) plan after we recorded all remaining expenses associated with audits, actuarial and consulting fees to the plan.

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 March 31, 2013 and December 31, 2012, we established values for available for sale investment securities as follows (000’s);


	March 31, 2013		December 31, 2012
Investment securities available for sale:
Level 1 inputs	$	1,249	$	1,251
Level 2 inputs		152,832		170,290
Level 3 inputs		-		-
Investment securities available for sale	$	154,081	$	171,541

SLMA stock:
Level 1 inputs	$	323	$	247
SLMA stock	$	323	$	247

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.

As of March 31, 2013 and December 31, 2012, we estimated the fair value of foreclosed assets using Level 2 inputs to be $2,726,909 and $3,719,449, 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).

9. FAIR VALUE MEASUREMENTS (Continued)

The following outlines the transactions in other real estate owned:

Other Real Estate Owned


Three months ended March 31, 2013	Legacy			Acquired			Total
Beginning balance	$	1,651,228		$	2,068,220		$	3,719,448
Transferred in		-			-			-
Investment in improvements		-			-			-
Write down in value		-			(66,600	)		(66,600	)
Sales/deposits on sales		(725,485	)		-			(725,485	)
Net realized gain (loss)		(200,454	)		-			(200,454	)
Total end of period	$	725,289		$	2,001,620		$	2,726,909

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)



	March 31, 2013				December 31, 2012
	Carrying		Fair		Carrying		Fair
	amount		value		amount		value
Financial assets:
Level 1 inputs:
Investment securities	$	1,248,600	$	1,248,600	$	1,251,250	$	1,251,250
Level 2 inputs:
Investment securities		152,832,588		152,832,588		170,289,972		170,289,972
Level 3 inputs:
Loans, net		611,850,594		614,853,249		595,144,928		599,320,353

Financial liabilities
Level 3 inputs:
Interest bearing deposits	$	560,330,114	$	562,095,044	$	546,562,555	$	554,778,445
Short term borrowings		31,510,107		31,510,107		37,905,467		37,905,467
Long term borrowings		6,166,788		6,441,149		6,192,350		6,488,481

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 three months ended March 31, 2013 or year ended December 31, 2012.

10. ACCOUNTING STANDARDS UPDATES

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 No. 2013-01 “Balance Sheet (Topic 210) Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,” clarifies that ordinary trade receivables are not within the scope of ASU 2011-11. ASU 2011-11, as amended by ASU 2013-01, was effective for annual and interim periods beginning on January 1, 2013, and it did not have a material impact on our consolidated financial statements or results of operations.

ASU 2012-02 “Intangibles-Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment” gives 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 an indefinite lived intangible asset is impaired. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that an indefinite lived intangible asset is impaired, then the entity must perform the quantitative impairment test. If, under the quantitative impairment test, the carrying amount of the intangible asset exceeds its fair value, an entity should recognize an impairment loss in the amount of that excess. Permitting an entity to assess qualitative factors when testing indefinite lived intangible assets for impairment results in guidance that is similar to the goodwill impairment testing guidance in ASU 2011-08. ASU 2012-02 was effective January 1, 2013 (early adoption permitted) and it did not have a significant impact on our financial statements or results of operations.

ASU 2012-06 “Business Combinations (Topic 805) Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government Assisted Acquisition of a Financial Institution (a consensus of the FASB Emerging Issues Task Force)” clarifies the guidance for subsequently measuring an indemnification asset recognized as a result of a government assisted acquisition of a financial institution. Under ASU 2012-06, when a reporting entity recognizes an indemnification asset as a result of a government assisted acquisition of a financial institution and, subsequently, a change in the cash flows expected to be collected on the indemnification asset occurs (as a result of a change in the cash flows expected to be collected on the assets subject to indemnification), the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets). ASU 2012-06 was effective beginning January 1, 2013 (early adoption permitted) and it did not have an impact on our financial statements or results of operations.

ASU 2013-02 “Comprehensive Income, (Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income amends the recent guidance related to the reporting of comprehensive income to enhance the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 was effective January 1, 2013 and it did not have an impact on our financial statements. The required disclosure is included on our Consolidated Statement of Comprehensive Income.

11. LITIGATION

The Bank has a collection case pending before the Superior Court for the District of Columbia, which arises from a $1,776,350 commercial loan issued to Ngozika Nwaneri, M.D. by MB&T. That loan was to be secured by deeds of trust against one commercial property and four residential building lots jointly owned by Dr. Nwaneri and his wife, Chinyere Nwaneri. Dr. Nwaneri executed the deeds of trust on behalf of Mrs. Nwaneri under the authority of two separate powers of attorney executed by Mrs. Nwaneri.

11. LITIGATION (CONTINUED)

of fiduciary duty. Dr. Nwaneri is seeking $2.5 million in compensatory damages and $2.5 million in punitive damages. On March 12, 2013, mediation proceedings with the borrower failed and a pre-trial hearing is scheduled for the end of May 2013. A trial date has not been scheduled in the case. We believe that Dr. and Mrs. Nwaneri’s claims are entirely without merit.

On September 27, 2012, Rosalie Jones, both individually and on behalf of a putative class of WSB Holdings, Inc.’s (WSB Holdings) stockholders filed a complaint in the Circuit Court for Prince George’s County, Maryland against WSB Holdings and its directors as well as Old Line Bancshares. The complaint seeks to enjoin the proposed merger and alleges, among other things, that the members of WSB Holdings’ board of directors breached their fiduciary duties by agreeing to sell WSB Holdings for inadequate and unfair consideration and pursuant to an unfair process. The complaint also alleges that WSB Holdings directors agreed to provisions in the merger agreement that constitute “onerous and preclusive deal protection devices,” and that certain officers and directors of WSB Holdings will receive personal benefits from the merger not shared in by other WSB Holdings stockholders. The complaint further alleges that WSB Holdings and Old Line Bancshares aided and abetted such alleged breaches.

On February 5, 2013, the defendants entered into a memorandum of understanding with the plaintiff regarding settlement of all claims asserted on behalf of the alleged class of WSB Holdings stockholders. In connection with the settlement contemplated by the memorandum of understanding, the litigation and all claims asserted in such litigation will be dismissed subject to court approval. The proposed settlement terms require Bancshares and WSB Holdings to make certain additional disclosures related to the merger, which disclosures are included in the joint proxy statement/prospectus of Old Line Bancshares and WSB Holdings dated February 15, 2013, and sent to their respective stockholders. The parties also agreed that plaintiffs may seek attorneys’ fees and costs in an as yet undetermined amount, with the defendants to pay such fees and costs if and to the extent they are approved by the court. The memorandum of understanding further contemplates that the parties will enter into a stipulation of settlement, which will be subject to customary conditions, including confirmatory discovery and court approval following notice to WSB Holdings’ stockholders. If the parties enter into a stipulation of settlement, a hearing will be scheduled at which the court will consider the fairness, reasonableness and adequacy of the settlement. There can be no assurance that the parties will ultimately enter into a stipulation of settlement, that the court will approve any proposed settlement, or that any eventual settlement will be under the same terms as those contemplated by the memorandum of understanding.

12. WSB ACQUISITION

On September 10, 2012, Old Line Bancshares and WSB Holdings, the parent company of The Washington Savings Bank, announced the execution of a definitive merger agreement (“the Merger Agreement”) that provides for the acquisition of WSB Holdings by Old Line Bancshares for approximately $48.7 million, or approximately $6.09 per share, in cash and stock, subject to adjustment (the “total consideration”).

Pursuant to the terms of the Merger Agreement, WSB Holdings will be merged with and into Old Line Bancshares with Old Line Bancshares surviving the merger. Immediately after the merger, The Washington Savings Bank will merge with and into the Bank, with the Bank being the surviving bank.

The acquisition will increase Old Line Bancshares’ total assets by more than $356 million for total assets immediately after closing of approximately $1.2 billion. We plan to complete the merger on May 10, 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.

Under the terms of the Merger Agreement, stockholders of WSB Holdings will receive at their election cash or shares of Old Line Bancshares in a dollar amount generally equal to the total consideration divided by the number of outstanding shares of common stock of WSB Holdings, provided that the aggregate cash consideration to be paid to stockholders of WSB Holdings will not exceed $17 million unless increased by Old Line Bancshares in its sole discretion, and subject to further adjustments as described in the Merger Agreement. For the three months ended March 31, 2013, we incurred $211,318 in expenses associated with this merger.

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 $634,000 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 18 full service branches serving five counties.

Summary of Recent Performance and Other Activities

In an economic and regulatory climate that continues to present challenges for our industry, we are pleased to report significant strategic accomplishments and continued profitability during the first quarter of 2013. Net income available to common stockholders was $1.3 million or $0.19 per basic and diluted common share for the three month period ended March 31, 2013. This was $469,546 or 26.74% lower than net income available to common stockholders of $1.8 million or $0.26 per basic and diluted common share for the same period in 2012.

The following highlights certain financial data and events that have occurred during the first quarter of 2013:

·	We received all required regulatory approvals and subsequent to quarter end received all required stockholder approvals for the WSB Holdings, Inc. merger, that we announced on September 10, 2012, and we expect to complete the merger on May 10, 2013.

·	On March 29, 2013, we closed our Old Line Centre branch and transferred all deposits from this branch to one of our other two Waldorf branch locations.

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

Ø	Net loans grew approximately $16.7 million or 2.8% during the three months ended March 31, 2013.

Ø	Total deposits grew by $13.0 million, or 1.8%, since December 31, 2012.

Ø	Average non-interest bearing deposits grew $23.2 million or 14.07% for the three months ended March 31, 2013 relative to the same period in 2012.

Ø	Average total loans grew approximately $56.1 million or 10.21% for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.

·	Our asset quality remained strong:

Ø	At March 31, 2013, we had three legacy loans (loans originated by Old Line Bank) on non-accrual status in the amount of $1.4 million.

Ø	At March 31, 2013 and December 31, 2012, we had 25 acquired loans (loans acquired from MB&T pursuant to the merger) on non-accrual status totaling $4.1 million.

Ø	At first quarter end 2013, we had accruing legacy loans past due between 30 and 89 days in the amount of $2.1 million and no accruing legacy loans 90 or more days past due.

Ø	At March 31, 2013, we had accruing acquired loans totaling $802,000 past due between 30 and 89 days and no accruing acquired loans 90 or more days past due.

·	We ended the first quarter of 2013 with a book value of $10.90 per common share and a tangible book value of $10.30 per common share.

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

·	We decreased the provision for loan losses by $175,000 during the three month period as compared to the three months ended March 31, 2012.

·	We recognized a loss, net of taxes, on our investment in Pointer Ridge of approximately $35,000 for the three month period ended March 31, 2013.

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 on May 10, 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.

On March 29, 2013, we closed our branch located at 12080 Old Line Centre, Waldorf, Maryland. In conjunction with this closure, we disposed of all of the fixed assets that we did not transfer to another location and accelerated the remaining lease payments due under the lease agreement for this location. We transferred the deposits of this branch to one of our other two Waldorf locations. The closure of this facility eliminates approximately $250,000 in annual non-interest expense.

In January of 2013, we hired Mark Semanie as an Executive Vice President. We anticipate that Mr. Semanie will enhance our core operational capabilities.

During the second quarter of 2013, we plan to open a loan production office located at 12501 Prosperity Drive, Suite 215, Silver Spring, in Montgomery County, Maryland. We executed a lease for this location during the first quarter of 2013. We have hired a Senior Vice President with over 30 years of banking experience to lead this office. This office will allow us to expand our services to the Montgomery County market. We anticipate that the individuals in this office will generate sufficient interest and non-interest income during 2013 and beyond to more than offset the cost associated with this office.

During the first quarter of 2013, we sold two properties that we obtained through foreclosure. With the sale of these properties, we recorded a $200,454 loss on sales of other real estate owned. We expect that the sale of these properties will reduce future legal and maintenance costs.

In June 2012, we established Old Line Financial Services as a division of Old Line Bank and hired an individual with over 25 years of experience to manage this division. Old Line Financial Services allows us to expand the services we provide our customers to include retirement planning and products. Additionally, this division offers investment services including investment management, estate and succession planning and allows our customers to directly purchase individual stocks, bonds and mutual funds. Through this division customers may also purchase life insurance, long term care insurance and key man/woman insurance. We expect that the fees this division generates in 2013 and beyond will more than offset the operating expenses of the division.

In accordance with accounting for business combinations, during the second quarter of 2011, we recorded the acquired assets and liabilities of MB&T 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 $240,476 for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. 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 MB&T 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 ended March 31, 2013 compared to $194,675 for the three months ended March 31, 2012.

The following summarizes the highlights of our financial performance for the three month period ended March 31, 2013 compared to same period in 2012 (figures in the table may not match those discussed in the balance of this section due to rounding).

Three Months ended March 31,

(Dollars in thousands)



	2013			2012			$ Change			% Change

Net income available to common stockholders	$	1,286		$	1,756		$	(470	)		(26.77	) %
Interest revenue		8,817			9,102			(285	)		(3.13	)
Interest expense		970			1,340			(370	)		(27.61	)
Net interest income after provision for loan losses		7,647			7,387			260			3.52
Non-interest revenue		1,027			879			148			16.84
Non-interest expense		6,879			5,686			1,193			20.98
Average total loans		605,702			549,594			56,108			10.21
Average interest earning assets		772,187			714,209			57,978			8.12
Average total interest bearing deposits		552,650			521,624			31,026			5.95
Average non-interest bearing deposits		187,698			164,540			23,158			14.07
Net interest margin (1)		4.36	%		4.51	%
Return on average equity		7.26	%		10.89	%
Basic earnings per common share	$	0.19		$	0.26		$	(0.07	)		(26.92	)
Diluted earnings per common share		0.19			0.26			(0.07	)		(26.92	)

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

Strategic Plan

We have based our strategic plan on the premise of enhancing stockholder value and growth through branching and operating profits. Our short term goals include collecting payments on non-accrual and past due loans, profitably disposing of 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.

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 Maryland Bankcorp.

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 dysfunctional political environment, high unemployment rate and soaring national debt 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 acquisition and the pending WSB acquisition.

Once we have completed the WSB acquisition, 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 existing 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 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 March 31, 2013 compared to three months ended March 31, 2012

Net interest income after provision for loan losses for the three months ended March 31, 2013 increased $260,038 or 3.52% to $7.6 million from $7.4 million for the same period in 2012. As discussed below and outlined in detail in the Rate/Volume Analysis, these changes were the result of a decline in interest paid on interest bearing liabilities as a result of the lower interest rate environment. The $175,000 decline in the provision for loan losses also positively impacted net interest income after provision for loan losses. These improvements were partially offset by a $291,058 decline in the accretion of the fair value adjustments and a $285,210 decrease in interest revenue primarily related to a decrease in the yield on interest earning assets as a result of the low interest rate environment, substantially offset by a 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. Although we continued to receive faster than expected repayment of the impaired loans that we acquired from MB&T, the rate of repayment was significantly slower than it was during the first quarter of 2012.

A competitive rate environment and a low prime rate cause low market yields that resulted in the decrease in interest income and continue to negatively impact net interest income. We continue to adjust the mix and volume of interest earning assets and liabilities on the balance sheet to maintain a relatively stable net interest margin.

As noted above, we offset most of the effect on interest income and net interest income caused by the low rate environment by growing total average interest earning assets by $58.0 million or 8.12% to $772.2 million for the three months ended March 31, 2013 from $714.2 million for the three months ended March 31, 2012, as well as by changes in the mix of our interest-earning assets.

As noted above, the decrease in interest paid on interest bearing liabilities offset the impact on net interest income of the decrease in the yield on interest earning assets during the three months ended March 31, 2013. The decrease in interest paid on interest earning liabilities was due to the average rate paid on interest bearing liabilities decreasing to 0.66% during the three months ended March 31, 2013 compared to 0.95% during the three months ended March 31, 2012. The growth in net interest income that derived from the decrease in the average rate paid on interest bearing liabilities was partially offset by growth in average interest bearing liabilities. Average interest bearing deposits, which increased to $552.6 million for the three months ended March 31, 2013 from $521.6 million for the three months ended March 31, 2012, 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.

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 and commercial loan officers, our average non-interest bearing deposits increased $23.2 million to $187.7 million during the three months ended March 31, 2013, compared to the three months ended March 31, 2012.

Our net interest margin was 4.36% for the three months ended March 31, 2013 as compared to 4.51% for the three months ended March 31, 2012. The yield on average interest earning assets decreased thirty nine basis points during the period from 5.26% for the quarter ended March 31, 2012 to 4.87% for the quarter ended March 31, 2013. Fifteen basis points of this decrease was primarily because we had a lower dollar value of impaired loans that we acquired from MB&T that were repaid during the 2013 period relative to the same quarter last year which caused a lower accretion of fair value adjustments. This coupled with re-pricing in the loan portfolio and slightly lower yields on new loans, caused the average loan yield to decline. The accretion of the fair value adjustments associated with the interest bearing deposit portfolio caused an additional two basis point decline in the interest margin during the first quarter of 2013 compared to the first quarter of 2012 as outlined below.

During the three months ended March 31, 2013 and 2012, 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 2013 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 March 31,
	2013						2012
	Fair Value Accretion Dollars			% Impact on Net Interest Margin			Fair Value Accretion Dollars		% Impact on Net Interest Margin
Commercial loans	$	209,144			0.11	%	$	41,752		0.02	%
Mortgage loans(1)		(4,500	)		(0.00	)		423,275		0.24
Consumer loans		2,371			0.00			1,694		0.00
Interest bearing deposits		33,461			0.02			64,813		0.04
Total Fair Value Accretion	$	240,476			0.13	%	$	531,534		0.30	%

(1) In 2013, we reclassified mortgage loans totaling $873,918 to commercial loans, the impact of this reclassification was immaterial to prior period net interest income or financial condition. Therefore, we did not adjust prior period information.

The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the three months ended March 31, 2013 and 2012, 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 March 31,	2013							2012
	Average							Average
	balance		Interest		Yield			balance		Interest		Yield
Assets:
Federal funds sold(1)	$	1,709,594		603		0.14	%	$	3,642,521	$	1,071		0.12	%
Interest bearing deposits		161,326		99		0.25			1,597,590		996		0.25
Investment securities(1)(2)
U.S. treasury		1,374,133		1,855		0.55			1,248,050		2,535		0.82
U.S. government agency		29,227,991		87,181		1.21			26,476,165		107,281		1.63
Mortgage backed securities		70,720,047		388,256		2.23			94,522,598		666,016		2.83
Municipal securities		63,834,888		751,570		4.77			37,007,270		500,435		5.44
Other		3,515,366		43,302		5.00			3,945,534		45,587		4.65
Total investment securities		168,672,425		1,272,164		3.06			163,199,617		1,321,854		3.26
Loans: (1) (3)
Commercial		100,592,871		1,317,401		5.31			104,376,133		1,317,340		5.08
Mortgage		493,997,648		6,514,081		5.35			431,676,205		6,510,549		6.07
Consumer		11,111,472		164,490		6.00			13,542,054		191,135		5.68
Total loans		605,701,991		7,995,972		5.35			549,594,392		8,019,024		5.87
Allowance for loan losses		4,058,816		-					3,825,189		-
Total loans, net of allowance		601,643,175		7,995,972		5.39			545,769,203		8,019,024		5.94
Total interest earning assets(1)		772,186,520		9,268,838		4.87			714,208,931		9,342,945		5.26
Non-interest bearing cash		25,465,996							27,694,416
Premises and equipment		25,083,069							23,607,367
Other assets		37,123,329							38,395,297
Total assets	$	859,858,914						$	803,906,011
Liabilities and Stockholders' Equity:
Interest bearing deposits
Savings	$	65,341,432		27,631		0.17		$	61,215,826		50,723		0.33
Money market and NOW		176,313,295		111,159		0.26			131,354,039		139,515		0.43
Other time deposits		310,994,955		718,349		0.94			329,054,012		937,260		1.15
Total interest bearing deposits		552,649,682		857,139		0.63			521,623,877		1,127,498		0.87
Borrowed funds		40,335,859		112,487		1.13			45,823,568		212,376		1.86
Total interest bearing liabilities		592,985,541		969,626		0.66			567,447,445		1,339,874		0.95
Non-interest bearing deposits		187,697,564							164,540,014
		780,683,105							731,987,459
Other liabilities		6,909,547							6,631,135
Non-controlling interest		387,467							443,876
Stockholders' equity		71,878,795							64,843,541
Total liabilities and stockholders' equity	$	859,858,914						$	803,906,011
Net interest spread(1)						4.21							4.31
Net interest income and Net interest margin(1)			$	8,299,212		4.36	%			$	8,003,071		4.51	%

(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 March 31, 2013 and 2012 were $5,713,683 and $5,074,864, respectively. There was no non-accrual interest included in interest income.

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 March 31,
	2013 compared to 2012
	Variance due to:

	Total			Rate			Volume

Interest earning assets:
Federal funds sold(1)	$	(468	)	$	406		$	(874	)
Interest bearing deposits		(897	)		(19	)		(878	)
Investment Securities(1)
U.S. treasury		(680	)		(1,103	)		423
U.S. government agency		(20,100	)		(38,315	)		18,215
Mortgage backed securities		(277,760	)		(214,879	)		(62,881	)
Municipal securities		251,135			(187,045	)		438,180
Other		(2,285	)		5,611			(7,896	)
Loans:(1)
Commercial		61			79,977			(79,916	)
Mortgage		3,532			(1,419,837	)		1,423,369
Consumer		(26,645	)		23,802			(50,447	)
Total interest revenue (1)		(74,107	)		(1,751,402	)		1,677,295

Interest bearing liabilities
Savings		(23,092	)		(28,864	)		5,772
Money market and NOW		(28,356	)		(101,406	)		73,050
Other time deposits		(218,911	)		(203,608	)		(15,303	)
Borrowed funds		(99,889	)		(92,885	)		(7,004	)
Total interest expense		(370,248	)		(426,763	)		56,515

Net interest income(1)	$	296,141		$	(1,324,639	)	$	1,620,780

(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.”

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 $200,000 for the three months ended March 31, 2013, as compared to $375,000 for the three months ended March 31, 2012, a decrease of $175,000 or 46.67%. After completing the analysis outlined below and as a result of continued improvement in the quality of the loan portfolio, we decreased the provision for loan losses. 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 0.94% of total assets and total past due accruing loans remained manageable at $2.9 million.

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. 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.

During the first quarter of 2013, we charged $102,596 to the allowance for loan losses for one legacy loan to one borrower. The remaining charge offs during the period related primarily to several acquired consumer loans and two acquired residential mortgage loans. The majority of the recoveries recorded to the allowance for loan losses were 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 0.66% of gross loans at March 31, 2013 and at December 31, 2012. 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
March 31, 2013
	Acquired			Legacy			Total

Balance, beginning of period	$	316,624		$	3,648,723		$	3,965,347
Provision for loan losses		98,174			101,826			200,000

Chargeoffs:
Commercial		-			(102,596	)		(102,596	)
Mortgage		(67,851	)		-			(67,851	)
Consumer		(12,990	)		(16	)		(13,006	)
Total chargeoffs		(80,841	)		(102,612	)		(183,453	)
Recoveries:
Commercial		8,177			8,819			16,996
Mortgage		27,133			4,250			31,383
Consumer		22,357			317			22,674
Total recoveries		57,667			13,386			71,053
Net (chargeoffs) recoveries		(23,174	)		(89,226	)		(112,400	)
Balance, end of period	$	391,624		$	3,661,323		$	4,052,947

Ratio of allowance for loan losses to:
Total gross loans								0.66	%
Non-accrual loans								74.33	%
Ratio of net-chargeoffs during period to
average total loans during period								0.02	%

Allowance for Loan Losses


March 31, 2012
	Acquired			Legacy			Total

Balance, beginning of period	$	-		$	3,741,271		$	3,741,271
Provision for loan losses		-			375,000			375,000

Chargeoffs:
Commercial		(47,635	)		(11,044	)		(58,679	)
Mortgage		-			(277,975	)		(277,975	)
Consumer		(32,870	)		(15,482	)		(48,352	)
Total chargeoffs		(80,505	)		(304,501	)		(385,006	)
Recoveries:
Commercial		24,102			-			24,102
Mortgage		5,247			-			5,247
Consumer		26,685			-			26,685
Total recoveries		56,034			-			56,034
Net (chargeoffs) recoveries		(24,471	)		(304,501	)		(328,972	)
Balance, end of period	$	(24,471	)	$	3,811,770		$	3,787,299

Ratio of allowance for loan losses to:
Total gross loans								0.68	%
Non-accrual loans								56.98	%
Ratio of net-chargeoffs during period to
average total loans during period								0.06	%

Allowance for Loan Losses


December 31, 2012
	Acquired			Legacy			Total

Balance, beginning of period	$	47,635		$	3,693,636		$	3,741,271
Provision for loan losses		834,183			690,817			1,525,000

Chargeoffs:
Commercial		(296,890	)		(19,863	)		(316,753	)
Mortgage		(381,664	)		(588,671	)		(970,335	)
Consumer		(89,282	)		(146,710	)		(235,992	)
Total chargeoffs		(767,836	)		(755,244	)		(1,523,080	)
Recoveries:
Commercial		24,165			8,471			32,636
Mortgage		71,217			11,043			82,260
Consumer		107,260			-			107,260
Total recoveries		202,642			19,514			222,156
Net (chargeoffs) recoveries		(565,194	)		(735,730	)		(1,300,924	)
Balance, end of period	$	316,624		$	3,648,723		$	3,965,347

Ratio of allowance for loan losses to:
Total gross loans								0.66	%
Non-accrual loans								67.10	%
Ratio of net-chargeoffs during period to
average total loans during period								0.23	%

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 March 31, 2013 and December 31, 2012, there was an allowance of $391,624 and $316,624, 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


	March 31,										December 31,
	2013					2012					2012
	Amount		% of Loans in Each Category			Amount		% of Loans in Each Category			Amount		% of Loans in Each Category


Other consumer	$	140,195		0.65	%	$	136,204		0.82	%	$	133,881		0.67	%
Boat		240,959		1.11			308,656		1.57			248,928		1.17
Mortgage		2,887,769		81.43			2,606,363		79.94			2,826,584		81.71
Commercial		784,024		16.81			736,076		17.67			755,954		16.45

Total	$	4,052,947		100.00	%	$	3,787,299		100.00	%	$	3,965,347		100.00	%

Non-interest Revenue

Three months ended March 31, 2013 compared to three months ended March 31, 2012

Non-interest revenue totaled $1,027,066 for the three months ended March 31, 2013, an increase of $148,253 or 16.87% from the 2012 amount of $878,813. Non-interest revenue for the three months ended March 31, 2013 and 2012 included fee income from service charges on deposit accounts, gain on sales or calls of investment securities, earnings on bank owned life insurance, losses on sales of other real estate owned and other fees and commissions including revenues with respect to Pointer Ridge. The three month period ended March 31, 2013 also included a loss on the disposal of assets. The primary cause of the increase in non-interest revenue was increases in gains on the sale of securities, rent and other revenues at Pointer Ridge and other fees and commissions. The gains on sales or calls of investment securities increased during the period as a higher dollar amount of securities were sold to provide liquidity and to reallocate the securities portfolio to minimize future repayment risk, which resulted in a higher recognized gain. Pointer Ridge rent and other revenue increased as a result of a decline in the vacancy in the building owned by Pointer Ridge. Other fees and commissions increased primarily because we issued a higher dollar value of letters of credit which increased letter of credit fees. These increases were partially offset by declines in service charges on deposit accounts and earnings on bank owned life insurance, and higher losses on sales of other real estate owned and disposal of assets. Service charges on deposit accounts declined because customers utilized fewer services. Earning on bank owned life insurance declined during the period as the rate of return is lower due to a reduction in interest rates. Loss on sales of other real estate owned increased as we sold two legacy properties during the 2013 period which resulted in a net loss of $224,450. We incurred an $85,000 loss with the disposal of assets as the result of closing of the Old Line Centre branch.

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


	March 31,
	2013			2012			$ Change			% Change
Service charges on deposit accounts	$	300,741		$	319,327		$	(18,586	)		(5.82	) %
Gain on sales or calls of investment securities		631,429			277,170			354,259			127.81
Earnings on bank owned life insurance		133,228			136,705			(3,477	)		(2.54	)
Gain/(loss) on sales of other real estate owned		(200,454	)		(31,988	)		(168,466	)		526.65
Gain/(loss) on disposal of assets		(85,561	)		-			(85,561	)		-
Pointer Ridge rent and other revenue		68,328			47,110			21,218			45.04
Other fees and commissions		179,355			130,489			48,866			37.45
Total non-interest revenue	$	1,027,066		$	878,813		$	148,253			16.87	%

Non-interest Expense

Three months ended March 31, 2013 compared to three months ended March 31, 2012

Non-interest expense increased $1.2 million or 20.99% for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The following chart outlines the changes in non-interest expenses for the period.


	March 31,
	2013		2012		$ Change			% Change
Salaries and benefits	$	3,232,677	$	2,808,994	$	423,683			15.08	%
Occupancy and equipment		1,068,867		907,871		160,996			17.73
Data processing		239,057		224,735		14,322			6.37
FDIC insurance and State of Maryland assessments		155,243		129,724		25,519			19.67
Merger and integration		240,485		29,167		211,318			724.51
Core deposit premium		177,582		194,675		(17,093	)		(8.78	)
Pointer Ridge other operating		113,397		110,455		2,942			2.66
Other operating		1,652,133		1,280,552		371,581			29.02
Total non-interest expenses	$	6,879,441	$	5,686,173	$	1,193,268			20.99	%

The growth in non-interest expenses, as compared to the first quarter of 2012 was mainly attributable to increases in salaries and benefits, merger and integration expenses, occupancy and equipment expenses and other operating expenses. Salaries and benefits increased by $423,683 or 15.08%, when compared to the first quarter of 2012 primarily as a result of the addition of the Montgomery County lending team and the Old Line Financial Services group during the second half of 2012. We anticipate these teams will generate increased interest and non-interest income that will more than offset the increased cost. During the first quarter of 2013, we also added an Executive Vice President who we expect will enhance the company’s core operational capabilities. The cost of health insurance benefits also increased compared to the first quarter of 2012 as a result of an increase in insurance rates. The work associated with the acquisition of WSB Holdings, Inc. caused merger and integration expenses to increase $211,318 or 724.5% compared to the same period in 2012. Occupancy and equipment expenses increased $160,996 or 17.7% compared to the same period in 2012 primarily due to the acceleration of the remaining lease expense for the Old Line Centre branch which we closed on March 31, 2013. Other operating expenses increased $371,581 primarily as a result of an approximately $265,000 increase in legal and other expenses associated with disposing of and maintaining foreclosed properties, a $45,000 increase in director compensation and recognition of the $51,000 stock option expense in the quarter for the grant of options that vested immediately. These increases were partially offset by the decline in core deposit premium, because we amortize this premium on an accelerated basis which causes a reduction in the expense over the amortization period. FDIC insurance and State of Maryland assessments increased minimally during the period as a result of the growth in assets.

Income Taxes

Three months ended March 31, 2013 compared to three months ended March 31, 2012

Income tax expense was $521,722 (29.06% of pre-tax income) for the three months ended March 31, 2013 as compared to $844,005 (32.71% of pre-tax income) for the same period in 2012. The dollar amount of the taxes was lower because net income was lower than in the three months ended March 31, 2012. The tax rate was lower for the three month period ended March 31, 2013, primarily because interest on tax exempt securities was higher than during the three months ended March 31, 2012.

Net Income Available to Common Stockholders

Three months ended March 31, 2013 compared to three months ended March 31, 2012

Net income available to common stockholders was $1.3 million or $0.19 per basic and diluted common share for the three month period ending March 31, 2013 compared to net income available to common stockholders of $1.8 million or $0.26 per basic and diluted common share for the same period in 2012. The decrease in net income available to common stockholders for the 2013 period was primarily the result of a $1,193,268 increase in non-interest expense. This increase was partially offset by an $85,038 increase in net interest income, a $175,000 decrease in the provision for loan losses, an increase of $148,253 in non-interest revenue, and a $322,283 decrease 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 March 31, 2013 amounted to $154.0 million, a decrease of $17.5 million, or 10.18%, from the December 31, 2012 amount of $171.5 million. As outlined above, at March 31, 2013, all securities are classified as available for sale.

The fair value of available for sale securities included net unrealized gains of $1.9 million at March 31, 2013 (reflected as unrealized gains of $1.2 million in stockholders’ equity after deferred taxes) as compared to net unrealized gains of $4.1 million ($2.5 million net of taxes) at December 31, 2012. The decrease in fair value was a result of the sale of $13.9 million in securities available for sale as well as 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 four 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 expect 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.



Acquired Loans as of April 1, 2011

April 1, 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	$	1,847,413		$	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 Non-Accretable Difference
Contractually required payments receivable	$	36,270,823
Less: Cash flows expected to be expected		(17,529,940	)
Non-accretable difference	$	18,740,883

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



Acquired Loans as of December 31, 2012

December 31, 2012	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	$	1,371,081		$	205,662	$	1,165,419	$	1,165,419
Business loans risk rated 5 at acquisition		50,153			42,882		7,271		7,271
Business loans risk rated 6 at acquisition		87,422			52,030		35,392		35,392
Total business loans individually evaluated		1,508,656			300,574		1,208,082		1,208,082
Real estate loans risk rated 4 at acquisition		3,526,864			482,256		3,044,608		3,044,608
Real estate loans risk rated 5 at acquisition		3,474,335			1,706,877		1,767,458		1,767,458
Real estate loans risk rated 6 at acquisition		16,420,887			9,077,153		7,343,734		7,343,734
Total real estate loans individually evaluated		23,422,086			11,266,286		12,155,800		12,155,800
Total impaired loans individually evaluated	$	24,930,742		$	11,566,860	$	13,363,882	$	13,363,882

Accretable Yield
Beginning balance December 31, 2011	$	-
Accreted to income		3,343,955
Reclassification from non-accretable (1)		(3,343,955	)
Ending balance December 31, 2012	$	-

Non-Accretable Yield Discount
Beginning balance December 31, 2011	$	15,589,150
Reclassification to accretable (1)		(3,343,955	)
Charge off		(76,648	)
Transferred to OREO		(601,687	)
Ending balance December 31, 2012	$	11,566,860

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



Acquired Loans as of March 31, 2013

March 31, 2013	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	$	290,246		$	42,811	$	247,435	$	247,435
Business loans risk rated 5 at acquisition		33,287			27,551		5,736		5,736
Business loans risk rated 6 at acquisition		82,516			48,877		33,639		33,639
Total business loans individually evaluated		406,049			119,239		286,810		286,810
Real estate loans risk rated 4 at acquisition		4,526,278			633,955		3,892,323		3,892,323
Real estate loans risk rated 5 at acquisition		3,459,644			1,695,567		1,764,077		1,764,077
Real estate loans risk rated 6 at acquisition		16,144,877			8,913,901		7,230,976		7,230,976
Total real estate loans individually evaluated		24,130,799			11,243,423		12,887,376		12,887,376
Total impaired loans individually evaluated	$	24,536,848		$	11,362,662	$	13,174,186	$	13,174,186

Accretable Yield
Beginning balance December 31, 2012	$	-
Accreted to income		240,238
Reclassification from non-accretable (1)		(240,238	)
Ending balance March 31, 2013	$	-

Non-Accretable Yield Discount
Beginning balance December 31, 2012	$	11,566,860
Reclassification to accretable (1)		(240,238	)
Charge off		-
Transferred to OREO		-
Ending balance March 31, 2013	$	11,326,622

(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 $16.7 million or 2.81% to $611.9 million at March 31, 2013 from $595.1 million at December 31, 2012. Commercial business loans increased by $5.0 million (5.06%), commercial real estate loans decreased by $3.4 million (0.99%), residential real estate loans increased by $5.7 million (6.29%), real estate construction loans (primarily commercial real estate construction) increased by $9.8 million (18.50%) and consumer loans decreased by $195,080 (1.77%) from their respective balances at December 31, 2012. During the three month period ended March 31, 2013, loan growth was directly attributable to the business development efforts of our officers and directors as well as our increased name recognition 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 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:



	March 31, 2013											December 31, 2012
	Legacy			Acquired			Total					Legacy			Acquired			Total

Real estate
Commercial	$	277,296,212		$	64,157,685		$	341,453,897		55.53	%	$	279,489,013		$	65,396,469		$	344,885,482		57.67	%
Construction		57,720,969			4,819,812			62,540,781		10.17			48,603,640			4,174,751			52,778,391		8.83
Residential		47,123,408			49,570,571			96,693,979		15.73			38,901,489			52,069,937			90,971,426		15.21
Commercial		92,926,974			10,422,695			103,349,669		16.81			88,306,302			10,070,234			98,376,536		16.45
Consumer		9,872,706			936,671			10,809,377		1.76			9,944,466			1,059,991			11,004,457		1.84
Gross loans		484,940,269			129,907,434			614,847,703		100.00	%		465,244,910			132,771,382			598,016,292		100.00	%
Allowance for loan losses		(3,661,323	)		(391,624	)		(4,052,947	)				(3,648,723	)		(316,624	)		(3,965,347	)
Deferred loan costs, net		1,055,838			-			1,055,838					1,093,983			-			1,093,983
Net loans	$	482,334,784		$	129,515,810		$	611,850,594				$	462,690,170		$	132,454,758		$	595,144,928

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)


	March 31, 2013				December 31, 2012
	# of Borrowers		(000's)		# of Borrowers		(000's)
Hotels		1	$	4,850		1	$	4,806
		1	$	4,850		1	$	4,806

Management has identified additional potential problem loans totaling $16.2 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 March 31, 2013, we did not have any loans past due 90 or more days, that we have not classified as non-accrual compared to one consumer loan in the amount of $6,410 at December 31, 2012.

At March 31, 2013, we had three non-accrual legacy loans with a total balance of $1.4 million compared to four legacy loans totaling $1.8 million at December 31, 2012. At March 31, 2013, we also had a total of $2.1 million of legacy loans past due 30-89 days compared to $1.8 million of legacy loans past due 30-89 days at December 31, 2012.

At March 31, 2013 and December 31, 2012, we had 25 non-accrual acquired loans totaling $4.1 million. At March 31, 2013, we also had a total of $802,465 acquired loans on accrual status 30-89 days past due and no loans on accrual status past due ninety days.

The table below outlines the transfer of loans from and to non-accrual status for the three 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, 2012		4		$	1,818			25	$	4,092		$	5,910
Payments received		-			(327	)		-		(28	)		(355	)
Charged off		(1	)		(103	)		-		-			(103	)
Transferred to other real estate owned		-			-			-		-			-
Ending balance, March 31, 2013		3		$	1,388			25	$	4,064		$	5,452

Non-Accrual Legacy Loans

As previously mentioned, at March 31, 2013, we had three non-accrual legacy loans with a total recorded book balance of $1.4 million compared to four legacy loans totaling $1.8 million at December 31, 2012. 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 was delinquent with payments and would not provide current financial information. On December 31, 2012, the balance on this loan was $351,276. In March of 2013, we settled on the sale of the property that secured the loan and recorded a $102,595 loss on this sale to the allowance for loan losses.

The next non-accrual legacy loan is a commercial real estate loan with a balance of $874,735 at December 31, 2012 that we transferred to non-accrual status during the first quarter of 2012. The borrower’s business has insufficient cash flow to make payments on this loan. 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 and the borrower has made all past due payments. We have not allocated any of the allowance for loan losses for this loan. The balance on this loan at March 31, 2013 is $821,841 and the non-accrued interest on this loan is $58,789. We also transferred two additional loans to entities related to this borrower to non-accrual status. The first loan with a balance of $138,708 on December 31, 2012 is also secured by commercial real estate and a current appraisal indicates the value of the real estate that is collateral for this loan is sufficient to provide payment in full and the borrower has made all past due payments. We have not allocated any of the allowance for loan losses for this loan. The balance on this loan at March 31, 2013 is $131,299 and the non-accrued interest on this loan is $5,498. We transferred a third unsecured loan that is related to this borrower in the amount of $8,819 to non-accrual status and charged this loan to the allowance for loan losses. The borrower repaid this charge off in full during the first quarter of 2013.

During the third quarter of 2012, we transferred a legacy residential real estate loan in the amount of $469,168 to non-accrual status. The balance on this loan on December 31, 2012 was $453,165. The borrower was 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. The borrower is currently remitting payments on this loan and attempting to bring all past due balances current. We have not allocated any of the allowance for loan losses for this loan. The balance on this loan on March 31, 2013 was $435,162 and the non-accrued interest on this loan is $27,729

Non-Accrual Acquired Loans

At March 31, 2013 and December 31, 2012, we had 25 non-accrual acquired loans totaling $4.1 million. Of these, the borrowers on 16 loans totaling $1.8 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 March 31, 2013, 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, 2012, we had one borrower with one note secured by commercial real estate and the fair value of the loan was $300,000. During the fourth quarter of 2012, we received a deed in lieu of foreclosure on this property and transferred the balance due to other real estate owned. We auctioned the property during the first quarter of 2013. The fair value is equivalent to our assessment of the current value of the real estate less any carrying costs or expenses to sell. We anticipate that we will settle on the sale of this property during the second quarter of 2013.

At March 31, 2013 and December 31, 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, 2012, we had a loan in the amount of $313,373 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 March 31, 2013, was $310,628 and the non-accrued interest was $41,685. We were awarded a confess judgment against the borrower and are working towards foreclosure of the property. We anticipate that we will foreclose on two of the three properties that secure this loan during the second quarter of 2013. The fair value is equivalent to our assessment of the current value of the real estate less any carrying cost or expenses to sell.

At March 31, 2013 and December 31, 2012, we had 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 $71,151.

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 and has filed bankruptcy. We were awarded a confessed judgment on this loan. A residential property is collateral on this loan. We anticipate we will foreclose on this loan during 2013. We have received an appraisal of the property and have allocated $100,000 of the allowance for loan loss to this loan. The non-accrued interest on this loan is $76,572.

In the fourth quarter of 2012, we transferred an additional loan secured by residential real estate in the amount of $324,960 to non-accrual status. We are working towards receiving a deed in lieu of foreclosure on this property and anticipate that we will receive it during the second quarter of 2013. We have allocated $50,000 of the allowance for loan losses to this loan. The non-accrued interest on this loan is $11,566.

There is one additional acquired loan with a fair value of $150,000 at March 31, 2013 and December 31, 2013 secured by a residential property that was previously paying slowly that is now seriously delinquent and we are proceeding with foreclosure. The non-accrued interest on this loan is $40,516.

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 March 31, 2013 and December 31, 2012.



Loans on Non-accrual Status
	March 31, 2013								December 31, 2012
	# of Contracts		Unpaid Principal Balance		Recorded Investment		Interest Not Accrued		# of Contracts		Unpaid Principal Balance		Recorded Investment		Interest Not Accrued
Legacy
Real Estate
Commercial		1	$	821,841	$	821,841	$	58,789		2	$	1,226,011	$	1,226,011	$	103,529
Residential		2		566,460		566,460		33,226		2		591,873		591,873		25,449
Total non-accrual loans		3		1,388,301		1,388,301		92,015		4		1,817,884		1,817,884		128,978

Acquired (1)
Real Estate
Commercial		8		3,731,273		1,393,383		700,084		8		3,808,963		1,401,187		649,266
Construction		4		2,526,247		100,000		635,570		4		2,538,565		100,000		592,476
Residential		10		4,287,907		2,536,979		603,101		10		4,346,364		2,555,374		526,669
Commercial		3		105,148		33,639		47,842		3		123,949		35,392		45,787
Total non-accrual loans		25		10,650,575		4,064,001		1,986,597		25		10,817,841		4,091,953		1,814,198
Total all non-accrual loans		28	$	12,038,876	$	5,452,302	$	2,078,612		29	$	12,635,725	$	5,909,837	$	1,943,176

(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 March 31, 2013 and December 31, 2012.



Troubled Debt Restructurings
	March 31, 2013						December 31, 2012
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	$	499,122		1	$	499,122	$	498,186
Acquired
Real Estate		3		642,574		601,258		3		645,878		604,326
Commercial		1		89,908		89,908		1		90,748		90,748
Total Troubled Debt Restructurings		5	$	1,231,604	$	1,190,288		5	$	1,235,748	$	1,193,260

At December 31, 2012 and March 31, 2013, we had one legacy accruing TDR totaling $499,122 and four acquired TDRs totaling $695,074 and $691,166, respectively. With the exception of the receipt of payments and reversal of a payment on the one legacy loan, there were no changes to TDRs during the three month period ended March 31, 2013.

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 March 31, 2013 and December 31, 2012, $25,000 of the allowance for loan losses was attributed to TDRs.

Other real estate owned

As of March 31, 2013 and December 31, 2012, the fair value of other real estate owned was $2,726,910 and $3,719,449, respectively. 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 during the period.


Three months ended March 31, 2013	Legacy			Acquired			Total
Beginning balance	$	1,651,228		$	2,068,220		$	3,719,448
Transferred in		-			-			-
Investment in improvements		-			-			-
Write down in value		-			(66,600	)		(66,600	)
Sales/deposits on sales		(725,485	)		-			(725,485	)
Net realized gain (loss)		(200,454	)		-			(200,454	)
Total end of period	$	725,289		$	2,001,620		$	2,726,909

Bank owned life insurance

We have invested $17.0 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 three months of 2013, the cash surrender value of the insurance policies increased by $108,040 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 $224,864 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 March 31, 2013, the core deposit intangible was $3.5 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 March 31, 2013, the deposit portfolio had increased to $748.5 million, a $13.0 million or 1.77% increase over the December 31, 2012 level of $735.5 million. Non-interest bearing deposits decreased $800,000 during the period to $188.1 million from $188.9 million. Although we did not experience any loss in customers during the period, several of our larger customers used funds to acquire properties or repay debt at quarter end. Interest-bearing deposits increased $13.7 million to

$560.3 million from $546.6 million. The increase in interest bearing deposits was primarily the result of increased depository relationships with commercial customers. The following table outlines the increase in interest bearing deposits:


	March 31,		December 31,
	2013		2012		$ Change		% Change
	(Dollars in thousands)
Certificates of deposit	$	317,109	$	310,772	$	6,337		2.04	%
Interest bearing checking		175,900		171,478		4,422		2.58
Savings		67,321		64,313		3,008		4.68
Total	$	560,330	$	546,563	$	13,767		2.52	%

We acquire brokered certificates of deposit 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 March 31, 2013, we had $53.3 million in CDARS and $69.2 million in money market accounts through Promontory’s reciprocal deposit program compared to $39.3 million and $63.9 million, respectively, at December 31, 2012. At March 31, 2013, we had received $17.8 million in deposits through the Promontory network that were not reciprocal deposits compared to $17.7 million at December 31, 2012. We had no other brokered certificates of deposit as of March 31, 2013 and December 31, 2012. 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 $5 million unsecured line of credit. In addition, Old Line Bank has available lines of credit, including overnight federal funds and repurchase agreements from its correspondent banks totaling $29.5 million as of March 31, 2013 and December 31, 2012. Old Line Bank has an additional secured line of credit from the Federal Home Loan Bank of Atlanta (FHLB) of $256.5 million at March 31, 2013. 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 $116.2 million of borrowings. 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, 2012, Old Line Bank had $6.3 million outstanding in these short term unsecured promissory notes with an average interest rate of 0.15% and $24.6 million outstanding in secured promissory notes with an average interest rate of 0.10%. We recorded these secured promissory notes with the acquisition of MB&T. At March 31, 2013, Old Line Bank had $5.4 million outstanding in short term unsecured promissory notes with an average interest rate of 0.15% and $26.1 million in secured promissory notes with an average interest rate of 0.10%.

On December 12, 2007, Old Line Bank borrowed $5.0 million from the FHLB. The interest rate on this advance was 3.3575% and interest was 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 had the option to convert the interest rate on this advance to a fixed rate three (3) month LIBOR. We repaid this advance on 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 was 3.119% and was payable on the 19th day of each month. On January 22, 2008 or any interest payment date thereafter, the FHLB had the option to convert the interest rate on this advance from a fixed rate to a one (1) month LIBOR based variable rate. We repaid this advance on December 19, 2012. As of March 31, 2013, Old Line Bank did not have any outstanding borrowing with FHLB.

The following table outlines our borrowings at March 31, 2013 and December 31, 2012.



	Borrowings
	March 31, 2013							December 31, 2012
	Amount		Rate			Maximum Amount Borrowed During Any Month End Period		Amount		Rate			Maximum Amount Borrowed During Any Month End Period
Short term promissory notes	$	5,365,206		0.15	%	$	7,547,004	$	6,332,804		0.15	%	$	9,652,162
Repurchase agreements		26,144,901		0.10	%		26,974,254		24,572,663		0.10	%		28,167,472
Over night advance		-		-			16,500,000		7,000,000		0.35	%		7,000,000
FHLB advance due Dec. 2012		-		-			-		-		-			5,000,000
FHLB advance due Dec. 2012		-		-			-		-		-			5,000,000
Total short term borrowings	$	31,510,107				$	51,021,258	$	37,905,467				$	54,819,634

Senior note, fixed at 6.28%		6,166,788		6.28	%				6,192,350		6.28	%
Total long term borrowings	$	6,166,788						$	6,192,350

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 March 31, 2013 and December 31, 2012, 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 $34.5 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 March 31, 2013, we had $37.7 million in cash and due from banks, $30,291 in interest bearing accounts, and $331,153 in federal funds sold. At December 31, 2012, we had $28.3 million in cash and due from banks, $130,192 in interest bearing accounts and $228,113 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 $74.7 million at March 31, 2013 and $74.9 million at December 31, 2012. We are considered “well capitalized” under the risk-based capital guidelines adopted by the Federal Reserve. Stockholders’ equity decreased during the three month period primarily because the after tax unrealized gain on available for sale securities declined $1.2 million and because of the payment of the $274,153 common stock cash dividend. These items were partially offset by net income available to common stockholders of $1.3 million and the $83,662 adjustment for stock based compensation awards.

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 March 31, 2013 and December 31, 2012, are as follows:


	March 31,		December 31,
	2013		2012
	(Dollars in thousands)

Commitments to extend credit and available credit lines:
Commercial	$	48,252	$	47,251
Real estate-undisbursed development and construction		43,665		31,815
Consumer		14,481		14,623
	$	106,398	$	93,689
Standby letters of credit	$	15,022	$	11,310

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 $43.7 million, or 41.04% of the $106.4 million of outstanding commitments at March 31, 2013, 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 March 31, 2013


	Net Interest Income		Yield			Net Interest Spread
GAAP net interest income	$	7,847,450		4.12	%		3.97	%
Tax equivalent adjustment
Federal funds sold		2		-			-
Investment securities		287,612		0.15			0.15
Loans		164,149		0.09			0.09
Total tax equivalent adjustment		451,763		0.24			0.24
Tax equivalent interest yield	$	8,299,213		4.36	%		4.21	%

Three months ended March 31, 2012


	Net Interest Income		Yield			Net Interest Spread
GAAP net interest income	$	7,762,412		4.37	%		4.18	%
Tax equivalent adjustment
Federal funds sold		-		-			-
Investment securities		174,470		0.10			0.09
Loans		66,189		0.04			0.04
Total tax equivalent adjustment		240,659		0.14			0.13
Tax equivalent interest yield	$	8,003,071		4.51	%		4.31	%

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 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, opening of a new loan production office and expansion into Montgomery County, Maryland, and that the individuals in such office will generate sufficient income to more than offset the costs associated with this office, that the fees generated by Old Line Financial Services division will more than offset the costs of operating that division, impact of recent hires, branch retention and expansion intentions, anticipated changes in non-interest expenses in future periods (including changes as a result of the pending merger with WSB), changes in earnings, continued increases in net interest income, hiring and acquisition possibilities, 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 cash flows on acquired impaired loans, expected loan, 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, the amount of potential problem loans, expected settlement on the sale of property during the second quarter of 2013 that we auctioned during the first quarter of 2013 with respect to one other real estate owned property, our anticipated foreclosure on properties securing a non-accrual loan, that we anticipate receiving full payment on another non-accrual loan secured by commercial real estate and four residential lots, expected foreclosure during 2013 on another non-accrual loan and anticipated receipt of a deed in lieu of foreclosure on a property securing another non-accrual loan, future 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 March 31, 2013. 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 March 31, 2013, 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

Old Line Bank has a collection case pending before the Superior Court for the District of Columbia, which arises from a $1,776,350 commercial loan issued to Ngozika Nwaneri, M.D. by MB&T. That loan was to be secured by deeds of trust against one commercial property and four residential building lots jointly owned by Dr. Nwaneri and his wife, Chinyere Nwaneri. Dr. Nwaneri executed the deeds of trust on behalf of Mrs. Nwaneri under the authority of two separate powers of attorney executed by Mrs. Nwaneri.

This loan has matured and Dr. Nwaneri has defaulted on his repayment obligations. The outstanding balance on this loan is approximately $1.6 million. In an effort to avoid Dr. Nwaneri’s payment obligations and to avoid foreclosure under the deed of trust, on October 22, 2010, Mrs. Nwaneri initiated a case in the Superior Court of the District of Columbia claiming that she did not sign the powers of attorneys and that the deeds of trust are void. The Bank interpleaded Dr. Nwaneri in the case and asserted claims against him for fraud and breach of contract, among other causes of action. In response, Dr. Nwaneri counter-sued the Bank and has asserted claims of fraud and breach of fiduciary duty. Dr. Nwaneri is seeking $2.5 million in compensatory damages and $2.5 million in punitive damages. On March 12, 2013, mediation proceedings with the borrower failed and a pre-trial hearing is scheduled for the end of May 2013. We believe that Dr. and Mrs. Nwaneri’s claims are entirely without merit.

On September 27, 2012, Rosalie Jones, both individually and on behalf of a putative class of WSB’s stockholders

filed a complaint in the Circuit Court for Prince George’s County, Maryland against WSB and its directors as well as Old Line Bancshares. The complaint seeks to enjoin our proposed merger with 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. The complaint also alleges that WSB 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.

On February 5, 2013, the defendants entered into a memorandum of understanding with the plaintiff regarding settlement of all claims asserted on behalf of the alleged class of WSB stockholders. In connection with the settlement contemplated by the memorandum of understanding, the litigation and all claims asserted in such litigation will be dismissed subject to court approval. The proposed settlement terms require Old Line Bancshares and WSB to make certain additional disclosures related to the merger, which disclosures are included in the joint proxy statement/prospectus of Old Line Bancshares and WSB dated February 15, 2013, and sent to their respective stockholders. The parties also agreed that plaintiffs may seek attorneys’ fees and costs in an as yet undetermined amount, with the defendants to pay such fees and costs if and to the extent they are approved by the court. The memorandum of understanding further contemplates that the parties will enter into a stipulation of settlement, which will be subject to customary conditions, including confirmatory discovery and court approval following notice to WSB’s stockholders. If the parties enter into a stipulation of settlement, a hearing will be scheduled at which the court will consider the fairness, reasonableness and adequacy of the settlement. There can be no assurance that the parties will ultimately enter into a stipulation of settlement, that the court will approve any proposed settlement, or that any eventual settlement will be under the same terms as those contemplated by the memorandum of understanding.

We are 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 Annual Report on Form 10-K for the year ended December 31, 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

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: May 10, 2013	By:	/s/ James W. Cornelsen
		James W. Cornelsen, President and Chief Executive Officer
		(Principal Executive Officer)


Date: May 10, 2013	By:	/s/ Christine M. Rush
		Christine M. Rush, Executive Vice President and Chief Financial Officer
		(Principal Accounting and Financial Officer)