UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

OR

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

Commission File Number: 000-50345

Old Line Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Maryland	20-0154352
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

1525 Pointer Ridge Place
Bowie, Maryland	20716
(Address of principal executive offices)	(Zip Code)

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

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

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	OLBK	The Nasdaq Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☐
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Yes ☐ No ☒

As of October 31, 2019, the registrant had 17,005,446 shares of common stock outstanding.

OLD LINE BANCSHARES, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

		Page Number
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018	3
	Consolidated Statements of Income (Unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018	4
	Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018	5
	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018	6
	Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2019 and 2018	7
	Notes to Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	62
Item 4.	Controls and Procedures	63
PART II.
Item 1.	Legal Proceedings	64
Item 1A.	Risk Factors	64
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64
Item 3.	Defaults Upon Senior Securities	64
Item 4.	Mine Safety Disclosures	64
Item 5.	Other Information	64
Item 6.	Exhibits	65
Signatures		66

Part 1. Financial Information

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Balance Sheets

	September 30,		December 31,
	2019		2018
	(Unaudited)
Assets
Cash and due from banks	$	44,987,316	$	41,495,763
Interest bearing accounts		1,625,029		2,051,273
Federal funds sold		388,971		953,582
Total cash and cash equivalents		47,001,316		44,500,618
Investment securities available for sale-at fair value		268,534,675		219,705,762
Loans held for sale, fair value of $23,203,560 and $11,860,147		22,534,097		11,564,993
Loans held for investment (net of allowance for loan losses of $8,001,352 and $7,471,023, respectively)		2,473,922,052		2,409,227,698
Equity securities at cost		10,886,803		11,150,750
Premises and equipment		42,073,240		42,624,787
Accrued interest receivable		7,960,574		7,958,511
Income taxes receivable		123,434		5,014,510
Deferred income taxes		1,858,345		4,660,278
Bank owned life insurance		69,167,140		67,920,021
Annuity Plan		6,226,727		6,268,426
Other real estate owned		1,091,634		882,510
Goodwill		94,668,455		94,668,455
Core deposit intangible		13,400,601		15,362,232
Other assets		37,388,851		8,497,544
Total assets	$	3,096,837,944	$	2,950,007,095
Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing	$	620,136,296	$	559,059,672
Interest bearing		1,793,209,494		1,736,989,227
Total deposits		2,413,345,790		2,296,048,899
Short term borrowings		204,378,672		228,184,856
Long term borrowings		38,569,343		38,371,291
Accrued interest payable		2,452,857		2,844,715
Supplemental executive retirement plan		6,115,372		5,997,819
Other liabilities		34,615,063		7,788,981
Total liabilities		2,699,477,097		2,579,236,561
Stockholders’ equity
Common stock, par value $0.01 per share; 25,000,000 shares authorized; 16,999,146 and 17,031,052 shares issued and outstanding in 2019 and 2018, respectively		169,991		170,311
Additional paid-in capital		292,993,861		293,501,107
Retained earnings		103,100,167		82,628,356
Accumulated other comprehensive income (loss)		1,096,828		(5,529,240	)
Total stockholders’ equity		397,360,847		370,770,534
Total liabilities and stockholders’ equity	$	3,096,837,944	$	2,950,007,095

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

3

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Income

(Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2019		2018			2019		2018
Interest Income
Loans, including fees	$	29,125,029	$	29,056,814		$	87,101,189	$	75,206,303
U.S. Treasury securities		16,156		16,325			48,423		42,953
U.S. government agency securities		527,463		89,953			1,576,012		262,905
Corporate bonds		258,924		200,394			776,942		607,601
Foreign bonds		41,318		21,601			93,964		35,979
Mortgage backed securities		593,737		563,384			1,933,777		1,690,299
Municipal securities		488,275		498,200			1,476,610		1,498,163
Federal funds sold		2,853		3,553			11,642		7,079
Other		293,179		303,100			941,570		895,099
Total interest income		31,346,934		30,753,324			93,960,129		80,246,381
Interest expense
Deposits		6,119,906		4,098,787			17,840,233		9,551,755
Borrowed funds		1,678,093		1,768,532			5,791,436		4,817,613
Total interest expense		7,797,999		5,867,319			23,631,669		14,369,368
Net interest income		23,548,935		24,886,005			70,328,460		65,877,013
Provision for loan losses		456,000		307,870			942,758		1,235,023
Net interest income after provision for loan losses		23,092,935		24,578,135			69,385,702		64,641,990
Non-interest income
Account service charges		709,302		728,550			2,049,185		2,028,013
Point of sale sponsorship program		688,188		711,577			1,925,005		1,385,079
Gain on sales or calls of investment securities		544,259		—			560,186		—
Earnings on bank owned life insurance		528,512		520,785			1,547,445		1,274,777
Gain (loss) on disposal of assets		—		(1,100	)		32,599		13,266
Loss on write down of stock		—		(91,498	)		—		(152,496	)
Rental income		214,315		204,714			644,945		602,208
Income on marketable loans		990,474		411,850			2,329,160		1,342,201
Other fees and commissions		382,447		320,457			989,523		1,295,359
Total non-interest income		4,057,497		2,805,335			10,078,048		7,788,407
Non-interest expense
Salaries and benefits		7,717,352		7,491,736			22,451,706		20,178,521
Occupancy and equipment		2,337,124		2,349,691			7,185,918		6,572,733
Data processing		782,593		659,926			2,270,503		1,971,747
FDIC insurance and State of Maryland assessments		62,535		278,109			571,151		786,506
Merger and integration		—		2,282,705			—		9,404,507
Core deposit premium amortization		654,046		663,685			1,961,631		1,516,734
Loss on sales of other real estate owned		—		26,266			—		80,738
OREO expense (income)		59,272		(99,957	)		126,771		113,032
Directors fees		166,050		172,550			515,550		539,750
Network services		119,144		127,226			349,909		302,038
Telephone		221,293		269,070			702,990		725,976
Other operating		2,715,009		2,441,331			7,678,720		6,539,421
Total non-interest expense		14,834,418		16,662,338			43,814,849		48,731,703
Income before income taxes		12,316,014		10,721,132			35,648,901		23,698,694
Income tax expense		3,131,785		2,456,303			9,048,418		6,642,850
Net income		9,184,229		8,264,829			26,600,483		17,055,844
Basic earnings per common share	$	0.54	$	0.49		$	1.56	$	1.12
Diluted earnings per common share	$	0.54	$	0.48		$	1.55	$	1.10

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

4

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

Three Months Ended September 30,	2019			2018
Net income	$	9,184,229		$	8,264,829
Other comprehensive income (loss):
Unrealized (loss) gain on securities available for sale, net of taxes of $364,356, and ($392,117), respectively		959,733			(1,032,857	)
Reclassification adjustment for realized gain on securities available for sale included in net income, net of taxes of ($149,766) and $0, respectively		(394,493	)		—
Other comprehensive income (loss)		565,240			(1,032,857	)
Comprehensive income	$	9,749,469		$	7,231,972

Nine Months Ended September 30,	2019			2018
Net income	$	26,600,483		$	17,055,844
Other comprehensive income (loss):
Unrealized (loss) gain on securities available for sale, net of taxes of $2,669,706, and ($1,708,971), respectively		7,032,090			(4,501,518	)
Reclassification adjustment for realized gain on securities available for sale included in net income, net of taxes of ($154,163) and $0, respectively		(406,023	)		—
Other comprehensive income (loss)		6,626,067			(4,501,518	)
Comprehensive income		33,226,550			12,554,326

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

5

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

													Accumulated
							Additional						other			Total
	Common stock						paid-in			Retained			comprehensive			Stockholders’
	Shares			Par value			capital			earnings			income (loss)			Equity
Balance December 31, 2018		17,031,052		$	170,311		$	293,501,107		$	82,628,356		$	(5,529,240	)	$	370,770,534
Net income attributable to Old Line Bancshares, Inc.		—			—			—			8,504,174			—			8,504,174
Other comprehensive income		—			—			—			—			2,807,204			2,807,204
Stock based compensation awards		—			—			291,715			—			—			291,715
Stock options exercised		2,400			24			48,907			—			—			48,931
Restricted stock issued		28,191			282			(282	)		—			—			—
Stock buyback		(10,074	)		(101	)		(251,090	)		—			—			(251,191	)
Common stock cash dividends $0.12 per share		—			—			—			(2,047,969	)		—			(2,047,969	)
Balance March 31, 2019		17,051,569		$	170,516		$	293,590,357		$	89,084,561		$	(2,722,036	)	$	380,123,398
Net income attributable to Old Line Bancshares, Inc.		—			—			—			8,912,080			—			8,912,080
Other comprehensive income		—			—			—			—			3,253,624			3,253,624
Stock based compensation awards		—			—			368,206			—			—			368,206
Stock buyback		(52,423	)		(525	)		(1,304,919	)		—			—			(1,305,444	)
Common stock cash dividends $0.12 per share		—			—			—			(2,040,355	)		—			(2,040,355	)
Balance June 30, 2019		16,999,146		$	169,991		$	292,653,644		$	95,956,286		$	531,588		$	389,311,509
Net income attributable to Old Line Bancshares, Inc.		—			—			—			9,184,229			—			9,184,229
Other comprehensive income		—			—			—			—			565,240			565,240
Stock based compensation awards		—			—			340,217			—			—			340,217
Common stock cash dividends $0.12 per share		—			—			—			(2,040,348	)		—			(2,040,348	)
Balance September 30, 2019		16,999,146		$	169,991		$	292,993,861		$	103,100,167		$	1,096,828		$	397,360,847
Balance December 31, 2017		12,508,332		$	125,083		$	148,882,865		$	61,054,487		$	(2,335,249	)	$	207,727,186
Net income attributable to Old Line Bancshares, Inc.		—			—			—			6,065,182			—			6,065,182
Other comprehensive loss		—			—			—			—			(2,303,310	)		(2,303,310	)
Tax Cut and Jobs Act		—			—			—			459,973			(459,973	)		—
Stock based compensation awards		—			—			288,559			—			—			288,559
Stock options exercised		38,921			389			520,507			—			—			520,896
Restricted stock issued		19,443			195			(195	)		—			—			—
Common stock cash dividends $0.08 per share		—			—			—			(1,005,723	)		—			(1,005,723	)
Balance March 31, 2018		12,566,696		$	125,667		$	149,691,736		$	66,573,919		$	(5,098,532	)	$	211,292,790
Net income attributable to Old Line Bancshares, Inc.		—			—			—			2,725,833			—			2,725,833
Other comprehensive loss		—			—			—			—			(1,165,351	)		(1,165,351	)
Acquisition of Bay Bancorp, Inc.		4,408,087			44,081			142,601,614			—			—			142,645,695
Stock based compensation awards		—			—			280,751			—			—			280,751
Stock options exercised		14,100			141			262,578			—			—			262,719
Common stock cash dividends $0.10 per share		—			—			—			(1,698,000	)		—			(1,698,000	)
Balance June 30, 2018		16,988,883		$	169,889		$	292,836,679		$	67,601,752		$	(6,263,883	)	$	354,344,437
Net income attributable to Old Line Bancshares, Inc.		—			—			—			8,264,829			—			8,264,829
Other comprehensive loss		—			—			—			—			(1,032,857	)		(1,032,857	)
Stock based compensation awards		—			—			302,974			—			—			302,974
Common stock cash dividends $0.10 per share		—			—			—			(1,699,192	)		—			(1,699,192	)
Balance September 30, 2018		16,988,883		$	169,889		$	293,139,653		$	74,167,389		$	(7,296,740	)	$	360,180,191

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

6

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities
Net income	$	26,600,483		$	17,055,844
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		2,379,624			2,334,125
Provision for loan losses		942,758			1,235,023
Change in deferred loan fees net of costs		(595,490	)		(791,450	)
Gain on sales or calls of securities		(560,186	)		—
Amortization of premiums and discounts		547,518			636,357
Origination of loans held for sale		(120,463,317	)		(77,092,451	)
Proceeds from sale of loans held for sale		107,165,053			71,324,767
Loss on write down of stock		—			152,496
Loss on sales of other real estate owned		—			80,738
Gain on sale of fixed assets		(32,599	)		(13,266	)
Amortization of intangible assets		1,961,631			1,516,734
Deferred income taxes		286,390			278,439
Stock based compensation awards		1,000,138			872,284
Increase (decrease) in
Accrued interest payable		(391,858	)		171,712
Income tax payable		—			(2,157,375	)
Supplemental executive retirement plan		117,553			230,263
Other liabilities		(1,450,261	)		(436,815	)
Decrease (increase) in
Accrued interest receivable		(2,063	)		(882,542	)
Bank owned life insurance		(1,247,119	)		(1,059,152	)
Annuity plan		41,699			(316,818	)
Income tax receivable		4,891,076			1,134,944
Other assets		(614,964	)		(86,942	)
Net cash provided by operating activities	$	20,576,066		$	14,186,915
Cash flows from investing activities
Cash and cash equivalents of acquired bank, net of cash consideration		—			21,617,611
Purchase of investment securities available for sale		(104,025,115	)		(20,483,491	)
Proceeds from disposal of investment securities
Available for sale at maturity, call or paydowns		64,350,481			15,876,726
Available for sale sold		—			51,650,175
Loans made, net of principal collected		(62,921,587	)		(141,256,263	)
Purchase of bank owned life insurance		—			(8,500,000	)
Proceeds from sale of other real estate owned		—			1,495,173
Change in equity securities		263,947			(1,745,803	)
Purchase of premises and equipment		(1,828,077	)		(1,093,079	)
Proceeds from the sale of premises and equipment		32,599			13,266
Net cash used in investing activities		(104,127,752	)		(82,425,685	)
Cash flows from financing activities
Net increase (decrease) in
Time deposits		2,269,821			245,116,710
Other deposits		115,027,070			(197,147,516	)
Short term borrowing advances		1,305,000,000			1,389,200,000
Short term borrowing repayments		(1,328,806,184	)		(1,350,377,081	)
Long term borrowings		198,052			198,051
Proceeds from stock options exercised		48,931			783,615
Repurchase of stock through stock repurchase program		(1,556,634	)		—
Cash dividends paid-common stock		(6,128,672	)		(4,402,915	)
Net cash provided by financing activities		86,052,384			83,370,864
Net increase in cash and cash equivalents		2,500,698			15,132,094
Cash and cash equivalents at beginning of period		44,500,618			35,174,111
Cash and cash equivalents at end of period	$	47,001,316		$	50,306,205

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

7

Old Line Bancshares, Inc. & Subsidiaries

Consolidated Statements of Cash Flows (continued)

(Unaudited)

	Nine Months Ended September 30,
	2019		2018
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest	$	24,023,527	$	14,197,656
Income taxes	$	5,750,804	$	7,600,000
Supplemental Disclosure of Non-Cash Flow Operating Activities:
Loans transferred to other real estate owned	$	209,124	$	1,041,079
Loans transferred to available for sale - BYBK acquisition	$	—	$	21,643,292
Initial recognition of right of use asset	$	26,395,472	$	—
Initial recognition of right of use liability	$	26,692,114	$	—

	2019		2018
Fair value of assets and liabilities from acquisition:
Fair value of assets acquired	$	—	$	650,194,375
Other intangible assets acquired		—		80,828,494
Fair value of liabilities assumed		—		(587,403,791	)
Total merger consideration	$	—	$	143,619,078

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

8

OLD LINE BANCSHARES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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. 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, Baltimore, Baltimore City, Calvert, Carroll, Charles, Frederick, Harford, Howard, Montgomery, Prince George’s, and St. Mary’s Counties in Maryland and surrounding areas.

As previously announced, on July 23, 2019, Old Line Bancshares and Old Line Bank entered into an Agreement and Plan of Merger with Wesbanco, Inc. ("WesBanco") and Wesbanco Bank, Inc., pursuant to which Old Line Bancshares will merge with and into Wesbanco (the “Merger”) and Old Line Bank will merge into Wesbanco Bank. We expect that the Merger will be consummated during the fourth quarter of 2019. Please see Note 12 to our consolidated financial statements, “Pending Acquisition,” for more information.

Basis of Presentation and Consolidation - The accompanying condensed consolidated financial statements include the activity of Old Line Bancshares and its wholly owned subsidiary, Old Line Bank. We have eliminated all significant intercompany transactions and balances.

The foregoing consolidated financial statements for the periods ended September 30, 2019 and 2018 are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), however, in the opinion of management we have included all adjustments necessary for a fair presentation of the results of the interim period. We derived the balances as of December 31, 2018 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, 2018. We have made no significant changes to Old Line Bancshares’ accounting policies as disclosed in the Form 10-K, except as described in the Recent Accounting Pronouncements section below.

Accounting Changes - Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) requires that lessees and lessors recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements.  ASU 2016-02 was effective for us on January 1, 2019.  ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients.  We elected to apply ASU 2016-02 at of the beginning of the period of adoption (January 1, 2019) and have not restated comparative periods.

Our operating leases relate primarily to office space and bank branches.  As a result of implementing ASU 2016-02, we recognized an operating lease right-of-use (“ROU”) asset of $26.2 million and an operating lease liability of $26.5 million on January 1, 2019, with no impact on our consolidated statements of income or consolidated statements of cash flows compared to the prior lease accounting model. The ROU asset and operating lease liability are recorded in other assets and other liabilities, respectively, in the consolidated balance sheets. See Note 11 - Leases for additional information.

Use of Estimates - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions may affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses.

Reclassifications - We have made certain reclassifications to the 2018 financial presentation to conform to the 2019 presentation. These reclassifications did not change net income or stockholders’ equity.

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Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which sets forth a “current expected credit loss” (“CECL”) model requiring Old Line Bancshares to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. For public business entities that are U.S. Securities and Exchange Commission filers, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Old Line Bancshares has constituted a committee that has the responsibility to gather loan information and consider acceptable methodologies to comply with this ASU. The committee meets periodically to discuss the latest developments and committee members keep themselves updated on such developments via webcasts, publications, and conferences. We have also evaluated and selected a third party vendor solution to assist us in the application of ASU 2016-13. The adoption of ASU 2016-13 is likely to result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. We are currently awaiting final comparison results on the parallel model compared to the CECL model.  Due to the expected merger with WesBanco, the CECL model will be transitioned into and with WesBanco’s model. Old Line Bancshares’ evaluation indicates that the provisions of ASU 2016-13 will impact its consolidated financial statements, in particular the level of the reserve for loan losses. We are, however, continuing to evaluate the extent of the potential impact.

In March 2017, FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Previously, entities generally amortized the premium over the contractual life of the security. The guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 was effective for interim and annual reporting periods beginning after December 15, 2018; early adoption was permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The adoption of this guidance did not have a material impact on Old Line Bancshares’ consolidated financial statements.

In July 2018, FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements.  The amendments set forth therein provide entities with an additional (and optional) transition method to adopt the new leases standard set forth in ASU 2016-02. Under such new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with U.S. GAAP (Topic 840, Leases).  The amendments also provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance (Topic 606) and certain criteria are met. If the non-lease component or components associated with the lease component are the predominant component of the combined component, an entity is required to account for the combined component in accordance with Topic 606. Otherwise, the entity must account for the combined component as an operating lease in accordance with Topic 842.  The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for Old Line Bancshares). Old Line Bancshares elected the transition options. ASU 2018-11 did not have a material impact on our consolidated financial statements.

ASU 2019-01, Leases (Topic 842), provides clarifications to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing essential information about leasing transactions. Specifically, ASU 2019-01 (i) allows the fair value of the underlying asset reported by lessors that are not manufacturers or dealers to continue to be its cost and not fair value as measured under the fair value definition, (ii) allows for the cash flows received for sales-type and direct financing leases to continue to be presented as results from investing, and (iii) clarifies that entities do not have to disclose the effect of the lease standard on adoption year interim amounts. ASU 2019-01 will be effective for us on January 1, 2020 and will not have a material impact on our consolidated financial statements.

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2. ACQUISITION OF BAY BANCORP, INC.

On April 13, 2018, Old Line Bancshares acquired Bay Bancorp, Inc. (“BYBK”), the parent company of Bay Bank, FSB (“Bay Bank”). Upon the consummation of the merger, each share of common stock of BYBK outstanding immediately before the merger was converted into the right to receive 0.4088 shares of Old Line Bancshares’ common stock, provided that cash was paid in lieu of any fractional shares of Old Line Bancshares common stock. As a result, Old Line Bancshares issued 4,408,087 shares of its common stock in exchange for the shares of BYBK common stock in the merger. The aggregate merger consideration was approximately $143.6 million based on the closing sales price of Old Line Bancshares’ common stock on April 13, 2018.

In connection with the merger, Bay Bank merged with and into Old Line Bank, with Old Line Bank the surviving bank.

At April 13, 2018, BYBK had consolidated assets of approximately $661 million. This merger added eleven banking locations located in BYBK’s primary market areas of Baltimore City and Anne Arundel, Baltimore, Howard and Harford Counties in Maryland.

The BYBK transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. Management made significant estimates and exercised significant judgment in accounting for the acquisition of BYBK. Management judgmentally assigned risk ratings to loans based on appraisals and estimated collateral values, expected cash flows, prepayment speeds and estimated loss factors to measure fair value for loans. Management used quoted or current market prices to determine the fair value of BYBK’s investment securities.

The following table provides the purchase price as of the acquisition date and the identifiable assets acquired and liabilities assumed at their estimated fair values.

Purchase Price Consideration
Cash consideration	$	973,383
Purchase price assigned to shares exchanged for stock		142,645,695
Total purchase price for BYBK acquisition		143,619,078

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Fair Value of Assets Acquired
Cash and due from banks	$	22,590,994
Investment securities		51,895,757
Restricted equity securities, at cost		2,339,700
Loans, net		546,215,988
Premises and equipment		3,127,963
Accrued interest receivable		1,714,054
Accrued taxes receivable		1,912,807
Deferred income taxes		1,219,602
Bank owned life insurance		16,319,198
Other real estate owned		1,041,079
Core deposit intangible		11,243,714
Other assets		1,817,233
Total assets acquired	$	661,438,089
Fair Value of Liabilities assumed
Deposits	$	541,368,907
Short term borrowings		41,100,000
Other liabilities		4,934,884
Total liabilities assumed	$	587,403,791
Fair Value of net assets acquired		74,034,298
Total Purchase Price		143,619,078
Goodwill recorded for BYBK	$	69,584,780

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3. INVESTMENT SECURITIES

Presented below is a summary of the amortized cost and estimated fair value of securities.

			Gross		Gross
	Amortized		unrealized		unrealized			Estimated
	cost		gains		losses			fair value
September 30, 2019
Available for sale
U.S. Treasury	$	2,992,763	$	3,018	$	—		$	2,995,781
U.S. government agency		59,034,066		1,126,506		(23,138	)		60,137,434
Corporate bonds		18,611,304		387,435		—			18,998,739
Foreign bonds		7,000,000		2,025		(17	)		7,002,008
Municipal securities		77,726,662		1,168,288		(382	)		78,894,568
Mortgage backed securities:
FHLMC certificates		17,009,957		19,704		(301,524	)		16,728,137
FNMA certificates		58,733,502		151,114		(945,451	)		57,939,165
GNMA certificates		25,913,190		80,616		(154,963	)		25,838,843
Total available for sale securities	$	267,021,444	$	2,938,706	$	(1,425,475	)	$	268,534,675
December 31, 2018
Available for sale
U.S. Treasury	$	3,003,410	$	—	$	(10,910	)	$	2,992,500
U.S. government agency		19,123,653		—		(517,475	)		18,606,178
Corporate bonds		18,615,768		227,691		(4,231	)		18,839,228
Foreign bonds		3,500,000		98		—			3,500,098
Municipal securities		79,416,920		19,392		(2,147,608	)		77,288,704
Mortgage backed securities
FHLMC certificates		19,079,921		962		(1,007,115	)		18,073,768
FNMA certificates		56,720,930		—		(3,062,170	)		53,658,760
GNMA certificates		27,873,539		—		(1,127,013	)		26,746,526
Total available for sale securities	$	227,334,141	$	248,143	$	(7,876,522	)	$	219,705,762

At September 30, 2019 and December 31, 2018, securities with unrealized losses segregated by length of impairment were as follows:

	September 30, 2019
	Less than 12 months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
U.S. government agency	$	—	$	—	$	3,922,889	$	23,138	$	3,922,889	$	23,138
Foreign debt securities		499,983		17		—		—		499,983		17
Municipal securities		495,906		382		—		—		495,906		382
Mortgage backed securities
FHLMC certificates		—		—		15,124,875		301,524		15,124,875		301,524
FNMA certificates		—		—		47,004,928		945,451		47,004,928		945,451
GNMA certificates		—		—		12,415,077		154,963		12,415,077		154,963
Total	$	995,889	$	399	$	78,467,769	$	1,425,076	$	79,463,658	$	1,425,475

	December 31, 2018
	Less than 12 months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
U.S. Treasury	$	1,503,516	$	1,313	$	1,488,984	$	9,597	$	2,992,500	$	10,910
U.S. government agency		1,357,980		26,795		15,288,957		490,680		16,646,937		517,475
Corporate bonds		2,995,769		4,231		—		—		2,995,769		4,231
Municipal securities		13,707,759		100,387		54,243,374		2,047,221		67,951,133		2,147,608
Mortgage backed securities
FHLMC certificates		1,715,756		26,062		16,293,413		981,053		18,009,169		1,007,115
FNMA certificates		1,164,291		11,023		52,494,470		3,051,147		53,658,761		3,062,170
GNMA certificates		8,871,024		138,099		17,875,503		988,914		26,746,527		1,127,013
Total	$	31,316,095	$	307,910	$	157,684,701	$	7,568,612	$	189,000,796	$	7,876,522

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At September 30, 2019 and December 31, 2018, we had 65 and 166 investment securities, respectively, in an unrealized loss position for 12 months or more and 2 and 34 securities, respectively, in an unrealized loss position for less than 12 months.  We consider all unrealized losses on securities as of September 30, 2019 to be temporary losses because we will redeem each security at face value at or prior to maturity. We have the ability and intent to hold these securities until recovery or maturity. As of September 30, 2019, 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 re-pricing 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.

Gain on sales or calls of investment securities for the nine months ended September 30, 2019 is the result of ten callable agencies that were called compared to no sales or calls for the comparable nine months last year.

Contractual maturities and pledged securities at September 30, 2019 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 (“MBS”) based on contractual maturity date. However, we receive payments on a monthly basis.

	Available for Sale
	Amortized		Fair
September 30, 2019	cost		value
Maturing
Within one year	$	5,497,172	$	5,501,382
Over one to five years		7,291,284		7,307,682
Over five to ten years		89,753,727		91,175,688
Over ten years		164,479,261		164,549,923
Total	$	267,021,444	$	268,534,675
Pledged securities	$	121,507,956	$	120,840,383

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4. LOANS

Major classifications of loans held for investment are as follows:

	September 30, 2019									December 31, 2018
	Legacy (1)			Acquired			Total			Legacy (1)			Acquired			Total
Commercial Real Estate
Owner Occupied	$	309,452,786		$	124,699,211		$	434,151,997		$	299,266,275		$	140,892,706		$	440,158,981
Investment		662,296,193			175,779,493			838,075,686			592,529,807			195,883,002			788,412,809
Hospitality		231,201,755			18,957,943			250,159,698			172,189,046			13,134,019			185,323,065
Land and A&D		81,167,986			7,034,455			88,202,441			71,908,761			21,760,867			93,669,628
Residential Real Estate
First Lien-Investment		127,305,162			40,180,391			167,485,553			104,084,050			48,483,340			152,567,390
First Lien-Owner Occupied		108,338,535			123,386,650			231,725,185			108,696,078			140,221,589			248,917,667
Residential Land and A&D		42,648,776			10,016,798			52,665,574			42,639,161			16,828,434			59,467,595
HELOC and Jr. Liens		22,149,070			35,570,762			57,719,832			20,749,184			41,939,123			62,688,307
Commercial and Industrial		255,088,072			64,195,020			319,283,092			239,766,662			91,431,724			331,198,386
Consumer		13,004,012			25,708,210			38,712,222			16,289,147			34,919,111			51,208,258
Total loans		1,852,652,347			625,528,933			2,478,181,280			1,668,118,171			745,493,915			2,413,612,086
Allowance for loan losses		(7,780,318	)		(221,034	)		(8,001,352	)		(7,004,839	)		(466,184	)		(7,471,023	)
Deferred loan costs, net		3,742,124			—			3,742,124			3,086,635			—			3,086,635
Net loans	$	1,848,614,153		$	625,307,899		$	2,473,922,052		$	1,664,199,967		$	745,027,731		$	2,409,227,698

__________________

(1) As a result of the acquisitions of Maryland Bankcorp, Inc. (“Maryland Bankcorp”), the parent company of Maryland Bank & Trust Company, N.A. (“MB&T”), in April 2011, WSB Holdings Inc., the parent company of The Washington Savings Bank (“WSB”), in May 2013, Regal Bancorp, Inc. (“Regal”), the parent company of Regal Bank & Trust (“Regal Bank”), in December 2015, DCB Bancshares, Inc. (“DCB”), the parent company of Damascus Community Bank (“Damascus”), in July 2017, and BYBK, the parent company of Bay Bank, in April 2018, we have segmented the portfolio into two components, “Legacy” loans originated by Old Line Bank and “Acquired” loans acquired from MB&T, WSB, Regal Bank, Damascus and Bay Bank.

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. Our lending staff follows pricing guidelines established periodically by our management team. In an effort to manage risk, prior to funding the loan committee, consisting of four non-employee members of the board of directors and four executive officers, must approve by majority vote all credit decisions in excess of a lending officer’s lending authority. Management believes that we employ experienced lending officers, secure appropriate collateral and carefully monitor the financial condition of our borrowers and the concentrations of loans in the portfolio.

In addition to the internal business processes employed in the credit administration area, Old Line 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

We finance commercial real estate for our clients, for owner occupied and investment properties, hospitality and land acquisition and development. Commercial real estate loans totaled $1.61 billion and $1.51 billion, respectively, at September 30, 2019 and December 31, 2018. This lending has involved loans secured by owner-occupied commercial buildings for office, storage and warehouse space, as well as non-owner occupied commercial buildings. Our underwriting criteria for commercial real estate loans include maximum loan-to-value ratios, debt coverage ratios, secondary sources of repayments, guarantor requirements, net worth requirements and quality of cash flows. Loans secured by commercial real estate may be large in size and may involve a greater degree of risk than one-to-four family residential mortgage loans. Payments on such loans are often dependent on successful operation or management of the properties. We will generally finance owner occupied commercial real estate that does not exceed loan to value of 80% and investor real estate at a maximum loan to value of 75%.

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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 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.

At September 30, 2019, we had approximately $250.2 million of commercial real estate loans outstanding 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.

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 owner occupied and investment properties. Our residential loan portfolio amounted to $509.6 million and $523.6 million, respectively, at September 30, 2019 and December 31, 2018. Although most of these loans are in our 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 43%, collateral value, length of employment and prior credit history. A credit score of at least 640 is required, except for loans originated for sale in the secondary market, as discussed below. We do not originate any subprime residential real estate loans.

This segment of our portfolio also consists of funds advanced for construction of custom single family residences homes (where the home buyer is the borrower) and financing to builders for the construction of pre-sold homes and multi-family housing. These loans generally have short durations, meaning maturities typically of twelve months or less. Old Line Bank limits its construction lending risk through adherence to established underwriting procedures. These loans generally have short durations, meaning maturities typically of twelve months or less. Residential houses, multi-family dwellings and commercial buildings under construction and the underlying land for which the loan was obtained secure the construction loans. The vast majority of these loans are concentrated in our market area.

Construction lending also entails significant risk. These risks generally involve larger loan balances concentrated with single borrowers with funds advanced upon the security of the land or the project under construction. An appraisal of the property estimates the value of the project “as is and as if” completed. An appraisal of the property estimates the value of the project prior to completion of construction. Thus, initial funds are advanced based on the current value of the property with the remaining construction funds advanced under a budget sufficient to successfully complete the project within the “as completed” loan to value. To further mitigate the risks, we generally limit loan amounts to 80% or less of appraised values and obtain first lien positions on the property.

We generally only offer real estate construction financing only to experienced builders, commercial entities or individuals who have demonstrated the ability to obtain a permanent loan “take-out” (conversion to a permanent mortgage upon completion of the project). We also perform a complete analysis of the borrower and the project under construction. This analysis includes a review of the cost to construct, the borrower’s ability to obtain a permanent “take-out” the cash flow available to support the debt payments and construction costs in excess of loan proceeds, and the value of the collateral. During construction, we advance funds on these loans on a percentage of completion basis. We inspect each project as needed prior to advancing funds during the term of the construction loan. We may provide permanent financing on the same projects for which we have provided the construction financing.

We also offer fixed rate home improvement loans. Our home equity and home improvement loan portfolio gives us a diverse client base. Although most of these loans are in our market area, the diversity of the individual loans in the portfolio reduces our potential risk. Usually, we secure our home equity loans and lines of credit with a security interest in the borrower’s primary or secondary residence.

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Under our loan approval policy, all residential real estate loans approved must comply with federal regulations. Generally, we will make residential mortgage loans in amounts up to the limits established by Fannie Mae and Freddie Mac for secondary market resale purposes. Currently this amount for single-family residential loans varies from $484,350 up to a maximum of $726,525 for certain high-cost designated areas. We also make residential mortgage loans up to limits established by the Federal Housing Administration, which currently is $726,525. The Washington, D.C. and Baltimore areas are both considered high-cost designated areas. We will, however, make loans in excess of these amounts if we believe that we can sell the loans in the secondary market or that the loans should be held in our portfolio. For loans we originate for sale in the secondary market, we typically require a credit score of 620 or higher, with some exceptions provided we receive an approval recommendation from FannieMae, FreddieMac or the Federal Housing Administration’s automated underwriting approval system.  Loans sold in the secondary market are sold to investors on a servicing released basis and recorded as loans as held for sale.  The premium is recorded in income on marketable loans in non-interest income, net of commissions paid to the loan officers.

Commercial and Industrial Lending

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

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

Consumer Installment Lending

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

Our consumer loan portfolio includes indirect loans, which consists primarily of auto and RV loans. These loans are financed through dealers and the dealers receive a percentage of the finance charge, which varies depending on the terms of each loan. We use the same underwriting standards in originating these indirect loans as we do for consumer loans generally.

Consumer loans may present greater credit risk than residential mortgage loans because many consumer loans are unsecured or rapidly depreciating assets secure these loans. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance because of the greater likelihood of damage, loss or depreciation. Consumer loan collections depend on the borrower’s continuing financial stability. If a borrower suffers personal financial difficulties, the 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.

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Concentrations of Credit

Most of our lending activity occurs within the state of Maryland within the suburban Washington, D.C. and Baltimore market areas in Baltimore City and Anne Arundel, Baltimore, Calvert, Carroll, Charles, Frederick, Harford, Howard, Montgomery, Prince George’s and St. Mary’s Counties. The majority of our loan portfolio consists of commercial real estate loans and residential real estate loans.

Non-Accrual and Past Due Loans

We consider 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 and place a loan on non-accrual status when the 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 purchased, credit-impaired loans at fair value upon acquisition, and an accretable yield is established and recognized as interest income on purchased loans to the extent subsequent cash flows support the estimated accretable yield. Purchased, credit-impaired loans that perform consistently with the accretable yield expectations are not reported as non-accrual or nonperforming. However, purchased, credit-impaired loans that do not continue to perform according to accretable yield expectations are considered impaired, and presented as non-accrual and nonperforming. Currently, management expects to fully collect the carrying value of acquired, credit-impaired loans.

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The table below presents an age analysis of the loans held for investment portfolio at September 30, 2019 and December 31, 2018.

Age Analysis of Past Due Loans

	Age Analysis of Past Due Loans
	September 30, 2019						December 31, 2018
	Legacy		Acquired		Total		Legacy		Acquired		Total
Current	$	1,841,048,778	$	614,066,133	$	2,455,114,911	$	1,659,191,112	$	729,738,007	$	2,388,929,119
Accruing past due loans:
30 - 89 days past due
Commercial Real Estate:
Owner Occupied		1,692,891		—		1,692,891		3,990,558		—		3,990,558
Investment		1,716,554		3,099,400		4,815,954		1,729,404		3,849,944		5,579,348
Residential Real Estate:
First Lien-Investment		—		479,052		479,052		179,701		896,227		1,075,928
First Lien-Owner Occupied		90,884		1,684,528		1,775,412		94,178		3,062,084		3,156,262
Land and A&D		622,365		—		622,365		883,460		413,191		1,296,651
HELOC and Jr. Liens		100,227		512,939		613,166		119,924		790,989		910,913
Commercial and Industrial		2,615,507		1,253,843		3,869,350		670,318		1,444,347		2,114,665
Consumer		136,811		602,432		739,243		320,071		1,338,813		1,658,884
Total 30 - 89 days past due		6,975,239		7,632,194		14,607,433		7,987,614		11,795,595		19,783,209
90 or more days past due
Commercial Real Estate:
Investment		—		—		—		—		139,247		139,247
Residential Real Estate:
First-Investment		—		83,391		83,391		—		—		—
First Lien-Owner Occupied		—		771,798		771,798		—		103,365		103,365
Commercial and Industrial		58,665		—		58,665		—		—		—
Consumer		15,419		—		15,419		—		54		54
Total 90 or more days past due		74,084		855,189		929,273		—		242,666		242,666
Total accruing past due loans		7,049,323		8,487,383		15,536,706		7,987,614		12,038,261		20,025,875
Recorded Investment Non-accruing loans:
Commercial Real Estate:
Owner Occupied		2,691,810		249,087		2,940,897		—		182,261		182,261
Investment		576,671		52,646		629,317		—		51,070		51,070
Land and A&D		—		10,000		10,000		—		45,000		45,000
Residential Real Estate:
First Lien-Investment		392,490		130,973		523,463		192,501		292,758		485,259
First Lien-Owner Occupied		243,846		1,446,632		1,690,478		262,194		2,027,974		2,290,168
Land and A&D		284,129		199,234		483,363		277,704		201,737		479,441
HELOC and Jr. Liens		—		788,585		788,585		—		690,732		690,732
Commercial and Industrial		336,179		10,435		346,614		191,388		45,269		236,657
Consumer		29,071		87,825		116,896		15,658		180,846		196,504
Non-accruing past due loans:		4,554,196		2,975,417		7,529,613		939,445		3,717,647		4,657,092
Total Loans	$	1,852,652,297	$	625,528,933	$	2,478,181,230	$	1,668,118,171	$	745,493,915	$	2,413,612,086

We consider all nonperforming loans and troubled debt restructurings (“TDRs”) to be impaired. We do not recognize interest income on nonperforming loans during the time period that the loans are nonperforming. We only recognize interest income on nonperforming 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 tables below present our impaired loans at and for the periods ended September 30, 2019 and December 31, 2018.

19

	Impaired Loans
							Three months September 30, 2019				Nine months September 30, 2019
	Unpaid						Average		Interest		Average		Interest
	Principal		Recorded		Related		Recorded		Income		Recorded		Income
	Balance		Investment		Allowance		Investment		Recognized		Investment		Recognized
Legacy
With no related allowance recorded:
Commercial Real Estate:
Owner Occupied	$	4,388,978	$	4,388,978	$	—	$	4,408,758	$	26,298		4,390,510	$	113,063
Investment		1,661,904				—		1,665,461		6,348		1,672,558		37,937
Land and A&D		—		—		—		—		—		—		—
Residential Real Estate:
First Lien-Investment		177,569		177,569		—		177,569		—		178,361		4,344
First Lien-Owner Occupied		554,426		554,426		—		585,780		4,763		594,879		17,992
Commercial and Industrial		388,132		388,132		—		396,657		3,817		404,026		10,573
Consumer		18,371		18,371		—		19,857		473		20,986		1,346
With an allowance recorded:
Commercial Real Estate:
Residential Real Estate:
First Lien-Investment		214,921		214,921		36,621		213,397		—		199,543		—
First Lien-Owner Occupied		141,717		141,717		—		137,449		—		136,898		—
Land and A&D		284,179		284,179		35,000		284,179		—		283,663		—
Commercial and Industrial		261,831		261,831		92,424		262,469		—		263,095		402
Consumer		10,700		10,700		1,328		11,730		157		12,200		927
Total legacy impaired		8,102,728		6,440,824		165,373		8,163,306		41,856		8,156,719		186,584
Acquired(1)
With no related allowance recorded:
Commercial Real Estate:
Owner Occupied		268,416		268,416		—		268,197		—		267,605		—
Investment		72,408		72,408		—		163,876		—		163,876		—
Land and A&D		—		—		—		—		—		—		—
Residential Real Estate:
First Lien-Owner Occupied		1,578,372		1,566,765		—		1,696,380		21,155		1,706,748		95,104
First Lien-Investment		—		—		—		—		—		—		—
Land and A&D		52,325		52,325		—		59,432		950		60,299		4,168
HELOC and Jr. Lien		575,505		575,505		—		641,739		4,821		651,554		20,181
Commercial		—		—		—		—		—		—		—
Consumer		93,903		93,903		—		107,108		2,489		119,554		7,692
With an allowance recorded:
Commercial Real Estate:
Investment		—		—		—		—		—		—		—
Land and A&D		293,376		10,000		10,000		293,376		—		316,506		—
Residential Real Estate:
Land and A&D		157,628		157,628		86,434		162,348		—		161,556		—
First Lien-Investment		131,636		131,636		35,160		139,152		6,397		135,530		7,905
First Lien-Owner Occupied		67,633		67,633		26,865		68,922		719		69,375		2,532
HELOC and Jr. Lien		226,635		226,635		56,048		253,151				255,925		3,674
Commercial and Industrial		84,995		84,995		4,435		84,898		—		85,797		1,341
Consumer		17,753		17,753		2,092		26,486		—		27,308		654
Total acquired impaired		3,620,585		3,325,602		221,034		3,965,065		36,531		4,021,633		143,251
Total impaired	$	11,723,313	$	9,766,426	$	386,407	$	12,128,371	$	78,387		12,178,352	$	329,835

__________________

(1) U.S. GAAP requires that we record acquired loans at fair value at acquisition, which includes a discount for loans with credit impairment. These purchased credit impaired loans are not performing according to their contractual terms and meet the definition of an impaired loan. Although we do not accrue interest income at the contractual rate on these loans, we do recognize an accretable yield as interest income to the extent such yield is supported by cash flow analysis of the underlying loans.

20

Impaired Loans
December 31, 2018
	Unpaid						Average		Interest
	Principal		Recorded		Related		Recorded		Income
	Balance		Investment		Allowance		Investment		Recognized
Legacy
With no related allowance recorded:
Commercial Real Estate:
Owner Occupied	$	1,737,394	$	1,737,394	$	—	$	1,766,117	$	74,203
Investment		1,688,661		1,688,661		—		1,716,183		88,410
Residential Real Estate:
First Lien-Owner Occupied		262,194		262,194		—		285,514		11,412
Land and A&D		277,704		277,704		—		277,704		—
Commercial and Industrial		486,048		486,048		—		509,971		18,595
Consumer		1,495		1,495		—		10,707		1,130
With an allowance recorded:
Residential Real Estate:
First Lien-Owner Occupied
First Lien-Investment		192,501		192,501		39,420		192,501		—
Commercial and Industrial		148,349		148,349		13,149		152,898		3,926
Consumer		14,163		14,163		1,416		27,217		1,129
Total legacy impaired		4,808,509		4,808,509		53,985		4,938,812		198,805
Acquired(1)
With no related allowance recorded:
Commercial Real Estate:
Owner Occupied		283,083		232,635		—		542,654		3,281
Residential Real Estate:
First Lien-Owner Occupied		2,127,854		2,011,286		—		2,159,327		38,636
Land and A&D		58,659		58,659		—		62,178		2,896
Consumer		22,139		22,139		—		26,027		364
With an allowance recorded:
Commercial Real Estate:
Owner Occupied
Investment		72,408		72,408		14,340		163,876		2,750
First Lien-Owner Occupied		459,033		459,033		98,008		482,422		7,695
First Lien-Investment		298,187		298,187		62,701		310,862		7,871
Land and A&D		154,297		154,297		99,517		159,819		—
HELOC and Jr. Lien		533,565		533,565		78,814		534,204		12,254
Commercial and Industrial		48,750		48,750		48,750		48,750		237
Consumer		188,102		188,102		19,053		231,978		11,619
Total acquired impaired		4,810,584		4,359,717		466,183		5,289,532		96,107
Total impaired	$	9,619,093	$	9,168,226	$	520,168	$	10,228,344	$	294,912

__________________

(1) U.S. GAAP requires that we record acquired loans at fair value at acquisition, which includes a discount for loans with credit impairment. These purchased credit impaired loans are not performing according to their contractual terms and meet the definition of an impaired loan. Although we do not accrue interest income at the contractual rate on these loans, we do recognize an accretable yield as interest income to the extent such yield is supported by cash flow analysis of the underlying loans.

We consider a loan a TDR when we conclude that both of the following conditions exist: the restructuring constitutes a concession and the debtor is experiencing financial difficulties. Restructured loans at September 30, 2019 consisted of seven loans for an aggregate of $2.2 million compared to seven loans for an aggregate of $2.4 million at December 31, 2018.

We had no loan modifications reported as TDRs during the three or nine months ended September 30, 2019. We had one loan modification reported as a TDR during the nine months ended September 30, 2018. We had no loans that were modified as a TDR that defaulted during the three or nine-month periods ended September 30, 2019 or 2018.

The following table includes the recorded investment in and number of modifications of TDRs for the three and nine months ended September 30, 2019 and 2018. We report the recorded investment in loans prior to a modification and also the recorded investment in the loans after the loans were restructured. Reductions in the recorded investment are primarily due to the partial charge-off of the principal balance prior to the modification. We had no loans that were modified as a TDR that defaulted within three months of the modification date during the three- or nine-month periods ended September 30, 2019 and 2018.

21

Loans Modified as a TDR for the three months ended

September 30, 2019

September 30, 2018

Pre-

Post

Pre-

Post

Modification

Modification

Modification

Modification

Outstanding

Outstanding

Outstanding

Outstanding

Troubled Debt Restructurings—

#of

Recorded

Recorded

#of

Recorded

Recorded

(Dollars in thousands)

Contracts

Investment

Investment

Contracts

Investment

Investment

Legacy

Residential Real Estate Owner Occupied

—

—

—

—

—

—

Total legacy TDRs

—

$

—

$

—

$

—

$

—

Loans Modified as a TDR for the nine months ended

September 30, 2019

September 30, 2018

Pre-

Post

Pre-

Post

Modification

Modification

Modification

Modification

Outstanding

Outstanding

Outstanding

Outstanding

Troubled Debt Restructurings—

#of

Recorded

Recorded

#of

Recorded

Recorded

(Dollars in thousands)

Contracts

Investment

Investment

Contracts

Investment

Investment

Legacy

Consumer

—

—

—

—

28,009

27,009

Total legacy TDRs

—

$

—

$

—

$

28,009

$

27,009

Acquired impaired loans

The following table documents changes in the accretable (premium) discount on acquired impaired loans during the nine months ended September 30, 2019 and 2018, along with the outstanding balances and related carrying amounts for the beginning and end of those respective periods.

	September 30, 2019			September 30, 2018
Balance at beginning of period	$	124,090		$	115,066
Additions due to BYBK acquisition		—			50,984
Accretion of fair value discounts		(1,375,970	)		(873,308	)
Reclassification (to)/from non-accretable discount		1,334,580			847,153
Balance at end of period	$	82,700		$	139,895

	Contractually
	Required Payments
	Receivable		Carrying Amount
At September 30, 2019	$	9,125,242	$	7,976,188
At December 31, 2018		11,146,165		9,396,862
At September 30, 2018		17,975,448		14,109,972
At December 31, 2017		8,277,731		6,617,774

Credit Quality Indicators

We review the adequacy of the allowance for loan losses at least quarterly. We base the evaluation of the adequacy of the allowance for loan losses upon loan categories. We categorize loans as residential real estate loans, commercial real estate loans, commercial loans and consumer loans. We further divide commercial real estate loans by owner occupied, investment, hospitality and land acquisition and development. We also divide residential real estate by owner occupied, investment, land acquisition and development and junior liens. All categories are divided by risk rating and loss factors and weighed 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 all loans based upon a review of the three year loss ratio for the category and qualitative factors.

22

We charge off loans that management has identified as losses. We consider suggestions from our external loan review firm and bank examiners when determining which loans to charge off. We automatically charge off consumer loan accounts based on regulatory requirements. We partially charge off real estate loans that are collateral dependent based on the value of the collateral.

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

23

The following tables outline the class of loans by risk rating at September 30, 2019 and December 31, 2018:

	Account Balance
September 30, 2019	Legacy		Acquired		Total
Risk Rating
Pass(1 - 5)
Commercial Real Estate:
Owner Occupied	$	303,183,923	$	122,143,948	$	425,327,871
Investment		659,590,203		74,557,546		734,147,749
Hospitality		231,201,755		18,957,943		250,159,698
Land and A&D		81,167,986		6,839,775		88,007,761
Residential Real Estate:
First Lien-Investment		126,493,210		37,115,151		163,608,361
First Lien-Owner Occupied		108,036,843		118,639,242		226,676,085
Land and A&D		40,330,083		9,718,740		50,048,823
HELOC and Jr. Liens		22,149,070		33,850,157		55,999,227
Commercial		252,223,178		61,748,358		313,971,536
Consumer		12,974,941		25,495,847		38,470,788
		1,837,351,192		509,066,707		2,346,417,899
Special Mention(6)
Commercial Real Estate:
Owner Occupied		408,090		1,261,341		1,669,431
Investment		1,044,086		915,223		1,959,309
Land and A&D		—		184,681		184,681
Residential Real Estate:
First Lien-Investment		280,873		1,746,159		2,027,032
First Lien-Owner Occupied		57,846		1,945,545		2,003,391
Land and A&D		2,034,514		98,824		2,133,338
HELOC and Jr. Liens		—		845,111		845,111
Commercial		1,401,346		2,364,123		3,765,469
Consumer		—		97,199		97,199
		5,226,755		9,458,206		14,684,961
Substandard(7)
Commercial Real Estate:
Owner Occupied		5,860,773		1,293,922		7,154,695
Investment		1,661,904		306,724		1,968,628
Land and A&D		—		10,000		10,000
Residential Real Estate:
First Lien-Investment		531,079		1,319,081		1,850,160
First Lien-Owner Occupied		243,846		2,801,863		3,045,709
Land and A&D		284,179		199,234		483,413
HELOC and Jr. Liens		—		875,493		875,493
Commercial		1,463,548		82,539		1,546,087
Consumer		29,071		115,164		144,235
		10,074,400		7,004,020		17,078,420
Doubtful(8)		—		—		—
Loss(9)		—		—		—
Total	$	1,852,652,347	$	525,528,933	$	2,378,181,280

24

	Account Balance
December 31, 2018	Legacy		Acquired		Total
Risk Rating
Pass(1 - 5)
Commercial Real Estate:
Owner Occupied	$	293,682,007	$	137,978,800	$	431,660,807
Investment		589,763,511		194,092,985		783,856,496
Hospitality		172,189,046		13,134,019		185,323,065
Land and A&D		71,908,761		21,514,420		93,423,181
Residential Real Estate:
First Lien-Investment		103,270,617		45,431,446		148,702,063
First Lien-Owner Occupied		108,371,748		134,959,907		243,331,655
Land and A&D		40,268,376		16,524,667		56,793,043
HELOC and Jr. Liens		20,749,184		41,196,500		61,945,684
Commercial		237,713,832		89,049,308		326,763,140
Consumer		16,273,489		34,674,679		50,948,168
		1,654,190,571		728,556,731		2,382,747,302
Special Mention(6)
Commercial Real Estate:
Owner Occupied		420,347		1,303,849		1,724,196
Investment		1,077,635		557,687		1,635,322
Land and A&D		—		201,447		201,447
Residential Real Estate:
First Lien-Investment		289,618		1,709,025		1,998,643
First Lien-Owner Occupied		62,136		1,522,737		1,584,873
Land and A&D		2,093,081		102,030		2,195,111
Commercial		174,729		174,429		349,158
Consumer		—		30,848		30,848
		4,117,546		5,602,052		9,719,598
Substandard(7)
Commercial Real Estate:
Owner Occupied		5,163,921		1,610,057		6,773,978
Investment		1,688,661		1,232,330		2,920,991
Land and A&D		—		45,000		45,000
Residential Real Estate:
First Lien-Investment		523,815		1,342,869		1,866,684
First Lien-Owner Occupied		262,194		3,738,945		4,001,139
Land and A&D		277,704		201,737		479,441
HELOC and Jr. Liens		—		742,623		742,623
Commercial		1,878,101		2,207,987		4,086,088
Consumer		15,658		213,584		229,242
		9,810,054		11,335,132		21,145,186
Doubtful(8)		—		—		—
Loss(9)		—		—		—
Total	$	1,668,118,171	$	745,493,915	$	2,413,612,086

The following table details activity in the allowance for loan losses by portfolio segment for the three- and nine-month periods ended September 30, 2019 and 2018. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

	Commercial			Commercial		Residential
Three Months Ended September 30, 2019	and Industrial			Real Estate		Real Estate			Consumer			Total
Beginning balance	$	1,665,674		$	4,882,255	$	1,283,903		$	57,903		$	7,889,735
Provision for loan losses		(54,913	)		279,425		91,970			139,518			456,000
Recoveries		400			417		6,119			19,424			26,360
Total		1,611,161			5,162,097		1,381,992			216,845			8,372,095
Loans charged off		(48,750	)		—		(165,498	)		(156,495	)		(370,743	)
Ending Balance	$	1,562,411		$	5,162,097	$	1,216,494		$	60,350		$	8,001,352

25

	Commercial			Commercial		Residential
Nine Months Ended September 30, 2019	and Industrial			Real Estate		Real Estate			Consumer			Total
Beginning balance	$	1,562,740		$	4,728,694	$	1,081,394		$	98,195		$	7,471,023
Provision for loan losses		41,176			432,152		248,477			220,953			942,758
Recoveries		11,353			1,251		53,149			58,320			124,073
Total		1,615,269			5,162,097		1,383,020			377,468			8,537,854
Loans charged off		(52,858	)		—		(166,526	)		(317,118	)		(536,502	)
Ending Balance	$	1,562,411		$	5,162,097	$	1,216,494		$	60,350		$	8,001,352
Amount allocated to:
Legacy Loans:
Individually evaluated for impairment	$	92,424		$	—	$	71,621		$	1,328		$	165,373
Other loans not individually evaluated		1,465,552			5,152,097		939,200			58,096			7,614,945
Acquired Loans:
Individually evaluated for impairment		4,435			10,000		205,673			926			221,034
Ending balance	$	1,562,411		$	5,162,097	$	1,216,494		$	60,350		$	8,001,352

	Commercial			Commercial		Residential
Three Months Ended September 30, 2018	and Industrial			Real Estate		Real Estate		Consumer			Total
Beginning balance	$	1,680,448		$	4,196,752	$	749,630	$	77,747		$	6,704,577
Provision for loan losses		(141,751	)		303,547		34,609		111,465			307,870
Recoveries		65,819			417		3,119		5,127			74,482
Total		1,604,516			4,500,716		787,358		194,339			7,086,929
Loans charged off		—			—		—		(106,879	)		(106,879	)
Ending Balance	$	1,604,516		$	4,500,716	$	787,358	$	87,460		$	6,980,050

	Commercial		Commercial		Residential
Nine Months Ended September 30, 2018	and Industrial		Real Estate		Real Estate			Consumer			Total
Beginning balance	$	1,262,030	$	3,783,735	$	844,355		$	30,466		$	5,920,586
Provision for loan losses		273,017		716,147		(70,403	)		316,262			1,235,023
Recoveries		69,469		834		15,230			11,980			97,513
Total		1,604,516		4,500,716		789,182			358,708			7,253,122
Loans charged off		—		—		(1,824	)		(271,248	)		(273,072	)
Ending Balance	$	1,604,516	$	4,500,716	$	787,358		$	87,460		$	6,980,050
Amount allocated to:
Legacy Loans:
Individually evaluated for impairment	$	93,892	$	—	$	76,495		$	—		$	170,387
Other loans not individually evaluated		1,441,108		4,500,716		525,749			60,852			6,528,425
Acquired Loans:
Individually evaluated for impairment		69,516		—		185,114			26,608			281,238
Ending balance	$	1,604,516	$	4,500,716	$	787,358		$	87,460		$	6,980,050

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Our recorded investment in loans at September 30, 2019 and 2018 related to each balance in the allowance for probable loan losses by portfolio segment and disaggregated on the basis of our impairment methodology was as follows:

	Commercial		Commercial		Residential
September 30, 2019	and Industrial		Real Estate		Real Estate		Consumer		Total
Legacy loans:
Individually evaluated for impairment with specific reserve	$	261,831	$	—	$	640,817	$	10,700	$	913,348
Individually evaluated for impairment without specific reserve		388,132		6,050,882		731,995		18,371		7,189,380
Other loans not individually evaluated		254,438,109		1,278,067,839		299,068,731		12,974,940		1,844,549,619
Acquired loans:
Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition)		84,995		10,000		583,532		17,753		696,280
Individually evaluated for impairment without specific reserve (ASC 310-20 at acquisition)		—		340,824		2,194,595		93,903		2,629,322
Individually evaluated for impairment without specific reserve (ASC 310-30 at acquisition)		172,609		3,234,991		4,568,592		—		7,976,192
Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition)		63,937,416		322,885,287		201,807,881		25,596,555		614,227,139
Ending balance	$	319,283,092	$	1,610,589,823	$	509,596,143	$	38,712,222	$	2,478,181,280

	Commercial		Commercial		Residential
September 30, 2018	and Industrial		Real Estate		Real Estate		Consumer		Total
Legacy loans:
Individually evaluated for impairment with specific reserve	$	93,892	$	—	$	242,592	$	—	$	336,484
Individually evaluated for impairment without specific reserve		509,772		3,453,579		494,423		—		4,457,774
Other loans not individually evaluated		215,125,991		1,113,299,121		258,804,372		17,671,242		1,604,900,726
Acquired loans:
Individually evaluated for impairment with specific reserve subsequent to acquisition (ASC 310-20 at acquisition)		68,888		45,000		407,735		27,009		548,632
Individually evaluated for impairment without specific reserve (ASC 310-20 at acquisition)		167,560		773,457		2,720,353		52,730		3,714,100
Individually evaluated for impairment without specific reserve (ASC 310-30 at acquisition)		559,248		7,872,328		5,664,394		14,000		14,109,970
Collectively evaluated for impairment without reserve (ASC 310-20 at acquisition)		96,617,110		379,553,784		245,912,416		38,603,984		760,687,294
Ending balance	$	312,642,461	$	1,504,997,269	$	514,246,285	$	56,368,965	$	2,388,254,980

5. OTHER REAL ESTATE OWNED

The fair value of other real estate owned was $1.1 million at September 30, 2019 and December 31, 2018. As a result of the acquisitions of Maryland Bankcorp, WSB Holdings, Regal and BYBK, we have segmented other real estate owned (“OREO”) 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, WSB, Regal Bank and Bay Bank or obtained as a result of loans originated by MB&T, WSB, Regal Bank and Bay Bank (acquired); we did not acquire any OREO properties in the DCB acquisition. We are currently aggressively either marketing these properties for sale or improving them in preparation for sale.

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The following outlines the transactions in OREO during the period.

Nine Months ended September 30, 2019	Legacy		Acquired		Total
Beginning balance	$	—	$	882,510	$	882,510
Real estate acquired through foreclosure of loans		—		209,124		209,124
Sales/deposits on sales		—		—		—
Net realized gain/(loss)		—		—		—
Total end of period	$	—	$	1,091,634	$	1,091,634

Residential Foreclosures and Repossessed Assets — Once all potential alternatives for reinstatement are exhausted, past due loans collateralized by residential real estate are referred for foreclosure proceedings in accordance with local requirements of the applicable jurisdiction. Once possession of the property collateralizing the loan is obtained, the repossessed property will be recorded within other assets either as OREO or, where management has both the intent and ability to recover its losses through a government guarantee, as a foreclosure claim receivable. At September 30, 2019 and December 31, 2018, residential foreclosures classified as OREO totaled $544 thousand. We had six loans for an aggregate of $474 thousand secured by residential real estate in process of foreclosure at September 30, 2019 compared to five loans for $786 thousand at December 31, 2018.

6. EARNINGS PER COMMON SHARE

We determine basic earnings per common share by dividing net income 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				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Weighted average number of shares		16,999,146		16,988,883		17,021,359		15,277,219
Dilutive average number of shares		17,129,181		17,187,837		17,146,723		15,485,452

7. STOCK-BASED COMPENSATION

For the three months ended September 30, 2019 and 2018, we recorded stock-based compensation expense of $340,217 and $302,974, respectively.  For the nine months ended September 30, 2019 and 2018, we recorded stock-based compensation expense of $1,000,138 and $872,284, respectively. At September 30, 2019, there was $2.0 million of total unrecognized compensation cost related to non-vested stock options that we expect to realize over the next 2.0 years. As of September 30, 2019, there were 167,213 shares remaining available for future issuance under the 2010 equity incentive plan. The officers exercised 4,370 options during the nine-month period ended September 30, 2019 compared to 53,021 options exercised during the nine-month period ended September 30, 2018.

For purposes of determining estimated fair value of stock options, we have computed the estimated fair value of all stock-based compensation using the Black-Scholes option pricing model and, for stock options granted prior to December 31, 2018, we have applied the assumptions set forth in Old Line Bancshares’ Annual Report on Form 10-K for the year ended December 31, 2018.  Restricted stock awards are valued at the current stock price on the date of the award. During the nine months ended September 30, 2019, there were no stock options granted compared to 50,000 stock options granted during the nine months ended September 30, 2018. The weighted average grant date fair value of the 2018 stock options is $8.90 and was computed using the Black-Scholes option pricing model under similar assumptions.

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During the nine months ended September 30, 2019 and 2018, we granted 28,191 and 19,443 restricted common stock awards, respectively. The weighted average grant date fair value of these restricted stock awards was $28.74 at September 30, 2019.  At September 30, 2019, there was $5.0 million of total unrecognized compensation cost related to restricted stock awards that we expect to realize over the next 2.5 years. There were 667 restricted shares forfeited during the nine-month period ended September 30, 2019 and no restricted shares forfeited during the nine-month period ended September 30, 2018.

8. FAIR VALUE MEASUREMENT

The fair value of an asset or liability is 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.

The fair value hierarchy established by accounting standards defines three input levels for fair value measurement. The applicable standard describes three levels of inputs that may be used to measure fair value: Level 1 is based on quoted market prices in active markets for identical assets. Level 2 is based on significant observable inputs other than Level 1 prices. Level 3 is based on significant unobservable inputs that reflect a company’s own assumptions about the assumption that market participants would use in pricing an asset or liability. We evaluate fair value measurement inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer between levels. There were no transfers between levels during the three and nine months ended September 30, 2019 or the year ended December 31, 2018.

At September 30, 2019, we hold, as part of our investment portfolio, available for sale securities reported at fair value consisting of municipal securities, U.S. government sponsored entities, corporate bonds, and MBS. Prior to September 30, 2019, corporate bonds included our foreign debt securities (Israel bonds) that we have now moved into a separate classification. The fair value of the majority of these securities is determined using widely accepted valuation techniques including matrix pricing and broker quote-based applications. Inputs include benchmark yields, reported trades, issuer spreads, prepayments speeds and other relevant items, which inputs are used by a third-party pricing service we use to make these determinations.

To validate the appropriateness of the valuations provided by the third party, we regularly update the understanding of the inputs used and compare valuations to an additional third party source. We classify all our investment securities available for sale in Level 2 of the fair value hierarchy, with the exception of treasury securities, which fall into Level 1, and our corporate bonds and our foreign debt securities, which fall into Level 3.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

	At September 30, 2019 (In thousands)
			Quoted Prices in		Other		Significant		Total Changes
			Active Markets for		Observable		Unobservable		in Fair Values
			Identical Assets		Inputs		Inputs		Included in
	Carrying Value		(Level 1)		(Level 2)		(Level 3)		Period Earnings
Available-for-sale:
Treasury securities	$	2,996	$	2,996	$	—	$	—	$	—
U.S. government agency		60,137		—		60,137		—		—
Corporate bonds		18,999		—		—		18,999		—
Foreign debt securities		7,002		—		—		7,002
Municipal securities		78,895		—		78,895		—		—
FHLMC MBS		16,728		—		16,728		—		—
FNMA MBS		57,939		—		57,939		—		—
GNMA MBS		25,839		—		25,839		—		—
Total recurring assets at fair value	$	268,535	$	2,996	$	239,538	$	26,001	$	—

	At December 31, 2018 (In thousands)
			Quoted Prices in		Other		Significant		Total Changes
			Active Markets for		Observable		Unobservable		in Fair Values
			Identical Assets		Inputs		Inputs		Included in
	Carrying Value		(Level 1)		(Level 2)		(Level 3)		Period Earnings
Available-for-sale:
Treasury securities	$	2,993	$	2,993	$	—	$	—	$	—
U.S. government agency		18,606		—		18,606		—		—
Corporate bonds		18,843		—		—		18,843		—
Foreign debt securities		3,496		—		—		3,496		—
Municipal securities		77,289		—		77,289		—		—
FHLMC MBS		18,074		—		18,074		—		—
FNMA MBS		53,659		—		53,659		—		—
GNMA MBS		26,746		—		26,746		—		—
Total recurring assets at fair value	$	219,706	$	2,993	$	194,374	$	22,339	$	—

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.

The fair value of the majority of the securities in significant unobservable inputs (Level 3) is determined using widely accepted valuation techniques including matrix pricing and broker-quote based applications. Inputs include benchmark yields, reported trades, issuer spreads, prepayments speeds and other relevant items, which inputs are used by a third-party pricing service we use to make these determinations.

The following table provides a reconciliation of changes in fair value included in assets measured in the Consolidated Balance Sheet using inputs classified as level 3 in the fair value for the period indicated:

(in thousands)	Level 3
Investment available-for-sale
Balance as of January 1, 2019	$	22,339
Realized and unrealized gains (losses)
Included in earnings		—
Included in other comprehensive income		162
Purchases, issuances, sales and settlements		3,500
Transfers into or out of level 3		—
Balance at September 30, 2019	$	26,001

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The fair value calculated may not be indicative of net realized value or reflective of future fair values.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We may be required, from time to time, to measure certain assets at fair value on a non-recurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis at September 30, 2019 and December 31, 2018 are included in the tables below.

We also measure certain non-financial assets such as OREO, TDRs, 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.

	At September 30, 2019 (In thousands)
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Carrying Value		(Level 1)		(Level 2)		(Level 3)
Impaired Loans
Legacy:	$	7,933		—		—	$	7,933
Acquired:		3,109		—		—		3,109
Total Impaired Loans		11,042		—		—		11,042
Other real estate owned:
Legacy:	$	—		—		—	$	—
Acquired:		1,092		—		—		1,092
Total other real estate owned:		1,092		—		—		1,092
Total	$	12,134	$	—	$	—	$	12,134

	At December 31, 2018 (In thousands)
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Carrying Value		(Level 1)		(Level 2)		(Level 3)
Impaired Loans
Legacy:	$	2,745		—		—	$	2,745
Acquired:		3,894		—		—		3,894
Total Impaired Loans		6,639		—		—		6,639
Other real estate owned:
Legacy:	$	—		—		—	$	—
Acquired:		883		—		—		883
Total other real estate owned:		883		—		—		883
Total	$	7,522	$	—	$	—	$	7,522

As of September 30, 2019, and December 31, 2018, we estimated the fair value of impaired assets using Level 3 inputs to be $12.1 million and $7.5 million, respectively. We determined these Level 3 inputs based on appraisal evaluations, offers to purchase and/or appraisals that we obtained from an outside third party during the preceding twelve months less costs to sell. Discounts have predominantly been in the range of 0% to 50%. As a result of the acquisitions of Maryland Bankcorp, WSB Holdings, Regal, DCB and BYBK, we have segmented the impaired loans and OREO into two components, impaired assets obtained as a result of loans originated by Old Line Bank (legacy) and impaired assets acquired from MB&T, WSB, Regal Bank, DCB and Bay Bank or obtained as a result of loans originated by MB&T, WSB, Regal Bank and Bay Bank (acquired).

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of Old Line Bancshares’ financial instruments not recorded at fair value on a recurring or non-recurring basis as of September 30, 2019 and December 31, 2018.  For short term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization.  For non-marketable equity securities, the carrying amount is a reasonable estimate of fair value as these securities can only be redeemed or sold at their par value and only to the respective issuing government-supported institution or to another member institution.  For net loans receivable, an exit price notion is used consistent with ASC Topic 820-Fair Value Measurement. For financial liabilities such as noninterest-bearing demand, interest bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

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	September 30, 2019 (in thousands)
					Quoted Prices		Significant		Significant
			Total		in Active		Other		Other
	Carrying		Estimated		Markets for		Observable		Unobservable
	Amount		Fair		Identical Assets		Inputs		Inputs
	(000’s)		Value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and cash equivalents	$	47,001	$	47,001	$	47,001	$	—	$	—
Loans receivable, net		2,473,922		2,478,723		—		—		2,478,723
Loans held for sale		22,534		22,669		—		22,669		—
Equity Securities at cost		10,887		10,887		—		10,887		—
Accrued interest receivable		7,961		7,961		—		1,650		6,311
Liabilities:
Deposits:
Non-interest-bearing		620,136		620,136		—		620,136		—
Interest bearing		1,793,209		1,810,152		—		1,810,152		—
Short term borrowings		204,379		204,379		—		204,379		—
Long term borrowings		38,569		38,569		—		38,569		—
Accrued interest payable		2,453		2,453		—		2,453		—

	December 31, 2018 (in thousands)
					Quoted Prices		Significant		Significant
			Total		in Active		Other		Other
	Carrying		Estimated		Markets for		Observable		Unobservable
	Amount		Fair		Identical Assets		Inputs		Inputs
	(000’s)		Value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and cash equivalents	$	44,501	$	44,501	$	44,501	$	—	$	—
Loans receivable, net		2,409,228		2,383,673		—		—		2,383,673
Loans held for sale		11,564		11,860		—		11,860		—
Equity Securities at cost		11,151		11,151		—		11,151		—
Accrued interest receivable		7,959		7,959		—		1,393		6,566
Liabilities:
Deposits:
Non-interest-bearing		559,060		559,060		—		559,060		—
Interest bearing		1,736,989		1,752,883		—		1,752,883		—
Short term borrowings		228,185		228,185		—		228,185		—
Long term borrowings		38,371		38,371		—		38,371		—
Accrued interest payable		2,845		2,845		—		2,845		—

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9. SHORT TERM BORROWINGS

Short term borrowings consist of promissory notes or overnight repurchase agreements sold to Old Line Bank’s customers, federal funds purchased and advances from the Federal Home Loan Bank of Atlanta (the “FHLB”). At September 30, 2019, we had $180.0 million outstanding in short term FHLB borrowings, compared to $190.0 million at December 31, 2018. At September 30, 2019 and December 31, 2018, we had no unsecured promissory notes and $24.4 million and $38.2 million, respectively, in secured promissory notes.

Securities Sold Under Agreements to Repurchase

To support the $24.4 million in repurchase agreements at September 30, 2019, we have provided collateral in the form of investment securities. At September 30, 2019 we have pledged $120.8 million in U.S. government agency securities and MBS to customers who require collateral for overnight repurchase agreements and deposits. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. As a result, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. We monitor collateral levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities in the event the collateral fair value falls below stipulated levels. We closely monitor the collateral levels to ensure adequate levels are maintained. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents. We have the right to sell or re-pledge the investment securities. For government entity repurchase agreements, the collateral is held by Old Line Bank in a segregated custodial account under a tri-party agreement. The repurchase agreements totaling $24.4 million mature daily and will remain fully collateralized until the account has been closed or terminated.

10. LONG TERM BORROWINGS

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

Also included in long term borrowings are trust preferred subordinated debentures totaling $4.3 million (net of $2.4 million fair value adjustment) at September 30, 2019 acquired in the Regal acquisition. The trust preferred subordinated debentures consists of two trusts – Trust 1 in the amount of $4.0 million (fair value adjustment of $1.3 million) maturing on March 17, 2034 and Trust 2 in the amount of $2.5 million (fair value adjustment $1.1 million) maturing on December 14, 2035.

11. LEASES

We have operating leases in which we are the lessee, and such leases are recorded on our consolidated balance sheets as operating lease ROU assets in other assets and operating lease liabilities in other liabilities. We are not a party to any significant finance leases pursuant to which we are the lessee.

Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease during the lease term. We recognize ROU assets and operating lease liabilities at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental collateralized borrowing rate at the lease commencement date. We further adjust ROU assets for lease incentives. We recognize operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, on a straight-line basis over the lease term, and record operating lease expense in net occupancy expense in the consolidated statements of income and other comprehensive income.

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Our leases relate primarily to office space and bank branches with remaining lease terms of generally 1 to 20 years. Certain lease arrangements contain extension options that typically range from 5 to 10 years at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, we do not include them in the lease term.

The tables below summarizes our net lease cost:

The operating lease costs expense were as follows:      

Three months ended September 30, 2019	$	744,472
Nine Months ended September 30, 2019	$	2,185,178

Supplemental cash flow information related to leases was as follows:        

Three months ended September 30,	2019
Operating cash flows from operating leases	$	670,716
Right-of-use assets obtained in exchange for lease
Operating leases	$	466,526
Nine months ended September 30,
Operating cash flows from operating leases	$	1,948,934
Right-of-use assets obtained in exchange for lease
Operating leases	$	1,356,776

Supplemental balance sheet information related to leases was as follows:        

Nine months ended September 30, 2019	2019
Operating lease right-of-use assets	$	27,743,459
Lease liabilities	$	28,276,343
Weighted Average Remaining Operating Lease Term In Years		12.68
Weighted Average Discount Rate on Operating Leases		3.00	%

Maturities of lease liabilities were as follows: (includes extensions of leases)    

	Operating
	Leases
One year or less	$	1,902,749
One to three years		4,080,198
Three to five years		4,238,506
Thereafter		18,501,545
Total undiscounted cash flows		28,722,998
Discount of cash flows		(446,655	)
Total lease liability	$	28,276,343

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12. PENDING ACQUISITION

On July 23, 2019, Old Line Bancshares, Old Line Bank, Wesbanco, and Wesbanco Bank, Inc. (“WesBanco Bank”), entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which WesBanco will acquire Old Line Bancshares for consideration of approximately $500 million in stock (based on the closing price of WesBanco common stock on July 22, 2019). The Merger Agreement, which has been approved by the Boards of Directors of both companies and both banks, also provides that Old Line Bank will be merged with and into WesBanco Bank immediately following the completion of the Merger. All required stockholder approvals of Wesbanco and Old Line Bancshares were obtained on October 29, 2019.

Consummation of the Merger is subject to certain conditions, including, among others, the receipt of all required regulatory approvals. Please refer to our Current Report on Form 8-K filed on July 24, 2019, for further information and details relating to the Merger Agreement.

We expect that the Merger will be consummated during the fourth quarter of 2019.

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.”

In this report, references to the “Company,” “we,” “us,” and “ours” refer to Old Line Bancshares, Inc. and its subsidiary Old Line Bank, collectively, unless the context otherwise requires, and references to the “Bank” refer to Old Line Bank.

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.

On April 1, 2011, we acquired Maryland Bankcorp, Inc. (“Maryland Bankcorp”), the parent company of Maryland Bank & Trust Company, N.A (“MB&T”), on May 10, 2013, we acquired WSB Holdings, Inc. (“WSB Holdings”), the parent company of The Washington Savings Bank, F.S.B. (“WSB”), on December 4, 2015, we acquired Regal Bancorp, Inc. (“Regal”), the parent company of Regal Bank & Trust (“Regal Bank”), on July 28, 2017, we acquired DCB Bancshares, Inc. (“DCB”), the parent company of Damascus Community Bank (“Damascus”), and on April 13, 2018, we acquired Bay Bancorp, Inc. (“BYBK”), the parent company of Bay Bank, FSB (“Bay Bank”). The BYBK acquisition brought our assets to approximately $2.8 billion and we now operate 37 full service branches serving 11 Maryland counties and Baltimore City.

Proposed Merger with WesBanco, Inc.

On July 23, 2019, the Company, Old Line Bank, Wesbanco, Inc. (“WesBanco”), and Wesbanco Bank, Inc. (“WesBanco Bank”), entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which WesBanco will acquire the Company for consideration of approximately $500 million in stock (based on the closing price of WesBanco common stock on July 22, 2019) (the “Merger”). The Merger Agreement, which has been approved by the Boards of Directors of both companies and both banks, also provides that Old Line Bank will be merged with and into WesBanco Bank immediately following the completion of the Merger. All required stockholder approvals of Wesbanco and Old Line Bancshares were obtained on October 29, 2019.

Consummation of the Merger is subject to certain conditions, including, among others, the receipt of all required regulatory approvals. Please refer to our Current Report on Form 8-K filed on July 24, 2019, for further information and details relating to the Merger Agreement.

We expect that the Merger will be consummated during the fourth quarter of 2019. References to our expectations, goals, and strategies, and similar statements, in this report with respect to periods that would occur after this time should be understood to be applicable only if the Merger is not consummated.

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Summary of Recent Performance and Other Activities

Net income increased $919 thousand, or 11.12%, to $9.2 million for the three months ended September 30, 2019, compared to $8.3 million for the three-month period ended September 30, 2018. Earnings were $0.54 per basic and diluted common share for the three months ended September 30, 2019, compared to $0.49 per basic and $0.48 per diluted common share for the three months ended September 30, 2018. The increase in net income for the third quarter of 2019 as compared to the same 2018 period is primarily the result of a $1.8 million decrease in non-interest expenses and a $1.3 million increase in non-interest income, partially offset by a $1.3 million decrease in net interest income. Net income for the 2018 period included $2.3 million ($1.5 million net of taxes) of merger-related expenses (or $0.09 per basic and diluted common share) in connection with the Company’s acquisition of BYBK in April 2018.

Net income was $26.6 million for the nine months ended September 30, 2019, compared to $17.1 million for the same period last year, an increase of $9.5 million, or 55.96%. Earnings were $1.56 per basic and $1.55 per diluted common share for the nine months ended September 30, 2019, compared to $1.12 per basic and $1.10 per diluted common share for the same period last year. The increase in net income is primarily the result of increases of $4.5 million in net interest income and $2.3 million in non-interest income and a decrease of $4.9 million in non-interest expenses. Included in net income for the 2018 period was $9.4 million ($7.6 million net of taxes, or $0.50 per basic and diluted common share) for merger-related expenses associated with the acquisition of BYBK.

The following highlights contain additional financial data and events that have occurred during the three- and nine-month periods ended September 30, 2019:

• Average gross loans increased $49.9 million, or 2.08%, and $302.3 million, or 14.20%, respectively, to $2.4 billion for each of the three- and nine-month periods ended September 30, 2019, compared to $2.1 billion and $2.4 billion, respectively, during the three and nine months ended September 30, 2018.

• Loans originated and sold in the secondary market were $120.5 million for the nine months ended September 30, 2019 compared to $77.1 million for the same nine-month period last year, resulting in an increase in income on marketable loans of $987 thousand compared to the same period last year.

• Total yield on interest earning assets increased to 4.68% for the nine months ended September 30, 2019, compared to 4.60% for the same period last year. Conversely, total yield on interest earning assets decreased to 4.61% for the three-month period ended September 30, 2019, compared to 4.69% for the corresponding 2018 period.

• Return on average assets (“ROAA”) and return on average equity (“ROAE”) were 1.19% and 9.24%, respectively, for the three months ended September 30, 2019, compared to ROAA and ROAE of 1.12% and 8.89%, respectively, for the third quarter of 2018.

• ROAA and ROAE were 1.17% and 9.14%, respectively, for the nine months ended September 30, 2019, compared to ROAA and ROAE of 0.87% and 7.31%, respectively, for the nine months ended September 30, 2018.

• Total assets increased $146.8 million, or 4.98%, during the nine months ended September 30, 2019, primarily due to increases of $64.7 million in loans held for investment and $48.8 million in our investment securities available for sale and the addition of $27.7 million for an operating lease right of use asset.

• Total deposits grew by $117.3 million, or 5.11%, since December 31, 2018 with $61.1 million of the growth occurring in non-interest bearing deposits.

• We ended the third quarter of 2019 with a book value of $23.38 per common share and a tangible book value of $17.02 per common share compared to $21.77 and $15.39, respectively, at December 31, 2018.

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

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The following summarizes the highlights of our financial performance for the three- and nine-month periods ended September 30, 2019 compared to same periods in 2018 (figures in the table may not match those discussed in the balance of this section due to rounding).

	Three months ended September 30,
	(Dollars in thousands)
	2019			2018			$ Change			% Change
Net income	$	9,184		$	8,265		$	919			11.12	%
Interest income		31,347			30,753			594			1.93
Interest expense		7,798			5,867			1,931			32.91
Net interest income before provision for loan losses		23,549			24,886			(1,337	)		(5.37	)
Provision for loan losses		456			308			148			48.05
Non-interest income		4,057			2,805			1,252			44.63
Non-interest expense		14,834			16,662			(1,828	)		(10.97	)
Average total loans		2,446,911			2,397,054			49,857			2.08
Average interest earning assets		2,730,825			2,628,566			102,259			3.89
Average total interest bearing deposits		1,753,114			1,658,060			95,054			5.73
Average non-interest bearing deposits		631,578			601,559			30,019			4.99
Net interest margin		3.48	%		3.81	%					(8.66	)
Return on average assets		1.19	%		1.12	%					6.25
Return on average equity		9.24	%		8.89	%					3.94
Basic earnings per common share	$	0.54		$	0.49		$	0.05			10.20
Diluted earnings per common share		0.54			0.48			0.06			12.50

	Nine months ended September 30,
	(Dollars in thousands)
	2019			2018			$ Change			% Change
Net income	$	26,600		$	17,056		$	9,544			55.96	%
Interest income		93,960			80,246			13,714			17.09
Interest expense		23,632			14,369			9,263			64.47
Net interest income before provision for loan losses		70,328			65,877			4,451			6.76
Provision for loan losses		943			1,235			(292	)		(23.64	)
Non-interest income		10,078			7,788			2,290			29.40
Non-interest expense		43,815			48,732			(4,917	)		(10.09	)
Average total loans		2,431,180			2,128,896			302,284			14.20
Average interest earning assets		2,717,239			2,360,680			356,559			15.10
Average total interest bearing deposits		1,748,184			1,462,088			286,096			19.57
Average non-interest bearing deposits		598,365			558,923			39,442			7.06
Net interest margin		3.52	%		3.79	%					(7.12	)
Return on average assets		1.17	%		0.87	%					34.48
Return on average equity		9.14	%		7.31	%					25.03
Basic earnings per common share	$	1.56		$	1.12		$	0.44			39.29
Diluted earnings per common share		1.55			1.10			0.45			40.91

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 continuing our strong pattern of organic loan and deposit growth, enhancing and maintaining credit quality, collecting payments on non-accrual and past due loans, profitably disposing of certain acquired loans and other real estate owned (“OREO”), maintaining an attractive branch network, expanding fee income, generating extensions of core banking services, and using technology to maximize stockholder value. During the past few years, we have expanded by acquisition into Baltimore, Carroll, Howard, Harford and Frederick Counties and Baltimore City, Maryland, organically and through acquisitions in Montgomery and Anne Arundel Counties, Maryland, and organically in Prince George’s County, Maryland.

We use the Internet and technology to augment our growth plans. Currently, we offer our customers image technology, Internet banking with online account access and bill pay service, and mobile banking. We provide selected commercial customers the ability to remotely capture their deposits and electronically transmit them to us. We will continue to evaluate cost effective ways that technology can enhance our management capabilities, products and services.

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Should the pending Merger not be consummated, we may continue to take advantage of strategic opportunities presented to us via mergers occurring in our marketplace. For example, we may purchase branches that other banks close or lease branch space from other banks or hire additional loan officers. We also continually evaluate and consider opportunities with financial services companies or institutions with which we may become a strategic partner, merge or acquire. We believe that the BYBK acquisition will continue to generate increased earnings and increased returns for our stockholders.

Although the current interest rate environment continues to present challenges for our industry, we have worked diligently towards our goal of becoming the premier community bank in Maryland. While we are uncertain about the continued pace of economic growth or the impact of the current political environment, uncertainty regarding recent tariffs imposed and future tariffs that may be imposed on imports into the United States, and the growing national debt, we remain cautiously optimistic that we have identified any problem assets, that our remaining borrowers will stay current on their loans and that we can continue to grow our balance sheet and earnings.

Although the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) had been slowly increasing the federal funds rate (which in turn increases market interest rates) between December 2015 and the end of 2018, interest rates at the beginning of 2019 were still low compared to typical interest rates before the 2007-2009 recession, and the Federal Reserve Board has cut interest rates three times during 2019. Given the resulting expectation that interest rates will, therefore, remain at historically low levels during the remainder of 2019, we believe that we can continue to grow total loans during the remainder of 2019 even given certain economic indicators and economic predictions of a coming economic slowdown or recession, although this may not come to fruition if the economy experiences a more severe slowdown than we anticipate. We also believe that we can continue to grow total deposits during the remainder of 2019 despite the expected continuation of historically low interest rate levels. As a result of this expected growth, we expect that net interest income will continue to increase during the fourth quarter of 2019, although there can be no guarantee that this will be the case.

We also expect to incur merger-related expenses during the fourth quarter of 2019 as a result of the pending Merger [. We also expect that salaries and benefits expenses and occupancy and equipment expenses will continue to be higher for 2019 and going forward generally than they were in 2018 as a result of including the expenses related to the employees and branches that we acquired in the BYBK merger. Such expenses may increase even further if we selectively take the opportunity to add more business development talent, although we will continue to look for opportunities to reduce expenses. 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.

Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. As discussed in Old Line Bancshares’ Form 10-K for the fiscal year ended December 31, 2018, we consider our critical accounting policies to be the allowance for loan losses, other-than-temporary impairment of investment securities, goodwill and other intangible assets, income taxes, business combinations and accounting for acquired loans. There have been no material changes in our critical accounting policies during the nine months ended September 30, 2019.

Results of Operations for the Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018.

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 paid on 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.

Net interest income before provision for loan losses for the three months ended September 30, 2019 decreased $1.3 million, or 5.37%, to $23.5 million from $24.9 million for the same period of 2018. As outlined in detail in the Rate/Volume Variance Analysis, this decrease was a result of an increase in interest expense, primarily due to an increase in the average interest rates on our deposits and borrowings, partially offset by an increase in total interest income, due to an increase in the average balance of our interest earning assets, partially offset by a decrease in the average yield on such assets, all as discussed further below. We continue to adjust the mix and volume of interest earning assets and liabilities on the balance sheet to maintain a relatively strong net interest margin.

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Total interest income increased $594 thousand, or 1.93%, to $31.3 million during the three months ended September 30, 2019 compared to $30.8 million during the three months ended September 30, 2018, primarily as a result of increases of $525 thousand in interest income on our investment securities available for sale and $68 thousand in interest and fees on our loans.

The increase in interest income on our investment securities is the result of increases in both their average balance and average yield. The average balance of our investment portfolio increased $56.0 million, or 23.96%, for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, primarily due to increases in the average balance of our U.S. government agency securities. The average yield on the investment portfolio increased to 3.28% for the three months ended September 30, 2019 from 3.09% during the three months ended September 30, 2018, primarily due to higher yields on our U.S. government agency securities, MBS, and other securities.

The increase in interest and fees on loans is the result of a $49.9 million increase in the average balance of our loans, driven primarily by an increase in the average balance of our mortgage loans, partially offset by an eight basis point decrease in the average yield on our loans due primarily to lower yields on new commercial and mortgage loans.

The fair value accretion/amortization on acquired loans affects interest income, primarily due to payoffs on such acquired loans. Payoffs during the three months ended September 30, 2019 contributed an 11 basis point increase in interest income, compared to 13 basis points for the three months ended September 30, 2018.

Total interest expense increased $1.9 million, or 32.91%, to $7.8 million during the three months ended September 30, 2019 from $5.9 million for the same period of 2018, primarily as a result of a 36 basis point increase in the average interest rate paid on our interest bearing liabilities, which increased to 1.56% during the three months ended September 30, 2019, from 1.20% during the three months ended September 30, 2018. This increase was due to a 40 basis point increase in the average rate paid on our deposits, primarily as a result of increases in the rates paid on our time deposits but also as a result of increases in the rates paid on our money market and NOW accounts, and, to a lesser extent, a 36 basis point increase in the average rate paid on our borrowings quarter over quarter, primarily as a result of the higher rate paid on our FHLB borrowings. The increases in the average rates paid on both our deposits and our FHLB borrowings is the result of us paying higher rates as a result of Federal Reserve Board rate increases implemented during 2018; the two decreases in the federal funds rate through September 30, 2019, did not result in a corresponding decrease in the average rates paid on our deposits as market interest rates have continued to increase despite these recent cuts.

Despite a $46.0 million, or 2.37%, increase in the average balance of our interest bearing liabilities, changes in the mix of these liabilities contributed to a slight overall decrease in interest expense as a result of changes in the average balance of such liabilities. In particular, while our average time deposits increased $118.2 million, or 15.6%, the average balance of our borrowings decreased $49.0 million, or 17.3%, period over period; because the average rate on our borrowings is significantly higher than the average rate paid on our deposits, the overall impact of these volume changes was a small decrease in total interest expense for the 2019 period.

Non-interest bearing deposits allow us to fund growth in interest earning assets at minimal cost. Average non-interest bearing deposits increased $30.0 million to $631.6 million for the three months ended September 30, 2019, compared to $601.6 million for the three months ended September 30, 2018.

Our net interest margin decreased to 3.48% for the three months ended September 30, 2019 from 3.81% for the three months ended September 30, 2018. The net interest margin decreased due to the increase in the average rate paid on our interest bearing liabilities and the decline in the average yield on our interest earning assets, which decreased eight basis points from 4.69% for the quarter ended September 30, 2018 to 4.61% for the quarter ended September 30, 2019.

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The net interest margin during the 2019 period was positively affected by the amount of accretion on acquired loans. Accretion decreased due to a lower amount of early payoffs on acquired loans with fair value marks during the three months ended September 30, 2019 compared to the same period of 2018. The fair value accretion/amortization is recorded on pay-downs recognized during the quarter, which contributed 11 basis points for the three months ended September 30, 2019 compared to 14 basis points for the three months ended September 30, 2018.

During the three months ended September 30, 2019 and 2018, we continued to successfully collect payments on acquired loans that we had recorded at fair value at the acquisition date, which resulted in a positive impact in interest income. Total accretion decreased by $197 thousand for the three months ended September 30, 2019, compared to the same period last year. The payments received were a direct result of our efforts to negotiate payments, sell notes or foreclose on and sell collateral after the acquisition date.

The accretion positively impacted the yield on loans and increased the net interest margin during these periods as follows:

	Three months ended September 30,
	2019					2018
			% Impact on					% Impact on
	Accretion		Net Interest			Accretion		Net Interest
	Dollars		Margin			Dollars		Margin
Commercial loans	$	116,166		0.02	%	$	113,378		0.02	%
Mortgage loans		430,796		0.06			620,664		0.09
Consumer loans		106,316		0.02			110,220		0.02
Interest bearing deposits		64,630		0.01			70,157		0.01
Total accretion	$	717,908		0.11	%	$	914,419		0.14	%

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Average Balances, Yields and Net Interest Margin Analysis. The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the three months ended September 30, 2019 and 2018, showing the average distribution of assets, liabilities, stockholders’ equity and related income, expense and corresponding weighted average yields and rates. Non-accrual loans are included in total loan balances lowering the effective yield for the portfolio in the aggregate. The average balances used in this table and other statistical data were calculated using average daily balances.

	Average Balances, Interest and Yields
	2019							2018
	Average				Yield/			Average				Yield/
Three months ended September 30,	balance		Interest		Rate			balance		Interest		Rate
Assets:
Federal funds sold (1)	$	559,247	$	2,964		2.10	%	$	952,087	$	3,645		1.52	%
Interest bearing deposits (1)		1,763,347		3,457		0.78			3,813,051		34,902		3.63
Investment securities (1)(2)
U.S. Treasury		2,990,893		17,087		2.27			3,008,239		17,453		2.30
U.S. government agency		64,684,335		557,867		3.42			14,152,697		95,222		2.67
Corporate bonds		18,606,348		258,924		5.52			14,618,051		200,393		5.44
Foreign bonds		6,282,609		41,318		2.61			3,500,000		21,601		2.45
Mortgage backed securities		108,940,000		593,737		2.16			107,063,440		563,384		2.09
Municipal securities		77,846,475		625,756		3.19			79,535,757		640,470		3.19
Other equity securities		10,259,800		298,533		11.54			11,754,944		279,052		9.42
Total investment securities		289,610,460		2,393,222		3.28			233,633,128		1,817,575		3.09
Loans(1)
Commercial		336,516,694		3,890,791		4.59			325,406,078		3,844,213		4.69
Mortgage real estate		2,069,258,513		24,753,504		4.75			2,015,218,388		24,438,610		4.81
Consumer		41,135,973		698,692		6.74			56,429,628		955,621		6.72
Total loans		2,446,911,180		29,342,987		4.76			2,397,054,094		29,238,444		4.84
Allowance for loan losses		8,018,971		—					6,885,911		—
Total loans, net of allowance		2,438,892,209		29,342,987		4.77			2,390,168,183		29,238,444		4.85
Total interest earning assets(1)		2,730,825,263		31,742,630		4.61			2,628,566,449		31,094,566		4.69
Non-interest bearing cash		50,954,051							48,035,416
Goodwill and intangibles		108,464,503							110,861,142
Premises and equipment		68,481,420							43,626,501
Other assets		94,581,576							103,995,121
Total assets(1)		3,053,306,813							2,935,084,629
Liabilities and Stockholders’ Equity:
Interest bearing deposits
Savings		209,675,468		88,590		0.17			224,657,254		107,608		0.19
Money market and NOW		670,171,158		1,192,205		0.71			678,323,856		968,323		0.57
Time deposits		873,267,184		4,839,111		2.20			755,079,192		3,022,855		1.59
Total interest bearing deposits		1,753,113,810		6,119,906		1.38			1,658,060,302		4,098,786		0.98
Borrowed funds		234,165,450		1,678,093		2.84			283,169,572		1,768,532		2.48
Total interest bearing liabilities		1,987,279,260		7,797,999		1.56			1,941,229,874		5,867,318		1.20
Non-interest bearing deposits		631,577,580							601,558,786
		2,618,856,840							2,542,788,660
Other liabilities		40,290,606							23,355,099
Stockholders’ equity		394,159,367							368,940,870
Total liabilities and stockholders’ equity	$	3,053,306,813						$	2,935,084,629
Net interest spread(1)						3.05							3.49
Net interest margin(1)			$	23,944,631		3.48	%			$	25,227,248		3.81	%

__________________

(1) Interest income 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.

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The following table describes the impact on our interest income and expense resulting from changes in average balances and average rates for the three months ended September 30, 2019 and 2018. We have allocated the change in interest income, interest expense and net interest income due to both volume and rate proportionately to the rate and volume variances.

Rate/Volume Variance Analysis

	Three months ended September 30,
	2019 compared to 2018
	Variance due to:
	Total			Rate			Volume
Interest earning assets:
Federal funds sold(1)	$	(681	)	$	1,832		$	(2,513	)
Interest bearing deposits		(31,445	)		(26,821	)		(4,624	)
Investment Securities(1)
U.S. Treasury		(366	)		(334	)		(32	)
U.S. government agency		462,645			110,333			352,312
Corporate bonds		58,530			10,547			47,983
Foreign bonds		19,717			4,863			14,854
Mortgage backed securities		30,353			27,012			3,341
Municipal securities		(14,714	)		(3,660	)		(11,054	)
Other		19,482			79,217			(59,735	)
Loans:(1)
Commercial		46,578			(153,796	)		200,374
Mortgage		314,894			(664,664	)		979,558
Consumer		(256,929	)		10,857			(267,786	)
Total interest income (1)		648,064			(604,614	)		1,252,678
Interest bearing liabilities
Savings		(19,018	)		(16,645	)		(2,373	)
Money market and NOW		223,882			244,154			(20,272	)
Time deposits		1,816,256			1,647,111			169,145
Borrowed funds		(90,439	)		402,566			(493,005	)
Total interest expense		1,930,681			2,277,186			(346,505	)
Net interest income(1)	$	(1,282,617	)	$	(2,881,800	)	$	1,599,183

__________________

(1) Interest income is presented on a 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.”

Provision for Loan Losses. The provision for loan losses for the three months ended September 30, 2019 was $456 thousand, an increase of $148 thousand, or 48.11%, compared to $308 thousand for the three months ended September 30, 2018. This increase was due to loan growth.

Management identified additional probable losses in the loan portfolio and recorded $371 thousand in charge-offs during the three-month period ended September 30, 2019, compared to $107 thousand in charge-offs for the three months ended September 30, 2018. We recognized recoveries of $26 thousand during the three months ended September 30, 2019 compared to recoveries of $74 thousand during the same period of 2018.

The allowance for loan losses to gross loans held for investment was 0.32% and 0.31%, and the allowance for loan losses to non-accrual loans was 106.26% and 160.42%, at September 30, 2019 and December 31, 2018, respectively. The decrease in the allowance for loan losses to non-accrual loans is primarily the result of an increase in our non-accrual loans.

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Non-interest Income. Non-interest income increased $1.3 million, or 44.64%, to $4.1 million for the three months ended September 30, 2019, from the corresponding period of 2018 amount of $2.8 million.

The following table outlines the amounts of and changes in non-interest income for the three-month periods.

	Three months ended September 30,
	2019		2018			$ Change			% Change
Service charges on deposit accounts	$	316,783	$	342,012		$	(25,229	)		(7.38	)%
Wire transfer fees		26,865		36,743			(9,878	)		(26.88	)
ATM Income		365,654		349,795			15,859			4.53
POS sponsorship program		688,188		711,577			(23,389	)		(3.29	)
Gain on sales or calls of investment securities		544,259		—			544,259			100.00
Earnings on bank owned life insurance		528,512		520,785			7,727			1.48
Gain on disposal of assets		—		(1,100	)		1,100			100.00
Write down on stock		—		(91,498	)		91,498			100.00
Rental income		214,315		204,714			9,601			4.69
Income on marketable loans		990,474		411,850			578,624			140.49
Other fees and commissions		382,447		320,457			61,990			19.34
Total non-interest income	$	4,057,497	$	2,805,335		$	1,252,162			44.64	%

Non-interest income increased during the 2019 period primarily as a result of increases in income on marketable loans and gain on sales or calls of investment securities.

Income on marketable loans consists of gain on the sale of residential mortgage loans originated for sale and any fees we receive in connection with such sales. Income on marketable loans increased $579 thousand during the three months ended September 30, 2019, compared to the same period last year due to an increase in gains recorded on the sale of residential mortgage loans as a result of a $25 million increase in the volume of mortgage loans sold in the secondary market, which resulted in an increase in the aggregate dollar amount of premiums we received for such sales compared to the same period last year. The residential mortgage division sold loans in the secondary market aggregating $53.3 million during the third quarter of 2019 compared to $28.7 million for the same period last year.

Gain on sales or calls of investment securities increased $544 thousand during the three months ended September 30, 2019, compared to the same period last year, which resulted from the calls of approximately $29.8 million of our callable agencies during the three months ended September 30, 2019 compared to no such calls for the same period last year.

Non-interest Expense. Non-interest expense decreased $1.8 million, or 10.97%, for the three months ended September 30, 2019 compared to the three months ended September 30, 2018.

43

The following table outlines the amounts of and changes in non-interest expenses for the periods.

	Three months ended September 30,
	2019		2018			$ Change			% Change
Salaries and benefits	$	7,717,352	$	7,491,736		$	225,616			3.01	%
Occupancy and equipment		2,337,124		2,349,691			(12,567	)		(0.53	)
Data processing		782,593		659,926			122,667			18.59
FDIC insurance and State of Maryland assessments		62,535		278,109			(215,574	)		(77.51	)
Merger related expenses		—		2,282,705			(2,282,705	)		100.00
Core deposit premium amortization		654,046		663,685			(9,639	)		(1.45	)
Loss on sale of other real estate owned		—		26,266			(26,266	)		100.00
OREO expense		59,272		(99,957	)		159,229			(159.30	)
Director fees		166,050		172,550			(6,500	)		(3.77	)
Network services		119,144		127,226			(8,082	)		(6.35	)
Telephone		221,293		269,070			(47,777	)		(17.76	)
Other operating		2,715,009		2,441,331			273,678			11.21
Total non-interest expenses	$	14,834,418	$	16,662,338		$	(1,827,920	)		(10.97	)%

Non-interest expenses decreased quarter over quarter primarily as a result of the lack of merger-related expenses during the 2019 period compared to $2.3 million in merger and integration expenses during the three months ended September 30, 2018 from the BYBK acquistion, partially offset by increases of $226 thousand in salaries and employee benefits, $274 thousand in other operating expenses and $123 thousand in data processing for the three months ended September 30, 2019 compared to the same period of 2018.

Other operating expenses, a noted above, increased $274 thousand quarter over quarter. These expenses include, for example, office supplies, software expense, and marketing and advertising expenses.

Data processing expenses increased as a result of additional customer transactions quarter over quarter.

Income Taxes. We had income tax expense of $3.1 million (25.43% of pre-tax income) for the three months ended September 30, 2019 compared to income tax expense of $2.5 million (22.91% of pre-tax income) for the same period of 2018. The effective tax rate increased for the 2019 period primarily due to an increase in our tax-exempt earnings for the three months ended September 30, 2019 compared to same period last year.

Results of Operations for the Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018.

Net interest income before provision for loan losses for the nine months ended September 30, 2019 increased $4.5 million, or 6.76%, to $70.3 million from $65.9 million for the same period of 2018. As outlined in detail in the Rate/Volume Variance Analysis, this increase was the result of an increase in total interest income, primarily due to an increase in loan interest income resulting from increases in the average balance of and, to a lesser extent, the average yield on, our loans, partially offset by an increase in interest expense resulting from increases in the average rate on and, to a lesser extent, the average balance of, our interest bearing liabilities, all as discussed further below.

Total interest income increased $13.7 million, or 17.09%, to $94.0 million during the nine months ended September 30, 2019 compared to $80.2 million during the nine months ended September 30, 2018, primarily as a result of an $11.9 million increase in interest and fees on loans. The increase in interest and fees on loans is primarily the result of a $302.3 million increase in the average balance of our loans during the nine months ended September 30, 2019 compared to the same period of 2018, as a result of both organic growth and the loans acquired in the BYBK acquisition. In addition, the average yield on the loan portfolio increased to 4.68% for the nine months ended September 30, 2019 from 4.76% during the nine months ended September 30, 2018 due primarily to higher yields on new mortgage loans. The fair value accretion/amortization on acquired loans affects interest income, primarily due to payoffs on such acquired loans. Payoffs contributed a 12 basis point increase in interest income for each of the nine-month periods ended September 30, 2019 and 2018.

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A $1.8 million increase in interest earned on investment securities also contributed to the increase in total interest income. This increase was the result of an increase in the average balance of our investment securities, primarily in our U.S. government agency securities, and, to a lesser extent, an increase in the average yield on our investment securities. The average yield on our investment securities increased 25 basis points for nine months ended September 30, 2019 compared to the same period of 2018, primarily as a result of increases in the average rate on our MBS and our U.S. government agency securities.

Total interest expense increased $9.3 million, or 64.46%, to $23.6 million during the nine months ended September 30, 2019 from $14.4 million for the same period of 2018, as a result of increases in the average rate paid on and, to a lesser extent, the average balance of, our interest bearing liabilities. The average interest rate paid on all interest bearing liabilities increased to 1.57% during the nine months ended September 30, 2019 from 1.11% during the nine months ended September 30, 2018, due primarily to higher interest rates paid on our time deposits, although the average rate increased on all of our interest bearing liabilities period over period. The fair value accretion recorded on acquired deposits also affects interest expense, however, the benefit from accretion on such deposits was one basis point for both nine-month periods ended September 30, 2019 and 2018.

The average balance of our interest bearing liabilities increased $280.8 million, or 16.21%, to $2.0 billion for the nine months ended September 30, 2019 from $1.7 billion for the nine months ended September 30, 2018, as a result of a $286.1 million, or 19.57%, increase in our average interest bearing deposits, partially offset by a decrease in our average borrowings of $5.3 million, or 1.98%, period over period. The increase in the average balance of our interest bearing deposits is primarily due to the deposits that we acquired in the BYBK acquisition. The decrease in the average balance of our borrowings is primarily due to the reduction of short-term FHLB advances.

Average non-interest bearing deposits increased $39.4 million to $598.4 million for the nine months ended September 30, 2019, compared to $558.9 million for the nine months ended September 30, 2018 as a result of the non-interest bearing deposits that we acquired in the BYBK acquisition and the successful efforts of our commercial loan officers and business development officers in working with loan clients to move their commercial deposits to Old Line Bank.

Our net interest margin decreased to 3.52% for the nine months ended September 30, 2019 from 3.79% for the nine months ended September 30, 2018. The net interest margin decreased due to an increase in the average rate paid on our interest bearing liabilities, partially offset by the improvement in the yield on average interest earning assets, which increased eight basis points from 4.60% for the nine months ended September 30, 2018 to 4.68% for the nine months ended September 30, 2019, as well as an increase in non-interest bearing deposits as a source of funding. The net interest margin during 2019 was also positively affected by the amount of accretion on acquired loans. Accretion increased due to a higher amount of early payoffs on acquired loans with fair value marks during the nine months ended September 30, 2019 compared to the same period of 2018. The fair value accretion/amortization is recorded on pay-downs recognized during the period, which payoffs contributed a 12 basis point increase in interest income for both nine-month periods ended September 30, 2019 and 2018.

During the nine months ended September 30, 2019 and 2018, we continued to successfully collect payments on acquired loans that we had recorded at fair value at the acquisition date, which resulted in a positive impact in interest income. Total accretion increased by $260 thousand for the nine months ended September 30, 2019, as compared to the same period last year. The higher level of accretion on acquired loans was due to a higher level of early payoffs on acquired loans with credit marks and the higher level of acquired loans with accreting marks.

The accretion positively impacted the yield on loans and increased the net interest margin during these periods as follows:

	Nine months ended September 30,
	2019					2018
			% Impact on					% Impact on
	Accretion		Net Interest			Accretion		Net Interest
	Dollars		Margin			Dollars		Margin
Commercial loans	$	327,537		0.02	%	$	370,902		0.02	%
Mortgage loans		1,718,730		0.08			1,451,314		0.08
Consumer loans		415,002		0.02			334,338		0.02
Interest bearing deposits		176,339		0.01			221,221		0.01
Total accretion	$	2,637,608		0.13	%	$	2,377,775		0.13	%

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Average Balances, Yields and Accretion of Fair Value Adjustments Impact. The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the nine months ended September 30, 2019 and 2018, showing the average distribution of assets, liabilities, stockholders’ equity and related income, expense and corresponding weighted average yields and rates. Non-accrual loans are included in total loan balances lowering the effective yield for the portfolio in the aggregate. The average balances used in this table and other statistical data were calculated using average daily balances.

	Average Balances, Interest and Yields
	2019							2018
	Average				Yield/			Average				Yield/
Nine months ended September 30,	balance		Interest		Rate			balance		Interest		Rate
Assets:
Federal funds sold (1)	$	818,886	$	11,980		1.96	%	$	641,625	$	7,287		1.52	%
Interest bearing deposits (1)		1,845,457		5,590		0.40			4,556,328		34,909		1.02
Investment securities (1)(2)
U.S. Treasury		2,990,327		51,492		2.30			3,184,060		46,190		1.94
U.S. government agency		64,245,263		1,666,856		3.47			13,957,146		278,303		2.67
Corporate bonds		19,727,097		776,942		5.27			13,383,969		607,601		5.10
Foreign bonds		3,732,601		93,963		3.37			3,500,000		35,979		3.15
Mortgage backed securities		110,809,163		1,933,777		2.33			108,259,016		1,690,299		2.09
Municipal securities		78,431,991		1,893,998		3.23			79,767,641		1,927,042		3.23
Other equity securities		11,315,717		966,635		11.42			10,945,092		894,447		10.93
Total investment securities		291,252,159		7,383,663		3.39			232,996,924		5,479,861		3.14
Loans(1)
Commercial		345,513,339		12,058,838		4.67			285,941,800		10,273,526		4.88
Mortgage real estate		2,040,608,972		73,292,120		4.80			1,783,718,356		62,548,306		4.61
Consumer		45,057,835		2,380,670		7.06			59,235,553		2,945,729		6.62
Total loans		2,431,180,146		87,731,628		4.68			2,128,895,709		75,767,561		4.76
Allowance for loan losses		7,857,731		—					6,410,911		—
Total loans, net of allowance		2,423,322,415		87,731,628		4.84			2,122,484,798		75,767,561		4.77
Total interest earning assets(1)		2,717,238,917		95,132,861		4.68			2,360,679,675		81,289,618		4.60
Non-interest bearing cash		48,947,806							44,005,578
Goodwill and intangibles		109,120,518							81,303,285
Premises and equipment		60,560,567							42,778,668
Other assets		96,357,244							90,534,120
Total assets(1)		3,032,225,052							2,619,301,326
Liabilities and Stockholders’ Equity:
Interest bearing deposits
Savings		211,652,678		272,999		0.17			193,371,948		245,133		0.17
Money market and NOW		663,793,362		3,631,025		0.73			616,787,570		2,478,336		0.54
Time deposits		872,737,680		13,936,209		2.13			651,928,973		6,828,286		1.40
Total interest bearing deposits		1,748,183,720		17,840,233		1.36			1,462,088,491		9,551,755		0.87
Borrowed funds		264,092,084		5,791,436		2.93			269,426,578		4,817,613		2.39
Total interest bearing liabilities		2,012,275,804		23,631,669		1.57			1,731,515,069		14,369,368		1.11
Non-interest bearing deposits		598,365,381							558,923,100
		2,610,641,185							2,290,438,169
Other liabilities		32,675,582							17,072,083
Stockholders’ equity		388,908,285							311,791,074
Total liabilities and stockholders’ equity	$	3,032,225,052						$	2,619,301,326
Net interest spread(1)						3.11							3.49
Net interest margin(1)			$	71,501,192		3.52	%			$	66,920,250		3.79	%

__________________

(1) Interest income is presented on a 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.

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The following table describes the impact on our interest income and expense resulting from changes in average balances and average rates for the nine months ended September 30, 2018 and 2017. We have allocated the change in interest income, interest expense and net interest income due to both volume and rate proportionately to the rate and volume variances.

Rate/Volume Variance Analysis

	Nine months ended September 30,
	2019 compared to 2018
	Variance due to:
	Total			Rate			Volume
Interest earning assets:
Federal funds sold(1)	$	4,693		$	2,733		$	1,960
Interest bearing deposits		(29,319	)		(16,889	)		(12,430	)
Investment Securities(1)
U.S. Treasury		5,302			8,785			(3,483	)
U.S. government agency		1,388,553			139,583			1,248,970
Corporate bond		169,341			(110,599	)		279,940
Foreign bonds		57,984			56,061			1,923
Mortgage backed securities		243,478			211,781			31,697
Municipal securities		(33,044	)		(1,048	)		(31,996	)
Other		72,188			46,305			25,883
Loans:(1)
Commercial		1,785,312			(386,958	)		2,172,270
Mortgage		10,743,814			1,974,587			8,769,227
Consumer		(565,059	)		218,612			(783,671	)
Total interest income (1)		13,843,243			2,142,953			11,700,290
Interest bearing liabilities
Savings		27,866			5,525			22,341
Money market and NOW		1,152,689			995,635			157,054
Time deposits		7,107,923			4,793,191			2,314,732
Borrowed funds		973,823			1,093,101			(119,278	)
Total interest expense		9,262,301			6,887,452			2,374,849
Net interest income(1)	$	4,580,942		$	(4,744,499	)	$	9,325,441

__________________

(1) Interest income is presented on a 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.”

Provision for Loan Losses. The provision for loan losses for the nine months ended September 30, 2019 was $943 thousand, a decrease of $292 thousand, or 23.66%, compared to $1.2 million for the nine months ended September 30, 2018. This decrease is due to the fact that existing reserves were generally adequate to cover the increase in the loan portfolio during the nine-month period, as well as the fact that some loans for which we had a specific loan reserve at December 31, 2018 were paid off during the nine months ended September 30, 2019.

Management identified additional probable losses in the loan portfolio and recorded $537 thousand in charge-offs for the nine months ended September 30, 2019 compared to charge-offs of $273 thousand for the nine months ended September 30, 2018. We recognized recoveries of $124 thousand during the nine months ended September 30, 2019 compared to $98 thousand for the same period of 2018.

Non-interest Income. Non-interest income totaled $10.1 million for the nine months ended September 30, 2019, an increase of $2.3 million, or 29.40%, from the corresponding period of 2018 amount of $7.8 million.

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The following table outlines the amounts of and changes in non-interest income for the nine-month periods.

	Nine months ended September 30,
	2019		2018			$ Change			% Change
Service charges on deposit accounts	$	950,397	$	926,343		$	24,054			2.60	%
Wire transfer fees		87,664		98,887			(11,223	)		(11.35	)
ATM income		1,011,124		1,002,783			8,341			0.83
POS Sponsorship program		1,925,005		1,385,079			539,926			38.98
Gain on sales or calls of investment securities		560,186		—			560,186			100.00
Earnings on bank owned life insurance		1,547,445		1,274,777			272,668			21.39
Gain on disposal of assets		32,599		13,266			19,333			145.73
Loss on sale of stock		—		(152,496	)		152,496			100.00
Rental income		644,945		602,208			42,737			7.10
Income on marketable loans		2,329,160		1,342,201			986,959			73.53
Other fees and commissions		989,523		1,295,359			(305,836	)		(23.61	)
Total non-interest income	$	10,078,048	$	7,788,407		$	2,289,641			29.40	%

Non-interest income increased during the 2019 period compared to the 2018 period primarily as a result of increases of $540 thousand in income from our point of sale (“POS”) sponsorship program, which was not in place during the first quarter of 2018, $987 thousand in income on marketable loans, $560 thousand in gain on sales or calls of investment securities, and $273 thousand in earnings on bank owned life insurance, partially offset by a decrease of $306 thousand in other fees and commissions.

Income on marketable loans increased $987 thousand during the nine months ended September 30, 2019, compared to the same period last year due to an increase in gains recorded on the sale of residential mortgage loans primarily as a result of a higher volume of loans sold in the secondary market. The residential mortgage division originated loans aggregating $122.3 million for sale in the secondary market during the nine months ended September 30, 2019 compared to $76.7 million for the same period last year.

Gain on sales or calls of investment securities increased $560 thousand during the 2019 period compared to the 2018 period, which resulted from the calls on approximately $49.2 million of our callable U.S. government agency securities during the nine months ended September 30, 2019 compared to no such calls for the same period last year.

The increase in earnings on bank owned life insurance is due to the $16.3 million of bank owned life insurance that we acquired in the BYBK merger.

Other fees and commissions decreased $306 thousand during the nine months ended September 30, 2019, compared to the same period last year, primarily due to the receipt of a one-time bonus on our annuity plan during the nine months ended September 30, 2018, for which we had no corresponding income for the nine months ended September 30, 2019.

Non-interest Expense. Non-interest expense decreased $4.9 million, or 10.09%, for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.

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The following table outlines the amounts of and changes in non-interest expenses for the periods.

	Nine months ended September 30,
	2019		2018		$ Change			% Change
Salaries and benefits	$	22,451,706	$	20,178,521	$	2,273,185			11.27	%
Occupancy and equipment		7,185,918		6,572,733		613,185			9.33
Data processing		2,270,503		1,971,747		298,756			15.15
FDIC insurance and State of Maryland assessments		571,151		786,506		(215,355	)		(27.38	)
Merger and integration		—		9,404,507		(9,404,507	)		100.00
Core deposit premium amortization		1,961,631		1,516,734		444,897			29.33
Loss on sale of other real estate owned		—		80,738		(80,738	)		(100.00	)
OREO expense		126,771		113,032		13,739			12.15
Director fees		515,550		539,750		(24,200	)		(4.48	)
Network services		349,908		302,038		47,870			15.85
Telephone		702,990		725,976		(22,986	)		(3.17	)
Other operating		7,678,720		6,539,421		1,139,299			17.42
Total non-interest expenses	$	43,814,848	$	48,731,703	$	(4,916,855	)		(10.09	)%

Non-interest expenses decreased period over period primarily as a result of our having no merger and integration expenses during the nine months ended September 30, 2019 compared to $9.4 million in merger and integration expenses during the same period last year from the BYBK acquisition, partially offset by increases in salaries and employee benefits, occupancy and equipment, core deposit premium amortization, data processing, and other operating expenses.

Salaries and employee benefits increased $2.3 million and occupancy and equipment expenses increased $613 thousand period over period primarily as a result of the inclusion of expenses related to the staff and the branches, respectively, that we acquired in the BYBK acquisition for the entire nine-month period of 2019 compared to just approximately five and half months of such expenses for the nine months ended September 30, 2018.

Core deposit amortization increased $445 thousand for the nine-month period ended September 30, 2019 compared to the same period last year as a result of the higher amortization of premiums from deposits that we acquired in the BYBK acquisition.

Data processing expenses increased for the nine-month period ended September 30, 2019 compared to the same period last year as a result of additional customer transactions primarily due to the additional branches, and therefore additional customers, resulting from our acquisition of BYBK, which were included for the full 2019 period but for less than two-thirds of the 2018 period.

Other operating expenses increased $1.1 million due to increases in general operating costs, including marketing and advertising, sponsorships and donations, loan expenses, and software expense.

Income Taxes. We had income tax expense of $9.0 million (25.38% of pre-tax income) for the nine months ended September 30, 2019 compared to income tax expense of $6.6 million (28.03% of pre-tax income) for the same period of 2018. The effective tax rate decreased for the 2019 period primarily due to the non-deductible merger expenses we incurred during the nine months ended September 30, 2018, for which there was no corresponding expense for the nine months ended September 30, 2019.

Analysis of Financial Condition

Investment Securities. Our portfolio consists primarily of investment grade securities including U.S. Treasury securities, U.S. government agency securities, U.S. government sponsored entity securities, corporate bonds, foreign bonds, securities issued by states, counties and municipalities, MBS, certain equity securities (recorded at cost), Federal Home Loan Bank stock, Maryland Financial Bank stock, and Atlantic Community Bankers Bank stock.

We have prudently managed our investment portfolio to maintain liquidity and safety. The portfolio provides a source of liquidity and 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 at fair value and report the unrealized appreciation and depreciation as a separate component of stockholders’ equity, net of income tax effects. Although we may sell securities to reposition the portfolio, generally, we invest in securities for the yield they produce and not to profit from trading the securities. We continually evaluate our investment portfolio to ensure it is adequately diversified, provides sufficient cash flow and does not subject us to undue interest rate risk. There are no trading securities in our portfolio.

49

Our investment securities at September 30, 2019 amounted to $268.5 million, an increase of $48.8 million, or 22.22%, from the December 31, 2018 amount of $219.7 million. As outlined above, at September 30, 2019, all such securities are classified as available for sale.

The fair value of available for sale securities included net unrealized gains of $1.5 million at September 30, 2019 (reflected as $1.1 million net of taxes) compared to net unrealized losses of $7.6 million (reflected as $5.5 million net of taxes) at December 31, 2018. The increase in the value of the investment securities is due to the decrease in market interest rates, which resulted in an increase in bond values. We have evaluated securities with unrealized losses for an extended period of time and determined that all such 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. Net of allowance, unearned fees and origination costs, loans held for investment increased $64.7 million, or 2.69%, during the nine months ended September 30, 2019, increasing to $2.5 billion at September 30, 2019 from $2.4 billion at December 31, 2018. Loan growth during 2019 was a result of net organic growth of $184.5 million, due to new commercial real estate loan originations, partially offset by $120.0 million in paydowns on previously-acquired loans. Commercial real estate loans increased by $103.0 million, residential real estate loans decreased by $14.0 million, commercial and industrial loans decreased by $11.9 million, and consumer loans decreased by $12.5 million from their respective balances at December 31, 2018.

Most of our lending activity occurs within the state of Maryland in the suburban Washington, D.C. and Baltimore market areas of Baltimore City and Anne Arundel, Baltimore, Calvert, Carroll, Charles, Frederick, Harford, Howard, Montgomery, Prince George’s and St. Mary’s Counties. The majority of our loan portfolio consists of commercial real estate loans and residential real estate loans.

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The following table summarizes the composition of the loan portfolio held for investment by dollar amount at the dates indicated:

	September 30, 2019									December 31, 2018
	Legacy (1)			Acquired			Total			Legacy (1)			Acquired			Total
Commercial Real Estate
Owner Occupied	$	309,452,786		$	124,699,211		$	434,151,997		$	299,266,275		$	140,892,706		$	440,158,981
Investment		662,296,193			175,779,493			838,075,686			592,529,807			195,883,002			788,412,809
Hospitality		231,201,755			18,957,943			250,159,698			172,189,046			13,134,019			185,323,065
Land and A&D		81,167,986			7,034,455			88,202,441			71,908,761			21,760,867			93,669,628
Residential Real Estate
First Lien-Investment		127,305,162			40,180,391			167,485,553			104,084,050			48,483,340			152,567,390
First Lien-Owner Occupied		108,338,535			123,386,650			231,725,185			108,696,078			140,221,589			248,917,667
Residential Land and A&D		42,648,776			10,016,798			52,665,574			42,639,161			16,828,434			59,467,595
HELOC and Jr. Liens		22,149,070			35,570,762			57,719,832			20,749,184			41,939,123			62,688,307
Commercial and Industrial		255,088,072			64,195,020			319,283,092			239,766,662			91,431,724			331,198,386
Consumer		13,004,012			25,708,210			38,712,222			16,289,147			34,919,111			51,208,258
Total loans		1,852,652,347			625,528,933			2,478,181,280			1,668,118,171			745,493,915			2,413,612,086
Allowance for loan losses		(7,780,318	)		(221,034	)		(8,001,352	)		(7,004,839	)		(466,184	)		(7,471,023	)
Deferred loan costs, net		3,742,124			—			3,742,124			3,086,635			—			3,086,635
Net loans	$	1,848,614,153		$	625,307,899		$	2,473,922,052		$	1,664,199,967		$	745,027,731		$	2,409,227,698

__________________

(1) As a result of the acquisitions of Maryland Bankcorp, WSB Holdings, Regal, DCB and BYBK, we have segmented the portfolio into two components, “Legacy” loans originated by Old Line Bank and “Acquired” loans acquired from MB&T, WSB, Regal Bank, Damascus and Bay Bank.

Bank Owned Life Insurance (“BOLI”). At September 30, 2019, we have invested $69.2 million in life insurance policies on our executive officers, other officers of Old Line Bank, retired officers of MB&T and former officers of WSB, Regal Bank, Damascus and Bay Bank. BOLI increased $1.2 million during the nine months ended September 30, 2019 as a result of the interest earned on these policies. Gross earnings on BOLI were $1.5 million during the nine months ended September 30, 2019, which earnings were partially offset by $300 thousand in expenses associated with the policies, for total net earnings of $1.2 million. We anticipate that the earnings on these policies will continue to help offset our employee benefit expenses as well as our obligations under our salary continuation agreements and supplemental life insurance agreements that we have entered into with our executive officers and that MB&T and WSB had entered into with their executive officers. 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 $190 thousand liability associated with the post-retirement death benefits of the BOLI policies acquired from MB&T and there are no such benefits related to the BOLI policies acquired from WSB, Regal Bank, Damascus or Bay Bank.

Annuity Plan. Our annuity plan is an interest earning investment that we purchased to fund a new supplemental retirement plan and amendments to existing retirement plans that will provide lifetime payments to two of our executive officers. We invested $6.0 million during the fourth quarter of 2017 and the annuity plan was effective January 1, 2018. The annuity plan was valued at $6.2 million at September 30, 2019 and December 31, 2018.

Deposits. Deposits increased $117.3 million during the nine months ended September 30, 2019, to $2.4 billion at September 30, 2019 from $2.3 billion at December 31, 2018. This increase is comprised of a $61.1 million increase in our non-interest bearing deposits and a $56.2 million increase in our interest bearing deposits.

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The following table outlines the changes in interest bearing deposits:

	September 30,		December 31,
	2019		2018		$ Change			% Change
	(Dollars in thousands)
Certificates of deposit	$	867,525	$	865,255	$	2,270			0.26	%
Interest bearing checking		717,115		657,061		60,054			9.14
Savings		208,569		214,673		(6,104	)		(2.84	)
Total	$	1,793,209	$	1,736,989	$	56,220			3.24	%

We acquire brokered certificates of deposit and money market accounts 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 Federal Deposit Insurance Corporation (the “FDIC”) insured deposit products in aggregate amounts exceeding current insurance limits. When we place funds through Promontory on behalf of a customer, we receive matching deposits through the network’s reciprocal deposit program. We can also place deposits through this network without receiving matching deposits. At September 30, 2019, we had $40.1 million in CDARS and $165.8 million in money market accounts through Promontory’s reciprocal deposit program compared to $47.9 million and $168.8 million, respectively, at December 31, 2018.

We do not currently have any brokered certificates of deposit other than CDARS. Old Line Bank did not obtain any brokered certificates of deposit during the nine months ended September 30, 2019. We may, however, use brokered deposits in the future as an element of our funding strategy if and when required to maintain an acceptable loan to deposit ratio.

Borrowings. Short term borrowings consist of short term borrowings with the FHLB and short term promissory notes issued to Old Line Bank’s commercial customers as 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 and are secured by investments. At September 30, 2019, we had $180.0 million outstanding in short term FHLB borrowings, compared to $190.0 million at December 31, 2018. At September 30, 2019 and December 31, 2018, we had no unsecured promissory notes and $24.4 million and $38.2 million, respectively, in secured promissory notes.

Long term borrowings at September 30, 2019 consist primarily of the Notes in the amount of $35.0 million (fair value of $34.3 million) due in 2026. The initial interest rate on the Notes is 5.625% per annum from August 15, 2016 to August 14, 2021, payable semi-annually on each February 15 and August 15. Beginning August 15, 2021, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month LIBOR rate plus 450.2 basis points, payable quarterly on each February 15, May 15, August 15 and November 15 through maturity or early redemption. Also included in long term borrowings are trust preferred subordinated debentures totaling $4.0 million (net of $2.4 million fair value adjustment) that we acquired in the Regal acquisition. The trust preferred subordinated debentures consists of two trusts – Trust 1 in the amount of $4.0 million (fair value adjustment of $1.3 million) with an interest rate of floating 90-day LIBOR plus 2.85%, maturing in 2034 and Trust 2 in the amount of $2.5 million (fair value adjustment $1.1 million) with an interest rate of floating 90-day LIBOR plus 1.60%, maturing in 2035.

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Liquidity and Capital Resources. 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 regulatory guidelines. As further discussed below, we have credit lines, unsecured and secured, available from several correspondent banks totaling $70.0 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 flow from the investment and loan portfolios.

Our immediate sources of liquidity are cash and due from banks, federal funds sold and deposits in other banks. On September 30, 2019 we had $45.0 million in cash and due from banks, $1.6 million in interest bearing accounts, and $389 thousand in federal funds sold. As of December 31, 2018, we had $41.5 million in cash and due from banks, $2.1 million in interest bearing accounts, and $954 thousand 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.

We did not have any unusual liquidity requirements during the nine months ended September 30, 2019. Although we plan for various liquidity scenarios, if turmoil in the financial markets occurs and our depositors lose confidence in us, we could experience liquidity issues.

Old Line Bancshares has available a $5.0 million unsecured line of credit at September 30, 2019. In addition, Old Line Bank has $65.0 million in available lines of credit at September 30, 2019, consisting of overnight federal funds from its correspondent banks. Old Line Bank has an additional secured line of credit from the FHLB of $742.3 million at September 30, 2019. 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 $446.3 million in lendable collateral value for FHLB borrowings. We may increase availability by providing additional collateral. Additionally, we have overnight repurchase agreements sold to Old Line Bank’s customers and have provided collateral in the form of investment securities to support the $24.4 million in repurchase agreements.

The FDIC and the Federal Reserve Board have adopted risk-based capital rules for banking organizations. These rules require ratios of capital to assets for minimum capital adequacy and to be classified as well capitalized under prompt corrective action provisions. Under these rules, a bank is considered “well capitalized” if it: (i) has a total risk-based capital ratio of 10.0% or greater; (ii) a Tier 1 risk-based capital ratio of 8.0% or greater; (iii) a common Tier 1 equity ratio of at least 6.5% or greater; (iv) a Tier 1 leverage capital ratio of 5.0% or greater; and (v) is not subject to any written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure.

Additionally, the rules limit a banking organization’s ability to make capital distributions, engage in share repurchases, and pay certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The minimum ratios including the buffer are: (i) (i) a total risk-based capital ratio of 10.5%; (ii) a Tier 1 risk-based capital ratio of 8.5%; (iii) a common Tier 1 equity ratio of 7.0%. The buffer does not apply to the Tier 1 leverage capital ratio.

As of September 30, 2019, Old Line Bancshares’ capital levels were such that it remained characterized as “well capitalized” under the rules.

Current regulations require subsidiaries of a financial institution to be separately capitalized and require investments in and extensions of credit to any subsidiary engaged in activities not permissible for a bank to be deducted in the computation of the institution’s regulatory capital. Regulatory capital and regulatory assets below also reflect decreases of $1.1 million and $1.5 million, respectively, which represents unrealized gains (after-tax for capital additions and pre-tax for asset additions, respectively) on MBS and investment securities classified as available for sale. In addition, the risk-based capital reflects an increase of $8.0 million for the general loan loss reserve during the nine months ended September 30, 2019.

As of September 30, 2019, Old Line Bank met all capital adequacy requirements to be considered well capitalized. There were no conditions or events since the end of the third quarter of 2019 that management believes have changed Old Line Bank’s classification as well capitalized.

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The following table shows Old Line Bank’s regulatory capital ratios and the minimum capital ratios currently required by its banking regulator to be “well capitalized” at September 30, 2019.

						Minimum capital					To be well
	Actual					adequacy(1)					capitalized
September 30, 2019	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in 000’s)
Common equity tier 1 (to risk-weighted assets)	$	315,990		11.68	%	$	121,767		4.5	%	$	175,885		6.5	%
Total capital (to risk weighted assets)	$	324,169		11.98	%	$	216,474		8	%	$	270,593		10	%
Tier 1 capital (to risk weighted assets)	$	315,990		11.68	%	$	162,356		6	%	$	216,474		8	%
Tier 1 leverage (to average assets)	$	315,990		10.74	%	$	117,712		4	%	$	147,139		5	%

__________________

(1) Does not include the capital conservation buffer of 2.5% that is added on top of each of the minimum risk-based capital ratios noted above other than the Tier leverage (to average assets) ratio.

Our management believes that, under current regulations, and eliminating the assets of Old Line Bancshares, Old Line Bank remains well capitalized and will continue to meet its minimum capital requirements in the foreseeable future. However, events beyond our control, such as a shift in interest rates or an economic downturn in areas where we extend credit, could adversely affect future earnings and, consequently, our ability to meet minimum capital requirements in the future.

Asset Quality

Overview. Management performs reviews of all delinquent loans and foreclosed assets and directs relationship officers to work with customers to resolve potential credit issues in a timely manner. Management reports to the Bank’s Loan Committee weekly and requests its approval for loans that require such approval pursuant to our loan policies. Management also reports to the board of directors with respect to certain loan matters on a monthly basis. Such reports include, among other things, information on delinquent loans and foreclosed real estate. We have formal action plans on criticized assets and provide status reports on OREO on a quarterly basis. These action plans include our actions and plans to cure the delinquent status of the loans and to dispose of foreclosed properties. The Loan Committee consists of four executive officers and four non-employee members of the board of directors.

We classify any property acquired as a result of foreclosure on a mortgage loan as OREO 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.

Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of a borrower has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. These loans do not meet the criteria for, and are therefore not included in, nonperforming assets. Management, however, classifies potential problem loans as either special mention, watch, or substandard. These loans were considered in determining the adequacy of the allowance for loan losses and are closely and regularly monitored to protect our interests. Potential problem loans, which are not included in nonperforming assets, amounted to $23.3 million at September 30, 2019 compared to $26.2 million at December 31, 2018. At September 30, 2019, we had $10.7 million and $12.6 million, respectively, of potential problem loans attributable to our legacy and acquired loan portfolios, compared to $13.0 million and $13.2 million, respectively, at December 31, 2018.

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Acquired Loans. Loans acquired in mergers are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan losses. U.S. GAAP requires 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 nonperforming 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. Purchased, credit-impaired loans that perform consistent with the accretable yield expectations are not reported as non-accrual or nonperforming.

We recorded at fair value all acquired loans from MB&T, WSB, Regal Bank, Damascus and Bay Bank. The fair value of the acquired loans includes expected loan losses, and as a result there was no allowance for loan losses 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 charge-offs are normally lower for acquired loans since we recorded these loans net of expected loan losses. Therefore, the ratio of net charge-offs 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 when compared in total.

Applicable accounting guidance requires that if we experience a decrease in the expected cash flows of a loan subsequent to its acquisition date, we establish an allowance for loan losses for such acquired loan with decreased cash flows. At September 30, 2019, there was $221 thousand of allowance reserved for potential loan losses on acquired loans compared to $466 thousand at December 31, 2018.

Nonperforming Assets. As of September 30, 2019, our nonperforming assets totaled $9.5 million and consisted of $7.5 million of nonaccrual loans, $929 thousand of loans past due 90 days and still accruing and OREO of $1.1 million.

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The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.

	Nonperforming Assets
	September 30, 2019						December 31, 2018
	Legacy		Acquired		Total		Legacy		Acquired		Total
Accruing loans 90 or more days past due
Commercial Real Estate
Owner Occupied	$	—	$	—	$	—	$	—	$	—	$	—
Investment		—		—		—		—		139,247		139,247
Residential Real Estate:
First Lien-Investment		—		83,391		83,391		—		—		—
First Lien-Owner Occupied		—		771,798		771,798		—		103,365		103,365
Commercial		58,665		—		58,665		—		—		—
Consumer		15,419		—		15,419		—		54		54
Total accruing loans 90 or more days past due		74,084		855,189		929,273		—		242,666		242,666
Non-accrued loans:
Commercial Real Estate
Owner Occupied		2,691,810		249,087		2,940,897		—		182,261		182,261
Investment		576,671		52,646		629,317		—		51,070		51,070
Land and A&D		—		10,000		10,000		—		45,000		45,000
Residential Real Estate:
First Lien-Investment		392,490		130,973		523,463		192,501		292,758		485,259
First Lien-Owner Occupied		243,846		1,446,632		1,690,478		262,194		2,027,974		2,290,168
Land and A&D		284,179		199,234		483,413		277,704		201,737		479,441
HELOC and Jr. Liens		—		788,585		788,585		—		690,732		690,732
Commercial		336,179		10,435		346,614		191,388		45,269		236,657
Consumer		29,071		87,825		116,896		15,658		180,846		196,504
Total non-accrued past due loans:		4,554,246		2,975,417		7,529,663		939,445		3,717,647		4,657,092
Other real estate owned (“OREO”)		—		1,091,634		1,091,634		—		882,810		882,810
Total nonperforming assets	$	4,628,330	$	4,922,240	$	9,550,570	$	939,445	$	4,843,123	$	5,782,568
Accruing Troubled Debt Restructurings
Commercial Real Estate:
Owner Occupied	$	—	$	1,476,072	$	1,476,072	$	—	$	1,510,628	$	1,510,628
Residential Real Estate:
First Lien-Owner Occupied		—		391,479		391,479		—		402,650		402,650
Commercial		323,747		64,385		388,132		349,387		67,791		417,178
Consumer		22,668		—		22,668		26,301		—		26,301
Total Accruing Troubled Debt Restructurings	$	346,415	$	1,931,936	$	2,278,351	$	375,688	$	1,981,069	$	2,356,757

The table below reflects our ratios of our nonperforming assets at September 30, 2019 and December 31, 2018.

	September 30,			December 31,
	2019			2018
Ratios, Excluding Acquired Assets
Total nonperforming assets as a percentage of total loans held for investment and OREO		0.25	%		0.06	%
Total nonperforming assets as a percentage of total assets		0.19	%		0.04	%
Total nonperforming assets as a percentage of total loans held for investment		0.25	%		0.06	%
Ratios, Including Acquired Assets
Total nonperforming assets as a percentage of total loans held for investment and OREO		0.39	%		0.24	%
Total nonperforming assets as a percentage of total assets		0.31	%		0.20	%
Total nonperforming assets as a percentage of total loans held for investment		0.39	%		0.24	%

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The table below presents a breakdown of the recorded book balance of non-accruing loans at September 30, 2019 and December 31, 2018.

	September 30, 2019								December 31, 2018
			Unpaid				Interest				Unpaid
	# of		Principal		Recorded		Not		# of		Principal		Recorded		Interest Not
	Contracts		Balance		Investment		Accrued		Contracts		Balance		Investment		Accrued
Legacy
Commercial Real Estate:
Owner Occupied		1	$	2,691,810	$	2,691,810	$	70,802		—	$	—	$	—	$	—
Investment		1		576,671		576,671		29,167		—		—		—		—
Residential Real Estate
First Lien-Investment		2		392,490		392,490		50,426		1		192,501		192,501		34,588
First Lien-Owner Occupied		2		243,846		243,846		1,248		2		262,194		262,194		1,413
Land and A & D		1		284,179		284,179		29,316		1		277,704		277,704		16,947
Commercial		4		336,179		336,179		19,412		3		191,388		191,388		6,052
Consumer		3		29,071		29,071		241		3		15,658		15,658		648
Total non-accrual loans		14		4,554,246		4,554,246		200,612		10		939,445		939,445		59,648
Acquired(1)
Commercial Real Estate:
Owner Occupied		1	$	268,416	$	249,087	$	42,378		3	$	283,083	$	182,261	$	42,871
Investment		1		72,408		52,646		8,262		1		72,408		51,070		2,117
Land and A & D		1		293,376		10,000		191,064		1		328,851		45,000		176,212
Residential Real Estate
First Lien-Investment		2		131,636		130,973		3,109		3		298,187		292,758		16,682
First Lien-Owner Occupied		8		1,455,748		1,446,632		139,301		11		2,167,249		2,027,974		201,174
HELOC and Jr. Lien		11		802,140		788,585		35,908		2		701,430		690,732		23,529
Land and A & D		2		209,953		199,234		29,494		9		212,957		201,737		21,319
Commercial		1		10,647		10,435		271		1		48,750		45,269		3,107
Consumer		16		88,987		87,825		1,542		20		183,941		180,846		6,923
Total non-accrual loans		43		3,333,311		2,975,417		451,329		51		4,296,856		3,717,647		493,934
Total all non-accrued loans		57	$	7,887,557	$	7,529,663	$	651,941		61	$	5,236,301	$	4,657,092	$	553,582

__________________

(1) U.S. GAAP requires 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 nonperforming 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 90 or more days past due.

Non-accrual legacy loans at September 30, 2019 increased $3.6 million from December 31, 2018, due primarily to the addition of two commercial real estate loans aggregating $3.3 million.

Non-accrual acquired loans at September 30, 2019 decreased $742 thousand from December 31, 2018 due primarily to a residential mortgage loan that had previously been classified as non-accrual being paid off during 2019.

At September 30, 2019, there was no legacy OREO. Acquired OREO was $1.1 million at September 30, 2019 compared to $883 thousand at December 31, 2018.

Allowance for Loan Losses. 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 Staff Accounting Bulletin 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.

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We have in place risk management practices designed to ensure timely identification of changes in loan risk profiles. Undetected losses, however, inherently exist within the portfolio. Although we may allocate specific portions of the allowance for specific loans or other factors, the entire allowance is available for any loans that we should charge off. We will not create a specific valuation allowance for a loan unless we consider the loan impaired.

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

				Commercial		Residential
September 30, 2019	Commercial			Real Estate		Real Estate			Consumer			Total
Beginning balance	$	1,562,740		$	4,728,694	$	1,081,394		$	98,195		$	7,471,023
Provision for loan losses		41,176			432,152		248,477			220,953			942,758
Recoveries		11,353			1,251		53,149			58,320			124,073
Total		1,615,269			5,162,097		1,383,020			377,468			8,537,854
Loans charged off		(52,858	)		—		(166,526	)		(317,118	)		(536,502	)
Ending Balance	$	1,562,411		$	5,162,097	$	1,216,494		$	60,350		$	8,001,352
Amount allocated to:
Legacy Loans:
Individually evaluated for impairment	$	92,424		$	—	$	71,621		$	1,328		$	165,373
Other loans not individually evaluated		1,465,552			5,152,097		939,200			58,096			7,614,945
Acquired Loans:
Individually evaluated for impairment		4,435			10,000		205,673			926			221,034
Ending balance	$	1,562,411		$	5,162,097	$	1,216,494		$	60,350		$	8,001,352

				Commercial		Residential
December 31, 2018	Commercial			Real Estate		Real Estate			Consumer			Total
Beginning balance	$	1,262,030		$	3,783,735	$	844,355		$	30,466		$	5,920,586
Provision for loan losses		241,994			943,709		220,513			442,479			1,848,695
Recoveries		69,469			1,250		18,350			16,144			105,213
Total		1,573,493			4,728,694		1,083,218			489,089			7,874,494
Loans charged off		(10,753	)		—		(1,824	)		(390,894	)		(403,471	)
Ending Balance	$	1,562,740		$	4,728,694	$	1,081,394		$	98,195		$	7,471,023
Amount allocated to:
Legacy Loans:
Individually evaluated for impairment	$	13,149		$	—	$	39,420		$	1,416		$	53,985
Other loans not individually evaluated		1,455,841			4,714,354		702,934			77,726			6,950,855
Acquired Loans:
Individually evaluated for impairment		93,750			14,340		339,040			19,053			466,183
Ending balance	$	1,562,740		$	4,728,694	$	1,081,394		$	98,195		$	7,471,023

The ratios of the allowance for loan losses are as follows at the dates indicated:

	September 30, 2019		December 31, 2018
Ratio of allowance for loan losses to:
Total gross loans held for investment	0.32	%	0.31	%
Non-accrual loans	106.26	%	160.42	%
Net charge-offs to average loans	0.00	%	0.01	%

During the nine months ended September 30, 2019, we charged off $537 thousand in loans through the allowance for loan losses compared to $403 thousand for the year ended December 31, 2018.

The allowance for loan losses represented 0.32% and 0.31%, respectively, of gross loans held for investment at September 30, 2019 and December 31, 2018, and 0.42% and 0.45%, respectively, of legacy loans at September 30, 2019 and December 31, 2018. 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.

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Overall, we continue to believe that the loan portfolio remains manageable in terms of charge-offs and nonperforming assets as a percentage of total loans. We remain diligent and aware of our credit costs and the impact that these can have on our financial institution, and we have taken proactive measures to identify problem loans, including in-house and independent review of larger transactions. Our policy for evaluating problem loans includes obtaining new certified real estate appraisals as needed. We continue to monitor and review frequently the overall asset quality within the loan portfolio.

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 that would have a material effect on Old Line Bancshares.

Outstanding loan commitments and lines and letters of credit at September 30, 2019 and December 31, 2018, are as follows:

	September 30, 2019		December 31, 2018
	(Dollars in thousands)
Commitments to extend credit and available credit lines:
Commercial	$	192,517	$	198,969
Real estate-undisbursed development and construction		204,811		232,680
Consumer		73,485		77,780
Total	$	470,813	$	509,429
Standby letters of credit	$	17,182	$	17,513

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 counterparty. 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 creditworthiness 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 $192.5 million, or 40.89% of the $470.8 million of outstanding commitments, at September 30, 2019 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 creditworthiness and the collateral required on a case by case basis.

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Reconciliation of Non-GAAP Measures

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

Three months ended September 30, 2019

						Net
	Net Interest					Interest
	Income		Yield			Spread
GAAP net interest income	$	23,548,935		3.42	%		3.00	%
Tax equivalent adjustment
Federal funds sold		111		—			—
Investment securities		177,627		0.03			0.03
Loans		217,958		0.03			0.03
Total tax equivalent adjustment		395,696		0.06			0.06
Tax equivalent interest yield	$	23,944,631		3.48	%		3.06	%

Three months ended September 30, 2018

						Net
	Net Interest					Interest
	Income		Yield			Spread
GAAP net interest income	$	24,886,006		3.76	%		3.44	%
Tax equivalent adjustment
Federal funds sold		92		—			—
Investment securities		159,520		0.02			0.02
Loans		181,630		0.03			0.03
Total tax equivalent adjustment		341,242		0.05			0.05
Tax equivalent interest yield	$	25,227,248		3.81	%		3.49	%

Nine months ended September 30, 2019

						Net
	Net Interest					Interest
	Income		Yield			Spread
GAAP net interest income	$	70,328,460		3.46	%		3.05	%
Tax equivalent adjustment
Federal funds sold		338		—			—
Investment securities		541,955		0.03			0.03
Loans		630,439		0.03			0.03
Total tax equivalent adjustment		1,172,732		0.06			0.06
Tax equivalent interest yield	$	71,501,192		3.52	%		3.11	%

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Nine months ended September 30, 2018

						Net
	Net Interest					Interest
	Income		Yield			Spread
GAAP net interest income	$	65,877,013		3.73	%		3.43	%
Tax equivalent adjustment
Federal funds sold		208		—			—
Investment securities		481,771		0.03			0.03
Loans		561,258		0.03			0.03
Total tax equivalent adjustment		1,043,237		0.06			0.06
Tax equivalent interest yield	$	66,920,250		3.79	%		3.49	%

Non-GAAP financial measures included in this quarterly report should be read along with these tables providing a reconciliation of non-GAAP financial measures to U.S. GAAP financial measures. The Company’s management believes that the non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company and provide meaningful comparison to its peers. Non-GAAP financial measures should not be consider as an alternative to any measure of performance or financial condition as promulgated under U.S. GAAP, and investors should consider the Company’s performance and financial condition as reported under U.S. GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the results or financial condition as reported under U.S. GAAP.

Impact of Inflation and Changing Prices

Management has prepared the financial statements and related data presented herein in accordance with U.S. GAAP, 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.

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 forward-looking statements presented herein with respect to, among other things: (a) our objectives, expectations and intentions, including (i) that the BYBK acquisition will continue to generate increased earnings and increased returns for our stockholders, (ii) anticipated increases in certain non-interest expenses and that net interest income will continue to increase during the remainder of 2019, (iii) the amount of potential problem loans, (iv) our belief that we have identified any problem assets and that our borrowers will continue to remain current on their loans, (v) expected losses on and our intentions with respect to our investment securities, (vi) continued earnings on bank owned life insurance, (vii) expanding fee income and generating extensions of core banking services, and (viii) hiring and acquisition possibilities; (b) sources of and sufficiency of liquidity; (c) the impact of outstanding off-balance sheet commitments; (d) the adequacy of the allowance for loan losses; (e) expected loan, deposit, balance sheet and earnings growth; (f) expectations with respect to the impact of pending legal proceedings; (g) the anticipated impact of recent accounting pronouncements; (h) continuing to meet regulatory capital requirements; (i) improving earnings per share and stockholder value; (j) the expected timing of the consummation of our pending merger with WesBanco; and (k) financial and other goals and plans.

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

For a more complete discussion of some of these risks and uncertainties referred to above, see “Risk Factors” in Old Line Bancshares’ Annual Report on Form 10-K for the year ended December 31, 2018, as updated as set forth in Item 1A of Old Line Bancshares’ Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2019.

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. Various factors, including interest rates, foreign exchange rates, commodity prices, or equity prices, may cause these changes. We are subject to market risk primarily through the effect of changes in interest rates on our portfolio of assets and liabilities. Foreign exchange rates, commodity prices, or equity prices do not pose significant market risk to us. Due to the nature of our operations, only interest rate risk is significant to our consolidated results of operations or financial position. We have no material changes in our quantitative and qualitative disclosures about market risk as of September 30, 2019 from that presented in our Annual Report on Form 10-K for the year ended December 31, 2018.

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 tables below present Old Line Bank’s interest rate sensitivity at September 30, 2019 and December 31, 2018. Because certain categories of securities and loans are prepaid before their maturity date even without regard to interest rate fluctuations, we have made certain assumptions to calculate the expected maturity of securities and loans.

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	Interest Sensitivity Analysis
	September 30, 2019
	Maturing or Repricing
	Within			4 - 12			1 - 5			Over
	3 Months			Months			Years			5 Years			Total
	(Dollars in thousands)
Interest Earning Assets:
Interest bearing accounts	$	30		$	—		$	—		$	—		$	30
Time deposits in other banks		—			250			100			—			350
Federal funds sold		389			—			—			—			389
Investment securities		—			5,501			7,308			255,726			268,535
Loans		311,360			118,386			1,177,345			871,090			2,478,181
Total interest earning assets		311,779			124,137			1,184,753			1,126,816			2,747,485
Interest Bearing Liabilities:
Interest-bearing transaction deposits		475,664			241,452			—			—			717,116
Savings accounts		69,523			69,523			69,523			—			208,569
Time deposits		13,651			425,608			428,265			—			867,524
Total interest-bearing deposits		558,838			736,583			497,788			—			1,793,209
FHLB advances		180,000			—			—			—			180,000
Other borrowings		24,379			—			—			38,569			62,948
Total interest-bearing liabilities		763,217			736,583			497,788			38,569			2,036,157
Period Gap	$	(451,438	)	$	(612,446	)	$	686,965		$	1,088,247		$	711,328
Cumulative Gap	$	(451,438	)	$	(1,063,884	)	$	(376,919	)	$	711,328
Cumulative Gap/Total Assets		(14.58	)%		(34.35	)%		(12.17	)%		22.97	%

	Interest Sensitivity Analysis
	December 31, 2018
	Maturing or Repricing
	Within			4 - 12			1 - 5			Over
	3 Months			Months			Years			5 Years			Total
	(Dollars in thousands)
Interest Earning Assets:
Interest bearing accounts	$	30		$	—		$	—		$	—		$	30
Time deposits in other banks		—			—			—			—			—
Federal funds sold		954			—			—			—			954
Investment securities		2,776			4,882			64,437			147,611			219,706
Loans		364,674			103,417			1,064,479			881,042			2,413,612
Total interest earning assets		368,434			108,299			1,128,916			1,028,653			2,634,302
Interest Bearing Liabilities:
Interest-bearing transaction deposits		436,132			220,929			—			—			657,061
Savings accounts		71,558			71,558			71,558			—			214,674
Time deposits		136,838			343,596			384,820			—			865,254
Total interest-bearing deposits		644,528			636,083			456,378			—			1,736,989
FHLB advances		190,000			—			—			—			190,000
Other borrowings		38,185			—			—			38,371			76,556
Total interest-bearing liabilities		872,713			636,083			456,378			38,371			2,003,545
Period Gap	$	(504,279	)	$	(527,784	)	$	672,538		$	990,282		$	630,757
Cumulative Gap	$	(504,279	)	$	(1,032,063	)	$	(359,525	)	$	630,757
Cumulative Gap/Total Assets		(17.09	)%		(34.99	)%		(12.19	)%		21.38	%

Item 4. Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, Old Line Bancshares’ Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of Old Line Bancshares’ disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based upon that evaluation, Old Line Bancshares’ Chief Executive Officer and Chief Financial Officer concluded that Old Line Bancshares’ disclosure controls and procedures are effective as of September 30, 2019. 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.

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In addition, there were no changes in Old Line Bancshares’ internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2019, 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

From time to time, we may be involved in litigation relating to claims arising out of our normal course of business. Currently, we are not involved in any legal proceedings the outcome of which, in management’s opinion, would be material to our financial condition or results of operations.

Item 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, 2018, as updated as set forth in Item 1A of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2019.

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

As reflected in the following table we did not repurchased any shares of our common stock during the quarter ended September 30, 2019:

Shares Purchased during the period:	Total number of shares repurchased		Average Price paid per share		Total number of share purchased as part of publicly announced program(1)		Maximum number of shares that may yet be purchased under the program (1)
July 1 -September 30, 2019		—		—		62,497		779,139
Total		—		—

__________________

(1) On November 28, 2018, Old Line Bancshares’ board of directors approved the repurchase of up to 850,000 shares of our outstanding common stock. This repurchase approval replaces the previous authorization for Old Line Bancshares to repurchase up to 500,000 shares of its common stock, approved in February 2015, pursuant to which there were 160,763 shares remaining available to be repurchased, which prior authorization was terminated upon approval of the new repurchase authorization. As of September 30, 2019, 70,861 shares had been repurchased under the current authorization at an average price of $24.90 per share or a total cost of approximately $1.8 million.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

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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
32	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101	Interactive Data Files pursuant to Rule 405 of Regulation S-T.

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SIGNATURES

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

	Old Line Bancshares, Inc.
Date: November 8, 2019	By:	/s/ James W. Cornelsen
		James W. Cornelsen, President and Chief Executive Officer
		(Principal Executive Officer)
Date: November 8, 2019	By:	/s/ Elise M. Adams
		Elise M. Adams Executive Vice President and Chief Financial Officer (Principal Accounting and Financial Officer)

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