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

☐

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

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

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

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

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

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

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.

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.

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

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

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

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

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%.

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.

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.

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.

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.

	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.

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)

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.

Loans Modified as a TDR for the three months ended

September 30, 2019

September 30, 2018

Pre-

Post

Pre-

Post

Modification

Outstanding

Troubled Debt Restructurings—

#of

Recorded

#of

Recorded

(Dollars in thousands)

Contracts

Investment

Contracts

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

Outstanding

Troubled Debt Restructurings—

#of

Recorded

#of

Recorded

(Dollars in thousands)

Contracts

Investment

Contracts

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.

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.

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

	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

	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

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

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.

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

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.

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.

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.

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

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.

	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		—

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.

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

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.

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.

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.”

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.

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.

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.

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	%

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.

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.

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.

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.

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	%

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

OLD LINE BANCSHARES INC 10-Q