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TABLE OF CONTENTS
Item 8. Financial Statements

Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K


ý

 

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

For the fiscal year ended December 31, 2013

OR

o

 

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

1525 Pointer Ridge Place
Bowie, Maryland

(Address of principal executive offices)

 

20716
(Zip Code)

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

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

Common stock, par value $0.01 per share    Name of exchange on which registered 
(Title of each class)   The NASDQ Stock Market LLC

         Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes    ý No

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. o Yes    ý No

         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 ý    No o

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

         Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

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

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller Reporting Company ý

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes    ý No

         The aggregate market value of the common equity held by non-affiliates was $97.0 million as of June 30, 2013 based on a sales price of $13.19 per share of Common Stock, which is the sales price at which the Common Stock was last traded on June 30, 2013 as reported by the NASDAQ Stock Market LLC.

         The number of shares outstanding of the issuer's Common Stock was 10,785,370 as of March 1, 2014.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the Proxy Statement for the 2014 Annual Meeting of Stockholders of Old Line Bancshares, Inc., to be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year, are incorporated by reference in Part III of this Annual Report on Form 10-K.

   


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OLD LINE BANCSHARES, INC.

ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013

PART I

       

Item 1.

 

Business

   
1
 

Item 1A.

 

Risk Factors

    18  

Item 1B.

 

Unresolved Staff Comments

    24  

Item 2.

 

Properties

    25  

Item 3.

 

Legal Proceedings

    27  

Item 4.

 

Mine Safety Disclosures

    27  

PART II

   
 
 

Item 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   
28
 

Item 6.

 

Selected Financial Data

    30  

Item 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

    31  

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

    69  

Item 8.

 

Financial Statements

    71  

Item 9.

 

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

    136  

Item 9A.

 

Controls and Procedures

    136  

Item 9B.

 

Other Information

    136  

PART III

   
 
 

Item 10.

 

Directors, Executive Officers and Corporate Governance

   
137
 

Item 11.

 

Executive Compensation

    137  

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    137  

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

    137  

Item 14.

 

Principal Accounting Fees and Services

    138  

PART IV

   
 
 

Item 15.

 

Exhibits, Financial Statement Schedules

   
139
 

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PART I

Item 1.

Cautionary Note About Forward Looking Statements

        Some of the matters discussed in this annual report including under the captions "Business of Old Line Bancshares, Inc.," "Business of Old Line Bank," "Risk Factors", and "Management's Discussion And Analysis Of Financial Condition And Results Of Operations" and elsewhere in this annual report constitute forward looking statements. These forward-looking statements include (a) our objectives, expectations and intentions, including (i) branch retention and market expansion, (ii) statements regarding anticipated changes in non-interest expenses and that net interest income will continue to increase during 2014, (iii) maintenance of the core and net interest margins, (iv) our belief that we have identified any problem assets and that our borrowers will continue to remain current on their loans, (v) Old Line Bancshares being well positioned to capitalize on potential opportunities in a healthy economy, (vi) expected losses on and our intentions with respect to our investment securities, (vii) earnings on bank owned life insurance, (viii) continued use of brokered deposits for funding, and (ix) expected collection on acquired impaired loans; (b) sources of and sufficiency of liquidity; (c) the adequacy of the allowance for loan losses; (d) expected loan, deposit, asset, balance sheet and earnings growth; (e) collecting payment on non-accrual loans; (f) expectations with respect to the impact of pending legal proceedings; (g) improving earnings per share and stockholder value; (i) the impact of off-balance sheet arrangements; (h) that income from the new Silver Spring loan production office will offset associated costs; and (i) financial and other goals and plans.

        Old Line Bancshares bases these statements on our beliefs, assumptions and on information available to us as of the date of this filing, which involves risks and uncertainties. These risks and uncertainties include, among others: the risk that Old Line Bancshares may fail to realize all of the anticipated benefits of the merger with WSB Holdings ; our ability to retain key personnel; our ability to successfully implement our growth and expansion strategy; risk of loan losses; that the allowance for loan losses may not be sufficient; that changes in interest rates and monetary policy could adversely affect Old Line Bancshares; that changes in regulatory requirements and/or restrictive banking legislation may adversely affect Old Line Bancshares, including regulations adopted pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"); that the market value of our investments could negatively impact stockholders' equity; risks associated with or lending limit; expenses associated with operating as a public company; potential conflicts of interest associated with the interest in Pointer Ridge; deterioration in general economic conditions, continued slow growth during the recovery or another recession; and changes in competitive, governmental, regulatory, technological and other factors which may affect us specifically or the banking industry generally; and other risks otherwise discussed in this report, including under "Item 1A. Risk Factors."

        Our actual results and the actual outcome of our expectations and strategies could differ materially from those anticipated or estimated because of these risks and uncertainties and you should not put undue reliance on any forward-looking statements. All forward-looking statements speak only as of the date of this filing, and we undertake no obligation to update the forward-looking statements to reflect factual assumptions, circumstances or events that have changed after we have made the forward-looking statements.

Business

        Old Line Bancshares, Inc.    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, Inc. is to own all of the capital stock of Old Line Bank.

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        On May 22, 2003, the stockholders of Old Line Bank approved the reorganization of Old Line Bank into a holding company structure. The reorganization became effective on September 15, 2003. In connection with the reorganization, (i) Old Line Bank became our wholly-owned subsidiary and (ii) each outstanding share (or fraction thereof) of Old Line Bank common stock was converted into one share (or fraction thereof) of Old Line Bancshares, Inc. common stock, and the former holders of Old Line Bank common stock became the holders of all our outstanding shares.

        Our primary business is to own all of the capital stock of Old Line Bank. We also have an approximately $499,871 investment in a real estate investment limited liability company named Pointer Ridge Office Investment, LLC ("Pointer Ridge"). We own 62.50% of Pointer Ridge.

        Old Line Bank is a trust company chartered under Subtitle 2 of Title 3 of the Financial Institutions Article of the Annotated Code of Maryland. Old Line Bank was originally chartered in 1989 as a national bank under the title "Old Line National Bank." In June 2002, Old Line Bank converted to a Maryland chartered trust company exercising the powers of a commercial bank, and received a Certificate of Authority to do business from the Maryland Commissioner of Financial Regulation.

        Old Line Bank converted from a national bank to a Maryland chartered trust company to reduce certain federal, supervisory and application fees that were then applicable to Old Line National Bank and to have a local primary regulator. Prior to the conversion, Old Line Bank's primary regulator was the Office of the Comptroller of the Currency. Currently, Old Line Bank's primary regulator is the Maryland Commissioner of Financial Regulation.

        Old Line Bank does not exercise trust powers and its regulatory structure is the same as a Maryland chartered commercial bank. Old Line Bank is a member of the Federal Reserve System and the Federal Deposit Insurance Corporation insures our deposits.

        We are headquartered in Bowie, Maryland, approximately 10 miles east of Andrews Air Force Base and 20 miles east of Washington, D.C. We engage in a general commercial banking business, making various types of loans and accepting deposits. We market our financial services to small to medium sized businesses, entrepreneurs, professionals, consumers and high net worth clients. Our current primary market area is the suburban Maryland (Washington, D.C. suburbs) counties of Anne Arundel, Calvert, Charles, Montgomery, Prince George's and St. Mary's. We also target customers throughout the greater Washington, D.C. metropolitan area.

        Our principal source of revenue is interest income and fees generated by lending and investing funds on deposit. We typically balance the loan and investment portfolio towards loans. Generally speaking, loans earn more attractive returns than investments and are a key source of product cross sales and customer referrals. Our loan and investment strategies balance the need to maintain adequate liquidity via excess cash or federal funds sold with opportunities to leverage our capital appropriately.

        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 maintaining credit quality, creating an attractive branch network, expanding fee income, generating extensions of core banking services and using technology to maximize stockholder value.

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

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Recent Mergers and Acquisitions

        WSB Holdings, Inc.    On May 10, 2013, Old Line Bancshares acquired WSB Holdings, Inc. ("WSB Holdings"), the parent company of The Washington Savings Bank, F.S.B. ("WSB"). In connection with the acquisition, WSB was merged with and into Old Line Bank, with Old Line Bank the surviving bank. We have retained, and expect to continue to retain, all of WSB's branches and the branch personnel, with severance of employees occurring at WSB's lending, credit, operations, accounting and executive offices. We are pleased to have the remaining WSB personnel as part of the Old Line Bank team and anticipate that they will be a significant contributor to our success.

        As anticipated, the acquisition, the addition of new lenders and our five new branches caused an increase in non-interest expense in 2013. As a result of the addition of these individuals and branches, however, we also experienced an increased level of loan and deposit growth during 2013 that we expect will continue for the foreseeable future, which has provided and we expect will continue to provide increase interest income that exceeds their non-interest expenses. We acquired WSB's established mortgage origination group in the acquisition. This group originates real estate residential loans for our portfolio and loans classified as held for sale to be sold in the secondary market.

        The acquisition increased Old Line Bancshares, Inc.'s total assets by more than $310 million immediately after closing. As a result of this acquisition, Old Line Bank is the fourth largest independent commercial bank based in Maryland, with assets of more than $1.2 billion and 23 full service branches serving five counties.

        Maryland Bankcorp, Inc.    On April 1, 2011, Old Line Bancshares acquired Maryland Bankcorp, Inc. ("Maryland Bankcorp"), the parent company of Maryland Bank & Trust Company, N.A. ("MB&T"). In connection with the acquisition, MB&T was merged with and into Old Line Bank, with Old Line Bank the surviving bank. The acquisition of MB&T's ten full-service branches expanded our market presence in Calvert and St. Mary's counties. The acquisition increased Old Line Bancshares, Inc.'s total assets by more than $349 million immediately after closing to approximately $750 million.

        For more information regarding our mergers and acquisitions, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Mergers and Acquisitions" and Note 2—Acquisition of WSB Holdings, Inc. in the Notes to our Consolidated Financial Statements.

Location and Market Area

        We consider our current primary market area to consist of the suburban Maryland (Washington, D.C. suburbs) counties of Anne Arundel, Calvert, Charles, Prince George's, Montgomery and St. Mary's. The economy in our current primary market area has focused on real estate development, high technology, retail and the government sector.

        Our headquarters and a branch are located at 1525 Pointer Ridge Place, Bowie, Prince George's County, Maryland. A critical component of our strategic plan and future growth is Prince George's County. We currently have eight branch locations and four loan production offices in Prince George's County. Prince George's County wraps around the eastern boundary of Washington, D.C. and offers urban, suburban and rural settings for employers and residents. There are several national and international airports less than an hour away, as is Baltimore. As a result of the acquisition of WSB, we acquired the building located at 4201 Mitchellville Road, Bowie, Maryland which houses our mortgage group as well as administrative staff. This loan production office primarily originates loans sold in the secondary market and has expanded our presence in the surrounding counties of the Washington D.C. metro area.

        We currently have six branch offices and a loan production office located in Charles County, Maryland. Just 15 miles south of the Washington Capital Beltway, Charles County is the gateway to Southern Maryland. The northern part of Charles County is the "development district" where the

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commercial, residential and business growth is focused. Waldorf, White Plains and the planned community of St. Charles are located here.

        Five of our branch offices are located in Anne Arundel County, Maryland. We have one in Annapolis that we opened in September 2008 that we relocated and expanded to include a loan production office in 2011. We have another branch that we opened in Crofton in July 2009. We have three branches that were acquired in the WSB acquisition, located in Crofton, Millersville and Odenton. Anne Arundel County borders the Chesapeake Bay and is situated in the high tech corridor between Baltimore and Washington, D.C. With over 534 miles of shoreline, it provides waterfront living to many residential communities. Annapolis, the State Capital and home to the United States Naval Academy, and Baltimore/Washington International Thurgood Marshal Airport (BWI) are located in Anne Arundel County. Anne Arundel County has one of the strongest economies in the State of Maryland and its unemployment rate is consistently below the national average.

        We expanded our presence in Calvert and St. Mary's counties in 2011 as a result of the MB&T acquisition. The unemployment rates in Calvert and St. Mary's counties are among the lowest in the state of Maryland and also consistently rank below the national average. Calvert County, located approximately 25 miles southeast of Washington, D.C., is one of several Maryland counties that comprise the Washington Metropolitan Area and is adjacent to Anne Arundel, Prince George's, St. Mary's and Charles Counties. Major employers in Calvert County include municipal and government agencies and Constellation Energy. We have two branches and a loan production office in Calvert County. In St. Mary's County, we have three branches and a loan production office. St. Mary's County is located approximately 35 miles southeast of Washington, D.C. It is adjacent to Charles, Calvert and St. Mary's counties and is home to the Patuxent River Naval Air Station, a major naval air testing facility on the east coast of the United States.

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

        During the first quarter of 2013, we opened a loan production office located at 12501 Prosperity Drive, Suite 215, Silver Spring, in Montgomery County, Maryland. We have hired a Senior Vice President with over 30 years of banking experience to lead this office. This office will allow us to continue to expand our services to the Montgomery County market. We anticipate that the individuals in this office will generate sufficient interest and non-interest income during 2014 and beyond to more than offset the cost associated with this office. Montgomery County is located just to the north of Washington, D.C., and is adjacent to Frederick, Howard and Prince George's Counties in Maryland and Loudoun and Fairfax Counties in Virginia. Montgomery County is an important business and research center and is the third largest biotechnology cluster in the United States. The U.S. Department of Health and Human Services, the U.S. Department of Defense, and the U.S. Department of Commerce are among the top county employers. Several large firms are also based in the county, including Marriott International, Lockheed Martin, GEICO, Discovery Communications and the Travel Channel. Montgomery County has the tenth highest median household income in the U.S., and the second highest in the state of Maryland.

Lending Activities

        General.    Our primary market focus is on making loans to small and medium size businesses, entrepreneurs, professionals, consumers and high net worth clients in our primary market area. Our lending activities consist generally of short to medium term commercial business loans, commercial real estate loans, real estate construction loans, home equity loans and consumer installment loans, both secured and unsecured As a result of the WSB acquisition, we now originate residential loans for sale in the secondary market in addition to originating loans we maintain in our portfolio.

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        Credit Policies and Administration.    We have adopted a comprehensive lending policy, which includes stringent underwriting standards for all types of loans. 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 our executive officers and eight members of the Board of Directors must approve by a majority vote all credit decisions in excess of a lending officer's lending authority. Management believes that 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 normal repayment risks, all loans in the portfolio are subject to risks stemming from the state of the economy and the related effects on the borrower and/or the real estate market. With the exception of loans provided to finance luxury boats, which we originated prior to 2008, generally longer term loans have periodic interest rate adjustments and/or call provisions. Senior management monitors the loan portfolio closely to ensure that we minimize past due loans and that we swiftly deal with potential problem loans.

        Old Line Bank also engages an outside, independent firm to review the loan portfolio. This firm performs a detailed annual review and an interim update at least once a year. We use the results of the firm's report to validate our internal loan ratings and we review their commentary on specific loans and on our loan administration activities in order to improve our operations.

        Commercial and Industrial Lending.    Our commercial and industrial lending consists of lines of credit, revolving credit facilities, accounts receivable financing, term loans, equipment loans, SBA loans, standby letters of credit and unsecured loans. We originate commercial 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 higher average balances, increased difficulty monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrower's business. 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 usually includes a review of the borrower's annual tax returns and updated financial statements.

        Commercial Real Estate Lending.    We finance commercial real estate for our clients, usually for owner occupied properties. We generally will finance owner occupied commercial real estate at a maximum loan to value of 85%. Our underwriting policies and processes focus on the clients' ability to repay the loan as well as an assessment of the underlying real estate. We originate commercial real estate loans on a fixed rate or adjustable rate basis. Usually, these rates adjust during a three, five or seven year time period based on the then current treasury or prime rate index. Repayment terms include amortization schedules from three years to a maximum of 25 years with principal and interest payments due monthly and with all remaining principal due at maturity. We also make commercial real estate construction loans, primarily for owner-occupied properties.

        Commercial real estate lending entails significant additional risks as compared with residential mortgage lending. Risks inherent in managing a commercial real estate portfolio relate to sudden or gradual drops in property values as well as changes in the economic climate that may detrimentally impact the borrower's ability to repay. We attempt to mitigate these risks by carefully underwriting these loans. Our underwriting generally includes an analysis of the borrower's capacity to repay, the current collateral value, a cash flow analysis and review of the character of the borrower and current and prospective

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conditions in the market. We generally limit loans in this category to 75%-80% of the value of the property and require personal and/or corporate guarantees. For loans of this type in excess of $250,000, we monitor the financial condition and operating performance of the borrower through a review of annual tax returns and updated financial statements. In addition, we will meet with the borrower and/or perform site visits as required.

        Residential Real Estate Lending.    We offer a variety of consumer oriented residential real estate loans. A portion of our portfolio is made up of home equity loans to individuals with a loan to value not exceeding 80%. 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 primary 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. Our initial underwriting includes an analysis of the borrower's debt/income ratio which generally may not exceed 43%. We also consider the borrower's length of employment and prior credit history in the approval process. We require borrowers to have a credit score of 660. We do not have any subprime residential real estate loans.

        We obtain detailed loan applications to determine a borrower's ability to repay and verify the more significant items on these applications through credit reports, financial statements and confirmations. We also require appraisals of collateral and title insurance on secured real estate loans. Most borrowers must establish a mortgage escrow account for items such as real estate taxes, governmental charges and hazard and private mortgage insurance premiums.

        A portion of this segment of the loan portfolio consists of funds advanced for construction of custom single family residences, (where the home buyer is the borrower), financing to builders for the construction of pre-sold homes, and loans for multi-family housing. These loans generally have short durations, meaning maturities typically of nine months or less. Residential houses, multi-family dwellings and commercial buildings under construction and the underlying land for which the loan was obtained secure the construction loans. The vast majority of these loans are concentrated in our primary market area.

        Construction lending entails significant risk. These risks involve larger loan balances concentrated with single borrowers with funds advanced upon the security of the land or the project under construction. An appraisal of the property estimates the value of the project prior to completion of construction. Thus, it is more difficult to accurately evaluate the total loan funds required to complete a project and related loan to value ratios. To mitigate these risks, we generally limit loan amounts to 80% or less of appraised values, obtain first lien positions on the property securing the loan, and adhere to established underwriting procedures. In addition, we generally 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.

        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 from time to time by Fannie Mae and Freddie Mac for secondary market resale purposes. This amount for single-family residential loans currently varies from $417,000 up to a maximum of $625,500 for certain high-cost designated areas. We also make residential mortgage loans up to limits established by the Federal Housing Administration, which currently is $625,500. 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.

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For loans sold in the secondary market, we require a credit score or 640 with some exceptions to 620 for Veterans. 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 gain on sale of loans in non-interest income, net of commissions paid to the loan officers.

        Land and Acquisition and Development Lending.    These loans usually include funding for the acquisition and development of unimproved properties to be used for residential or non-residential construction. We may provide permanent financing on the same projects for which we have provided the construction financing.

        Land, Acquisition and development lending, while providing higher yields, may also have greater risks of loss than long-term residential mortgage loans on improved, owner-occupied properties.

        The Bank generally makes land acquisition loans with terms of up to three years and loan to value ratios of up to 65%, and land development loans with terms of up to two years and loan-to value ratios of up to 75%.

        The primary loan-specific risk in land and land development are: unemployment, deterioration of the business and/or collateral values, deterioration of the financial condition of the borrowers and/or guarantors creates a risk of default, and that an appraisal on the collateral is not reflective of the true property value. These loans usually include funding for the acquisition and development of unimproved properties to be used for residential or non-residential construction. We may provide permanent financing on the same projects for which we have provided the development and construction financing. Portfolio risk includes condition of the economy, changing demand for these types of loans, large concentration of these types of loans, and geographic concentrations of these types of loans.

        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. This category includes our luxury boat loans, which we made prior to 2008 and that remain in our portfolio. 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, the borrower's total debt service should not exceed 40% of his or her gross income.

        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 loan may not be repaid. Also, various federal and state laws, including bankruptcy and insolvency laws, may limit the amount we can recover on such loans. However, in our opinion, many of these risks do not apply to the luxury boat portion of the loan portfolio due to the credit quality and liquidity of these borrowers.

        Lending Limit.    As of December 31, 2013, our legal lending limit for loans to one borrower was approximately $15.7 million. As part of our risk management strategy, we may attempt to participate a portion of larger loans to other financial institutions. This strategy allows Old Line Bank to maintain customer relationships yet reduce credit exposure. However, this strategy may not always be available.

Investments and Funding

        We balance our liquidity needs based on loan and deposit growth via the investment portfolio, purchased funds, and short term borrowings. It is our goal to provide adequate liquidity to support our loan growth. In the event we have excess liquidity, we use investments to generate positive earnings. In the event deposit growth does not fully support our loan growth, we can use a combination of investment sales, federal funds, other purchased funds and short term borrowings to augment our funding position.

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        We actively monitor our investment portfolio and we usually classify investments in the portfolio as "available for sale." In general, under such a classification, we may sell investment instruments as management deems appropriate. On a monthly basis, we "mark to market" the investment portfolio through an adjustment to stockholders' equity net of taxes. Additionally, we use the investment portfolio to balance our asset and liability position. We invest in fixed rate or floating rate instruments as necessary to reduce our interest rate risk exposure.

Other Banking Products

        We offer our customers safe deposit boxes, wire transfer services, debit cards, prepaid cards, automated teller machines at all of our branch locations, investment services and credit cards through a third party processor. Additionally, we provide Internet banking capabilities to our customers. With our Internet banking service, our customers may view their accounts on line and electronically remit bill payments. Our commercial account services include direct deposit of payroll for our commercial clients' employees, an overnight sweep service, lockbox services and remote deposit capture service. We also provide our customers investment services including investment management, estate and succession planning and brokerage services.

Deposit Activities

        Deposits are the major source of our funding. We offer a broad array of deposit products that include demand, NOW, money market and savings accounts as well as certificates of deposit. We believe that we pay competitive rates on our interest bearing deposits. As a relationship oriented organization, we generally seek to obtain deposit relationships with our loan clients.

        As our overall balance sheet position dictates, we may become more or less competitive in our interest rate structure. We do use brokered deposits as a funding mechanism. Our primary source of brokered deposits is the Promontory Interfinancial Network (Promontory). Through this deposit matching network and its certificate of deposit account and money market registry services, we have the ability to offer our customers access to Federal Deposit Insurance Corporation- ("FDIC") insured deposit products in aggregate amounts exceeding current insurance limits. When we place funds through Promontory on behalf of a customer, we receive matching deposits through the network. We also purchased brokered certificates of deposit from other sources during 2010. We did not purchase brokered deposits from any other source during 2013, however, as a result of the WSB acquisition, brokered deposits increased by $18.0 million.

Competition

        We face intense competition both in making loans and attracting deposits. We compete with other commercial banks, savings associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating in our primary market area and elsewhere.

        We believe that we have effectively leveraged our talents, contacts and location to achieve a strong financial position. However, our primary market area is highly competitive and heavily branched. Competition in our primary market area for loans to small and medium sized businesses, entrepreneurs, professionals and high net worth clients is intense, and pricing is important. Many of our competitors have substantially greater resources and lending limits than we do and offer extensive and established branch networks and other services that we do not offer. Moreover, larger institutions operating in our primary market area have access to borrowed funds at a lower rate than is available to us. Deposit competition also is strong among institutions in our primary market area. As a result, it is possible that to remain competitive we may need to pay above market rates for deposits.

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Employees

        As of December 31, 2013, we had 228 full time and 26 part time employees. No collective bargaining unit represents any of our employees and we believe that relations with our employees are good.

Supervision and Regulation

        Old Line Bancshares, Inc. and Old Line Bank are subject to extensive regulation under state and federal banking laws and regulations. These laws and regulations impose specific requirements and restrictions on virtually all aspects of operations and generally are intended to protect depositors, not stockholders. The following summary sets forth certain material elements of the regulatory framework applicable to Old Line Bancshares, Inc. and Old Line Bank. It does not describe all of the provisions of the statutes, regulations and policies that are identified. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by express reference to each of the particular statutory and regulatory provisions. A change in applicable statutes, regulations or regulatory policy may have a material effect on our business.

Old Line Bancshares, Inc.

        Old Line Bancshares, Inc. is a Maryland corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. We are subject to regulation and examination by the Board of Governors of the Federal Reserve Board (the "Federal Reserve Board"), and are required to file periodic reports and any additional information that the Federal Reserve Board may require. The Bank Holding Company Act generally prohibits a bank holding company from engaging in activities other than banking, managing or controlling banks or other permissible subsidiaries and acquiring or retaining direct or indirect control of any company engaged in any activities closely related to banking or managing or controlling banks.

        In accordance with the Dodd-Frank Act and Federal Reserve Board policy, a bank holding company is expected to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board regulations or both. This doctrine is commonly known as the "source of strength" doctrine. The Federal Reserve Board may require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary (other than a non-bank subsidiary of a bank) upon the Federal Reserve Board's determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or non-bank subsidiary if the agency determines that divestiture may aid the depository institution's financial condition.

        The Federal Reserve Board must approve, among other things, the acquisition by a bank holding company of control of more than 5% of the voting shares, or substantially all the assets, of any bank or bank holding company or the merger or consolidation by a bank holding company with another bank holding company. In general, the Bank Holding Company Act limits the business of bank holding companies to banking, managing or controlling banks, furnishing services for its authorized subsidiaries, and engaging in activities that the Federal Reserve Board has determined, by order or regulation, to be so closely related to banking and/or managing or controlling banks as to be properly incident thereto. Some of the activities that the Federal Reserve Board has determined by regulation to be closely related to banking

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include servicing loans, performing certain data processing services, acting as a fiduciary, investment or financial advisor, and making investments in corporations or projects designed primarily to promote community welfare.

        The Change in Bank Control Act and the related regulations of the Federal Reserve Board require any person or persons acting in concert, to file a written notice with the Federal Reserve Board before the person or persons acquire direct or indirect "control" of a bank or bank holding company. As a general matter, a party is deemed to control a bank or bank holding company if the party owns or controls 25% or more of any class of voting stock. Subject to rebuttal, a party may be presumed to control a bank or bank holding company if the investor owns or controls 10% or more of any class of voting stock. Ownership by affiliated parties, or parties acting in concert, is typically aggregated for these purposes. If a party's ownership of Old Line Bancshares, Inc. were to exceed the above thresholds, the investor could be deemed to "control" Old Line Bancshares, Inc. for regulatory purposes. This could subject the investor to regulatory filings or other regulatory consequences.

        The Federal Reserve Board has adopted guidelines regarding the capital adequacy of bank holding companies, which require bank holding companies to maintain specified minimum ratios of capital to total assets and capital to risk-weighted assets. See "Capital Adequacy Guidelines." The Federal Reserve Board has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board's view that a bank holding company should pay cash dividends only to the extent that the company's net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company's capital needs, asset quality, and overall financial condition.

        The Federal Reserve Board and the Maryland Commissioner of Financial Regulation (the "Commissioner") regularly examine the operations and condition of Old Line Bancshares. In addition, the Federal Reserve Board and the Commissioner have enforcement authority over Old Line Bancshares, which includes the power to remove officers and directors and the authority to issue cease-and-desist orders to prevent Old Line Bancshares from engaging in unsafe or unsound practices or violating laws or regulations governing its business. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

        The status of Old Line Bancshares, Inc. as a registered bank holding company under the Bank Holding Company Act of 1956, as amended, does not exempt it from certain federal and state laws and regulations applicable to Maryland corporations generally, including, without limitation, certain provisions of the federal securities laws.

Old Line Bank

        Old Line Bank is a Maryland chartered trust company (with all of the powers of a commercial bank), and is a member of the Federal Reserve System. Deposits of Old Line Bank are insured to the maximum legal limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC"). It is subject to regulation, supervision and regular examination by the Commissioner and the Federal Reserve Board. The regulations of these various agencies govern most aspects of Old Line Bank's business, including required reserves against deposits, lending, investments, mergers and acquisitions, borrowing, dividends and location and number of branch offices. In addition, Old Line Bank is subject to numerous federal, state and local laws and regulations that set forth specific requirements with respect to extensions of credit, credit practices, disclosure of credit terms, and discrimination in credit transactions.

        The Federal Reserve Board and the Commissioner regularly examine the operations and condition of Old Line Bank, including, but not limited to, its capital adequacy, reserves, loans, investments, and management practices. These examinations are for the protection of Old Line Bank's depositors and the

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Deposit Insurance Fund. In addition, Old Line Bank is required to furnish quarterly and annual reports to the Federal Reserve Board. The Federal Reserve Board's enforcement authority includes the power to remove officers and directors and the authority to issue cease-and-desist orders to prevent a bank from engaging in unsafe or unsound practices or violating laws or regulations governing its business. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

        The Federal Reserve Board has adopted regulations regarding capital adequacy, which require member banks to maintain specified minimum ratios of capital to total assets and capital to risk-weighted assets. See "—Capital Adequacy Guidelines." Federal Reserve Board regulations and State law limit the amount of dividends that Old Line Bank may pay to Old Line Bancshares, Inc. See "—Dividends."

The Dodd-Frank Act

        The Dodd-Frank Act, enacted in 2010, will have a broad impact on the financial services industry, imposing significant regulatory and compliance changes, including the designation of certain financial companies as systemically significant, the imposition of increased capital, leverage, and liquidity requirements, and numerous other provisions designed to improve supervision and oversight of, and strengthen safety and soundness within, the financial services sector.

        The following items provide a brief description of certain provisions of the Dodd-Frank Act.

    Source of strength.  The Dodd-Frank Act codified the Federal Reserve Board's "source of strength" doctrine, requiring that every bank holding company and savings and loan holding company must serve as a source of strength for each of its depository institution subsidiaries. The regulatory agencies must issue regulations that implement this requirement, including by requiring that all bank and savings and loan holding companies provide capital, liquidity and other support to their depository institution subsidiaries in times of financial stress. Under this requirement, Old Line Bancshares in the future could be required to provide financial assistance to Old Line Bank should Old Line Bank experience financial distress.

    Mortgage loan origination and risk retention.  The Dodd-Frank Act contains additional regulatory requirements that may affect our operations and result in increased compliance costs. For example, the Dodd-Frank Act imposes new standards for mortgage loan originations on all lenders, including banks, in an effort to require steps to verify a borrower's ability to repay. In addition, the Dodd-Frank Act generally requires lenders or securitizers to retain an economic interest in the credit risk relating to loans the lender sells or mortgage and other asset-backed securities that the securitizer issues. The risk retention requirement generally will be 5%, but could be increased or decreased by regulation.

    Consumer Financial Protection Bureau ("CFPB").  The Dodd-Frank Act created a new independent CFPB within the Federal Reserve Board. The CFPB is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The CFPB has rulemaking authority over many of the statutes governing products and services offered to bank consumers, including the authority to prohibit "unfair, deceptive or abusive" acts and practices. For banking organizations with assets under $10 billion, like Old Line Bank, the Federal Reserve Board, as Old Line Bank's primary federal regulator, will continue to have examination and enforcement authority under federal consumer financial law. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the CFPB. Compliance with any such new regulations would increase our cost of operations.

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    Deposit insurance.  The Dodd-Frank Act made permanent the general $250,000 deposit insurance limit for insured deposits and provided unlimited deposit insurance through December 31, 2012 for noninterest-bearing transaction accounts. The Dodd-Frank Act increased the minimum target ratio for the Deposit Insurance Fund from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits, and the FDIC must achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are required to fund the increase. The Dodd-Frank Act also eliminated the 1.5% maximum fund ratio, and instead gives the FDIC the discretion to determine the maximum fund ratio. The FDIC has exercised that discretion by establishing a long-term fund ratio of 2.0%.

    Enhanced lending limits.  The Dodd-Frank Act strengthened the existing limits on a depository institution's credit exposure to one borrower. Federal banking law prohibits a depository institution's ability to extend credit to one person (or group of related persons) in amounts that exceed certain thresholds. The Dodd-Frank Act expanded the scope of these restrictions to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions.

    Corporate governance.  The Dodd-Frank Act addresses many investor protection, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies, including Old Line Bancshares. The Dodd-Frank Act provides the SEC with authority to adopt proxy access rules that would allow stockholders of publicly traded companies to nominate candidates for election as a director and have those nominees included in a company's proxy materials and directs the SEC and national securities exchanges to adopt rules that: (1) provide stockholders of U.S. publicly traded companies an advisory vote on executive compensation; (2) will enhance independence requirements for compensation committee members; and (3) will require companies listed on national securities exchanges to adopt incentive-based compensation clawback policies for executive officers.

        Many of the requirements of the Dodd-Frank Act will be implemented over time and the full extent of the impact such requirements will have on our operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements may negatively impact our results of operations and financial condition. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse to our investors.

Capital Adequacy Guidelines

        The federal bank regulatory agencies have adopted risk based capital adequacy guidelines by which they assess the adequacy of capital in examining and supervising banks and bank holding companies and in analyzing bank regulatory applications. Risk based capital requirements determine the adequacy of capital based on the risk inherent in various classes of assets and off balance sheet items. Pursuant to the Federal Deposit Insurance Corporation Improvement Act the agencies have established five capital tiers for depository institutions: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Failure to meet minimum capital requirements can initiate certain discretionary, and under certain circumstances, mandatory, actions by regulators that could have a direct material adverse effect on Old Line Bank's financial condition.

        Banks and bank holding companies are expected to maintain minimum ratios of capital to risk-weighted assets. There are two main categories of capital under the guidelines. Tier 1 capital generally

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consists of the sum of common stockholders' equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stock), less goodwill and certain other deductions. Tier 2 capital consists of perpetual preferred stock that is not otherwise eligible to be included as Tier 1 capital, hybrid capital instruments, term subordinated debt and intermediate-term preferred stock and, subject to limitations, general allowances for credit losses. Tier 2 capital is limited to the amount of Tier 1 capital. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics, with the categories ranging from 0% (requiring no risk-based capital) for assets such as cash, to 100% for the bulk of assets that are typically held by a commercial bank, including certain multi-family residential and commercial real estate loans, commercial business loans and consumer loans, to 200% for certain non- investment grade investments.

        Residential first mortgage loans on one- to four- family residential real estate and certain seasoned multi-family residential real estate loans, which are not 90 days or more past due or non-performing and which have been made in accordance with prudent underwriting standards are assigned a 50% level in the risk weighing system, as are certain privately-issued mortgage backed securities representing indirect ownership of such loans. Off balance sheet items also are adjusted to take into account certain risk characteristics.

        In addition to the risk based capital requirements, the federal bank regulatory agencies have established a minimum 3.0% leverage capital ratio (Tier 1 capital to total adjusted assets) requirement for the most highly rated banks and bank holding companies, with an additional cushion of at least 100 to 200 basis points for all other banks and bank holding companies, which effectively increases the minimum leverage capital ratio for such other banks to 4.0% - 5.0% or more. Under the applicable regulations, the highest rated banks and bank holding companies are those that the federal bank regulatory agencies determine are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, those which are considered a strong banking organization.

        A bank or bank holding company that has less than the minimum leverage capital ratio requirement must submit, to the applicable regulator for review and approval, a reasonable plan describing the means and timing by which the bank or bank holding company will achieve its minimum leverage capital ratio requirement. A bank or bank holding company that fails to file such a plan is deemed to be operating in an unsafe and unsound manner and could be subject to a cease-and-desist order.

        Under federal prompt corrective action regulations, the Federal Reserve Board is authorized and, under certain circumstances required, to take supervisory actions against state member banks that are not adequately capitalized. Under these regulations, a bank is considered to be (i) "well capitalized" if it maintains a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and Tier I leverage capital of 5.0% or greater (measured as tier 1 capital to adjusted total assets), and is not subject to any written capital order or directive; (ii) "adequately capitalized" if it has total risk-based capital of 8.0% or more, Tier I risk-based capital of 4.0% or more and Tier I leverage capital of 4.0% or more (3.0% under certain circumstances), and does not meet the definition of "well capitalized"; (iii) "undercapitalized" if it has total risk-based capital of less than 8.0%, Tier I risk-based capital of less than 4.0% or Tier I leverage capital of less than 4.0% (3.0% under certain circumstances); (iv) "significantly undercapitalized" if it has total risk-based capital of less than 6.0%, Tier I risk-based capital less than 3.0%, or Tier I leverage capital of less than 3.0%; and (v) "critically undercapitalized" if its ratio of tangible equity to total assets is equal to or less than 2.0%. Under certain circumstances, the Federal Reserve Board may reclassify a well capitalized institution as adequately capitalized, and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the Federal Reserve Board may not reclassify a significantly undercapitalized institution as critically undercapitalized). The Federal Reserve Board may set higher capital requirements for an individual institution when particular circumstances warrant.

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        Currently, Old Line Bancshares, Inc. and Old Line Bank are well capitalized.

        In July 2013, the Federal Reserve Board approved revisions to its capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act. The rules include new risk-based capital and leverage ratios, which are effective January 1, 2015, and revise the definition of what constitutes "capital" for calculating those ratios. The proposed new minimum capital level requirements applicable to Old Line Bancshares and Old Line Bank will be: (1) a new common equity Tier 1 capital ratio of 4.5%; (2) a Tier 1 capital ratio of 6% (increased from 4%); (3) a total capital ratio of 8% (unchanged from current rules); and (4) a Tier 1 leverage ratio of 4%. The rules assign different risk weights to some assets, including a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rules also establish a "capital conservation buffer" of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The new capital conservation buffer requirement will be phased in beginning in January 2016 until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses to executive officers if its capital level falls below the buffer amount.

        As an additional means to identify problems in the financial management of depository institutions, the FDIA requires federal bank regulatory agencies to establish certain non-capital safety and soundness standards for institutions for which they are the primary federal regulator. The standards relate generally to operations and management, asset quality, interest rate exposure and executive compensation. The agencies are authorized to take action against institutions that fail to meet such standards.

Deposit Insurance Assessments

        The deposits of Old Line Bank are insured up to applicable limits per insured depositor by the FDIC. The Dodd-Frank Act permanently increased the FDIC deposit insurance coverage per separately insured depositor for all account types to $250,000. The FDIC assesses deposit insurance premiums on all insured depository institutions. Under the FDIC's risk-based assessment system, insured institutions are assigned to risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution's assessment rate depends upon the category to which it is assigned and certain adjustments specified by FDIC regulations, with institutions deemed less risky to the deposit insurance fund paying lower rates. Assessment rates (inclusive of possible adjustments) currently range from 21/2 to 45 basis points of each institution's total assets less tangible capital. The FDIC may increase or decrease the range of assessments uniformly, except that no adjustment can deviate more than two basis points from the base assessment rate without notice and comment rulemaking, The FDIC's current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution's aggregate deposits. Under the FDIA, the FDIC may terminate insurance of deposits upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Maryland Regulatory Assessment

        The Commissioner assesses state chartered banks to cover the expense of regulating banking institutions. Old Line Bank's asset size determines the amount of the assessment. In 2013, we paid $88,951 to the Commissioner.

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Transactions with Affiliates and Insiders

        Maryland law imposes restrictions on certain transactions with affiliates of Maryland commercial banks. Generally, under Maryland law, a director, officer or employee of a commercial bank may not borrow, directly or indirectly, any money from the bank, unless the loan has been approved by a resolution adopted by and recorded in the minutes of the board of directors of the bank, or the executive committee of the bank, if that committee is authorized to make loans. If the executive committee approves such a loan, the loan approval must be reported to the board of directors at its next meeting. Certain commercial loans made to directors of a bank and certain consumer loans made to non-officer employees of the bank are exempt from the law's coverage. Section 23A of the Federal Reserve Act and the Federal Reserve Board's Regulation W limit the extent to which a bank or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such bank's capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such bank's capital stock and surplus. An affiliate of a bank is generally any company or entity that controls, is controlled by, or is under common control with the bank. In a holding company context, the parent bank holding company and any companies which are controlled by such parent holding company are affiliates of the bank. The term "covered transaction" includes the making of loans, purchase of assets, issuance of guarantees, and other similar transactions. In addition, loans or other extensions of credit by a bank to an affiliate are required to be collateralized in accordance with regulatory requirements and the bank's transactions with affiliates must be consistent with safe and sound banking practices and may not involve the purchase by the bank of any low-quality asset from an affiliate. Section 23B of the Federal Reserve Act applies to covered transactions as well as certain other transactions between a bank and its affiliates and Section 23B and Regulation W require that all such transactions be on terms substantially the same, or at least as favorable, to the bank as those provided to non-affiliates. Regulation W generally excludes a bank subsidiary from treatment as an affiliate unless the subsidiary is a depository institution, a financial subsidiary, directly controlled by an affiliate or controlling shareholder of the bank, or unless the Federal Reserve Board or other appropriate federal regulator determines by regulation or order to treat the subsidiary as a bank affiliate. All of Old Line Bank's transactions with its affiliates comply with the applicable provisions of Sections 23A and 23B and Regulation W.

        Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's Regulation O govern extensions of credit made by a bank to its directors, executive officers, and principal stockholders ("insiders"). Among other things, these provisions require that extensions of credit to insiders be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features. Further, such extensions may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank's capital. Extensions of credit in excess of certain limits must be also be approved by the board of directors. All of Old Line Bank's loans to its and Old Line Bancshares' executive officers, directors and greater than 10% stockholders, and affiliated interests of such persons, comply with the requirements of Regulation O.

        We have entered into banking transactions with our directors and executive officers and the business and professional organizations in which they are associated in the ordinary course of business. We make such loans and loan commitments in accordance with all applicable laws.

Loans to One Borrower

        Old Line Bank is subject to statutory and regulatory limits on the extension of credit to one borrower. Generally, the maximum amount of total outstanding loans that a Maryland chartered trust company may have to any one borrower at any one time is 15% of Old Line Bank's unimpaired capital and unimpaired surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan is

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secured by readily marketable collateral, which is defined to include certain securities and bullion, but generally does not include real estate.

Liquidity

        Old Line Bank is subject to the reserve requirements imposed by the State of Maryland. A Maryland commercial bank is required to have at all times a reserve equaled to at least 15% of its demand deposits. Old Line Bank is also subject to the reserve requirements of Federal Reserve Board's Regulation D, which applies to all depository institutions. Beginning on January 1, 2013, amounts in transaction accounts above $12.4 million and up to $79.5 million must have reserves held against them in the ratio of three percent of the amount. Amounts above $79.5 million require reserves of $2,013,000 plus 10 percent of the amount in excess of $79.5 million. Beginning on January 1, 2014, amounts in transaction accounts above $13.3 million and up to $89.0 million must have reserves held against them in the ratio of three percent of the amount. Amounts above $89.0 million require reserves of $2,271,000 plus 10 percent of the amount in excess of $89.0 million. The Maryland reserve requirements may be used to satisfy the requirements of Federal Reserve Board's Regulation D. Old Line Bank is in compliance with its reserve requirements currently and at December 31, 2013.

Dividends

        Old Line Bancshares, Inc. is a legal entity separate and distinct from Old Line Bank. Virtually all of Old Line Bancshares, Inc.'s revenue available for the payment of dividends on its common stock results from dividends paid to Old Line Bancshares, Inc. by Old Line Bank. Under Maryland law, Old Line Bank may declare a cash dividend, after providing for due or accrued expenses, losses, interest, and taxes, from its undivided profits or, with the prior approval of the Maryland Commissioner of Financial Regulation, from its surplus in excess of 100% of its required capital stock. Also, if Old Line Bank's surplus is less than 100% of its required capital stock, cash dividends may not be paid in excess of 90% of net earnings. In addition to these specific restrictions, the bank regulatory agencies have the ability to prohibit or limit proposed dividends if such regulatory agencies determine the payment of such dividends would result in Old Line Bank being in an unsafe and unsound condition.

Community Reinvestment Act

        Old Line Bank is required to comply with the Community Reinvestment Act ("CRA") regardless of its capital condition. The CRA requires that, in connection with its examinations of Old Line Bank, the Federal Reserve Board evaluates the record of Old Line Bank in meeting the credit needs of its local community, including low and moderate income neighborhoods, consistent with the safe and sound operation of the institution. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. These factors are considered in, among other things, evaluating mergers, acquisitions and applications to open a branch or facility. The CRA also requires all institutions to make public disclosure of their CRA ratings. Old Line Bank received a "Satisfactory" rating in its latest CRA examination.

Standards for Safety and Soundness

        Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by

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the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.

Anti-Money Laundering and OFAC

        Under federal law, financial institutions must maintain anti-money laundering programs that include established internal policies, procedures and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification in their dealings with foreign financial institutions and foreign customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and law enforcement authorities have been granted increased access to financial information maintained by financial institutions. Bank regulators routinely examine institutions for compliance with these obligations, and they must consider an institution's compliance in connection with the regulatory review of applications, including applications for banking mergers and acquisitions. The regulatory authorities have imposed "cease and desist" orders and civil money penalty sanctions against institutions found to be violating these obligations.

        The Office of Foreign Assets Control, or OFAC, is responsible for helping to insure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC sends bank regulatory agencies lists of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. If Old Line Bancshares or Old Line Bank finds a name on any transaction, account, or wire transfer that is on an OFAC list, they must freeze such account, file a suspicious activity report, and notify the appropriate authorities.

Consumer Protection Laws

        Old Line Bank is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy. These laws include the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, the Fair and Accurate Credit Transactions Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, and the Real Estate Settlement Procedures Act, and various state law counterparts.

        In addition, federal law currently contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution's policies and procedures regarding the handling of customers' nonpublic personal financial information. These provisions also provide that, except for certain limited exceptions, a financial institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. Further, under the "Interagency Guidelines Establishing Information Security Standards," banks must implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer information. Federal law makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.

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Sarbanes-Oxley Act of 2002

        The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. We have prepared policies, procedures and systems designed to ensure compliance with the Sarbanes-Oxley Act and related regulations.

Other Legislative and Regulatory Initiatives

        In addition to the Dodd-Frank Act and the regulations that will be promulgated thereunder, new proposals may be introduced in the United States Congress and in the Maryland Legislature and before various bank regulatory authorities which would alter the powers of, and restrictions on, different types of banking organizations and which would restructure part or all of the existing regulatory framework for banks, bank holding companies and other providers of financial services. Moreover, other bills may be introduced in Congress which would further regulate, deregulate or restructure the financial services industry, including proposals to substantially reform the regulatory framework. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which any new regulation or statute may affect our business.

Effect of Governmental Monetary Policies

        Domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies affect our earnings. The Federal Reserve Board's monetary policies have had, and are likely to continue to have, an important impact on the operating results of financial institutions through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board affect the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.

Item 1A.    Risk Factors

        You should consider carefully the following risks, along with other information contained in this Form 10-K. The risks and uncertainties described below are not the only ones that may affect us. Additional risks and uncertainties also may adversely affect our business and operations including those discussed in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations. Any of the following events, should they actually occur, could materially and adversely affect our business and financial results.

        We may fail to realize all of the anticipated benefits of the merger.    As discussed above in "Item 1—Business," in May 2013 we acquired WSB Holdings. The ultimate success of the merger will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining our businesses with WSB Holdings'.

        It is possible that the continuing integration process could result in the loss of key employees, the loss of key depositors or other bank customers, the disruption of our ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain our relationships with our clients, customers, depositors and employees or to achieve the anticipated benefits of the merger.

        We may not have adequately assessed the fair value of the acquired assets and liabilities.    Current accounting guidance requires that we record assets and liabilities at their estimated fair values on the purchase date. In accordance with accounting for business combinations, we included the credit losses evident in the fair value of loans at the date of our acquisition of WSB and eliminated the allowance for

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loan losses maintained by WSB at the acquisition date. The determination of fair value requires that we consider a number of factors including the remaining life of the acquired loans and deposits, estimated prepayments or withdrawals, estimated loss ratios, estimated value of the underlying collateral, and the net present value of expected cash flows. Actual deviations from these predicted cash flows, maturities or repayments or the underlying value of the collateral may mean that our present value determination is inaccurate. This may cause fluctuations in interest income, non-interest income, provision expense, interest expense and non-interest expense and negatively impact our results of operations.

        A continuation or worsening of current economic conditions could adversely affect our results of operations and financial condition.    Changes in prevailing economic conditions, including declining real estate values, changes in interest rates which may cause a decrease in interest rate spreads, adverse employment conditions, the monetary and fiscal policies of the federal government and other significant external events may adversely affect our financial results. Although the U.S. economy has emerged from the severe recession that occurred in 2007 through 2009, economic growth has been slow and uneven, and unemployment levels remain high. Recovery by many businesses has been impaired by lower consumer spending. A return to prolonged deteriorating economic conditions could significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Although signs of stability have emerged, we expect that the business environment in the State of Maryland and the entire United States will continue to present challenges for the foreseeable future. Further continuing economic uncertainty, including regarding concerns about U.S. debt levels and related governmental actions, including potential tax increases and cuts in government spending, may hamper the ongoing recovery or otherwise negatively impact economic conditions going forward. In addition, continued elevated unemployment levels may result in higher than expected loan delinquencies, increases in our nonperforming and criticized classified assets and a decline in demand for our products and services. These events may cause us to incur losses and may adversely affect our financial condition and results of operations.

        Although the adverse economic climate during the past several years has not severely impacted us due to our strict underwriting standards, further adverse changes in the economy, including decreases in current real estate values, increased unemployment or the economy moving back into a recession, could have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings.

        A continuation or worsening of credit markets and economic conditions could adversely affect our liquidity.    Old Line Bank must maintain sufficient liquidity to ensure cash flow is available to satisfy current and future financial obligations including demand for loans and deposit withdrawals, funding of operating costs and other corporate purposes. We obtain funding through deposits and various short term and long term wholesale borrowings, including federal funds purchased, unsecured borrowings, brokered certificates of deposits and borrowings from the Federal Home Loan Bank of Atlanta and others. Economic uncertainty and disruptions in the financial system may adversely affect our liquidity. Dramatic declines in the housing market during the past several years, falling real estate prices and increased foreclosures and unemployment, have resulted in significant asset value write downs by financial institutions, including government sponsored entities and investment banks. These investment write downs have caused financial institutions to seek additional capital. Should we experience a substantial deterioration in our financial condition or should disruptions in the financial markets restrict our funding, it would negatively impact our liquidity. To mitigate this risk, we closely monitor our liquidity and maintain a line of credit with the Federal Home Loan Bank and have received approval to borrow from the Federal Reserve Bank of Richmond.

        Our need to comply with extensive and complex governmental regulation could have an adverse effect on our business and our growth strategy.    The banking industry is subject to extensive regulation by state and federal banking authorities. Many of these regulations are intended to protect depositors, the public or the FDIC

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insurance funds, not stockholders. Regulatory requirements affect our lending practices, capital structure, investment practices, dividend policy, ability to attract and retain personnel and many other aspects of our business. These requirements may constrain our rate of growth and changes in regulations could adversely affect us. The cost of compliance with regulatory requirements could adversely affect our ability to operate profitably.

        In addition, because federal regulation of financial institutions changes regularly and is the subject of constant legislative debate, we cannot forecast how federal regulation of financial institutions may change in the future and impact our operations. In light of the performance of and government intervention in the financial sector, we fully expect there will be significant changes to the banking and financial institutions' regulatory agencies in the near future. We further anticipate that regulatory authorities may enact additional laws and regulations in response to the ongoing financial crisis that could have an impact on our operations. Changes in regulation and oversight, including in the form of changes to statutes, regulations or regulatory policies or changes in interpretation or implementation of statutes, regulations or policies, could affect the service and products we offer, increase our operating expenses, increase compliance challenges and otherwise adversely impact our financial performance and condition. In addition, the burden imposed by these federal and state regulations may place banks in general, and Old Line Bank specifically, at a competitive disadvantage compared to less regulated competitors.

        Various provisions of the Dodd-Frank Act may adversely impact our results of operations, liquidity or financial condition.    The Dodd-Frank Act represents a comprehensive overhaul of the U.S. financial services industry. Among other things, the Dodd-Frank Act establishes the new Consumer Financial Protection Bureau (the "CFPB"), includes provisions affecting corporate governance and executive compensation disclosure of all SEC reporting companies, allows financial institutions to pay interest on business checking accounts, broadens the base for FDIC insurance assessments, and includes new restrictions on how mortgage brokers and loan originators may be compensated. The Dodd-Frank Act requires the CFPB and other federal agencies to implement many new and significant rules and regulations to implement its various provisions. There are a number of regulations under the Dodd-Frank act that have not yet been proposed or adopted. We will not know the full impact of the Dodd-Frank Act on our business for years until regulations implementing the statute are adopted and implemented. As a result, we cannot at this time predict the extent to which the Dodd-Frank Act will impact our business, operations or financial condition. However, compliance with these new laws and regulations may require us to make changes to our business and operations and will likely result in additional costs and a diversion of management's time from other business activities, any of which may adversely impact our results of operations, liquidity or financial condition.

        Because we serve a limited market area in Maryland, an economic downturn in our market area could more adversely affect us than it affects our larger competitors that are more geographically diverse.    Our current primary market area consists of the suburban Maryland (Washington, D.C. suburbs) counties of Anne Arundel, Calvert, Charles, Montgomery, Prince George's and St. Mary's. We have expanded in the counties in which we have historically operated and into Calvert, Montgomery and St. Mary's Counties, Maryland and may expand in contiguous northern and western counties, such as Howard County, Maryland. However, broad geographic diversification is not currently part of our community bank focus. Overall, during the last five years, the business environment negatively impacted many businesses and households in the United States and worldwide. Although the economic decline has not impacted the suburban Maryland and Washington D.C. suburbs as adversely as other areas of the United States, it has caused an increase in unemployment and business failures and a decline in property values. As a result, if our market area continues to suffer an economic downturn, it may more severely affect our business and financial condition than it affects larger bank competitors. In particular, due to the proximity of our primary market area to Washington, D.C., decreases in spending by the Federal government could impact us more than banks that serve a larger or a different geographical area. Our larger competitors, for example, serve more geographically diverse market areas, parts of which may not be affected by the same

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economic conditions that may exist in our market area. Further, unexpected changes in the national and local economy may adversely affect our ability to attract deposits and to make loans. Such risks are beyond our control and may have a material adverse effect on our financial condition and results of operations and, in turn, the value of our securities.

        We originate and retain in our portfolio residential mortgage loans. A continued downturn in the local real estate market and economy could adversely affect earnings.    Our loan portfolio includes residential mortgage loans that we originate. Although the local real estate market and economy in our primary market areas have performed better than many other markets, a downturn could cause higher unemployment, more delinquencies, and could adversely affect the value of properties securing loans. In addition, the real estate market may take longer to recover or not recover to previous levels. These risks increase the probability of an adverse impact on our financial results as fewer borrowers would be eligible to borrow and property values could be below necessary levels required for adequate coverage on the requested loan.

        Proposed and final regulations could restrict our ability to originate residential real estate loans.    The CFPB has issued a rule, effective January 10, 2014, designed to clarify for lenders how they can avoid legal liability under the Dodd-Frank Act, which would otherwise hold lenders accountable for ensuring a borrower's ability to repay a mortgage. Loans that meet this "qualified mortgage" definition will be presumed to have complied with the new ability-to-repay standard. Under the CFPB's rule, a "qualified mortgage" loan must not contain certain specified features.

        The rule also establishes general underwriting criteria for qualified mortgages, including that the consumer must have a total (or "back end") debt-to-income ratio that is less than or equal to 43%. Lenders must also verify and document the income and financial resources relied upon to qualify the borrower on the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments. The CFPB's rule on qualified mortgages could limit our ability or desire to make certain types of loans or loans to certain borrowers, or could make it more costly and/or or time consuming to make these loans, which could limit our growth or profitability.

        In addition, the Dodd-Frank Act requires the regulatory agencies to issue regulations that require securitizers of loans to retain "not less than 5% of the credit risk for any asset that is not a qualified residential mortgage." The regulatory agencies initially issued a proposed rule to implement this requirement in April 2011. A revised proposed rule was issued in August 2013. The Dodd-Frank Act provides that the definition of "qualified residential mortgage" can be no broader than the definition of "qualified mortgage" issued by the CFPB for purposes of its regulations. Although the final rule with respect to the retention of credit risk has not yet been issued, the final rule could have a significant effect on the secondary market for loans and the types of loans we originate, and restrict our ability to make loans.

        We depend on the services of key personnel. The loss of any of these personnel could disrupt our operations and our business could suffer.    Our success depends substantially on the skills and abilities of our executive management team, including James W. Cornelsen, our President and Chief Executive Officer, Joseph E. Burnett, our Executive Vice President and Chief Lending Officer, John Miller, our Executive Vice President and Chief Credit Officer, and Mark A. Semanie, our Executive Vice President, Chief Operating Officer and Acting Chief Financial Officer. We have not entered into an employment agreement with Mr. Miller, and he is therefore free to unilaterally terminate his employment. Although we have entered into employment agreements with Messrs. Cornelsen, Burnett and Semanie, the existence of such agreements does not assure that we will retain their services. These executives provide valuable services to us and would be difficult to replace.

        Also, our growth and success and our anticipated future growth and success, in a large part, is due and we anticipate will be due to the relationships maintained by our banking executives with our customers.

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The loss of services of one or more of these executives or of other key employees could have a material adverse effect on our operations and our business could suffer. The experienced commercial lenders that we have hired are not a party to any employment agreement with us and they could terminate their employment with us at any time and for any reason.

        Our growth and expansion strategy may not be successful.    Our ability to grow depends upon our ability to attract new deposits, identify loan and investment opportunities and maintain adequate capital levels. We may also grow through acquisitions of existing financial institutions or branches thereof. There are no guarantees that our expansion strategies will be successful. Also, in order to effectively manage our anticipated and/or actual loan growth we have and may continue to make additional investments in equipment and personnel, which also will increase our non-interest expense. If we grow too quickly and are not able to control costs and maintain asset quality, growth could materially and adversely affect our financial performance.

        Our concentrations of loans in various categories may also increase the risk of credit losses.    We currently invest more than 25% of our capital in various loan types and industry segments, including commercial real estate loans and loans to the hospitality industry (hotels/motels). While recent declines in the local commercial real estate market have not caused the collateral securing our loans to exceed acceptable loan to value ratios, a further deterioration in the commercial real estate market could cause deterioration in the collateral securing these loans and/or a decline in our customers' earning capacity. This could negatively impact us. Although we have made a large portion of our hospitality loans to long term, well established operators in strategic locations, a continued decline in the occupancy rate in these facilities could negatively impact their earnings. This could adversely impact their ability to repay their loan, which would adversely impact our net income.

        If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.    We maintain an allowance for loan losses that we believe is adequate for absorbing any potential losses in our loan portfolio. Management, through a periodic review and consideration of the loan portfolio, determines the amount of the allowance for loan losses. Although we believe the allowance for loan losses is adequate to absorb probable losses in our loan portfolio, even under normal economic conditions, we cannot predict such losses with certainty. The unprecedented volatility experienced in the financial and capital markets during the last several years makes this determination even more difficult as processes we use to estimate the allowance for loan losses may no longer be dependable because they rely on complex judgments, including forecasts of economic conditions that may not be accurate. As a result, we cannot be sure that our allowance is or will be adequate in the future. If management's assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb future losses, our earnings will suffer.

        As of December 31, 2013, commercial and industrial and commercial real estate mortgage loans comprise approximately 74.62% of our loan portfolio. These types of loans are generally viewed as having more risk of default than residential real estate or consumer loans and typically have larger balances than residential real estate loans and consumer loans. A deterioration of one or a few of these loans could cause a significant increase in non-performing loans. Such an increase could result in a net loss of earnings from these loans, an increase in the provision for loan losses and an increase in loan charge-offs, all of which could have a material adverse effect on our financial condition and results of operations.

        Our profitability depends on interest rates and changes in monetary policy may impact us.    Our results of operations depend to a large extent on our "net interest income," which is the difference between the interest expense incurred in connection with our interest bearing liabilities, such as interest on deposit accounts, and the interest income received from our interest earning assets, such as loans and investment securities. Interest rates, because they are influenced by, among other things, expectations about future events, including the level of economic activity, federal monetary and fiscal policy, and geopolitical stability, are not predictable or controllable. Additionally, competitive factors heavily influence the interest rates we can earn on our loan and investment portfolios and the interest rates we pay on our deposits.

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Community banks are often at a competitive disadvantage in managing their cost of funds compared to the large regional, super regional or national banks that have access to the national and international capital markets. These factors influence our ability to maintain a stable net interest margin.

        We seek to maintain a neutral position in terms of the volume of assets and liabilities that mature or reprice during any period so that we may reasonably predict our net interest margin. However, interest rate fluctuations, loan prepayments, loan production and deposit flows are constantly changing and influence our ability to maintain this neutral position. Generally speaking, our earnings are more sensitive to fluctuations in interest rates the greater the variance in the volume of assets and liabilities that mature and reprice in any period. The extent and duration of the sensitivity will depend on the cumulative variance over time, the velocity and direction of interest rates, and whether we are more asset than liability sensitive. Accordingly, we may not be successful in maintaining this neutral position and, as a result, our net interest margin may suffer.

        The market value of our investments could negatively impact stockholders' equity.    We have designated all of our investment securities portfolio (or 14.8% of total assets) at December 31, 2013 as available for sale. We "mark to market" temporary unrealized gains and losses in the estimated value of the available for sale portfolio and reflect this adjustment as a separate item in stockholders' equity, net of taxes. As of December 31, 2013, we had temporary unrealized losses in our available for sale portfolio of $3.4 million (net of taxes). As a result of the recent economic recession and the continued economic slowdown, several municipalities continue to report budget deficits and companies continue to report lower earnings. These budget deficits and lower earnings could cause temporary and other than temporary impairment charges in our investment securities portfolio and cause us to report lower net income and a decline in stockholders' equity.

        Any future issuances of common stock in connection with acquisitions or otherwise could dilute your ownership of Old Line Bancshares.    We may use our common stock to acquire other companies or to make investments in banks and other complementary businesses in the future. We may also issue common stock, or securities convertible into common stock, through public or private offerings, in order to raise additional capital in connection with future acquisitions, to satisfy regulatory capital requirements or for general corporate purposes. Any such stock issuances would dilute your ownership interest in Old Line Bancshares and may dilute the per-share value of the common stock.

        Our future acquisitions, if any, may cause us to become more susceptible to adverse economic events.    While we currently have no agreements to acquire additional financial institutions, we may do so in the future if an attractive acquisition opportunity arises that is consistent with our business plan. Any future business acquisitions could be material to us, and the degree of success achieved in acquiring and integrating these businesses into Old Line Bancshares could have a material effect on the value of our common stock. In addition, any acquisition could require us to use substantial cash or other liquid assets or to incur debt. In those events, we could become more susceptible to future economic downturns and competitive pressures.

        We face limits on our ability to lend.    The amount of our capital limits the amount that we can loan to a single borrower. Generally, under current law, we may lend up to 15% of our unimpaired capital and surplus to any one borrower. As of December 31, 2013, we were able to lend approximately $15.7 million to any one borrower. This amount is significantly less than that of many of our larger competitors and may discourage potential borrowers who have credit needs in excess of our legal lending limit from doing business with us. We generally try to accommodate larger loans by selling participations in those loans to other financial institutions, but this strategy is not always available. We may not be able to attract or maintain customers seeking larger loans and we may not be able to sell participations in such loans on terms we consider favorable.

        Additional capital may not be available when needed or required by regulatory authorities.    Federal and state regulatory authorities require us to maintain adequate levels of capital to support our operations. In

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addition, we may elect to raise additional capital to support our business or to finance future acquisitions, if any, or we may otherwise elect or our regulators may require that we raise additional capital. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control. Current conditions in the capital markets are such that traditional sources of capital may not be available to us on reasonable terms if we needed to raise additional capital. Accordingly, we may not be able to raise additional capital if needed or on terms that are favorable or otherwise not dilutive to existing stockholders. If we cannot raise additional capital when needed, or on desirable terms, it may have a material adverse effect on our financial condition, results of operations and prospects.

        We face substantial competition which could adversely affect our growth and operating results.    We operate in a competitive market for financial services and face intense competition from other financial institutions both in making loans and in attracting deposits. Many of these financial institutions have been in business for many years, are significantly larger, have established customer bases, have greater financial resources and lending limits than we do, and are able to offer certain services that we are not able to offer. If we cannot attract deposits and make loans at a sufficient level, our operating results will suffer, as will our opportunities for growth.

        System failure or cybersecurity breaches of our network security could subject us to increased operating costs as well as litigation and other potential losses.    We rely heavily on communications and information systems to conduct our business. The computer systems and network infrastructure we use could be vulnerable to unforeseen hardware and cybersecurity issues. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations. In addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure we use, including our Internet banking activities, against damage from physical break-ins, cybersecurity breaches and other disruptive problems caused by the Internet or other users. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us, subject us to additional regulatory scrutiny, damage our reputation, result in a loss of customers, and inhibit current and potential customers from our Internet banking services, any or all of which could have a material adverse effect on our results of operations and financial condition. Each year, we add additional security measures to our computer systems and network infrastructure to mitigate the possibility of cybersecurity breaches including firewalls and penetration testing, but there can be no assurance that such security measures will be effective in preventing such breaches, damage or failures. We continue to investigate cost effective measures to mitigate any potential losses, and have insurance protection; intended to cover losses due to network security breaches; there is no guarantee, however, that such insurance, would cover all costs associated with any breach, damage or failure of our computer systems and network infrastructure.

        Consumers may decide not to use banks to complete their financial transactions.    Technology and other changes are allowing consumers to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can now maintain funds that they have historically held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.

Item 1B.    Unresolved Staff Comments

        None.

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Item 2.    Properties

        As of December 31, 2013, we operate a total of 23 branch locations and eight loan production offices. Our headquarters is located at 1525 Pointer Ridge Place, Bowie, Maryland in Prince George's County. Pointer Ridge Office Investment, LLC, an entity in which we have an approximately $500,000 investment and a 62.50% ownership interest, owns this property. Frank Lucente, a director of Old Line Bancshares, Inc. and Old Line Bank controls 12.50% of Pointer Ridge and controls the manager of Pointer Ridge. Due to the acquisition of WSB Holdings, we acquired the property and building located at 4201 Mitchellville Road, Bowie, Maryland. The net book value of the land, buildings, furniture, fixtures and equipment owned by us was $35.2 million at December 31, 2013.

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Legacy Properties

Location
  Address   Opened
Date
  Square
Feet
  Monthly
Lease
Amount
  Term   Renewal
Option

Accokeek

  15808 Livingston Road
Accokeek, Maryland
    12/1995     1,218     Owned        

Annapolis

 

2530 Riva Road
Annapolis, Maryland

   
9/2011
   
3,899
 
$

11,713
 

10yrs 7mos

 

(2) 5 years

Bowie Suite 100

 

1525 Pointer Ridge Place
Bowie, Maryland

   
6/2006
   
2,557
 
$

7,603
 

13 years

 

(2) 5years

Bowie Suite 101

 

1525 Pointer Ridge Place
Bowie, Maryland

   
1/2012
   
2,282
 
$

3,228
 

8yrs 5 mos

 

(2) 5years

Bowie Suite 300

 

1525 Pointer Ridge Place
Bowie, Maryland

   
6/2006
   
5,449
 
$

14,187
 

13 years

 

(2) 5years

Bowie Suite 301

 

1525 Pointer Ridge Place
Bowie, Maryland

   
1/2012
   
1,732
 
$

2,450
 

8yrs 5 mos

 

(2) 5years

Bowie Suite 302, 303, 303a, 304 & 305

 

1525 Pointer Ridge Place
Bowie, Maryland

   
12/2012
   
2,896
 
$

6,448
 

6yrs 6 mos

 

(2) 5years

Bowie Suite 400

 

1525 Pointer Ridge Place
Bowie, Maryland

   
6/2006
   
11,053
 
$

28,320
 

13 years

 

(2) 5years

Clinton

 

7801 Old Branch Avenue
Clinton, Maryland

   
9/2002
   
2,550
 
$

6,429
 

5 years

 

(2) 5years

College Park 1st Floor

 

9658 Baltimore Avenue
College Park, Maryland

   
3/2008
   
1,916
 
$

5,970
 

10 years

 

(2) 5 years

College Park 4th Floor

 

9658 Baltimore Avenue
College Park, Maryland

   
7/2005
   
1,268
 
$

3,399
 

10 years

 

(2) 5 years

Crain Highway

 

2995 Crain Highway
Waldorf, Maryland

   
6/1999
   
8,044
   
Owned
       

Crofton

 

1641 Maryland Route 3 North
Crofton, Maryland

   
7/2009
   
2,420
 
$

7,523
 

10 years

 

(3) 5 years

Fairwood

 

12100 Annapolis Road
Glen Dale, Maryland

   
10/2009
   
2,863
   
Owned
       

Greenbelt

 

6421 Ivy Lane
Greenbelt, Maryland

   
9/2009
   
33,000
 
$

8,825
 

30 years

 

(2) 10 years

Old Line Centre

 

12080 Old Line Centre
Waldorf, Maryland

   
11/1989
   
2,048
 
$

5,377
 

10 years

 

(1) 5 years

Silver Spring

 

12501 Prosperity Drive
Silver Spring, Maryland

   
3/2013
   
2,131
 
$

3,906
 

3 years 2 mos

 

(1) 3 years

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Properties Acquired April 1, 2011

Location
  Address   Opened
Date
  Square
Feet
  Monthly
Lease
Amount
  Term   Renewal
Option

Bryans Road

  7175 Indian Head Highway
Bryans Road, Maryland
    5/1964     3,711     Owned        

California

 

22741 Three Notch Road
California, Maryland

   
4/1985
   
3,366
 
$

6,429
 

5 years

 

(2) 5 years

Callaway

 

20990 Point Lookout Road
Callaway, Maryland

   
8/2005
   
1,795
   
Owned
       

Fort Washington

 

12740 Old Fort Road
Fort Washington, Maryland

   
2/1973
   
2,800
 
$

6,700
 

5 years

 

(1) 5 years

La Plata

 

101 Charles Street
La Plata, Maryland

   
4/1974
   
2,910
 
$

8,693
 

15 years

 

(3) 10 years

Leonardtown Road

 

3135 Leonardtown Road
Waldorf, Maryland

   
6/1963
   
7,076
   
Owned
       

Lexington Park

 

46930 South Shangri La Drive
Lexington Park, Maryland

   
6/1959
   
7,763
 
$

11,423
 

20 years

 

N/A

Prince Frederick

 

691 Prince Frederick Blvd.
Prince Frederick, Maryland

   
8/1999
   
3,400
 
$

9,680
 

20 years

 

N/A

Solomons

 

80 Holiday Drive
Solomons, Maryland

   
2/1998
   
2,194
 
$

4,555
 

20 years

 

N/A

Waldorf Operations

 

3220 Old Washington Road
Waldorf, Maryland

   
12/1988
   
21,064
   
Owned
       


Properties Acquired May 10, 2013

Location
  Address   Opened
Date
  Square
Feet
  Monthly
Lease
Amount
  Term   Renewal
Option

Bowie

  4201 Mitchellville Road
Bowie, Maryland
    4/1997     43,600     Owned        

Crofton

 

1669 Crofton Centre
Crofton, Maryland

   
4/1985
   
3,366
 
$

Owned
       

Millersville

 

676 Old Mill Road
Millersville, Maryland

   
8/2005
   
1,795
   
7,500
 

5 years

 

(2) 5 years

Odenton

 

1161 Annapolis Road
Odenton, Maryland

   
2/1973
   
2,800
 
$

8,700
 

5 years

 

(1) 5 years

Waldorf

 

3225 Crain Highway
Waldorf, Maryland

   
4/1974
   
2,910
 
$

6,750
 

15 years

 

(3) 10 years

Item 3.    Legal Proceedings

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

Item 4.    Mine Safety Disclosures

        Not applicable.

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock Prices

        Our common stock trades on the Nasdaq Capital Market ("NASDAQ") under the trading symbol "OLBK." The table below shows the high and low sales prices of our common stock. The quotations reflect interdealer prices, without retail mark up, mark down, or commission, and may not represent actual transactions.

 
  Sale Price Range  
2013
  High   Low  

First Quarter

  $ 12.42   $ 10.90  

Second Quarter

    13.35     11.93  

Third Quarter

    13.50     12.74  

Fourth Quarter

    15.35     13.16  

2012
         
 
 

First Quarter

  $ 10.75   $ 7.75  

Second Quarter

    11.20     10.15  

Third Quarter

    11.24     9.55  

Fourth Quarter

    12.99     10.51  

        At December 31, 2013, there were 10,777,113 shares of common stock issued and outstanding held by approximately 477 stockholders of record. There were 362,983 shares of common stock issuable on the exercise of outstanding stock options, 294,327 of which were exercisable. The remaining shares are exercisable as follows:

Date Exercisable
  # of Shares  

02/27/2014

    10,329  

09/10/2014

    5,000  

12/31/2014

    17,669  

02/27/2015

    10,329  

09/10/2015

    5,000  

02/27/2016

    10,329  

09/10/2016

    5,000  

10/22/2016

    1,667  

10/22/2017

    1,667  

10/22/2018

    1,666  
       

Total

    68,656  
       
       

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Dividends

        We have paid the following dividends on our common stock during the years indicated:

 
  2013   2012  

March

  $ 0.04   $ 0.04  

June

    0.04     0.04  

September

    0.04     0.04  

December

    0.04     0.04  
           

Total

  $ 0.16   $ 0.16  
           
           

        Our ability to pay dividends in the future will depend on the ability of Old Line Bank to pay dividends to us. Old Line Bank's ability to continue paying dividends will depend on Old Line Bank's compliance with certain dividend regulations imposed upon us by bank regulatory authorities.

        In addition, we will consider a number of other factors, including our income and financial condition, tax considerations, and general business conditions before deciding to pay additional dividends in the future. We can provide no assurance that we will continue to pay dividends to our stockholders.

Issuer Purchases of Equity Securities

        We did not repurchase any of our securities during the three months ended December 31, 2013.

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Item 6.    Selected Financial Data

        The following table summarizes Old Line Bancshares, Inc.'s selected financial information and other financial data. The selected balance sheet and statement of income data are derived from our audited financial statements. You should read this information together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes included elsewhere in this report. Results for past periods are not necessarily indicative of results that may be expected for any future period.

December 31,
  2013   2012   2011  
 
  (Dollars in thousands except per share data)
 

Earnings and dividends:

                   

Interest income

  $ 44,263   $ 38,222   $ 32,321  

Interest expense

    4,202     5,058     5,219  

Net interest income

    40,061     33,164     27,101  

Provision for loan losses

    1,504     1,525     1,800  

Non-interest income

    8,870     3,708     2,493  

Non-interest expense

    36,077     25,162     20,636  

Income taxes

    3,602     2,720     1,927  

Net income

    7,747     7,465     5,232  

Less: Net loss attributable to the non-controlling interest

    (92 )   (65 )   (148 )

Net income available to common stockholders

    7,839     7,530     5,380  

Per common share data

                   

Basic earnings

  $ 0.87   $ 1.10   $ 0.86  

Diluted earnings

    0.86     1.09     0.86  

Dividends paid

    0.16     0.16     0.13  

Common stockholders book value, period end

    11.71     10.94     9.98  

Common stockholders tangible book value, period end

    10.50     10.30     9.28  

Average common shares outstanding

                   

Basic

    9,044,844     6,828,512     6,223,057  

Diluted

    9,149,200     6,893,645     6,253,898  

Common shares outstanding, period end

    10,777,113     6,845,432     6,817,694  

Balance Sheet Data:

                   

Total assets

  $ 1,167,223   $ 861,856   $ 811,042  

Total loans, less allowance for loan losses

    849,263     595,145     539,298  

Total investment securities

    172,170     171,541     161,785  

Total deposits

    974,359     735,458     690,768  

Stockholders' equity

    126,249     74,862     68,050  

Performance Ratios:

                   

Return on average assets

    0.74 %   0.90 %   0.79 %

Return on average stockholders' equity

    7.80 %   11.17 %   9.37 %

Total ending equity to total ending assets

    10.82 %   8.69 %   8.39 %

Net interest margin(1)

    4.53 %   4.65 %   4.61 %

Dividend payout ratio for period

    19.02 %   14.51 %   15.27 %

Asset Quality Ratios:

                   

Allowance to period-end loans

    0.58 %   0.66 %   0.69 %

Non-performing assets to total assets

    1.27 %   1.12 %   1.22 %

Non-performing loans to allowance for loan losses

    178.91 %   149.04 %   155.84 %

Capital Ratios:

                   

Tier 1 risk-based capital

    12.0 %   10.8 %   10.6 %

Total risk-based capital

    12.5 %   11.4 %   11.3 %

Leverage capital ratio

    9.3 %   7.9 %   7.8 %

(1)
See "Management's Discussion and Analysis of Financial Condition and Results of Operating—Reconciliation of Non-GAAP Measures."

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

        We operate a general commercial banking business, accepting deposits and making loans and investments.

        In an economic and regulatory climate that continues to present challenges for our industry, we are pleased to report significant strategic accomplishments during the year and continued profitability. Net income available to common stockholders, after inclusion of $3.5 million in merger and integration expenses, was $7.8 million or $0.87 per basic and $0.86 per diluted common share for the year ending December 31, 2013 which represented a 4.10% increase over the prior year's net income available to common stockholders of $7.5 million.

        The following highlights contain financial data and events that have occurred during 2013:

    The merger with WSB became effective May 10, 2013, causing total assets to grow to $1.2 billion at December 31, 2013 compared to $861.9 million at December 31, 2012.

    $12.2 million of new capital was successfully raised through a private placement of 936,695 shares of common stock at a price of $13.00 per share.

    Net loans increased $254.1 million or 42.70% during the year ended December 31, 2013, to $849.3 million at December 31, 2013 compared to $595.1 million at December 31, 2012, as a result of organic growth and the acquisition of WSB.

    Non-interest bearing deposits increased $39.8 million or 21.09% during the year ending December 31, 2013. Interest bearing deposits increased $199.1 million during the year compared to the balance at December 31, 2012, primarily as a result of the acquisition of WSB and partially offset by the planned reductions in higher cost deposits.

    Net income was $7.8 million or $0.87 per basic and $0.86 per diluted share for the year ended December 31, 2013 compared to $7.5 million, or $1.10 per basic and $1.09 per diluted share, for 2012.

    For the year ended December 31, 2013, Return on Average Assets (ROAA) and Return on Average Equity (ROAE) were 0.74% and 7.80%, respectively, compared to ROAA and ROAE of 0.90% and 11.17%, respectively, for the year ended December 31, 2012.

    The net interest margin was 4.53% during 2013 compared to 4.65% for 2012. Re-pricing in the loan portfolio and slightly lower yields on new loans caused the average loan yield to decline.

    Of note, we entered the residential lending business through the WSB acquisition.

    We ended 2013 with a book value of $11.71 per common share and a tangible book value of $10.50 per common share.

    We maintained liquidity and by all regulatory measures remained "well capitalized."

        Additionally, the following branch developments occurred during 2013:

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

    During the first quarter of 2013, we opened a loan production office located at 12501 Prosperity Drive, Suite 215, Silver Spring, in Montgomery County, Maryland. We have hired a Senior Vice

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      President with over 30 years of banking experience to lead this office. This office will allow us to continue to expand our services to the Montgomery County market. We anticipate that the individuals in this office will generate sufficient interest and non-interest income during 2014 and beyond to more than offset the cost associated with this office.

Strategic Plan

        We have based our strategic plan on the premise of enhancing stockholder value and growth through branching and operating profits. Our short term goals include collecting payments on non-accrual and past due loans, profitably disposing of certain acquired loans and other real estate owned, enhancing and maintaining credit quality, maintaining an attractive branch network, expanding fee income, generating extensions of core banking services, and using technology to maximize stockholder value. During the past few years, we have expanded organically in Montgomery County, Prince George's County and Anne Arundel County, Maryland. The acquisition of WSB Holdings will continue to further enhance our presence in Charles, Prince George's and Anne Arundel Counties.

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

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

        Although the current economic climate continues to present significant challenges for our industry, we have worked diligently towards our goal of becoming the premier community bank in the Washington, D.C. market, resulting in increased penetration into the Charles, Prince George's and Anne Arundel County markets through the new branches we acquired in the WSB acquisition. While we are uncertain about the pace of economic growth or the impact of the current political environment, and we believe that high unemployment and growing national debt will continue to dampen the economic climate, 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. We believe that we are well positioned to capitalize on the opportunities that may become available in the current economy as well as a healthier economy.

        If the Federal Reserve maintains the federal funds rate at current levels and the economy remains stable, we believe that we can continue to grow total loans and deposits during 2014. We also believe that we will be able to maintain our current level of core net interest margins during 2014. As a result of this growth and expected continued strength in the net interest margin, we expect that net interest income will continue to increase during 2014, although there can be no guarantee that this will be the case.

        We also expect that salaries and benefits expenses and other operating expenses will continue to be higher in 2014 than they were in 2013 due to the acquisition of WSB Holdings. 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. Final core conversion with WSB was completed during the fourth quarter of 2013, which caused earnings to be lower than would otherwise be expected. However, the majority of merger-related costs in connection with the WSB merger have been expensed in 2013 and going forward these expenses should be substantially lower.

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Mergers and Acquisitions.

        WSB Holdings, Inc.    On May 10, 2013, Old Line Bancshares acquired WSB Holdings, the parent company of The Washington Savings Bank, F.S.B. We converted each share of common stock of WSB Holdings into the right to receive, at the holder's election, $6.0743 in cash or 0.557 shares of Old Line Bancshares' common stock. We paid cash for any fractional shares of Old Line Bancshares' common stock and aggregate cash consideration of $17.0 million. The total merger consideration was $54.7 million based on recent trading prices of Old Line Bancshares' common stock at the time of the merger.

        In accordance with accounting for business combinations, during the second quarter of 2013, we recorded the acquired assets and liabilities of WSB at their estimated fair value on May 10, 2013, the acquisition date. The determination of the fair value of the loans caused a significant write down in the value of certain loans, which we assigned to an accretable or non-accretable discount. We recognize the accretable discount as interest income over the remaining term of the loan. The non-accretable discount will be adjusted based on subsequent increases or decreases to the expected cash flows and will result in either an increase to accretion income or provisions for loan losses, respectively. The accretion of the loan marks, along with other fair value adjustments, favorably impacted our net interest income by $682 thousand for the twelve months ended December 31, 2013.

        In conjunction with the merger, we also recorded the deposits acquired at their fair value and recorded a core deposit intangible of $2.4 million. The amortization of this intangible asset decreased net income by $179,642 for the year ended December 31, 2013.

        The former WSB franchise is currently operating under the Old Line Bank name.

        Maryland Bankcorp, Inc.    On April 1, 2011, Old Line Bancshares acquired Maryland Bankcorp, the parent company of Maryland Bank & Trust Company, N.A. We converted each share of common stock of Maryland Bankcorp into the right to receive, at the holder's election, $29.11 in cash or 3.4826 shares of Old Line Bancshares' common stock. We paid cash for any fractional shares of Old Line Bancshares' common stock and aggregate cash consideration of $1.0 million. The total merger consideration was $18.8 million.

        In accordance with accounting for business combinations, we recorded the acquired assets and liabilities of Maryland Bankcorp at their estimated fair value on April 1, 2011, the acquisition date. The determination of the fair value of the loans caused a significant write down in the value of certain loans, which we assigned to an accretable or non-accretable discount. We will recognize the accretable discount as interest income over the remaining term of the loan. The non-accretable discount will be adjusted based on subsequent increases or decreases to the expected cash flows and will result in either an increase to accretion income or provisions for loan losses, respectively. The accretion of the loan marks, along with other fair value adjustments, related to MB&T favorably impacted our net interest income by $2.8 million, $3.4 million and $2.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.

        In conjunction with the merger, we also recorded the deposits acquired at their fair value and recorded a core deposit intangible of $5.0 million. The amortization of this intangible asset decreased net income by $659,052, $727 thousand and $584 thousand for the years ended December 31, 2013, 2012 and 2011, respectively.

        The former MB&T franchise is currently operating under the Old Line Bank name.

Critical Accounting Policies and Estimates

        Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. They require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. The following are the accounting policies that we believe are critical. For a discussion of recent accounting pronouncements, see Note 1—Summary of Significant Accounting Policies in the Notes to our Consolidated Financial Statements.

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        We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America and follow general practices within the industry in which we operate. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. We base these estimates, assumptions, and judgments on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third party sources, when available.

        The most significant accounting policies that we follow are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how we value significant assets and liabilities in the financial statements and how we determine those values. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses as the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

        Allowance for Loan Losses—We evaluate the adequacy of the allowance for loan losses based upon loan categories except for delinquent loans and loans for which management has knowledge about possible credit problems of the borrower or knowledge of problems with loan collateral, which management evaluates separately and assigns loss amounts based upon the evaluation. We apply loss ratios to each category of loans, where we further divide the loans by risk rating and apply loss ratios by risk rating, to determine estimated loss amounts. Categories of loans are consumer loans, residential real estate, commercial real estate and commercial loans.

        The allowance for loan losses represents management's best estimate of the losses known and inherent in the loan portfolio that are both probable and reasonable to estimate, based on, among other factors, prior loss experience, volume and type of lending conducted, estimated value of any underlying collateral, economic conditions (particularly as such conditions relate to Old Line Bank's market area), regulatory guidance, peer statistics, management's judgment, past due loans in the loan portfolio, loan charge off experience and concentrations of risk (if any). Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant estimates, assumptions, and judgments. The loan portfolio also represents the largest asset type on the consolidated balance sheets.

        Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for loan losses, including in connection with the valuation of collateral and the financial condition of the borrower, and in establishing loss ratios and risk ratings. The establishment of allowance factors is a continuing exercise and allowance factors may change over time, resulting in an increase or decrease in the amount of the provision or allowance based upon the same volume and classification of loans.

        Changes in allowance factors or in management's interpretation of those factors will have a direct impact on the amount of the provision, and a corresponding effect on income and assets. Also, errors in management's perception and assessment of the allowance factors could result in the allowance not being

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adequate to cover losses in the portfolio, and may result in additional provisions or charge offs, which would adversely affect income and capital. For additional information regarding the allowance for loan losses, see the "Asset Quality" section of this annual report.

        Other-Than-Temporary Impairment—Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include (1) duration and magnitude of the decline in value, (2) the financial condition of the issuer or issuers and (3) the structure of the security. A decline in the market value of any available for sale security below cost that is deemed other-than-temporary results in a charge to earnings and establishment of a new cost basis for that security.

        Goodwill and Other Intangible Assets—Goodwill represents the excess of the purchase price over the sum of the estimated fair values of tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed related to the acquisitions of Maryland Bankcorp and WSB Holdings. Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in these transactions. The core deposit intangible is being amortized over 18 years for Maryland Bankcorp and ten years for WSB Holdings and the estimated useful lives are periodically reviewed for reasonableness.

        Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing the reporting unit's estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill assigned to that reporting unit is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment of goodwill assigned to that reporting unit.

        If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. We have determined that Old Line Bancshares has one reporting unit.

        We engaged an external valuation specialist to assist us in the goodwill assessment performed at September 30, 2013, our annual test date, and determined that no impairment charge was necessary. Fair value of the reporting unit in 2013 was determined using three methods, one based on the prices paid for common shares of reasonably similar publically traded companies, another based on the prices paid for acquisition of control of reasonably similar companies, and lastly, a third method based on discounted cash flow models with estimated cash flows based on internal forecasts of net income. These three methods provided a range of valuations that we used in evaluating goodwill for possible impairment. Additionally, should Old Line Bancshares' future earnings and cash flows decline and/or discount rates increase, an impairment charge to goodwill and other intangible assets may be required. There have been no events subsequent to the September 30, 2013 evaluation that caused us to perform an interim review of the carrying value of goodwill.

        Business Combinations—Accounting principles generally accepted in the United States (US GAAP) requires that the acquisition method of accounting, formerly referred to as purchase method, be used for

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all business combinations and that an acquirer be identified for each business combination. Under US GAAP, the acquirer is the entity that obtains control of one or more businesses in the business combination, and the acquisition date is the date the acquirer achieves control. US GAAP requires that the acquirer recognize the fair value of assets acquired, liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date.

        Acquired loans—These loans are recorded at fair value at the date of acquisition, and accordingly no allowance for loan losses is transferred to the acquiring entity in connection with purchase accounting. The fair values of loans with evidence of credit deterioration (purchased, credit-impaired loans) are initially recorded at fair value, but thereafter accounted for differently than purchased, non-credit-impaired loans. For purchased, credit-impaired loans, the excess of all cash flows estimated to be collectable at the date of acquisition over the purchase price of the purchase credit-impaired loan is recognized as interest income, using a level-yield basis over the life of the loan. This amount is referred to as the accretable yield. The purchased credit-impaired loan's contractually-required payments receivable estimated to be in excess of the amount of its future cash flows expected at the date of acquisition is referred to as the non-accretable difference, and is not reflected as an adjustment to the yield, in the form of a loss accrual or a valuation allowance.

        Subsequent to the acquisition date, management continues to monitor cash flows on a quarterly basis, to determine the performance of each purchased, credit-impaired loan in comparison to management's initial performance expectations. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent significant increases in cash flows result in a reversal of the provision for loan losses to the extent of prior provisions, or a reclassification of amount from non-accretable difference to accretable yield, with a positive impact on the accretion of interest income in future periods.

        Acquired performing loans are accounted for using the contractual cash flows method of recognizing discount accretion based on the acquired loans' contractual cash flows. Acquired performing loans are recorded as of the purchase date at fair value. Credit losses on the acquired performing loans are estimated based on analysis of the performing portfolio. A provision for loan losses is recognized for any further credit deterioration that occurs in these loans subsequent to the acquisition date.

        Income taxes—The provision for income taxes includes taxes payable for the current year and deferred income taxes. We determine deferred tax assets and liabilities based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which we expect the differences to reverse. If needed, we use a valuation allowance to reduce the deferred tax assets to the amount we expect to realize. We allocate tax expense and tax benefits to Old Line Bancshares and its subsidiaries based on their proportional share of taxable income.

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 periods indicated, 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.

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Average Balances, Interest and Yields

 
  2013   2012   2011  
Twelve Months Ended December 31,
  Average
balance
  Interest   Yield   Average
balance
  Interest   Yield   Average
balance
  Interest   Yield  

Assets:

                                                       

Federal funds sold(1)

  $ 3,582,839   $ 3,851     0.11 % $ 4,160,808   $ 6,028     0.14 % $ 4,511,838   $ 6,088     0.13 %

Interest bearing deposits

    105,513     184     0.17     4,366,490     10,957     0.25     11,617,100     35,954     0.31  

Investment securities(1)(2)

                                                       

U.S. Treasury

    1,279,948     3,218     0.25     1,248,731     10,202     0.82     951,656     7,665     0.81  

U.S. government agency

    39,298,327     569,019     1.45     27,322,439     383,208     1.40     17,015,717     351,399     2.07  

Mortgage backed securities

    72,334,100     1,464,994     2.03     88,403,848     2,243,209     2.54     85,595,192     2,635,172     3.08  

Municipal securities

    62,484,076     2,896,472     4.64     48,479,618     2,465,949     5.09     19,232,924     1,100,704     5.72  

Other equity securities

    4,297,264     259,738     6.04     3,879,785     193,516     4.99     3,443,591     128,679     3.74  
                                       

Total investment securities

    179,693,715     5,193,441     2.89     169,334,421     5,296,084     3.13     126,239,080     4,223,619     3.35  
                                       

Loans:(1)

                                                       

Commercial

    110,993,664     5,222,223     4.70     99,059,441     4,861,281     4.91     96,395,235     5,208,608     5.40  

Mortgage real estate

    626,060,637     34,980,352     5.59     456,291,701     28,637,163     6.28     348,392,803     21,994,769     6.31  

Consumer

    9,982,711     678,167     6.79     12,800,542     775,485     6.06     14,741,474     1,400,154     9.50  
                                       

Total loans

    747,037,012     40,880,742     5.47     568,151,684     34,273,929     6.03     459,529,512     28,603,531     6.22  

Allowance for loan losses

    5,021,045               4,061,789               2,500,720            
                                       

Total loans, net of allowance

    742,015,967     40,880,742     5.51     564,089,895     34,273,929     6.08     457,028,792     28,603,531     6.26  
                                       

Total interest earning assets(1)

    925,398,034     46,078,218     4.98     741,951,614     39,586,998     5.34     599,396,810     32,869,192     5.48  
                                       

Non-interest bearing cash

    38,323,683                 35,687,747                 24,604,437              

Premises and equipment

    31,797,485                 23,829,393                 20,989,733              

Other assets

    62,398,528                 38,164,921                 32,537,952              
                                                   

Total assets(1)

    1,057,917,730                 839,633,675                 677,528,932              
                                                   
                                                   

Liabilities and Stockholders' Equity:

                                                       

Interest bearing deposits

                                                       

Savings

    113,376,972     137,293     0.12     62,581,038     193,036     0.31     48,051,608     154,573     0.32  

Money market and NOW

    221,007,993     614,402     0.28     154,154,792     549,235     0.36     106,201,797     615,337     0.58  

Other time deposits

    357,443,212     2,964,348     0.83     321,166,233     3,492,836     1.09     281,542,957     3,619,784     1.29  
                                       

Total interest bearing deposits

    691,828,177     3,716,043     0.54     537,902,063     4,235,107     0.79     435,796,362     4,389,694     1.01  

Borrowed funds

    44,045,931     486,209     1.10     27,495,941     822,518     2.99     46,130,710     829,477     1.80  
                                       

Total interest bearing liabilities

    735,874,108     4,202,252     0.57     565,398,004     5,057,625     0.89     481,927,072     5,219,171     1.08  

Non-interest bearing deposits

    212,947,837                 199,597,077                 132,326,211              
                                                   

    948,821,945                 764,995,081                 614,253,283              

Other liabilities

    8,275,798                 6,827,885                 5,315,810              

Non-controlling interest

    355,322                 416,622                 517,639              

Stockholders' equity

    100,464,665                 67,394,087                 57,442,200              
                                                   

Total liabilities and stockholders' equity

  $ 1,057,917,730               $ 839,633,675               $ 677,528,932              
                                                   
                                                   

Net interest spread(1)

                4.41                 4.45                 4.40  

Net interest margin(1)

        $ 41,875,966     4.53 %       $ 34,529,373     4.65 %       $ 27,650,021     4.61 %
                                             
                                             

(1)
Interest revenue is presented on a fully taxable equivalent (FTE) basis. The FTE basis adjusts for the tax favored status of these types of assets. Management believes providing this information on a FTE basis provides investors with a more accurate picture of our net interest spread and net interest income and we believe it to be the preferred industry measurement of these calculations. See "Reconciliation of Non-GAAP Measures."

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

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Rate/Volume Analysis

        The following table describes the impact on our interest income and expense resulting from changes in average balances and average rates for the periods indicated. The change in interest income due to both volume and rate is reported with the rate variance.

 
  Twelve Months Ended December 31,   Twelve Months Ended December 31,  
 
  2013 compared to 2012   2012 compared to 2011  
 
  Variance due to:   Variance due to:  
 
  Total   Rate   Volume   Total   Rate   Volume  

Interest earning assets:

                                     

Federal funds sold(1)

  $ (2,177 ) $ (1,411 ) $ (766 ) $ (60 ) $ 423   $ (483 )

Interest bearing deposits

    (10,773 )   (2,553 )   (8,220 )   (24,997 )   (5,855 )   (19,142 )

Investment Securities(1)

                                     

U.S. Treasury

    (6,984 )   (7,231 )   247     2,537     90     2,447  

U.S. government agency

    185,811     13,814     171,997     31,809     (137,070 )   168,879  

Mortgage backed securities

    (778,215 )   (407,336 )   (370,879 )   (391,963 )   (477,186 )   85,223  

Municipal securities

    430,523     (227,535 )   658,058     1,365,245     (138,124 )   1,503,369  

Other

    66,222     44,143     22,079     64,837     46,862     17,975  

Loans:

                                     

Commercial

    360,942     (195,981 )   556,923     (347,327 )   (491,524 )   144,197  

Mortgage real estate

    6,343,189     (3,336,888 )   9,680,077     6,642,394     (189,125 )   6,831,519  

Consumer

    (97,318 )   87,813     (185,131 )   (624,669 )   (458,371 )   (166,298 )
                           

Total interest income(1)

    6,491,220     (4,033,165 )   10,524,385     6,717,806     (1,849,880 )   8,567,686  
                           

Interest bearing liabilities:

                                     

Savings

    (55,743 )   (157,465 )   101,722     38,463     (6,966 )   45,429  

Money market and NOW

    65,167     (136,955 )   202,122     (66,102 )   (287,150 )   221,048  

Other time deposits

    (528,488 )   (888,815 )   360,327     (126,948 )   (603,847 )   476,899  

Borrowed funds

    (336,309 )   (676,963 )   340,654     (6,959 )   411,889     (418,848 )
                           

Total interest expense

    (855,373 )   (1,860,198 )   1,004,825     (161,546 )   (486,074 )   324,528  
                           

Net interest income(1)

  $ 7,346,593   $ (2,172,967 ) $ 9,519,560   $ 6,879,352   $ (1,363,806 ) $ 8,243,158  
                           
                           

(1)
Interest revenue is presented on a fully taxable equivalent (FTE) basis. Management believes providing this information on a FTE basis provides investors with a more accurate picture of our net interest spread and net interest income and we believe it to be the preferred industry measurement of these calculations. See "Reconciliation of Non-GAAP Measures."

        The fair value yield on loan accretion slightly decreased due an increase in average interest earning assets. The fair value accretion positively increased the net interest margin as follows:

 
  Twelve Months Ended December 31,  
 
  2013   2012   2011  
 
  Fair Value
Accretion
Dollars
  % Impact on
Net Interest
Margin
  Fair Value
Accretion
Dollars
  % Impact on
Net Interest
Margin
  Fair Value
Accretion
Dollars
  % Impact on
Net Interest
Margin
 

Commercial loans

  $ 262,942     0.03 % $ 187,395     0.03 % $ 150,497     0.03 %

Mortgage loans

    2,712,895     0.29     3,026,204     0.41     1,725,898     0.29  

Consumer loans

    19,103     0.00     7,749     0.00     3,624      

Interest bearing deposits

    461,590     0.05     189,120     0.03     324,991     0.05  
                           

Total Fair Value Accretion

  $ 3,456,530     0.37 % $ 3,410,468     0.46 % $ 2,205,010     0.37 %
                           
                           

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Comparison of Operating Results for the Years Ended December 31, 2013 and 2012

        Net Interest Income.    Net interest income before provision for loan losses for the year ended December 31, 2013 increased $6.9 million or 20.79% to $40.1 million from $33.2 million for the year ended December 31, 2012. As discussed below and outlined in detail in the Rate/Volume Analysis, these changes were the result of a decline in interest paid on interest bearing liabilities and growth in average interest earning assets. The increase in the accretion of the fair value adjustments on loans and time deposits had a favorable impact on net interest income as compared to 2012 and was a result of the WSB acquisition.

        A competitive rate environment and a low prime rate resulted in decreases in both the rate paid on interest bearing liabilities and the yield on interest earning assets. Although this caused low market yields that continue to negatively impact net interest income, the relatively stable rate environment has allowed us to continue to adjust the mix and volume of interest earning assets and liabilities on the balance sheet.

        We offset the effect on net interest income caused by the low rate environment primarily by growing total average interest earning assets $183.4 million or 24.72% to $925.4 million for the year ended December 31, 2013 from $742.0 million for the year ended December 31, 2012. The growth in average interest earning assets derived from a $178.9 million increase in average total loans and a $10.4 million increase in average investment securities. The growth in net interest income that derived from the increase in total average interest earning assets was partially offset by growth in average interest bearing liabilities. The growth in average interest bearing liabilities resulted primarily from the $153.9 million increase in average interest bearing deposits which increased to $691.8 million for the year ended December 31, 2013 from $537.9 million for the year ended December 31, 2012.

        The growth in both average interest earning assets and interest bearing deposits was primarily a result of the acquisition of WSB in May 2013, but as with the year ending December 31, 2012, we also saw strong organic growth in both interest earning assets and interest bearing deposits.

        Our net interest margin was 4.53% for the year ended December 31, 2013 compared to 4.65% for the year ended December 31, 2012. The yield on average interest earning assets decreased 36 basis points during the 12-month period from 5.34% for the year ended December 31, 2012 to 4.98% for the year ended December 31, 2013. This decrease was primarily because the lower prime rate and competitive rate environment caused a lower average rate on loans and securities. This decrease was partially offset by a 32 basis point decline in the rate paid on interest bearing liabilities, however, fair value accretion actually decreased to 37 basis points from 46 basis points in the prior year.

        Re-pricing in the loan portfolio and slightly lower yields on our new loans also caused the average loan yield to decline. The decline in the yield on interest bearing liabilities was the result of a decline in rates paid on savings and other time deposits as well as an improvement in the mix of interest bearing liabilities. The accretion of fair value adjustments on certificates of deposits acquired from MB&T and WSB also slightly reduced the yield paid on other time deposits.

        During 2013, we continued to successfully collect payments on acquired loans that we had recorded at fair value according to ASC 310-20 and ASC 310-30, albeit at a lower dollar value during the 2013 period than we accomplished during the same period of 2012. These payments were a direct result of our efforts to negotiate payments, sell notes or foreclose on and seek collateral after the acquisition date. This decrease is primarily due to a lower dollar value of impaired loans that we acquired from MB&T that was repaid during the year ending December 31, 2013 relative to the same period of 2012, which caused a slightly lower accretion of the fair value adjustment on purchased credit impaired loans.

        Non-interest bearing deposits are a primary source of funding for our investment and loan portfolios. These deposits allow us to fund growth in interest earning assets at minimal cost. As a result of the WSB acquisition and growth generated from our legacy branch network, our average non-interest bearing deposits increased $13.4 million to $212.9 million during the twelve months ended December 31, 2013 compared to $565.4 million during the 12 months ended December 31, 2012. This was also a significant

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contributor to the improvement in the net interest margin as it allowed us to increase our level of interest earning assets, which allowed us to increase interest income without a corresponding increase in interest bearing liabilities and interest expense.

        With the branches acquired in the WSB Holdings acquisition and our increased presence in Anne Arundel, Charles, and Prince George's Counties, we anticipate that we will be able to continue to grow earning assets and deposits during 2014. We also believe that we will maintain our current level of net interest margin during 2014, although we will not be able to maintain this net interest margin if we fail to collect on a significant portion of the remaining impaired acquired loans totaling $8.7 million at December 31, 2013. As a result of expected growth and maintenance of the net interest margin, we expect that net interest income will continue to increase during 2014, although there can be no guarantee that this will be the case.

        Provision for loan losses.    Provision for loan losses for the year ended December 31, 2013 decreased $21 thousand, remaining at $1.5 million in both the years ended December 31, 2013 and 2012. Management identified probable losses in the loan portfolio and recorded charge-offs of $820 thousand for the year ended December 31, 2013, compared to $1.5 million for the year ended December 31, 2012. Recoveries of $280 thousand were recognized in 2013 compared to $222 thousand in 2012. The allowance for loan losses to gross loans held-for-investment was 0.58%, and the allowance for loan losses to non-accrual loans was 60.71%, at December 31, 2013. Additionally, we revised our allowance for loan losses methodology during the fourth quarter of 2013, which resulted in a lower indicated general reserve. See additional discussion under "Asset Quality".

        Non-Interest Income.    Non-interest income totaled $8.9 million for the year ended December 31, 2013, an increase of $5.2 million or 139.21% from the 2012 amount of $3.7 million. Non-interest income for the years ended December 31, 2013 and 2012 are as follows:

 
  Years Ended December 31,    
   
 
 
  2013   2012   $ Change   % Change  

Service charges on deposit accounts

  $ 1,607,931   $ 1,281,187   $ 326,744     25.50 %

Gain on sales or calls of investment securities

    641,088     1,156,781     (515,693 )   (44.58 )

Earnings on bank owned life insurance

    840,028     548,454     291,574     53.16  

Pointer Ridge rent and other revenue

    332,951     298,508     34,443     11.54  

Gain (loss) on disposal of assets

    (104,639 )   7,340     (111,979 )   (1,525.60 )

Rental Income

    753,643         753,643     100.00  

Gain on the sale of loans

    3,890,029         3,890,029     100.00  

Other fees and commissions

    909,151     415,840     493,311     118.63  
                     

Total non-interest income

  $ 8,870,182   $ 3,708,110   $ 5,162,072     139.21 %
                     
                     

        Non-interest income for the year ended December 31, 2013 and 2012 included fee income from service charges on deposit accounts, gain on sales or calls of investment securities, earnings on bank owned life insurance, rental income and other fees and commissions including revenues with respect to Pointer Ridge. The year ended December 31, 2013 also included a loss on the disposal of assets and a gain on the sale of loans. The primary reason for the increase in non-interest income was increases in gain on the sale of loans, rental income, earnings on bank owned life insurance, service charges on deposit accounts and other fees and commissions, offsetting the decrease in gains on sale of investment securities and loss on disposal of assets.

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        Net gain of $3.9 million on the sale of loans is primarily attributable to the net gain of $3.4 million earned on the sale of $22.6 million of loans in the fourth quarter of 2013 consisting of impaired loans acquired from previous mergers with MB&T and WSB. This disposal was conducted through brokered sale transactions and included approximately $12.0 million of loans that were over 90 days past due. The remaining $481 thousand of the gain on sale of loans is a result of gains recorded on loans originated in our mortgage origination department and sold in the secondary market.

        The $292 thousand increase in earnings on bank owned life insurance is the result of the acquisition of approximately $13.0 million of bank owned life insurance in the recent WSB merger. The $327 thousand increase in service charges on deposit accounts is due to the increase in our deposits primarily as a result of the WSB acquisition. Other fees and commissions increased $1.3 million in 2013 compared to 2012 primarily due to fees collected on our marketable loans and fees collected from Old Line Financial Services. Rental income increased as a result of rent received on space occupied by tenants at the office space located at 4201 Mitchellville Road, Bowie, Maryland that was acquired in the WSB merger. Gain on sales or calls of investment securities decreased during the period because we sold a lower dollar amount of securities during the year ending December 31, 2013 as compared to the same twelve months of 2012. We elected to sell the securities in 2012 in order to reallocate our holdings in the investment portfolio and minimize future prepayment risk. Loss on the disposal of assets of $104,639 during 2013 is the result of our closing the Old Line Centre branch in March 2013 and the disposal of certain assets in connection with the WSB Holdings merger.

        Non-Interest Expenses.    Non-interest expense increased $10.9 million or 43.38% for the year ended December 31, 2013 compared to the year ended December 31, 2012. The following chart outlines the changes in non-interest expenses for the period.

 
  Years ended December 31,    
   
 
 
  2013   2012   $ Change   % Change  

Salaries and benefits

  $ 16,617,920   $ 12,038,509   $ 4,579,411     38.04 %

Occupancy and equipment

    5,353,300     3,687,419     1,665,881     45.18  

Data processing

    1,422,771     869,984     552,787     63.54  

Pension plan termination

        700,884     (700,884 )   (100.00 )

FDIC insurance and State of Maryland assessments

    777,474     600,875     176,599     29.39  

Merger and integration

    3,518,945     470,999     3,047,946     647.12  

Core deposit premium

    838,694     727,421     111,273     15.30  

Pointer Ridge other operating

    409,071     422,147     (13,076 )   (3.10 )

Gain on sale of other real estate owned

    (144,934 )   (110,704 )   (34,230 )   30.92  

OREO expense

    838,429     591,348     247,081     41.78  

Other operating

    6,445,619     5,162,941     1,282,678     24.84  
                     

Total non-interest expenses

  $ 36,077,289   $ 25,161,823   $ 10,915,466     43.38 %
                     
                     

        The growth in non-interest expenses in 2013 as compared to 2012, was mainly attributable to increases in merger and integration expenses, data processing expenses, salaries and benefits, occupancy and equipment expenses and other operating expenses as well as an increase in other real estate owned ("OREO") expenses. Merger and integration expenses increased $3.0 million, or 647.12%, during the year ended December 31, 2013 compared to the same period in 2012 as a result of the acquisition of WSB Holdings. These expenses were primarily related to expenses associated with the termination of WSB's core data processing contract and legal fees, investment banking fees and severance payments in connection with the merger. Data processing increased $553 thousand, or 63.54%, as a result of additional monthly expenses for WSB's core banking processor.

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        Salaries and benefits increased by $4.6 million, or 38.04%, during the year ended December 31, 2013 when compared to the year ended December 31, 2012 primarily as a result of the additional staff acquired as a result of the WSB merger, and to a lesser extent, the additional staff for the Montgomery County lending team hired during the first quarter of 2013 and the Old Line Financial Services group that was hired during 2012. Also, during the first quarter of 2013, we added an Executive Vice President who, as expected, has enhanced our core operational capabilities. The cost of health insurance benefits also increased in 2013 compared to 2012 as a result of an increase in insurance rates and the increased staff.

        Occupancy and equipment expenses increased $1.7 million or 45.18% during the year ended December 31, 2013 compared to the same period in 2012 primarily due to the additional lease and depreciation expense for the acquired WSB branches and the acceleration of the remaining lease expense for the Old Line Centre branch that we closed on March 29, 2013.

        Other operating expenses increased $1.3 million during the year ended December 31, 2013 compared to the year ended December 31, 2012, primarily as a result of an approximately $316 thousand increase in network services associated with the expansion of our network as a result of the WSB Holdings merger and a $160 thousand increase in internal audit expense as a result of the agreement we signed with a third party to enhance our internal audit function. In addition, FDIC insurance and State of Maryland assessments increased as a result of the increase in deposits due to the WSB merger.

        Gain on the sale of other real estate owned was $145 thousand during the year ended December 31, 2013 compared to a gain of $111 thousand during 2012. The gain recognized during 2013 is primarily due to a gain of $384 thousand on five properties offsetting a $239 thousand loss on four properties. The gain recognized in 2012 was due to one property for which we recorded a $183 thousand gain offset by losses on three other properties. We expect that the sale of these properties will reduce future legal and maintenance costs. Other real estate owned expenses increased in 2013 compared to 2012 as a result of additional expenses related to other real estate owned that acquired in the WSB acquisition and therefore did not own in 2012.

        Income Taxes.    Income tax expense was $3.6 million (31.74% of pre-tax income) for the year ended December 31, 2013 compared to $2.7 million (26.71% of pre-tax income) for the same period in 2012. The increase in the effective tax rate was related to approximately $750 thousand of non-deductible items due to the WSB acquisition and because income before taxes increased compared to the twelve months ended December 31, 2012.

        Net Income Available to Common Stockholders.    Net income available to common stockholders was $7.8 million or $0.87 per basic and $0.86 per diluted common share for the year ending December 31, 2013 compared to net income available to common stockholders of $7.5 million or $1.10 per basic and $1.09 per diluted common share for the same period in 2012. The increase in net income available to common stockholders for 2013 was primarily the result of increases of $6.9 million in net interest income and $5.2 million in non-interest income. These increases were partially offset by a $10.9 million increase in non-interest expenses. Basic and diluted earnings per common share decreased for the year ended December 31, 2013 compared to the prior year as a result of the increases of 2.9 million shares of common stock issued to former WSB stockholders in the WSB acquisition and 936,695 shares issued in the private placement resulting in additional paid in capital of $49.8 million.

Comparison of Operating Results for the Years Ended December 31, 2012 and 2011

        Net Interest Income.    Net interest income before provision for loan losses for the twelve months ended December 31, 2012 increased $6.1 million or 22.38% to $33.2 million from $27.1 million for the same period in 2011. As discussed below and outlined in detail in the Rate/Volume Analysis, these changes were the result of average interest earning assets growing at a faster rate than average interest bearing liabilities, an improvement in interest rates earned on interest earning assets, and a decline in interest paid on

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interest bearing liabilities. The accretion of the fair value adjustments positively impacted net interest income after provision for loan losses as well as the $275,000 decrease in the provision for loan losses.

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

        We offset the effect on net income caused by the low rate environment primarily by growing total average interest earning assets $142.5 million or 23.78% to $742.0 million for the twelve months ended December 31, 2012 from $599.4 million for the twelve months ended December 31, 2011. The growth in average interest earning assets derived from a $108.6 million increase in average total loans and a $43.1 million increase in average investment securities. The growth in net interest income that derived from the increase in total average interest earning assets was partially offset by growth in average interest bearing liabilities. The growth in average interest bearing liabilities resulted primarily from the $102.1 million increase in average interest bearing deposits which increased to $537.9 million for the twelve months ended December 31, 2012 from $435.8 million for the twelve months ended December 31, 2011.

        Our net interest margin was 4.65% for the twelve months ended December 31, 2012 as compared to 4.61% for the twelve months ended December 31, 2011. The yield on average interest earning assets decreased 14 basis points during the period from 5.48% for the year ended December 31, 2011 to 5.34% for the year ended December 31, 2012. This decrease was primarily because the lower prime rate and competitive rate environment caused a lower average rate on loans and securities. This decrease was partially offset by an 18 basis point decline in the rate paid on interest bearing liabilities and an improvement in the fair value accretion.

        Non-interest bearing deposits are a primary source of funding for our investment and loan portfolios. These deposits allow us to fund growth in interest earning assets at minimal cost. As a result of the MB&T acquisition and growth generated from our legacy branch network, our average non-interest bearing deposits increased $67.3 million to $199.6 million during the twelve months ended December 31, 2012 compared to the twelve months ended December 31, 2011. This was also a significant contributor to the improvement in the net interest margin as it allowed us to increase our level of interest earning assets which allowed us to increase interest income without a corresponding increase in interest bearing liabilities and interest expense.

        With the branches acquired in the MB&T acquisition, the loans and branches that we anticipate we will obtain with the WSB Holdings acquisition and increased recognition in St. Mary's, Calvert, Charles, Prince George's and Anne Arundel counties, the high level of non-interest bearing deposits and continued growth in these and interest bearing deposits, we anticipate that we will continue to grow earning assets during 2013. If the Federal Reserve Board maintains the federal funds rate at current levels and the economy remains stable, we believe that we can continue to grow total loans and deposits during 2013 and beyond. We also believe that we will continue to maintain the net interest margin in the range of 4.50% during 2013, although we will not be able to so maintain the net interest margin if we fail to collect on a significant portion of impaired acquired loans. As a result of this growth and maintenance of the net interest margin, we expect that net interest income will continue to increase during 2013, although there can be no guarantee that this will be the case.

        Provision for loan losses.    Provision for loan losses for the year ended December 31, 2012 decreased $275,000 to $1.5 million from $1.8 million for the year ended December 31, 2011. During 2012, we identified probable losses and recorded charge-offs of $1.5 million compared to $762 thousand for 2011. We recognized recoveries of $222 thousand in 2012 compared to $235 thousand for 2011. At December 31, 2012, allowance for loan losses to gross loans was 0.66% and allowance for loan losses to non-accrual loans was 67.10%.

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        Non-Interest Income.    Non-interest income totaled $3.8 million for the year ended December 31, 2012, an increase of $1.1 million or 39.31% from the 2011 amount of $2.7 million. Non-interest income for the years ended December 31, 2012 and December 31, 2011 included fee income from service charges on deposit accounts, gains on sales or calls of investment securities, earnings on bank owned life insurance, gains or losses on sales of other real estate owned and other fees and commissions including revenues with respect to Pointer Ridge. The primary causes of the increase in non-interest income were an increase in the gain on sales or calls of investments and the acquisition of MB&T, which was supplemented by growth in legacy bank customers and services provided to both new and existing customers. The acquisition was the major contributor to the increases in service charges and other fees and commissions during the year ended December 31, 2012 compared to the year ended December 31, 2011. Gain on sales or calls of investment securities increased during the period because, in order to reallocate our holdings in the investment portfolio and minimize future prepayment risk, we elected to sell a higher dollar amount of securities and as a result recognized a higher net gain. Also contributing to the increase in non-interest revenues was a decrease in the other than temporary impairment on equity securities charge, which decreased because in 2011 we recognized a permanent impairment of equity securities and we experienced no such impairment in 2012. Pointer Ridge rent and other income increased as a result of a decline in the vacancy in the building owned by Pointer Ridge. These increases were partially offset by a decrease in earnings on bank owned life insurance and a decline in gain on sales of other real estate owned, which decreased because we sold acquired properties at a higher net gain in 2011 than we did in 2012.

        The following table outlines the changes in non-interest income for the 12-month period.

 
  Years Ended December 31,    
   
 
 
  2012   2011   $ Change   % Change  

Service charges on deposit accounts

  $ 1,281,187   $ 1,208,466   $ 72,721     6.02 %

Gains on sales or calls of investment securities

    1,156,781     140,149     1,016,632     725.39  

Other than temporary impairment on investment securities

        (123,039 )   123,039     (100.00 )

Earnings on bank owned life insurance

    548,454     701,509     (153,055 )   (21.82 )

Pointer Ridge rent and other revenue

    298,508     206,486     92,022     44.57  

Other fees and commissions

    423,180     359,701     63,479     17.65  
                     

Total non-interest income

  $ 3,708,110   $ 2,493,272   $ 1,214,838     48.72 %
                     
                     

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        Non-Interest Expense.    Non-interest expense increased $4.5 million for the year ended December 31, 2012 compared to the prior year. The following chart outlines the changes in non-interest expenses for the period.

 
  Years ended December 31,    
   
 
 
  2012   2011   $ Change   % Change  

Salaries and benefits

  $ 12,038,509   $ 10,024,591   $ 2,013,918     20.09 %

Occupancy and equipment

    3,687,419     3,131,557     555,862     17.75  

Data processing

    869,984     816,815     53,169     6.51  

Pension plan termination

    700,884         700,884     100.00  

FDIC insurance and State of Maryland assessments

    600,875     613,881     (13,006 )   (2.12 )

Merger and integration

    470,999     574,321     (103,322 )   (17.99 )

Core deposit premium

    727,421     584,024     143,397     24.55  

Pointer Ridge other operating

    422,147     562,223     (140,076 )   (24.91 )

Gain on sale of other real estate owned

    (110,704 )   (248,005 )   137,301     (55.36 )

Other operating

    5,754,289     4,576,931     1,177,358     25.72  
                     

Total non-interest expenses

  $ 25,161,823   $ 20,636,338   $ 4,525,485     21.93 %
                     
                     

        Salaries and benefits, occupancy and equipment, data processing and other operating expenses increased during the twelve months ended December 31, 2012 primarily because of increased operating expenses resulting from the acquisition of MB&T and enhancements to our infrastructure. As a result of the acquisition, we increased our number of employees by 86 and our branch network by nine. During the first three months of 2011, we did not incur expenses related to these branches and personnel. The increase in the core deposit premium was the result of the acquisition of MB&T and subsequent amortization of the core deposit intangible. These increases were partially offset by declines in merger and integration costs, FDIC insurance and State of Maryland assessments and Pointer Ridge other operating expenses. Merger and integration costs declined during 2012 because we have completed the merger with MB&T and previously expensed all costs associated with it, except for non-compete fees paid to former directors which we will continue to incur. This decline was partially offset by $354,333 in merger expenses associated with the pending acquisition of WSB. The decrease in FDIC insurance and State of Maryland assessments was a result of lower FDIC assessments as a result of the change in the base and rate calculation as required by the Dodd-Frank Act which was partially offset by an increase in the deposit base. Pointer Ridge other operating expense decreased because the vacancy rate in the building declined and the new tenants are paying a pro-rata share of the building's operating expenses.

        Income Taxes.    Income tax expense was $2.7 million (26.71% of pre-tax income) for the twelve months ended December 31, 2012 as compared to $1.9 million (26.91% of pre-tax income) for the same period in 2011. The dollar amount of the taxes was higher for the year ended December 31, 2012 because net income was significantly higher than in the twelve months ended December 31, 2011. The tax rate was lower for the year ended December 31, 2012 primarily because during the twelve months ended December 31, 2012 tax exempt income was higher than during the same period of 2011.

        Net Income Available to Common Stockholders.    Net income available to common stockholders was $7.5 million or $1.10 per basic common share and $1.09 per diluted common share for the year ending December 31, 2012 compared to net income available to common stockholders of $5.4 million or $0.86 per basic and diluted common share for 2011. The increase in net income attributable to Old Line Bancshares for 2012 was primarily the result of a $6.1 million increase in net interest income and $1.1 million increase in non-interest revenue. These increases were partially offset by a $4.4 million increase in non-interest expense and a $793,822 increase in taxes.

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Comparison of Financial Condition at December 31, 2013 and 2012

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

        The investment securities at December 31, 2013 amounted to $172.2 million, an increase of $629 thousand, or 0.37%, from the December 31, 2012 amount of $171.5 million. As outlined above, at December 31, 2013, all securities were classified as available for sale.

        The fair value of available for sale securities included net unrealized losses of $5.7 million at December 31, 2013 (reflected as unrealized losses of $3.4 million in stockholders' equity after deferred taxes) as compared to net unrealized gains of $4.1 million ($2.5 million net of taxes) at December 31, 2012. In general, the decrease in fair value was a result of changes in the duration or maturity of the portfolio and increasing market interest rates. We have evaluated securities with larger unrealized losses not backed by the U.S. Government and unrealized losses for an extended period of time and determined that these losses are temporary because, at this point in time, we expect to hold them until maturity. We have no intent or plan to sell these securities, it is not likely that we will have to sell these securities and we have not identified any portion of the loss that is a result of credit deterioration in the issuer of the security. As the maturity date moves closer and/or interest rates decline, any unrealized losses in the portfolio will decline or dissipate.

        The following table sets forth a summary of the investment securities portfolio as of the dates indicated. Available for sale securities are reported at estimated fair value.

December 31,
  2013   2012   2011  

Available For Sale Securities

                   

U.S. Treasury

  $ 1,249,987   $ 1,251,250   $ 1,256,250  

U.S. government agency

    40,735,132     28,570,971     24,695,921  

Municipal securities

    59,266,635     63,853,649     35,141,993  

Mortgage backed

    63,830,194     76,761,020     99,295,521  

SBA loan pools

    7,087,828     1,104,332     1,395,150  
               

Total Available for Sale Securities

  $ 172,169,776   $ 171,541,222   $ 161,784,835  
               
               

Equity securities

  $ 5,669,807   $ 3,615,444   $ 3,846,042  
               
               

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        The following table shows the maturities for the securities portfolio at December 31, 2013:

 
  Less than 1 year   Over one year to five
years
  Over five years to ten
years
  Over ten years   Total Securities  
 
  Amortzied
Cost
  Weighted
Avg.
Yield
  Amortzied
Cost
  Weighted
Avg.
Yield
  Amortzied
Cost
  Weighted
Avg.
Yield
  Amortzied
Cost
  Weighted
Avg.
Yield
  Amortzied
Cost
  Fair
Value
  Weighted
Avg.
Yield
 

U.S. Treasury

  $ 1,249,831     0.14 % $     % $     % $     % $ 1,249,831   $ 1,249,987     0.14 %

U.S. government agency

            7,993,558     1.20     34,948,550     1.39             42,942,108     40,735,132     1.35  

Municipal securities

            1,277,983     3.17     10,523,184     2.96     49,389,340     2.81     61,190,507     59,266,635     2.84  

Mortgage-backed securities

            481,314     4.84     984,265     3.76     63,683,147     2.00     65,148,726     63,830,194     2.05  

SBA loan pools

            794,579     1.55             6,544,473     3.44     7,339,052     7,087,828     3.24  
                                               

Total

  $ 1,249,831     0.14 % $ 10,547,434     1.63 % $ 46,455,999     1.80 % $ 119,616,960     2.41 % $ 177,870,224   $ 172,169,776     2.19 %
                                               
                                               

        We have pledged U.S. government and municipal securities to customers who require collateral for overnight repurchase agreements and deposits. While we classify mortgage backed securities based on the maturity date, the contractual maturities of these securities are not reliable indicators of their expected life because mortgage borrowers have the right to prepay mortgages at any time. Additionally, the issuer may call the callable agency securities listed above prior to the contractual maturity.

        Loans.    Net of allowance, unearned fees and origination costs, loans held for investment increased $252.1 million or 42.36% to 847.2 million at December 31, 2013 from $595.1 million at December 31, 2012. Commercial real estate increased by $154.2 million, residential real estate by $74.8 million, commercial and industrial by $22.8 million and consumer loans $353 thousand from their respective balances at December 31, 2012. The loan growth during the year was primarily due to the WSB acquisition and to a lesser extent, new originations and enhanced presence in our market area.

        Most of our lending activity occurs within the state of Maryland within the suburban Washington, D.C. market area in Anne Arundel, Calvert, Charles, Montgomery, Prince George's and St. Mary's Counties. The majority of our loan portfolio consists of commercial real estate loans and commercial and industrial loans.

        We have made certain reclassifications to the 2012 financial presentation to conform to the 2013 presentation. Years ending December 31, 2011, 2010 and 2009 are presented to conform to the loan classifications at that time.

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        Major classifications of loans held for investment are as follows:

 
  December 31, 2013   December 31, 2012  
 
  Legacy(1)   Acquired   Total   Legacy(1)   Acquired   Total  

Commercial Real Estate

                                     

Owner Occupied

  $ 163,105,356   $ 30,102,731   $ 193,208,087   $ 143,659,006   $ 35,918,995   $ 179,578,001  

Investment

    162,188,671     54,091,676     216,280,347     86,718,482     25,856,159     112,574,641  

Hospitality

    67,291,387     8,546,239     75,837,626     61,278,653         61,278,653  

Land and A&D

    40,595,806     8,399,178     48,994,984     22,633,751     3,328,394     25,962,145  

Residential Real Estate

                                   

First Lien-Investment

    45,294,434     28,364,096     73,658,530     27,872,303     17,752,952     45,625,255  

First Lien-Owner Occupied

    13,909,939     62,247,502     76,157,441     6,794,384     29,298,823     36,093,207  

Residential Land and A&D

    19,845,291     13,724,942     33,570,233     20,191,960     7,802,094     27,994,054  

HELOC and Jr. Liens

    18,302,560     3,359,063     21,661,623     16,405,433     3,263,189     19,668,622  

Commercial and Industrial

    89,629,043     11,161,347     100,790,390     69,746,472     8,490,785     78,237,257  

Consumer

    10,127,525     870,843     10,998,368     9,944,466     1,059,991     11,004,457  
                           

    630,290,012     220,867,617     851,157,629     465,244,910     132,771,382     598,016,292  

Allowance for loan losses

    (4,397,552 )   (531,661 )   (4,929,213 )   (3,648,723 )   (316,624 )   (3,965,347 )

Deferred loan costs, net

    1,021,167     (993 )   1,020,174     1,093,983         1,093,983  
                           

  $ 626,913,627   $ 220,334,963   $ 847,248,590   $ 462,690,170   $ 132,454,758   $ 595,144,928  
                           
                           

 

 
  December 31, 2011   December 31, 2010   December 31, 2009  
 
  Legacy(1)   Acquired   Total   Legacy   Total   Legacy   Total  

Real estate

                                           

Commercial

  $ 200,955,448   $ 72,145,634   $ 273,101,082   $ 153,526,907   $ 153,526,907   $ 124,002,072   $ 124,002,072  

Construction

    42,665,407     8,997,131     51,662,538     24,377,690     24,377,690     30,872,499     30,872,499  

Residential

    31,083,835     65,639,873     96,723,708     27,081,399     27,081,399     23,350,018     23,350,018  

Commercial

    90,795,904     16,329,991     107,125,895     83,523,056     83,523,056     74,174,400     74,174,400  

Consumer

    11,652,628     2,021,397     13,674,025     13,079,878     13,079,878     14,622,153     14,622,153  
                               

    377,153,222     165,134,026     542,287,248     301,588,930     301,588,930     267,021,142     267,021,142  

Allowance for loan losses

    (3,693,636 )   (47,635 )   (3,741,271 )   (2,468,476 )   (2,468,476 )   (2,481,716 )   (2,481,716 )

Deferred loan costs, net

    751,689         751,689     485,976     485,976     469,243     469,243  
                               

  $ 374,211,275   $ 165,086,391   $ 539,297,666   $ 299,606,430   $ 299,606,430   $ 265,008,669   $ 265,008,669  
                               
                               

(1)
As a result of the acquisitions of Maryland Bankcorp, the parent company of MB&T, in April 2011 and of WSB Holdings, the parent company of WSB, in May 2013, we have segmented the portfolio into two components, loans originated by Old Line Bank (legacy) and loans acquired from MB&T and WSB (acquired).

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        The following table presents the maturities or re-pricing periods of loans outstanding at December 31, 2013:

 
  Loan Maturity Distribution at December 31, 2013  
 
  1 year or less   1 - 5 years   After 5 years   Total  
 
  (Dollars in thousands)
 

Commercial Real Estate:

                         

Owner occupied

  $ 44,620,483   $ 89,806,698   $ 58,780,906   $ 193,208,087  

Investment

    30,991,178     111,282,612     74,006,557     216,280,347  

Hospitality

    29,014,978     29,917,533     16,905,115     75,837,626  

Land and A & D

    18,619,422     25,764,326     4,611,236     48,994,984  

Real Estate:

                         

Residental First-Investment

    21,392,783     26,687,455     25,578,292     73,658,530  

Residental First-Owner Occupied

    11,560,012     5,706,678     58,890,751     76,157,441  

Residential—Land and A&D

    19,816,862     12,993,945     759,426     33,570,233  

HELOC and Jr. Liens

    17,298,404     32,449     4,330,770     21,661,623  

Commercial

    55,827,629     38,061,986     6,900,775     100,790,390  

Consumer

    2,319,223     1,879,002     6,800,143     10,998,368  
                   

Total Loans

  $ 251,460,974   $ 342,132,684   $ 257,563,971   $ 851,157,629  
                   
                   

Fixed Rates

  $ 55,321,413   $ 101,222,306   $ 118,479,427   $ 275,023,146  

Variable Rates

   
196,139,561
   
240,910,378
   
139,084,544
   
576,134,483
 
                   

Total Loans

  $ 251,460,974   $ 342,132,684   $ 257,563,971   $ 851,157,629  
                   
                   

        Bank owned life insurance.    We have invested $30.6 million in life insurance policies on our executive officers, other officers of the Bank, retired officers of MB&T and former officers of WSB at December 31, 2013. This is a $13.7 million increase from December 31, 2012. This increase is primarily due to $13.0 million of bank owned life insurance (BOLI) acquired in the WSB acquisition. We anticipate the earnings on these policies will contribute to our employee benefit expenses as well as our obligations under our Salary Continuation Agreements and Supplemental Life Insurance Agreements that we entered into with our executive officers in January 2006 as well as that MB&T and WSB had entered into with their executive officers. During 2013, the cash surrender value of the bank owned life insurance policies increased by $840,028 as a result of earnings on these policies. There are no post-retirement death benefits associated with the BOLI policies owned by Old Line Bank prior to the acquisitions of MB&T and WSB. We have accrued a $232,183 liability associated with the post-retirement death benefits of the BOLI policies acquired from MB&T and there are no such benefits related to the BOLI policies acquired from WSB.

        Terminated pension plan.    MB&T had an employee pension plan that was frozen on June 9, 2003 and no additional benefits accrued subsequent to that date. We notified all plan participants that we terminated this plan effective August 1, 2011. We liquidated the securities the plan held, deposited the proceeds into interest bearing certificates of deposit and a money market account. On October 1, 2012, we purchased an annuity contract to transfer the remaining $2.1 million pension liability, effective November 1, 2012. In the fourth quarter of 2012, we recorded a $701 thousand expense for the termination of this plan and reversed a deferred tax liability with a credit to income tax payable in the amount of $406 thousand. We transferred the remaining pension plan assets of $235 thousand to the employee 401(k) plan and recorded all remaining expenses associated with audits, actuarial and consulting fees to the plan. There were no charges related to the pension plan for the year ended December 31, 2013.

        Other real estate owned.    As a result of the acquisitions of MB&T and WSB, we have segmented the other real estate owned into two components, real estate obtained as a result of loans originated by Old

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Line Bank (legacy) and other real estate acquired from MB&T and WSB or obtained as a result of loans originated by MB&T and WSB (acquired). We are currently aggressively either marketing these properties for sale or improving them in preparation for sale. During the year ended December 31, 2013, we sold nine properties and recorded net gains on these sales of $144,934.

        The following outlines the transactions in other real estate owned during the period.

December 31, 2013
  Legacy   Acquired   Total  

Beginning balance

  $ 1,651,229   $ 2,068,220   $ 3,719,449  

Acquired from WSB Holdings, Inc. 

        4,232,482     4,232,482  

Transferred in

        1,159,308     1,159,308  

Write down in value

    (250,000 )   (66,600 )   (316,600 )

Sales/deposits on sales

    (725,484 )   (3,902,747 )   (4,628,231 )

Net realized (loss) gain

    (200,454 )   345,388     144,934  
               

Total end of period

  $ 475,291   $ 3,836,051   $ 4,311,342  
               
               

        Goodwill and Core Deposit Intangible.    During the second quarter of 2013, we recorded goodwill of $6.2 million associated with the acquisition of WSB. During the third quarter of 2013, within the measurement period, goodwill was increased $946 thousand associated with the acquisition of WSB. As outlined in Note 2 to our Consolidated Financial Statements, this amount represented the difference between the estimated fair value of tangible and intangible assets acquired and liabilities assumed at acquisition date. This increase in the third quarter represents a $102 thousand fair value adjustment on one of our lot loans, $3 thousand in our deferred tax assets, an $8 thousand credit on one commercial land loan and $849,117 on fair value of our investments classified as available for sale that we identified during the period.

        At December 31, 2013, goodwill was $7.8 million and consisted of $633,790 related to the MB&T acquisition in April 2011 and $7.2 million related to the WSB acquisition in May 2013.

        As a result of the acquisitions of MB&T and WSB, we recorded core deposit intangibles of $7.4 million. This amount represented the premium that we paid to acquire MB&T and WSB's core deposits over the fair value of such deposits. We are amortizing MB&T's core deposit intangible on an accelerated basis over its estimated useful life of 18 years and WSB's over its estimated useful life of 10 years. At December 31, 2013, the core deposit intangible was $5.3 million as compared to $3.7 million at December 31, 2012. The increase is the result of the acquisition of WSB.

        Deposits.    At December 31, 2013, the deposit portfolio had increased to $974.4 million, a $238.9 million or 32.48% increase over the December 31, 2012 level of $735.5 million. Non-interest bearing deposits increased $39.8 million during the year to $228.7 million from $188.9 million at December 31, 2012 primarily because we established new relationships during the period, expanded upon existing ones and to a lesser extent, the WSB acquisition. Interest bearing deposits rose $199.1 million to $745.6 million at December 31, 2013 from $546.6 million at December 31, 2012, primarily as a result of the WSB acquisition. The following table outlines the growth in interest bearing deposits during 2013:

 
  December 31,
2013
  December 31,
2012
  $ Change   % Change  
 
  (Dollars in thousands)
 

Certificates of deposit

  $ 366,433   $ 310,772   $ 55,661     17.91 %

Interest bearing checking

    294,050     171,478     122,572     71.48  

Savings

    85,143     64,313     20,830     32.39  
                   

Total

  $ 745,626   $ 546,563   $ 199,063     36.42 %
                   
                   

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        We acquire brokered certificate of deposits through the Promontory Interfinancial Network (Promontory). Through this deposit matching network and its certificate of deposit account registry service (CDARS) and money market account service, we have the ability to offer our customers access to FDIC-insured deposit products in aggregate amounts exceeding current insurance limits. When we place funds through Promontory on behalf of a customer, we receive matching deposits through the network's reciprocal deposit program. We can also place deposits through this network without receiving matching deposits. At December 31, 2013, we had $27.4 million in CDARS and $74.8 million in money market accounts through Promontory's reciprocal deposit program compared to $39.3 million and $63.9 million, respectively, at December 31, 2012. At December 31, 2012, we had received $17.7 million in deposits through the Promontory network that were not reciprocal deposits. These deposits matured during the third quarter of 2013.

        During 2013, we acquired $18.0 million in brokered certificates of deposit in the WSB acquisition. We expect that we will continue to use brokered deposits as an element of our funding strategy when required to maintain an acceptable loan to deposit ratio.

        The following is a summary of the maturity distribution of certificates of deposit as of December 31, 2013.

 
  Certificate of Deposit Maturity Distribution
December 31, 2013
 
 
  Three Months
or
Less
  Three Months
to
Twelve
Months
  Over
Twelve
Months
  Total  
 
  (Dollars in thousands)
 

Certificates of deposit

                         

Less than $100,000

  $ 23,434   $ 65,710   $ 87,464   $ 176,608  

Greater than or equal to $100,000

    43,294     83,212     63,319     189,825  
                   

Total

  $ 66,728   $ 148,922   $ 150,783   $ 366,433  
                   
                   

        Borrowings.    Our borrowings consist of unsecured short-term promissory notes, securities sold under agreements to repurchase, a long-term senior note and, from time to time, advances from the Federal Home Loan Bank of Atlanta (FHLB). At December 31, 2013, borrowings totaled $55.6 million, an increase of $11.5 million from December 31, 2012. The increase was due to FHLB advances and repurchase agreements. The borrowings were used to fund new loan originations.

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        The following is a summary of our short-term and long-term borrowing at December 31, 2013, 2012 and 2011:

 
  December 31, 2013  
 
  Balance at End
of Year
  Weighted
Average
Interest
Rate
  Maximum
Amount
Outstanding at
Any Month
End
  Average
Balance
During Year
  Average
Interest
Rate
During
Year
 

Short-term borrowings

                               

Short-term promissory notes

  $ 7,773,704     0.15 % $ 7,773,704   $ 6,435,181     0.15 %

Repurchase agreements

    29,756,421     0.10     31,784,710     25,940,598     0.10  

FHLB overnight advance

    12,000,000     0.35     21,750,000     4,144,032     0.37  

FHLB advances

                1,387,349     3.02  
                           

Total short-term borrowings

    49,530,125           61,308,414     37,907,160        
                           

Long-term borrowings

                               

Senior note, fixed at 6.28%

    6,093,074     6.28     6,184,947     6,139,058     6.28  
                           

Total long-term borrowings

    6,093,074           6,184,947     6,139,058        
                           

Total borrowings

  $ 55,623,199         $ 67,493,361   $ 44,046,218        
                           
                           

 

 
  December 31, 2012  
 
  Balance at End
of Year
  Weighted
Average
Interest
Rate
  Maximum
Amount
Outstanding at
Any Month
End
  Average
Balance
During Year
  Average
Interest
Rate
During
Year
 

Short-term borrowings

                               

Short-term promissory notes

  $ 6,332,804     0.15 % $ 9,652,162   $ 78,776     0.15 %

Repurchase agreements

    24,572,663     0.10     28,167,472     237,044     0.44  

FHLB overnight advance

    7,000,000     0.35