2995 Crain Highway, Waldorf, Maryland 20601

Address of principal executive offices

(301) 645-0333

Issuer’s telephone number

     Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 þ		No o

     State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

     At August 1, 2005, 2,152,360.5 shares of the issuer’s Common Stock, par value $.01 per share, were issued and outstanding.

     Transitional Small Business Disclosure Format (Check One): Yes o No þ

 

 

PART I. FINANCIAL INFORMATION

Old Line Bancshares, Inc. & Subsidiary

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements

OLD LINE BANCSHARES, INC.

4. EARNINGS PER SHARE

     Basic earnings per common share is determined by dividing net income by the weighted average number of shares of common stock outstanding giving retroactive affect to the 20% stock dividend paid to shareholders of record on March 7, 2005 and payable March 24, 2005. Diluted earnings per share is calculated including the average dilutive common stock equivalents outstanding during the period. Dilutive common equivalent shares consist of stock options, calculated using the treasury stock method.

5. STOCK-BASED COMPENSATION

     Old Line Bancshares, Inc. applies APB No. 25 in accounting for stock options. Accordingly, Old Line Bancshares has not recognized compensation for stock options granted. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) was issued in October, 1995 to establish accounting and reporting standards for stock-based employee compensation plans. SFAS No. 123 requires measurement of compensation expense provided by stock-based plans using a fair value based method of accounting, and recognition of compensation expense in the statement of income or disclosure in the notes to the financial statements.

     Had we determined compensation expense in accordance with the provisions of SFAS No. 123, our net income and earnings per share would have been reduced to the following pro forma amounts:

     A summary of the status of the outstanding options follows:

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

Introduction

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

General

     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 owning all of the capital stock of Old Line Bank. Old Line Bancshares also has an approximately $550,000 equity investment in a real estate investment limited liability company named Pointer Ridge Office Investment, LLC (“Pointer Ridge”). Old Line Bancshares, Inc. owns 50% of Pointer Ridge. Frank Lucente, a director of Old Line Bancshares, Inc. and Old Line Bank, controls twenty five percent of Pointer Ridge and controls the manager of Pointer Ridge. The purpose of Pointer Ridge is to acquire, own, hold for profit, sell, assign, transfer, operate, lease, develop, mortgage, refinance, pledge and otherwise deal with real property located at the intersection of Pointer Ridge Road and Route 301 in Bowie, Maryland. Pointer Ridge has acquired the property and plans to construct a commercial office building containing approximately 40,000 square feet. Old Line Bancshares, Inc. plans to lease approximately 50% of this building for its main office (moving its existing main office from Waldorf, Maryland) and a branch of Old Line Bank.

     All share amounts and dollar amounts per share with regard to the common stock have been adjusted, unless otherwise indicated, to reflect the stock split effected in the form of a 20% stock dividend paid March 24, 2005.

Summary of Recent Performance and Other Activities

     We are pleased to report that during the quarter that ended June 30, 2005, we have made progress towards accomplishing our 2005 goals. During the year, we plan to improve earnings by:

	•		Increasing interest revenue through continued growth.
	•		Reducing interest expense by growing core deposits and non-interest bearing deposits with increased business development and promotional campaigns.
	•		Increasing non-interest revenue by establishing a division that provides boat loan brokerage services for a fee.

     Because of our continued and we believe successful business development efforts, Old Line Bank continues to achieve name recognition in the markets in which we operate and experienced a 12.00% growth in net loans and a 19.14% growth in deposits during the six months ended June 30, 2005 compared to December 31, 2004. This loan and deposit growth has allowed us to improve Old Line Bancshares’ net interest income while maintaining asset quality. At June 30, 2005, we had no loans past due more than 90 days. We maintained an allowance for loan losses to period end gross loans of 0.95% at June 30, 2005 compared to 0.91% at December 31, 2004. We have accomplished this growth while preserving leverage and capital standards that exceed regulatory requirements.

     The following outlines the highlights of our financial performance for the three month period ended June 30, 2005 compared to the three month period ended June 30, 2004. All numbers are in thousands (000’s).

     The following outlines the highlights of our financial performance for the six month period ended June 30, 2005 compared to the six month period ended June 30, 2004 (000’s):

     In August 2005, we added a team of three experienced, highly skilled loan officers to our staff. Each of these individuals has over 25 years of commercial banking experience and was employed by a major regional bank in the suburban Maryland market prior to joining us. These individuals have worked in our market area for approximately 18 years, have worked together as a team for over 14 years and have a history of successfully originating loan volume. We have executed a lease for a loan production office in College Park (Prince George’s County), Maryland out of which these individuals will operate. Our lease for this space provides that we will lease the branch space in this building on January 1, 2008 when the existing branch of another financial institution moves from the space. We expect that the addition of these individuals will cause an increase in salary and benefit expenses and an increase in rent expense. By the fourth quarter of 2005, we anticipate the addition of these loan officers will cause a positive impact on loan growth and an increase in net interest income.

     In June 2005, we remitted a one time premium payment of $3.3 million to a broker for an insurance company for the purchase of Bank Owned Life Insurance (“BOLI”) on the lives of our executive officers Messrs. Cornelsen and Burnett and Ms. Rush. We have submitted applications for the BOLI and the executive officers have completed their physicals required for the insurance. By October 1, 2005, we will enter into supplemental executive retirement plan (“SERP”) agreements with the executives. The SERP agreements will provide for future benefits to the executives. We will also enter into separate agreements that will provide that upon the death of the executive, Old Line Bank will split the insurance proceeds in excess of cash surrender value evenly between Old Line Bank and the executive officer’s designated beneficiary. We anticipate these transactions will have a modest positive impact on non-interest income and net income.

     In April 2005, Pointer Ridge executed a contract with Waverly Construction Inc. (“Waverly”) to begin construction of an approximately 40,000 square foot commercial office building at the intersection

of Pointer Ridge Road and Route 301 in Bowie, Maryland. The contract sum is Four Million One Hundred Eight Thousand Dollars ($4,108,000) and Waverly began construction of the project in May 2005. Pointer Ridge is currently in negotiations with a bank to obtain funding for construction and permanent financing on the building. Prior to completion of construction of the building, Pointer Ridge may require additional capital contributions from its members. We anticipate moving to our new headquarters in the first quarter of 2006.

     In February 2005, we established Old Line Marine as a division of Old Line Bank to serve as a luxury boat loan broker and to originate loans for Old Line Bank. We hired a veteran in the boating industry with over 27 years of experience to head this division, in addition to two other brokers with prior experience in the boat industry. The primary loan origination location for this division is Annapolis, Maryland. We also service the Norfolk, Virginia market. Prior to joining us, each of these individuals operated as brokers in these markets and was a major source of referrals to Old Line Bank. We conduct secondary market activity in our marine division as a broker and we earn a fee. In addition to increasing our non-interest income, we expect to capitalize on our relationships with high net worth individuals as a result of loans we make through this division. To date, our fees in this division generally average one percent of the total loan amount.

     The establishment of this division increased non-interest expense by $61,345 for the six months ended June 30, 2005 and increased non-interest revenue by $25,757 during the same period. By the fourth quarter of 2005, we anticipate this division will have a modest, positive impact on net income.

     In August 2004, we announced plans to open a branch in Crofton, Maryland in Anne Arundel County, located at 1641 Route 3 North, Crofton, Maryland, approximately 10 miles north of Pointer Ridge, the anticipated new Bowie, Maryland main office. We planned to open that branch in the fourth quarter of 2005 or the first quarter of 2006. However, the owner of the property has experienced engineering delays related to the construction of the facility. The owner has informed us that he has resolved the engineering items and we anticipate the owner will receive a building permit during the third quarter of 2005. We expect the branch to open in the first or second quarter of 2006.

     Because of the new branches, we anticipate salaries and benefits expenses and other operating expenses will increase. We anticipate that, over time, income generated from the branches will offset any increases in expenses.

     As we look ahead at the remainder of the year, our loan backlog remains strong. The economic conditions in the communities in which we operate remain solid with unemployment rates below the national average. Because of these conditions and the new team of lenders, we anticipate that our loans and deposits will continue to grow and we will continue to realize improved earnings over the prior year.

Results of Operations

      Net Interest Income

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

      Three months ended June 30, 2005 compared to three months ended June 30, 2004

     Net interest income after provision for loan losses for the three months ended June 30, 2005 increased $268,618 or 33.49% to $1.1 million from $802,151 for the same period in 2004. The increase was primarily attributable to a 32.53% or $28.5 million increase in total average interest earning assets to $116.1 million for the six months ended June 30, 2005 from $87.6 million for the six months ended June 30, 2004.

     Interest revenue increased from $1.1 million for the three months ended June 30, 2004 to $1.6 million for the same period in 2005. Interest expense for all interest bearing liabilities amounted to $470,920 for the three months ended June 30, 2005 versus $283,329 for the three months ended June 30, 2004. These changes were a result of normal business growth and a 50 basis point increase in the prime rate during the period from 5.75% on April 1, 2005 to 6.25% on June 30, 2005.

      Six months ended June 30, 2005 compared to six months ended June 30, 2004

     Net interest income after provision for loan losses for the six months ended June 30, 2005 increased 31.25% to $2.1 million from $1.6 million for the same period in 2004. The increase was primarily attributable to a 32.53% or $28.5 million increase in total average interest earning assets to $116.1 million for the six months ended June 30, 2005 from $87.6 million for the six months ended June 30, 2004.

     Interest revenue increased from $2.2 million for the six months ended June 30, 2004 to $3.1 million for the same period in 2005. Interest expense for all interest bearing liabilities amounted to $881,706 for the six months ended June 30, 2005 versus $563,731 for the six months ended June 30, 2004. As discussed below and outlined in detail in the Rate/Volume Analysis, these changes were a result of normal business growth offset by increases in the interest rates.

     Our net interest margin was 3.88% for the first six months of 2005, as compared to 3.94% for the first six months of 2004. The decrease in the net interest margin is the result of several components. The yield on average interest-earning assets improved during the period 20 basis points from 5.22% in 2004 to 5.42% in 2005, and average interest-earning assets grew by $28.5 million. However, a 30 basis point increase of the yield on average interest-bearing liabilities from 1.87% in 2004 to 2.17% in 2005, and a $21.4 million increase in interest bearing liabilities offset these improvements. The yield on average interest-earning assets improved because the Prime rate was 4.00% from January 1, 2004 through June 30, 2004 when it increased to 4.25%. On January 1, 2005, the rate was 5.25% with a 100 basis point increase during the period to 6.25% at June 30, 2005. The increase in the yield on average interest bearing liabilities occurred because of a promotional campaign used to attract certificates of deposits in January 2005 and increased rates. We expect improvement in our net interest margin during the year because of the increase in the prime rate and because we expect loans to grow at a faster rate than interest bearing liabilities. We will offer promotional campaigns to attract deposits throughout the year if required to maintain an acceptable loan to deposit ratio.

     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, total liabilities, stockholders’ equity and related income, expense and corresponding weighted average yields and rates. The average balances used in this table and other statistical data were calculated using average daily balances.

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.

      Provision for Loan Losses

     Originating loans involves a degree of risk that credit losses will occur in varying amounts according to, among other factors, the type of loans being made, the credit-worthiness of the borrowers over the term of the loans, the quality of the collateral for the loan, if any, as well as general economic conditions. We charge the provision for loan losses to earnings to maintain the total allowance for loan

losses at a level considered by management to represent its best estimate of the losses known and inherent in the portfolio that are both probable and reasonable to estimate, based on, among other factors, prior loss experience, volume and type of lending conducted, estimated value of any underlying collateral, economic conditions (particularly as such conditions relate to Old Line Bank’s market area), regulatory guidance, peer statistics, management’s judgment, past due loans in the loan portfolio, loan charge-off experience and concentrations of risk (if any). We charge losses on loans against the allowance when we believe that collection of loan principal is unlikely. Recoveries on loans previously charged off are added back to the allowance.

     The provision for loan losses increased $30,000 or 66.67% to $75,000 for the three months ended June 30, 2005 versus $45,000 for the three months ended June 30, 2004. During the quarter, we increased the provision for loan losses due to growth in boat, mortgage and commercial loans.

     The provision for loan losses was $125,000 for the six months ended June 30, 2005, as compared to $90,000 for the six months ended June 30, 2004, an increase of $35,000 or 38.89%. The increase was primarily the result of growth in loan balances outstanding in all segments of the portfolio as well as a change in the composition of the portfolio. If the loan portfolio continues to grow at the rate we anticipate it will grow, we expect that we will increase the provision for loan losses at a higher rate than we did during the first six months of the year.

     We review the adequacy of the allowance for loan losses at least quarterly. Our review includes evaluation of impaired loans as required by SFAS No. 114, Accounting by Creditors for Impairment of a Loan , and SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosure. Also incorporated in determining the adequacy of the allowance is guidance contained in the Securities and Exchange Commissions SAB No. 102, Loan Loss Allowance Methodology and Documentation; and the Federal Financial Institutions Examination Council’s Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions.

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

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

     With respect to commercial loans, management assigns a risk rating of one through eight to each loan at inception, with a risk rating of one having the least amount of risk and a risk rating of eight having the greatest amount of risk. For commercial loans of less than $250,000, we may review the risk rating annually based on, among other things, the borrower’s financial condition, cash flow and ongoing financial viability; the collateral securing the loan; the borrower’s industry and payment history. We review the risk rating for all commercial loans in excess of $250,000 at least annually. We evaluate loans with a risk rating of five or greater separately and assign loss amounts based upon the evaluation. For

loans with risk ratings between one and four, we determine loss ratios based upon a review of prior 18 months delinquency trends, the three year loss ratio, peer group loss ratios and industry standards.

     We also identify and make any necessary allocation adjustments for any specific concentrations of credit in a loan category that in management’s estimation increase the risk inherent in the category. If necessary, we will also make an adjustment within one or more loan categories for economic considerations in our market area that may impact the quality of the loans in the category. For all periods presented, there were no specific adjustments made for concentrations of credit or economic considerations.

     In the event that our review of the adequacy of the allowance results in any unallocated amounts, we reallocate such amounts to our loan categories based on the percentage that each category represents to total gross loans. We have risk management practices designed to ensure timely identification of changes in loan risk profiles. However, undetected losses inherently exist within the portfolio. We believe that the allocation of the unallocated portion of the reserve in the manner described above is appropriate.

     We will not create a separate valuation allowance unless we consider a loan impaired under SFAS No. 114 and SFAS No. 118. For all periods presented, we had no impaired loans.

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

     The allowance for loan losses represents 0.95% of gross loans at June 30, 2005 and 0.91% of gross loans at December 31, 2004. Old Line Bank has no exposure to foreign countries or foreign borrowers. Management believes that the allowance for loan losses is adequate for each period presented.

     The following table represents an analysis of the allowance for loan losses for the periods indicated:

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

Allocation of Allowance for Loan Losses

      Non-interest Revenue

      Three months ended June 30, 2005 compared to three months ended June 30, 2004

     Non-interest revenue totaled $124,609 for the three months ended June 30, 2005, a decrease of $13,475 or 9.76% from the 2004 amount of $138,084. Non-interest revenue for the three months ended June 30, 2005 and June 30, 2004 included fee income from service charges on deposit accounts, mortgage origination fees from a third party processor, credit card fees, ATM fees and gain on disposal of assets. For the three months ended June 30, 2005, non-interest revenue also included broker origination fees from the marine division.

     For the three months ended June 30, 2005, other fees and commissions declined $13,360. This was primarily a result of a decline in other fees on loans of $24,572, a $2,285 decline in miscellaneous fees and a $1,268 decline in letter of credit fees. These fees declined because we collected fewer fees during the period. A $13,980 increase in broker origination fees generated from the marine division offset these declines.

     In the second quarter of 2005, we began classifying fees from advances on construction loans as part of interest income instead of non-interest revenue. In 2005, management determined that this revenue relates more to the use of funds than to commitments to make such funds available. We have also re-classified these fees for 2004. Some of our residential builders who have revolving lines of credit for home construction pay fees for us to provide advances under these revolving lines of credit. The amounts reclassified did not have a material effect on total interest revenue on loans or other non-interest revenue.

      Six months ended June 30, 2005 compared to six months ended June 30, 2004

     Non-interest revenue totaled $262,718 for the six months ended June 30, 2005, a decrease of $8,853 or 3.26% from the 2004 amount of $271,571. Non-interest revenue for the six months ended June 30, 2005 included primarily fee income from service charges on deposit accounts, mortgage origination fees from a third party processor, credit card fees, ATM fees and gain on disposal of assets. For the six months ended June 30, 2005, non-interest revenue also included broker origination fees from the marine division.

     Non-interest revenue declined during the six months ended June 30, 2005. Loan fees declined $17,602 and letter of credit fees declined $5,466. A $19,482 increase in broker origination fees generated by the marine division offset this decline. Loan fees and letter of credit fees declined because we collected fewer fees on loans during the period.

      Non-interest Expense

      Three months ended June 30, 2005 compared to three months ended June 30, 2004

     Non-interest expense for the three months ended June 30, 2005 increased $113,974 or 16.19% to $817,943 compared to $703,969 at June 30, 2004. Salaries and benefit expenses increased $96,272 or 24.06% during the period because of general salary increases and because we hired a new branch manager in September 2004 and a new loan officer for the marine division in February 2005. Salary and benefits also increased due to the costs associated with our efforts to comply with Sarbanes/Oxley Section 404 (relating to internal controls) which becomes applicable to us in 2006. We have one individual focused on this effort.

     Other operating expenses increased $19,505 or 10.26% because of a $6,647 increase in stock transfer costs and a $4,268 increase in NASDAQ fees associated with the 20% stock dividend. Stationary and supply expense increased $8,149 during the period primarily due to re-stocking that occurred. Audit and exam fees also increased $6,000 during the period because the bank engaged a third party to conduct an audit of its compliance with the Bank Secrecy Act. Legal expenses increased during the period by $4,060. Director fees increased $3,000 due to an increase in the number of meetings and the amount paid per meeting. A $26,061 reduction in robbery and security costs offset these increases. In June 2004, we experienced a robbery loss and completed installation of new security devices in all of our branches. These devices reduced security expenses and reduced the risk of robbery.

      Six months ended June 30, 2005 compared to six months ended June 30, 2004

     Non-interest expense for the six months ended June 30, 2005 was $1.6 million versus $1.3 million for the same period in 2004. The $259,243 or 19.23% increase was attributable to a $200,798 increase in salary and benefit expense, an $8,315 increase in occupancy expense, and a $58,555 increase in other operating expenses. Salaries and benefits expenses increased because of general salary increases and because we hired a new credit officer in March 2004, a new branch manager in September 2004 and a new loan officer for the marine division in February 2005. Annual escalations in the leases caused the increased occupancy expenses. Other operating expenses increased because of a $17,525 increase in audit and legal fees, an $8,335 increase in stationary and supplies, a $6,700 increase in business development and entertainment costs associated with the start up of the marine division. A $4,830 increase in stock transfer costs and NASDAQ fees associated with the 20% stock dividend, and a $8,800 increase in director fees caused by an increase in the number of meetings and the fee paid per meeting also contributed to the increase. A $29,753 reduction in robbery and security costs offset these increases. In June 2004, we experienced a robbery loss and completed installation of new security devices in all of our branches. These devices reduced security expenses and reduced the risk of robbery.

      Income Taxes

      Three months ended June 30, 2005 compared to three months ended June 30, 2004

     Income tax expense was $134,750 (35.70%) of pre-tax income for the three months ended June 30, 2005 as compared to $85,911 (36.36%) for the three months ended June 30, 2004. The tax rate increased during the period because the interest earned on securities exempt from federal or state taxes was a smaller percentage of total interest revenue.

      Six months ended June 30, 2005 compared to six months ended June 30, 2004

     Income tax expense was $258,298 (35.49%) of pre-tax income for the six months ended June 30, 2005 compared to $179,518 (35.18% of pre-tax net income) for the same period in 2004.

      Net Income

      Three months ended June 30, 2005 compared to three months ended June 30, 2004

     Net income increased $92,330 or 61.41% to $242,685 for the three months ended June 30, 2005 compared to $150,355 for the three months ended June 30, 2004. Earnings per share increased to $0.11 basic and diluted for the three months ended June 30, 2005 from $0.07 basic and diluted for the three months ended June 30, 2004 because of the increase in net income. The $92,330 increase in net income was due to the $268,618 increase in net interest income after provision for loan losses, offset by the $13,475 decrease in non-interest revenue, the $113,974 increase in non-interest expenses and the $48,839 increase in income taxes.

      Six months ended June 30, 2005 compared to six months ended June 30, 2004

     Net income was $469,484 or $0.22 basic and diluted earnings per common share for the six month period ending June 30, 2005, an increase of $138,783 or 41.97% compared to net income of $330,701 or $0.16 basic and $0.15 diluted earnings per common share for the same period in 2004. The increase in net income was the result of a $485,859 increase in net interest income after provision for loan losses. An $8,853 decrease in non-interest revenue, a $259,443 increase in non-interest expense and a $78,780 increase in income tax expense for the period compared to the same period in 2004 offset the increase in net interest income. Earnings per share increased on a basic and diluted basis because of the increase in net income.

Analysis of Financial Condition

      Investment Securities

     Old Line Bank’s portfolio consists primarily of U.S. Treasury securities, U.S. government agency securities, securities issued by states, counties and municipalities, mortgage-backed securities, and certain equity securities, including Federal Reserve Bank Stock and Federal Home Loan Bank Stock. The portfolio provides a source of liquidity, collateral for repurchase agreements as well as a means of diversifying Old Line Bank’s earning asset portfolio. While we generally intend to hold the investment portfolio assets until maturity, we classify the majority (86.94%) of the portfolio as available for sale. We account for securities so classified at fair value and report the unrealized gains and losses as a separate component of stockholders’ equity, net of income tax effects. We account for securities classified in the held to maturity category at amortized cost. Old Line Bank invests in securities for the yield they produce and not to profit from trading the securities. There are no trading securities in the portfolio.

     The investment portfolio at June 30, 2005 amounted to $16.9 million, a decrease of $945,559, or 5.31%, from $17.8 million at December 31, 2004. The decrease in the investment portfolio occurred because some of these assets matured or were called and we deployed the proceeds into loans and federal funds for future loan fundings. The carrying value of available for sale securities includes net unrealized losses of $178,962 at June 30, 2005 (reflected as unrealized losses of $109,847 in stockholders’ equity after deferred taxes) as compared to net unrealized losses of $141,229 ($90,386 net of taxes) as of December 31, 2004. In general, this increase in unrealized losses was a result of rising interest rates.

      Investment in Pointer Ridge LLC

     On July 22, 2004, Old Line Bancshares, Inc. executed an Operating Agreement as a member with unaffiliated parties, Lucente Enterprises, Inc., and Chesapeake Custom Homes, LLC, as members, and Chesapeake Pointer Ridge Manager, LLC, as manager, to establish Pointer Ridge Office Investment, LLC (“Pointer Ridge”). The members’ ownership of Pointer Ridge is as follows:

     Mr. Frank Lucente, Vice Chairman and a member of the Board of Directors of Old Line Bancshares, Inc., is the President and majority owner of Lucente Enterprises, Inc. Lucente Enterprises, Inc. is the manager and majority member of Chesapeake Custom Homes, LLC and Chesapeake Pointer Ridge Manager, LLC.

     The purpose of Pointer Ridge is to acquire, own, hold for profit, sell, assign, transfer, operate, lease, develop, mortgage, refinance, pledge and otherwise deal with real property located at the intersection of Pointer Ridge Road and Route 301 in Bowie, Maryland. Pointer Ridge has acquired the property and plans to construct a commercial office building containing approximately 40,000 square feet. Old Line Bancshares, Inc. plans to lease approximately 50% of this building for its main office (moving its existing main office from Waldorf, Maryland) and a branch of Old Line Bank. On August 26, 2004, Old Line Bancshares, Inc. transferred its initial $550,000 capital contribution to Pointer Ridge.

     In April 2005, Pointer Ridge executed a contract with Waverly Construction Inc. (“Waverly”) to begin construction of an approximately 40,000 square foot commercial office building at the property. The contract sum is four million one hundred eight thousand dollars ($4,108,000). The contract stipulates that Waverly will begin work within seven calendar days of the receipt of (1) notice to proceed from Pointer Ridge; (2) grading permit; (3) building permit; (4) fully executed contract; and (5) written verification from Pointer Ridge of funding for the project being in place. Waverly has received notice to proceed and a fully executed contract from Pointer Ridge, and a grading and building permit from Prince George’s County. Although Waverly has not received written verification from Pointer Ridge that funding for the project is in place, Waverly began construction of the project in May. Pointer Ridge is currently in negotiations with an unrelated bank to obtain funding for construction and permanent financing on the building. We anticipate that the construction financing will be in place by September 2005. Prior to completion of construction of the building, Pointer Ridge may require additional capital contributions from its members. We anticipate moving to our new headquarters in the first quarter of 2006.

      Loan Portfolio

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

     The loan portfolio, net of allowance, unearned fees and origination costs increased $9.8 million or 12.02% to $91.3 million at June 30, 2005 from $81.5 million at December 31, 2004. This growth was attributable to increased business development efforts. Commercial business loans increased by $2 million (17.86%), commercial real estate loans (generally owner-occupied) increased by $5.6 million (16.33%), residential real estate loans (generally home equity and fixed rate home improvement loans) increased by $3.2 million (37.65%), real estate construction loans decreased by $2.7 million (40.91%) and installment loans increased by $1.8 million (8.41%) from their respective balances at December 31, 2004.

     During the period, our increased business development efforts have allowed Old Line Bank to establish several new customer relationships and expand existing relationships. Considering our current backlog of approved loans, and the addition of the new loan production office in College Park, Maryland, we anticipate that loan growth will continue during the remainder of 2005.

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

      Asset Quality

     Management performs reviews of all delinquent loans and relationship officers are charged with working with customers to resolve potential credit issues in a timely manner. Management generally classifies loans as non-accrual when collection of full principal and interest under the original terms of the loan is not expected or payment of principal or interest has become 90 days past due. Classifying a loan as non-accrual results in Old Line Bank no longer accruing interest on such loan and reversing any interest previously accrued but not collected. We will generally restore a non-accrual loan to accrual status when delinquent principal and interest payments are brought current and we expect to collect future monthly principal and interest payments. Old Line Bank recognizes interest on non-accrual loans only when received

     As of June 30, 2005 and December 31, 2004, Old Line Bank had no loans on non-accrual status. As of June 30, 2005 and December 31, 2004, Old Line Bank had no loans past due more than 90 days.

     We classify any property acquired as a result of foreclosure on a mortgage loan as “real estate owned” and record it at the lower of the unpaid principal balance or fair value at the date of acquisition and subsequently carry the loan at the lower of cost or net realizable value. We charge any required write-down of the loan to its net realizable value against the allowance for credit losses at the time of foreclosure. We charge to expense any subsequent adjustments to net realizable value. Upon foreclosure, Old Line Bank generally requires an appraisal of the property and, thereafter, appraisals of the property on at least an annual basis and external inspections on at least a quarterly basis. At June 30, 2005 and December 31, 2004, Old Line Bank held no real estate acquired as a result of foreclosure.

     Old Line Bank applies the provisions of Statement of Financial Accounting Standards No. 114 (“SFAS No. 114”), “Accounting by Creditors for Impairment of a Loan,” as amended by Statement of Financial Accounting Standards No. 118 (“SFAS No. 118”), “Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosure.” SFAS No. 114 and SFAS No. 118 require that impaired loans, which consist of all modified loans and other loans for which collection of all contractual principal and interest is not probable, be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, an impairment is recognized through a valuation allowance and

corresponding provision for credit losses. Old Line Bank considers consumer loans as homogenous loans and thus does not apply the SFAS No. 114 impairment test to these loans. We write off impaired loans when collection of the loan is doubtful.

     We had no impaired or restructured loans as of June 30, 2005 and December 31, 2004.

      Bank owned life insurance

     During June 2005, we remitted a one time premium payment of $3.3 million to a broker for an insurance company for the purchase of Bank Owned Life Insurance (“BOLI”) on the lives of our executive officers Messrs. Cornelsen, and Burnett and Ms. Rush. We have submitted applications for the BOLI and the officers have completed their physicals required for the insurance. By October 1, 2005, we will enter into supplemental executive retirement plan (“SERP”) agreements with the executives. The SERP agreements will provide for future benefits to the executives. We will also enter into separate agreements that will provide that upon the death of the executive, Old Line Bank will split the insurance proceeds in excess of cash surrender value evenly between Old Line Bank and the executive officer’s designated beneficiary.

      Deposits

     We seek deposits within our market area by paying competitive interest rates, offering high quality customer service and using technology to deliver deposit services effectively. At June 30, 2005, the deposit portfolio had grown to $106.0 million, a $17.0 million or 19.10% increase over the December 31, 2004 level of $89.0 million. Non-interest bearing deposits grew $1.5 million during the period from $25.4 million to $26.9 million while interest-bearing deposits grew $15.6 million to $79.1 million from $63.5 million. Most of the growth in interest-bearing deposits was in other time deposits, which increased from $36.4 million at December 31, 2004 to $44.4 million at March 31, 2005 and money market and NOW accounts which grew from $16.5 million at December 31, 2004 to $25.8 million at June 30, 2005. Our deposit base expanded due to increased commercial relationships, a promotional certificate of deposit campaign in January 2005 that increased other time deposits and increased activity and balances in real estate settlement accounts at period end that increased money market, NOW, and non interest-bearing deposits.

     As a general practice, we do not purchase brokered deposits. During the periods reported, we had no brokered deposits. As market conditions warrant and balance sheet needs dictate, we may participate in the wholesale certificates of deposit market.

      Borrowings

     Old Line Bank has available lines of credit, including overnight federal funds and repurchase agreements from its correspondent banks totaling $9.5 million as of June 30, 2005. Old Line Bank has an additional secured line of credit from the Federal Home Loan Bank of Atlanta of $26.26 million at June 30, 2005 of which we have borrowed $6 million as outlined below.

     Short-term borrowings consist of short-term promissory notes issued to Old Line Bank’s customers and federal funds purchased. In 2004, Old Line Bank developed an enhancement to the basic non-interest bearing demand deposit account for its commercial clients. This service electronically sweeps excess funds from the customer’s account into an interest bearing Master Note with Old Line Bank. These Master Notes reprice daily and have maturities of 270 days or less. At June 30, 2005, Old Line Bank had $8.9 million outstanding in these short term promissory notes with an interest rate of 1.31%.

     At June 30, 2005, long term borrowings were comprised of advances from the Federal Home Loan Bank totaling $6 million. Old Line Bank borrowed $4.0 million of the $6.0 million in January 2001, currently pays interest only at 4.80%, and must repay the $4.0 million in January 2011. Interest is payable January 3, April 3, July 3, and October 3 of each year. Effective January 3, 2002 and any payment date thereafter, the FHLB has the option to convert the interest rate into a three (3) month LIBOR based floating rate.

     In March 2004, Old Line Bank borrowed an additional $2 million from the Federal Home Loan Bank. Old Line Bank pays interest only, currently at 1.79%, and must repay the $2.0 million in March 2009. Interest is payable March 17, June 17, September 17 and December 17, of each year. Effective March 16, 2006 and any payment date thereafter, the FHLB has the option to convert the interest rate into a three (3) month LIBOR based floating rate.

     Old Line Bank may not prepay the Federal Home Loan Bank loans prior to maturity without incurring a significant prepayment penalty.

      Interest Rate Sensitivity Analysis and Interest Rate Risk Management

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

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

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

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

      Liquidity

     Our overall asset/liability strategy takes into account our need to maintain adequate liquidity to fund asset growth and deposit runoff. Our management monitors the liquidity position daily in conjunction with Federal Reserve guidelines. We have credit lines unsecured and secured available from several correspondent banks totaling $9.5 million. Additionally, we may borrow funds from the Federal Home Loan Bank of Atlanta. We can use these credit facilities in conjunction with the normal deposit strategies, which include pricing changes to increase deposits as necessary. We can also sell or pledge available for sale investment securities to create additional liquidity. From time to time we may sell or participate out loans to create additional liquidity as required. Additional sources of liquidity include cash from the investment and loan portfolios.

     Our immediate sources of liquidity are cash and due from banks and federal funds sold. As of June 30, 2005, we had $3.7 million in cash and due from banks and $15.3 million in federal funds sold and other overnight investments compared to $4.1 million in cash and due from banks and $5.2 million in federal funds sold and other overnight investments at December 31, 2004.

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

Capital

     Our stockholders’ equity amounted to $13.9 million at June 30, 2005 and $13.5 million at December 31, 2004. We are considered “well capitalized” under the risk-based capital guidelines adopted by the Federal Reserve. Stockholders’ equity increased during the period because of net income of $469,484, the $89,883 in proceeds after tax adjustment for stock options exercised less the $105,158 in dividends paid in March and June and the $19,461 unrealized losses in available for sale securities.

      Off-balance Sheet Arrangements

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

     Outstanding loan commitments, lines and letters of credit at June 30, 2005 and December 31, 2004 are as follows:

     We are not aware of any loss we would incur by funding our commitments or lines of credit. Commitments for real estate development and construction, which totaled $13.3 million, or 62.74% of the $21.2 million, are generally short-term and turn over rapidly, satisfying cash requirements with principal repayments and from sales of the properties financed.