Edgar Filing: OLD LINE BANCSHARES INC

e10qsb

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005.

Commission file number: 000-50345

Old Line Bancshares, Inc.

(Exact name of small business issuer as specified in its charter)


Maryland		20-0154352

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

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 November 1, 2005, 4,248,898.5 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

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Old Line Bancshares, Inc. & Subsidiary
Consolidated
Balance Sheets


	September 30,			December 31,
	2005			2004
	(Unaudited)
Assets
Cash and due from banks	$	3,255,895		$	4,090,776
Federal funds sold		20,381,325			5,229,867

Total cash and cash equivalents		23,637,220			9,320,643
Time deposits in other banks		—			300,000
Investment securities available for sale		14,140,556			15,612,411
Investment securities held to maturity		2,203,658			2,204,290
Loans, less allowance for loan losses		94,611,920			81,504,890
Restricted equity securities at cost		1,102,750			1,079,950
Investment in real estate, LLC		732,436			550,000
Bank premises and equipment		2,406,361			2,352,348
Accrued interest receivable		462,900			365,388
Deferred income taxes		191,289			88,723
Bank owned life insurance		3,288,125			—
Other assets		316,614			190,675

	$	143,093,829		$	113,569,318


Liabilities and Stockholders’ Equity

Deposits
Noninterest-bearing	$	26,217,156		$	25,424,314
Interest bearing		86,368,957			63,540,800

Total deposits		112,586,113			88,965,114
Short-term borrowings		9,899,778			4,637,012
Long-term borrowings		6,000,000			6,000,000
Accrued interest payable		307,911			173,320
Income tax payable		28,016			184,975
Other liabilities		161,813			114,585

		128,983,631			100,075,006


Stockholders’ equity
Common stock, par value $.01 per share in 2005 and 2004, authorized 5,000,000 shares in 2005 and 2004; issued and outstanding 2,152,360.5 in 2005 and 1,776,394.5 in 2004	$	21,524		$	17,764
Additional paid-in-capital		12,573,567			12,446,229
Retained earnings		1,710,340			1,120,705

		14,305,431			13,584,698
Accumulated other comprehensive income		(195,233	)		(90,386	)

		14,110,198			13,494,312

	$	143,093,829		$	113,569,318

See accompanying notes to consolidated financial statements

Old Line Bancshares, Inc. & Subsidiary

Statements of Income

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
Interest revenue
Loans, including fees	$	1,520,876	$	1,089,360	$	4,109,013	$	2,963,377
U.S. Treasury securities		31,899		31,915		95,238		81,520
U. S. government agency securities		58,586		73,744		177,949		225,835
Mortgage backed securities		20,071		28,087		66,040		91,964
Tax exempt securities		28,099		28,807		85,767		82,430
Federal funds sold		128,607		18,708		309,596		39,544
Other		10,365		11,977		35,192		39,387

Total interest revenue	$	1,798,503	$	1,282,598	$	4,878,795	$	3,524,057


Interest expense
Deposits		489,686		229,365		1,228,881		682,180
Borrowed funds		90,210		58,346		232,721		169,262

Total interest expense		579,896		287,711		1,461,602		851,442


Net interest income		1,218,607		994,887		3,417,193		2,672,615

Provision for loan losses		40,000		85,000		165,000		175,000

Net interest income after provision for loan losses		1,178,607		909,887		3,252,193		2,497,615


Noninterest revenue
Service charges on deposit accounts		62,237		65,583		179,740		185,756
Other fees and commissions		122,651		100,423		267,866		251,821

Total noninterest revenue		184,888		166,006		447,606		437,577


Noninterest expenses
Salaries		524,764		369,188		1,354,774		1,027,861
Employee benefits		89,679		56,813		237,335		175,008
Occupancy		59,563		49,314		168,544		149,980
Equipment		27,993		30,340		81,236		90,806
Data processing		32,299		32,070		95,382		96,155
Other operating		212,059		181,456		617,608		528,450

Total noninterest expenses		946,357		719,181		2,554,879		2,068,260


Income before income taxes		417,138		356,712		1,144,920		866,932

Income taxes		135,867		117,432		394,165		296,950

Net Income	$	281,271	$	239,280	$	750,755	$	569,982


Basic earnings per common share	$	0.13	$	0.11	$	0.35	$	0.27
Diluted earnings per common share	$	0.13	$	0.11	$	0.35	$	0.26

See accompanying notes to consolidated financial statements.

Old Line Bancshares, Inc. & Subsidiary

Consolidated Statements of Changes in Stockholder’s Equity

(Unaudited)


											Accumulated
					Additional						other
	Common stock				paid-in			Retained			comprehensive			Comprehensive
	Shares		Par value		capital			earnings			income (loss)			income

Balance, December 31, 2004		1,776,394.5	$	17,764	$	12,446,229		$	1,120,705		$	(90,386	)		—
Net income		—		—		—			750,755			—		$	750,755
Unrealized gain (loss) on securities available for sale, net of income taxes		—		—		—			—			(104,847	)		(104,847	)

Comprehensive income		—		—		—			—			—		$	645,908

Cash dividend $0.075 per share		—		—		—			(160,984	)		—
Stock split effected in the form of a 20% stock dividend		355,266.0		3,553		(3,553	)		(136	)		—
Stock options exercised		20,700.0		207		130,891			—			—


Balance, September 30, 2005		2,152,360.5	$	21,524	$	12,573,567		$	1,710,340		$	(195,233	)

See accompanying notes to consolidated financial statements

Old Line Bancshares, Inc. & Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)


	Nine months ended
	September 30,
	2005			2004
Cash flows from operating activities
Interest received	$	4,737,198		$	3,358,835
Fees and commissions received		447,670			437,577
Interest paid		(1,327,011	)		(841,572	)
Cash paid to suppliers and employees		(2,504,079	)		(1,917,167	)
Income taxes paid		(581,693	)		(336,068	)

		772,085			701,605


Cash flows from investing activities
Purchase of investment securities
Held to maturity		—			(842,422	)
Available for sale at maturity or call		—			(1,253,113	)
Proceeds from disposal of investment securities
Held to maturity		—			440,000
Available for sale at maturity or call		1,291,914			2,272,409
Loans made, net of principal collected		(13,224,216	)		(16,657,087	)
Purchase of equity securities		(22,800	)		(50,000	)
Investment in real estate, LLC		(182,500	)		(550,000	)
Investment in bank owned life insurance (BOLI)		(3,288,125	)
Redemption of certificates of deposit		300,000			300,000
Purchase of premises and equipment and software		(183,524	)		(87,441	)
Proceeds from sale of premises and equipment		—			21,000

		(15,309,251	)		(16,406,654	)


Cash flows from financing activities
Net increase (decrease) in
Time deposits		17,437,568			7,381,465
Other deposits		6,183,431			12,855,939
Net change in borrowed funds		5,262,766			(1,000,000	)
Proceeds from stock options exercised		131,098			83,522
Dividends paid		(161,120	)		(159,741	)

		28,853,743			19,161,185


Net increase (decrease) in cash and cash equivalents		14,316,577			3,456,136

Cash and cash equivalents at beginning of period		9,320,643			6,479,947

Cash and cash equivalents at end of period	$	23,637,220		$	9,936,083

See accompanying notes to consolidated financial statements.

Old Line Bancshares, Inc. & Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

(Continued)


	Nine months ended
	September 30,
	2005			2004
Reconciliation of net income to net cash provided by operating activities
Net income	$	750,755		$	569,982

Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		113,310			112,957
Provision for loan losses		165,000			175,000
Loss (gain) on sale of equipment		—			964
Change in deferred loan fees net of costs		(47,814	)		(112,272	)
Amortization of premiums and discounts		3,729			7,178
Deferred income taxes		(30,569	)		(33,663	)
Increase (decrease) in
Accrued interest payable		134,591			9,870
Other liabilities		(109,731	)		153,223
Decrease (increase) in
Accrued interest receivable		(97,512	)		(60,128	)
Other assets		(109,738	)		(121,506	)
Loss on Pointer Ridge, LLC		64			—

	$	772,085		$	701,605

See accompanying notes to consolidated financial statements

OLD LINE BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. GENERAL

Organization

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 $732,000 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.

Basis of Presentation

The accompanying consolidated financial statements include the activity of Old Line Bancshares, Inc. and its wholly owned subsidiary, Old Line Bank. All significant intercompany transactions and balances have been eliminated in consolidation.

The foregoing consolidated financial statements are unaudited; however, in the opinion of management, all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of the results of the interim period have been included. The balances as of December 31, 2004 were derived from audited financial statements. These statements should be read in conjunction with Old Line Bancshares’ financial statements and accompanying notes included in Old Line Bancshares, Inc.’s Form 10-KSB. There have been no significant changes to the Company’s accounting policies as disclosed in the Form 10-KSB. We have reclassified fees from advances on construction loans to interest revenue. In 2005, management determined that this revenue relates more to the use of funds than to commitments to make such funds available. The amounts that we reclassified were $30,076 for the three months ended September 30, 2004 and $61,693 for the nine months ended September 30, 2004. The results shown in this interim report are not necessarily indicative of results expected for the full year 2005.

The accounting and reporting policies of Old Line Bancshares, Inc. conform to accounting principles generally accepted in the United States of America.

2. INVESTMENT SECURITIES

As Old Line Bancshares, Inc. purchases securities, management determines if the securities should be classified as held to maturity, available for sale or trading. Securities which management has the intent and ability to hold to maturity are recorded at amortized cost which is cost adjusted for amortization of premiums and accretion of discounts to maturity. Securities which management may sell before maturity are classified as available for sale and carried at fair value with unrealized gains and losses included in stockholders’ equity on an after tax basis. Management has not identified any investment securities as trading.

3. INCOME TAXES

The provision for income taxes includes taxes payable for the current year and deferred income taxes. Deferred tax assets and liabilities are determined 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 the differences are expected to reverse.

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.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
Weighted average number of shares		2,151,401.80		2,131,673.40		2,143,941.35		2,131,673.40
Dilutive average number of shares		28,030.00		32,433.60		28,157.00		32,433.60

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:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Net income
As reported	$	281,271		$	239,280		$	750,755		$	569,982
Stock -based employee compensation expense		(23,158	)		(7,223	)		(29,725	)		(21,670	)
Income tax benefit of employee compensation expense		8,944			2,790			11,480			8,369

Pro forma	$	267,057		$	234,847		$	732,510		$	556,681

Basic earnings per share
As reported	$	0.13		$	0.11		$	0.35		$	0.27
Pro forma		0.12			0.11			0.34			0.26
Diluted earnings per share
As reported	$	0.13		$	0.11		$	0.35		$	0.26
Pro forma		0.12			0.11			0.34			0.26

A summary of the status of the outstanding options follows:


				September 30, 2005
	Number of			Weighted Average
	Shares			exercise price
Outstanding, beginning of year		114,420		$	6.62
Options granted		34,000			10.23
Options exercised		(20,700	)		—
Options expired		(900	)		9.58

Outstanding, September 30, 2005		126,820		$	6.84

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 $732,000 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 September 30, 2005, we have continued to make 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 16.08% growth in net loans and a 26.55% growth in deposits during the nine months ended September 30, 2005 compared to December 31, 2004. This loan and deposit growth has allowed us to improve Old Line Bancshares, Inc.’s net interest income while maintaining asset quality. At September 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 0.96% at September 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

September 30, 2005 compared to the three month period ended September 30, 2004. All numbers are in thousands (000’s).


Three months ended September 30,	2005		2004		$ Change		% Change
Net income	$	281	$	239	$	42		17.57	%
Interest revenue		1,799		1,283		516		40.22	%
Interest expense		580		288		292		101.39	%
Net interest income after provision for loan losses		1,179		910		269		29.56	%
Non-interest revenue		185		166		19		11.45	%
Non-interest expense		946		719		227		31.57	%
Earnings per share, basic		0.13		0.11		0.02		18.18	%
Earnings per share, diluted		0.13		0.11		0.02		18.18	%

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


Nine months ended September 30,	2005			2004			$ Change			% Change
Net income	$	751		$	570		$	181			31.75	%
Interest revenue		4,879			3,524			1,355			38.45	%
Interest expense		1,462			851			611			71.80	%
Net interest income after provision for loan losses		3,252			2,498			754			30.18	%
Non-interest revenue		448			438			10			2.28	%
Non-interest expense		2,555			2,068			487			23.55	%
Average interest earning assets		119,104			90,817			28,287			31.15	%
Average gross loans		87,286			66,485			20,801			31.29	%
Average interest bearing deposits		74,471			57,210			17,261			30.17	%
Average non interest bearing deposits		26,524			20,432			6,092			29.82	%
Interest Margin (1)		3.90	%		4.01	%		(0.11	%)		(2.74	%)
Return on average equity (1)		7.29	%		5.94	%		1.35	%		22.73	%
Earnings per share basic	$	0.35		$	0.27			0.08			29.63	%
Earnings per share diluted	$	0.35		$	0.26			0.09			34.62	%


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

In October 2005, we entered into an underwriting agreement pursuant to which we agreed to sell 2,096,538 shares of our common stock on a best efforts basis. On October 21, 2005, we closed the offering and sold 2,096,538 shares of common stock at a per share purchase price of $9.75 per share. The proceeds to the Company, after underwriters’ commissions, were $19,419,183. We intend to use the net proceeds from the offering to provide additional capital to Old Line Bank to support its growth and expansion. Until such time that we can use these funds, we anticipate that we will invest the net offering proceeds in liquid assets. We expect this will cause a positive impact in interest revenue on securities and net interest income. We expect the increase in the number of shares will cause a negative impact on earnings per share in the fourth quarter of 2005 and until we can deploy these proceeds into loans.

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. Initially, we anticipated that we would enter into supplemental executive retirement plan (“SERP”) agreements with the executives by November 1, 2005. However, due to delays in underwriting the life insurance policies, we have delayed the execution of the SERP agreements until at least December 1, 2005. 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.

Growth Strategy

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.

Expansion

In April 2005, Pointer Ridge executed a contract with Waverly Construction Inc. (“Waverly”), an unrelated party, 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 and the building is partially complete.

On November 3, 2005, Pointer Ridge entered into a loan agreement with an unrelated bank, pursuant to which the bank agreed to make a construction loan to Pointer Ridge in a principal amount not to exceed $5.88 million to finance the construction of a building. Subject to the satisfaction of certain conditions precedent, the Bank has agreed to convert the construction loan to a permanent loan. The construction loan accrues interest monthly at an interest rate equal to one month LIBOR plus 185 basis points per annum, is interest only and matures on December 1, 2006, unless it converts to a permanent loan. Provided that the bank continues to advance sums under the loan agreement, Old Line Bancshares, Inc. has guaranteed the construction of the building in accordance with the terms of the loan agreement and has guaranteed the payment of up to fifty percent (50%) of all costs and expenses incurred in completing the construction of the building. We anticipate moving to our new headquarters in the first or second quarter of 2006.

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 had 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 fourth quarter of 2005. We expect the branch to open in the second or third quarter of 2006.

We plan to open a new branch in College Park (Prince George’s County), Maryland in the same building as the loan production office that houses our new team of loan officers (see-“Expansion of Commercial, Construction and Commercial Real Estate Lending” below). Our lease provides that we will lease the branch space in January 2008 when the existing branch of a large southeastern regional bank moves from the space.

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.

Expansion of Commercial, Construction and Commercial Real Estate Lending

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 large southeastern regional bank with offices 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 generating a high volume of commercial, construction

and commercial real estate loans. This team operates from our College Park, Maryland loan production office.

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. The additional capital from the offering should allow us to leverage our balance sheet to support the anticipated loan growth as a result of these new hires.

Old Line Marine Division

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 marine lending industry with over 27 years of experience to head this division, in addition to two 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.

The establishment of this division increased non-interest expense by $114,000 for the nine months ended September 30, 2005 and increased non-interest revenue by $73,000 during the same period. By the fourth quarter of 2005, we anticipate this division will have a modest, positive impact on net income.

Results of Operations

Net Interest Income

Net interest income is the difference between revenue 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 September 30, 2005 compared to three months ended September 30, 2004

Net interest income after provision for loan losses for the three months ended September 30, 2005 increased $268,720 or 29.53% to $1.2 million from $909,887 for the same period in 2004. The increase was primarily attributable to a 31.17% or $28.3 million increase in total average interest earning assets to $119.1 million for the nine months ended September 30, 2005 from $90.8 million for the nine months ended September 30, 2004.

Interest revenue increased from $1.3 million for the three months ended September 30, 2004 to $1.8 million for the same period in 2005. Interest expense for all interest bearing liabilities amounted to $579,896 for the three months ended September 30, 2005 versus $287,711 for the three months ended September 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 6.25% on July 1, 2005 to 6.75% on September 30, 2005.

Nine months ended September 30, 2005 compared to nine months ended September 30, 2004

Net interest income after provision for loan losses for the nine months ended September 30, 2005 increased 32.00% to $3.3 million from $2.5 million for the same period in 2004. The increase was primarily attributable to a 31.17% or $28.3 million increase in total average interest earning assets to $119.1 million for the nine months ended September 30, 2005 from $90.8 million for the nine months ended September 30, 2004. This increase in volume coupled with a 28 basis point increase in the yield on interest earning assets from 5.26% for the nine months ended September 30, 2004 to 5.54% for the nine months ended September 30, 2004 had a positive impact on net interest income.

Interest revenue increased from $3.5 million for the nine months ended September 30, 2004 to $4.9 million for the same period in 2005. Interest expense for all interest bearing liabilities amounted to $1.5 million for the nine months ended September 30, 2005 versus $851,442 for the nine months ended September 30, 2004. As discussed below and outlined in detail in the Rate/Volume Analysis, these changes were a result of normal business growth and increases in the interest rates.

Our net interest margin was 3.90% for the first nine months of 2005, as compared to 4.01% for the first nine 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 28 basis points from 5.26% in 2004 to 5.54% in 2005, and average interest-earning assets grew by $28.3 million. However, a 47 basis point increase of the yield on average interest-bearing liabilities from 1.80% in 2004 to 2.27% in 2005, and a $23.0 million increase in interest bearing liabilities offset these improvements.

The yield on average interest-earning assets improved and the cost of interest bearing liabilities increased because of increases in market interest rates. On January 1, 2004, the federal funds rate was .94% and on September 30, 2004 the federal funds rate was 1.97%. On January 1, 2005, the federal funds rate was 1.97% and on September 30, 2005 it was 3.93%. The prime rate was 4.00% on January 1, 2004 and it was 4.75% on September 30, 2004. On January 1, 2005, the prime rate was 5.25% and was 6.75% at September 30, 2005.

These increased interest rates allowed us to earn a 187 basis point higher average yield on our federal funds and a 35 basis point higher average yield on our loan portfolio. The increased market interest rates and a promotional campaign used to attract certificates of deposits in January 2005 caused the cost of average interest bearing liabilities to increase 47 basis points during the period. We expect improvement in our net interest margin during the year because of increases in the federal funds and prime rates and because we expect the volume of and rates on loans to grow at a faster rate than the volume of and rates on 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.

Average Balances, Interest, and Yields


	For the Nine Months Ended September 30,
	2005							2004
	Average							Average
	Balance		Interest		Yield			Balance		Interest		Yield

Assets:
Federal Funds Sold	$	13,850,355	$	313,225		3.02	%	$	4,629,960	$	39,925		1.15	%
Interest bearing deposits		76,557		2,124		3.71			607,299		13,507		2.97
Investment Securities (1) (2)
U.S. Treasury		4,000,425		99,851		3.29			3,537,691		85,469		3.17
U.S. Agency		7,445,985		186,569		3.30			8,780,810		236,774		3.54
Mortgage-backed securities		2,246,288		66,040		3.88			3,101,206		91,964		3.90
State, county, municipals		3,478,804		120,792		4.58			3,362,437		130,419		5.10
Other		1,575,085		33,855		2.83			932,775		26,289		3.70

Total investment securities		18,746,587		507,107		3.57			19,714,919		570,915		3.80


Loans: (3)
Commercial		12,513,568		696,310		7.44			8,798,947		466,848		7.09
Mortgage		52,328,109		2,535,338		6.48			37,591,912		1,673,569		5.95
Installment		22,443,906		877,365		5.23			20,094,395		822,960		5.47

Total gross loans		87,285,583		4,109,013		6.29			66,485,254		2,963,377		5.95
Allowance for loan losses		854,673							620,561

Total loans, net of allowance		86,430,910		4,109,013		6.36			65,864,693		2,963,377		6.01

Total interest-earning assets		119,104,409		4,931,469		5.54			90,816,871		3,587,724		5.26

Noninterest-bearing cash		3,071,170							2,422,155
Premises and equipment		2,381,604							2,276,629
Other assets		2,302,933							1,122,665

Total Assets	$	126,860,116	$	4,931,469		5.20	%	$	96,638,320	$	3,587,724		4.95	%


Liabilities and Stockholders’ Equity
Interest-bearing deposits
Savings	$	9,828,092	$	37,567		0.51	%	$	10,994,744	$	40,431		0.49	%
Money market and NOW		19,640,443		99,197		0.68			16,605,322		56,852		0.46
Other time deposits		45,002,497		1,092,117		3.24			29,610,300		584,897		2.64

Total interest-bearing deposits		74,471,032		1,228,881		2.21			57,210,366		682,180		1.59
Borrowed funds		11,544,262		232,721		2.70			5,811,491		169,262		3.89

Total interest-bearing liabilities		86,015,294		1,461,602		2.27			63,021,857		851,442		1.80
Non interest-bearing deposits		26,524,305							20,432,017

		112,539,599		1,461,602		1.74			83,453,874		851,442		1.36
Other liabilities		546,346							373,880
Stockholders’ equity		13,774,170							12,810,566

Total liabilities and stockholders’ equity	$	126,860,115						$	96,638,320


Net interest spread						3.27	%						3.46	%

Net interest income			$	3,469,867		3.90	%			$	2,736,282		4.01	%


(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 securities. Management believes providing this information on a FTE basis provides investors with a more accurate picture of our net interest spread and net interest income and we believe it to be the preferred industry measurement of these calculations. See “Reconciliation of Non-GAAP Measures.”

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

(3)		We had no non-accruing loans for the periods presented.

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.

Rate/Volume Variance Analysis


	Nine months ended September 30,
	2005 compared to 2004
	Variance due to:
	Total			Rate			Volume
Earning Assets:
Federal Funds Sold	$	273,300			193,992		$	79,308
Interest bearing deposits		(11,383	)		544			(11,789	)
Investment Securities
U.S. Treasury		14,382			3,258			11,124
U.S. Agency		(50,205	)		(14,372	)		(35,833	)
Mortgage backed		(25,924	)		(640	)		(25,284	)
State, county, municipals		(9,627	)		(14,127	)		4,500
Other		7,566			(10,456	)		18,022
Loans:
Commercial		229,462			32,479			196,983
Mortgage		861,769			205,968			655,801
Installment		54,405			(41,719	)		96,124

Total interest revenue (1)		1,343,745			354,927			988,956


Interest-bearing liabilities
Savings		(2,864	)		1,412			(4,276	)
Money market and NOW		42,345			31,903			10,442
Other time deposits		507,220			203,290			303,930
Borrowed funds		63,459			(103,336	)		166,795

Total interest expense		610,160			133,269			476,891


Net interest income	$	733,585		$	221,658		$	512,065


(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 securities. Management believes providing this information on a FTE basis provides investors with a more accurate picture of our net interest spread and net interest income and we believe it to be the preferred industry measurement of these calculations. See “Reconciliation of Non-GAAP Measures.”

Provision for Loan Losses

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

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

The provision for loan losses decreased $45,000 or 52.94% to $40,000 for the three months ended September 30, 2005 versus $85,000 for the three months ended September 30, 2004. During the quarter, we decreased the provision for loan losses because the growth in our loan portfolio was occurring at a slower rate than the growth in our allowance for loan losses. Additionally, our review of 18 month historical loss experience and delinquency in the portfolio did not warrant a higher provision.

The provision for loan losses was $165,000 for the nine months ended September 30, 2005, as compared to $175,000 for the nine months ended September 30, 2004, a decrease of $10,000 or 5.71%. During the nine month period, we decreased the provision for loan losses because the growth in our loan portfolio was occurring at a slower rate than the growth in our allowance for loan losses, because of changes in the composition of the portfolio and because of recoveries. Additionally, our review of our 18 month historical loss experience and delinquency in the various segments of the portfolio did not warrant a higher provision.

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 .96% of gross loans at September 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:


	Nine Months Ended						Year Ended
	September 30,						December 31,
	2005			2004			2004
Balance, beginning of period	$	744,862		$	547,690		$	547,690

Provision for loan losses		165,000			175,000			220,000


Chargeoffs:
Commercial		—			—			(20,599	)
Mortgage		—			—			—
Consumer		(135	)		(18,409	)		(18,408	)

Total chargeoffs		(135	)		(18,409	)		(39,007	)
Recoveries:
Commercial		2,997			—			—
Mortgage		—			—			—
Consumer		646			16,113			16,179

Total recoveries		3,643			16,113			16,179

Net chargeoffs		3,508			(2,296	)		(22,828	)

Balance, end of period	$	913,370		$	720,394		$	744,862


Allowance for loan losses to gross loans		0.96	%		0.94	%		0.91	%
Ratio of net-chargeoffs during period to average loans outstanding during period		(0.004	%)		0.003	%		0.033	%

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


	Allocation of Allowance for Loan Losses
	September 30,										December 31,
	2005					2004					2004
			% of Loans					% of Loans					% of Loans
			in Each					in Each					in Each
	Amount		Category			Amount		Category			Amount		Category
Installment & others	$	6,198		0.62	%	$	7,550		0.81	%		7,120		0.72	%
Boat		170,836		24.28			150,858		27.05			148,411		25.35
Mortgage		476,386		59.84			362,163		58.10			401,585		60.27
Commercial		259,950		15.26			199,823		14.04			187,746		13.66


Total	$	913,370		100.00	%	$	720,394		100.00	%	$	744,862		100.00

Non-interest Revenue

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

Non-interest revenue totaled $184,888 for the three months ended September 30, 2005, an increase of $18,882 or 11.37% from the 2004 amount of $166,006. Non-interest revenue for the three months ended September 30, 2005 and September 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 September 30, 2005, non-interest revenue also included broker origination fees from the marine division and interest income from the investment made in bank owned life insurance in June 2005.

For the three months ended September 30, 2005, other fees and commissions increased $22,228. This was primarily a result of earnings of $40,012 from the investment made in bank owned life insurance in June 2005 and an increase of $45,111 in broker origination fees as a result of the establishment of the marine division in February 2005. These increases were offset by a $57,983 reduction in letter of credit and other miscellaneous loan fees. The reduction in letter of credit and other miscellaneous loan fees occurred because we issued fewer letters of credits during the period and collected fewer miscellaneous fees on loans.

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.

Nine months ended September 30, 2005 compared to nine months ended September 30, 2004

Non-interest revenue totaled $447,606 for the nine months ended September 30, 2005, an increase of $10,029 or 2.29% from the 2004 amount of $437,577. Non-interest revenue for the nine months ended September 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 nine months ended September 30, 2005, non-interest revenue also included broker origination fees from the marine division and income from the investment made in bank owned life insurance in June 2005.

Service charges on deposit accounts declined $6,016, loan fees declined $61,395 and letter of credit fees declined $9,455. The $40,013 in income earned from the $3.5 million investment in bank owned life insurance and a $64,593 increase in broker origination fees caused by the addition of the marine division offset this decline. Service charges, loan fees and letter of credit fees declined because we collected fewer fees for account services and on loans during the period.

Non-interest Expense

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

Non-interest expense for the three months ended September 30, 2005 increased $227,176 or 31.59% to $946,357 compared to $719,181 at September 30, 2004. Salaries and benefit expenses increased $188,442 or 44.24% during the period because of general salary increases, a new loan officer for the marine division in February 2005, a new originator in the marine division in April and one in June 2005 and the three new loan officers for the College Park loan production office in August 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 2007. We have one individual focused on this effort.

Occupancy expense increased $10,249 or 20.78% during the period because of the establishment of the College Park loan production office in August 2005 and annual escalation clauses in existing leases.

Other operating expenses increased $30,603 or 16.87% because of the costs associated with the establishment of the College Park office and business development efforts of the new lenders as well as the marine division. Director fees also increased $4,350 during the quarter as a result of the increase in the fee paid per meeting and an increase in the number of meetings. These increases were offset by a reduction in legal and shareholder meeting expenses.

Nine months ended September 30, 2005 compared to nine months ended September 30, 2004

Non-interest expense for the nine months ended September 30, 2005 was $2.6 million versus $2.1 million for the same period in 2004. The $486,619 or 23.53% increase was attributable to a $389,240 increase in salary and benefit expense, an $18,564 increase in occupancy expense, and an $89,158 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, a new loan officer for the marine division in February 2005, a new originator in the marine division in April 2005 and one in June 2005 and hired three new loan officers for the College Park loan production office in August 2005. Annual escalations in the leases and the establishment of the College Park loan production office in August 2005 caused the increased occupancy expenses.

Other operating expenses increased because of increased expenses associated with the establishment and business development efforts of the marine division and the College Park office, and a $12,000 increase in audit and exam fees. A $13,150 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 $26,074 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 September 30, 2005 compared to three months ended September 30, 2004

Income tax expense was $135,867 (32.57%) of pre-tax income for the three months ended September 30, 2005 as compared to $117,432 (32.92%) for the three months ended September 30, 2004. The tax rate decreased during the period because the interest earned on securities exempt from federal or state taxes was a larger percentage of total interest revenue.

Nine months ended September 30, 2005 compared to nine months ended September 30, 2004

Income tax expense was $394,165 (34.43%) of pre-tax income for the nine months ended September 30, 2005 compared to $296,950 (34.25% of pre-tax net income) for the same period in 2004.

Net Income

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

Net income increased $41,991 or 17.55% to $281,271 for the three months ended September 30, 2005 compared to $239,280 for the three months ended September 30, 2004. Earnings per share increased to $0.13 basic and diluted for the three months ended September 30, 2005 from $0.11 basic and diluted for the three months ended September 30, 2004 because of the increase in net income. The $41,991 increase in net income was due to the $268,720 increase in net interest income after provision for loan losses and the $18,882 increase in non-interest revenue offset by the $227,176 increase in non-interest expenses and the $18,435 increase in income taxes.

Nine months ended September 30, 2005 compared to nine months ended September 30, 2004

Net income was $750,755 or $0.35 basic and diluted earnings per common share for the nine month period ending September 30, 2005, an increase of $180,773 or 31.72% compared to net income of $569,982 or $0.27 basic and $0.26 diluted earnings per common share for the same period in 2004. The increase in net income was the result of a $754,578 increase in net interest income after provision for loan losses and a $10,029 increase in non-interest revenue. A $486,619 increase in non-interest expense and a $97,215 increase in income tax expense for the period compared to the same period in 2004 offset these increases. 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 (86.52%) 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 September 30, 2005 amounted to $16.3 million, a decrease of $1.5 million, or 8.43%, 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 $318,072 at September 30, 2005 (reflected as unrealized losses of $195,233 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

As of September 30, 2005, our investment in Pointer Ridge LLC was $732,436. We account for this investment using the equity method. This means that 50% of the equity of Pointer Ridge is included in Old Line Bancshares, Inc.’s balance sheet as an investment in real estate, LLC and 50% of the net income of Pointer Ridge is reported in Old Line Bancshares, Inc.’s income statement. To date, we have recorded a net loss of $64 from Pointer Ridge.

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:


Unaffiliated parties	25.0	%
Lucente Enterprises, Inc.	12.5	%
Chesapeake Custom Homes, LLC	12.5	%
Old Line Bancshares, Inc.	50.0	%

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. On September 16, 2005, Old Line Bancshares, Inc. transferred an additional $182,500 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.

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 $13.1 million or 16.07% to $94.6 million at September 30, 2005 from $81.5 million at December 31, 2004. This growth was attributable to increased business development efforts. Commercial business loans increased by $3.3 million (29.46%), commercial real estate loans (generally owner-occupied) increased by $7.3 million (21.28%), residential real estate loans (generally home equity and fixed rate home improvement loans) increased by $2.0 million (23.53%), real estate construction loans decreased by $1.8 million (27.27%) and installment loans increased by $2.3 million (10.75%) 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:

Loan Portfolio
(Dollars in thousands)


	September 30,					December 31,
	2005					2004
Real Estate
Commercial	$	41,610		43.73	%	$	34,300		41.86	%
Construction		4,836		5.08			6,551		8.00
Residential		10,491		11.03			8,530		10.41
Commercial		14,526		15.26			11,190		13.66
Installment		23,691		24.90			21,356		26.07

		95,154		100.00	%		81,927		100.00	%

Allowance for loan losses		(913	)				(745	)
Net deferred loan (fees) and costs		371					323

	$	94,612				$	81,505

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 September 30, 2005 and December 31, 2004, Old Line Bank had no loans on non-accrual status. As of September 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 September 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 September 30, 2005 and December 31, 2004.

Bank owned life insurance

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 officers have completed their physicals required for the insurance. Before year end 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 September 30, 2005, the deposit portfolio had grown to $112.6 million, a $23.6 million or 26.52% increase over the December 31, 2004 level of $89.0 million. Non-interest bearing deposits grew $729,842 during the period from $25.4 million to $26.2 million while interest-bearing deposits grew $22.9 million to $86.4 million from $63.5 million. Most of the growth in interest-bearing deposits was in certificate of deposits, which increased from $36.4 million at December 31, 2004 to $53.9 million at September 30, 2005 and money market and NOW accounts which grew from $16.5 million at December 31, 2004 to $24.1 million at September 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 September 30, 2005. Old Line Bank has an additional secured line of credit from the Federal Home Loan Bank of Atlanta of $28.6 million at September 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 September 30, 2005, Old Line Bank had $9.9 million outstanding in these short term promissory notes with an interest rate of 1.75%.

At September 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 positive 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 September 30, 2005, we had $3.3 million in cash and due from banks and $20.4 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 $14.1 million at September 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 $750,755, the $131,098 in proceeds after tax adjustment for stock options exercised less the $161,120 in dividends paid in March, June and September and the $104,847 of 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 September 30, 2005 and December 31, 2004 are as follows (000’s):


	September 30,		December 31,
	2005		2004

Commitments to extend credit and available credit lines:
Commercial	$	3,294	$	2,896
Real estate-undisbursed development and construction		13,344		7,419
Real estate-undisbursed home equity lines of credit		4,349		3,426


	$	20,987	$	13,741


Standby letters of credit	$	1,841	$	1,308

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 63.33% of the $21.0 million, are generally short-term and turn over rapidly, satisfying cash requirements with principal repayments and from sales of the properties financed.

Reconciliation of Non-GAAP Measures

Below is a reconciliation of the FTE adjustments and the GAAP basis information presented in this report.


	Nine months ended September 30, 2005
	Federal Funds			Investment			Interest			Total			Net Interest			Net Interest
	Sold			Securities			Earning Assets			Assets			Income			Spread
GAAP Interest income	$	309,596		$	458,062		$	4,878,795		$	4,878,795		$	3,417,193
Tax Equivalent adjustment		3,629			49,045			52,674			52,674			52,674

Tax Equivalent interest income	$	313,225		$	507,107		$	4,931,469		$	4,931,469		$	3,469,867


GAAP Interest yield		2.99	%		3.22	%		5.48	%		5.14	%		3.84	%		3.20	%
Taxable Equivalent adjustment		0.03	%		0.35	%		0.06	%		0.06	%		0.06	%		0.06	%

Tax Equivalent interest yield		3.02	%		3.57	%		5.54	%		5.20	%		3.90	%		3.26	%


	Nine months ended September 30, 2004
	Federal Funds			Investment			Interest			Total			Net Interest			Net Interest
	Sold			Securities			Earning Assets			Assets			Income			Spread
GAAP Interest income	$	39,544		$	507,629		$	3,524,057		$	3,524,057		$	2,672,615
Tax Equivalent adjustment		381			63,286			63,667			63,667			63,667

Tax Equivalent interest income	$	39,925		$	570,915		$	3,587,724		$	3,587,724		$	2,736,282


GAAP Interest yield		1.14	%		3.38	%		5.17	%		4.86	%		3.92	%		3.37	%
Taxable Equivalent adjustment		0.01	%		0.42	%		0.09	%		0.09	%		0.09	%		0.09	%

Tax Equivalent interest yield		1.15	%		3.80	%		5.26	%		4.95	%		4.01	%		3.46	%

Application of Critical Accounting Policies

Our financial statements are prepared 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. These estimates, assumptions, and judgments are based 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.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the provision for loan losses as the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

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

Changes in allowance factors or in management’s interpretation of those factors will have a direct impact on the amount of the provision, and a corresponding effect on income and assets. Also, errors in management’s perception and assessment of the allowance factors could result in the allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or charge-offs, which would adversely affect income and capital. For additional information regarding the allowance for loan losses, see the “Provision for Loan Losses” section of this financial review.

Information Regarding Forward-Looking Statements

In addition to the historical information contained in Part I of this Quarterly Report on Form 10-QSB, the discussion in Part I of this Quarterly Report on Form 10-QSB contains certain forward-looking statements. Forward-looking statements often use words such as “believe,” “expect,” “plan,” “may,” “will,” “should,” “project,” “contemplate,” “anticipate,” “forecast,” “intend” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.

The statements presented herein with respect to, among other things, Old Line Bancshares, Inc.’s plans, objectives, expectations and intentions, including statements regarding profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk and financial and other goals are forward looking. These statements are based on Old Line Bancshares, Inc.’s beliefs, assumptions and on information available to Old Line Bancshares, Inc. as of the date of this filing, and involve risks and uncertainties. These risks and uncertainties include, among others, those discussed in this Quarterly Report on Form 10-QSB; the ability of Old Line Bancshares, Inc. to retain key personnel; the ability of Old Line Bancshares, Inc. to successfully implement its growth and expansion strategy; risk of credit losses; risks associated with the marine brokerage division; the allowance for loan losses may not be sufficient; changes in interest rates and monetary policy may adversely affect Old Line Bancshares, Inc.; changes in regulatory requirements and/or restrictive banking legislation may adversely affect Old Line Bancshares, Inc.; the market value of investments could negatively impact stockholders’ equity; risks associated with Old Line Bancshares, Inc.’s lending limit; increased expenses due to stock benefit plans; expenses associated with operating as a public company; potential conflicts of interest associated with the interest in Pointer Ridge Office Investment, LLC; and changes in economic, competitive, governmental, regulatory, technological and other factors which may affect Old Line Bancshares, Inc. specifically or the banking industry generally. For a more complete discussion of some of these risks and uncertainties see the discussion under the caption “Factors Affecting Future Results” in Old Line Bancshares, Inc.’s Annual Report on Form 10-KSB for the year ended December 31, 2004.

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

Item 3. Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-QSB, Old Line Bancshares, Inc.’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of Old Line Bancshares, Inc.’s disclosure controls and procedures. Based upon that evaluation, Old Line Bancshares, Inc.’s Chief Executive Officer and Chief Financial Officer concluded that Old Line Bancshares, Inc.’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by Old Line Bancshares, Inc. in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

In addition, there were no changes in Old Line Bancshares, Inc.’s internal controls over financial reporting (as defined in Rule 13a-15 or Rule 15d-15) under the Securities Act of 1934, as amended) during the quarter ended September 30, 2005, that have materially affected, or are reasonably likely to materially affect, Old Line Bancshares, Inc.’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

None.

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

None

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Submission of Matters to a Vote of Securities Holders.

None

Item 5. Other Information.

Not applicable.

Item 6. Exhibits

	(a)		Exhibits.

	31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Old Line Bancshares, Inc.
Date: November 10, 2005	By:	/s/ James W. Cornelsen
		James W. Cornelsen, President
		(Principal Executive Officer)


Date: November 10, 2005	By:	/s/ Christine M. Rush
		Christine M. Rush, Chief Financial Officer
		(Principal Accounting and Financial Officer)