United States Securities and Exchange Commission

Washington, D.C. 20549

Form 10-KSB

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

For the fiscal year ended December 31, 2005

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

For the transition period from                     to                     

OLD LINE BANCSHARES, INC.

(Name of small business issuer in its charter)

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

2995 Crain Highway, Waldorf, Md.		20601
(Address of principal executive offices)		(Zip Code)

(301) 645-0333
(Issuer’s telephone number)

Securities registered under Section 12(b) of the Exchange Act:
None

Securities registered under Section 12(g) of the Exchange Act:
Common Stock: par value $0.01 per share

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. o

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

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. 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

The issuer’s revenues for its most recent fiscal year were $7,624,318.

The aggregate market value of the common equity held by non-affiliates was $45,188,401 as of March 17, 2006, based on a sales price of $11.80 per share of Common Stock, which is the sales price at which the Common Stock was last traded on March 16, 2006 as reported by the Nasdaq Capital Market.

The number of shares outstanding of the issuer’s Common Stock was 4,248,898.5 as of March 23, 2006.

Portions of the Proxy Statement for the 2006 Annual Meeting of Stockholders of Old Line Bancshares, Inc., to be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year, are incorporated by reference in Part III of this Annual Report on Form 10-KSB.

Transitional Small Business Disclosure Format (check one):

Yes o     No þ

 

 

OLD LINE BANCSHARES, INC.

ANNUAL REPORT ON FORM 10-KSB

TABLE OF CONTENTS

				Page #
Part I
Item 1.		Description of Business			1
Item 2.		Description of Property			16
Item 3.		Legal Proceedings			17
Item 4.		Submission of Matters to a Vote of Security Holders			17
Part II
Item 5.		Market for Common Equity and Related Stock Matters			18
Item 6.		Management’s Discussion and Analysis of Financial Condition And Results of Operations			21
Item 7.		Financial Statements			52
		Report of Independent Registered Public Accounting Firm
		Consolidated Balance Sheets December 31, 2005, 2004 and 2003
		Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003
		Consolidated Statement of Changes in Stockholders’ Equity For the years ended December 31, 2005, 2004 and 2003
		Consolidated Statements of Cash Flows For the years ended December 31, 2005, 2004 and 2003
		Notes to Consolidated Financial Statements
Item 8.		Changes in and Disagreements with Accountants on Accounting And Financial Disclosure			80
Item 8A.		Controls and Procedures			80
Item 8B.		Other Information			80
PART III
Item 9.		Directors, Executive Officers, Promoters, Control Persons, Compliance with Section 16 (a) of the Exchange Act			80
Item 10.		Executive Compensation			80
Item 11.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			80
Item 12.		Certain Relationships and Related Transactions			81
Item 13.		Exhibits and Reports on Form 8-K			82
Item 14.		Principal Accountant Fees and Services			84

PART I

Item 1. Description of Business

Business of Old Line Bancshares, Inc.

     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.

     On May 22, 2003, the stockholders of Old Line Bank approved the reorganization of Old Line Bank into a holding company structure. The reorganization became effective at 12:01 a.m. on September 15, 2003. In connection with the reorganization, (i) Old Line Bank became our wholly-owned subsidiary and (ii) each outstanding share (or fraction thereof) of Old Line Bank common stock was converted into one share (or fraction thereof) of Old Line Bancshares, Inc. common stock, and the former holders of Old Line Bank common stock became the holders of all our outstanding shares.

     Our primary business is owning all of the capital stock of Old Line Bank. We also have an $837,436 equity investment in a real estate investment limited liability company named Pointer Ridge Office Investment, LLC (“Pointer Ridge”). We own 50% of Pointer Ridge. Frank Lucente, one of our directors and a director of 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 is in the process of constructing a commercial office building containing approximately 40,000 square feet. We plan to lease approximately 50% of this building for our main office (moving our existing main office from Waldorf, Maryland) and to operate a branch of Old Line Bank from this address. We anticipate moving to our new headquarters in the second quarter of 2006.

     In October 2005, we completed a public offering of 2,096,538 shares of common stock at an offering price of $9.75 per share and received $19.2 million in net offering proceeds, substantially all of which we invested in Old Line Bank.

Business of Old Line Bank

General

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

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

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

     In June 2003, Old Line Bank completed a public offering of 299,000 shares of common stock at an offering price of $25 per share (1,076,400 shares at $6.94 as restated for the effects of the stock dividends paid) and received net offering proceeds of $6.9 million.

     We are headquartered in Waldorf, Maryland, approximately 10 miles south of Andrews Air Force Base and

25 miles southeast of Washington, D.C. We engage in a general commercial banking business, making various types of loans and accepting deposits. We market our financial services to small to medium sized businesses, entrepreneurs, professionals, consumers and high net worth clients. Our current primary market area is the suburban Maryland (Washington, D.C. suburbs) counties of Prince George’s and Charles. We also target customers throughout the greater Washington, D.C. metropolitan area. Our branch offices generally operate six days per week from 8:00 a.m. until 7:00 p.m. on weekdays and from 8:00 a.m. until noon on Saturday. None of our branch offices are open on Sunday.

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

     We have based our strategic plan on the premise of enhancing stockholder value and growth through branching and operating profits. Our short-term goals include maintaining credit quality, creating an attractive branch network, expanding fee income, generating extensions of core banking services and using technology to maximize stockholder value.

Location and Market Area

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

     Our current corporate headquarters and two of our branch offices are located in Waldorf, Maryland in Charles County. Just 15 miles south of the Washington Capital Beltway, Charles County is the gateway to Southern Maryland. The northern part of Charles County is the “development district” where the commercial, residential and business growth is focused. Waldorf, White Plains and the planned community of St. Charles are located here.

     A critical component of our strategic plan and future growth is Prince George’s County. Prince George’s County wraps around the eastern boundary of Washington, D.C. and offers urban, suburban and rural settings for employers and residents. There are several national and international airports less than an hour away, as is Baltimore. We currently have two branch locations in Prince George’s County including our newest branch, which opened in 2002. In the second quarter of 2006, we expect to move our headquarters location from Waldorf, Maryland to the Pointer Ridge location in Bowie, Maryland in Prince George’s County. We also plan to establish a new branch at the Pointer Ridge location. In August 2005, we opened a loan production office in College Park, Prince George’s County. In 2008, we intend to open a branch in the office building in which the loan production office is located.

     As part of our expansion efforts, in July 2004, Old Line Bank executed a lease and applied to regulatory authorities to open a branch at 1641 State Route 3 North, Crofton, Maryland in Anne Arundel County, approximately 10 miles north of the anticipated new Bowie, Maryland main office. In August 2004, we received regulatory authority to open the branch. We anticipate that construction of the building in which we will locate the branch will begin during the second or third quarter of 2006. We expect the branch will open in the first quarter of 2007, although the lease and the branch are subject to completion of construction. Anne Arundel County borders the Chesapeake Bay and is situated in the high-tech corridor between Baltimore and Washington, D.C. With over 534 miles of shoreline, it provides waterfront living to many residential communities. Annapolis, the State Capital and home to the United States Naval Academy, and Baltimore/Washington International Thurgood Marshal Airport (BWI) are located in Anne Arundel County. Anne Arundel County has one of the strongest economies in the State of Maryland and its unemployment rate is consistently below the national average.

Lending Activities

     General. Our primary market focus is on making loans to small and medium size businesses, entrepreneurs, professionals, consumers and high net worth clients in our primary market area. Our lending

activities consist generally of short to medium term commercial business loans, commercial real estate loans, real estate construction loans, home equity loans and consumer installment loans, both secured and unsecured. As a niche-lending product, we provide luxury boat financing to individuals, who generally tend to be high net-worth individuals. These boats are generally Coast Guard documented and have a homeport of record in the Chesapeake Bay or its tributaries.

     Credit Policies and Administration. We have adopted a comprehensive lending policy, which includes stringent underwriting standards for all types of loans. Our lending staff follows pricing guidelines established periodically by our management team. In an effort to manage risk, prior to funding, the loan committee consisting of the President, Chief Credit Officer, Chief Lending Officer and six members of the Board of Directors must approve by a majority vote all credit decisions in excess of a lending officer’s lending authority. Management believes that it employs experienced lending officers, secures appropriate collateral and carefully monitors the financial conditions of its borrowers and the concentration of loans in the portfolio.

     In addition to the normal repayment risks, all loans in the portfolio are subject to the state of the economy and the related effects on the borrower and/or the real estate market. With the exception of loans provided to finance luxury boats, generally longer-term loans have periodic interest rate adjustments and/or call provisions. Senior management monitors the loan portfolio closely to ensure that we minimize past due loans and that we swiftly deal with potential problem loans.

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

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

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

     Commercial Real Estate Lending. We finance commercial real estate for our clients, usually for owner occupied properties. We generally will finance owner-occupied commercial real estate at a maximum loan–to-value of 80%. Our underwriting policies and processes focus on the clients’ ability to repay the loan as well as an assessment of the underlying real estate. We originate commercial real estate loans on a fixed rate or adjustable rate basis. Usually, these rates adjust during a three, five or seven year time period based on the then current treasury or prime rate index. Repayment terms include amortization schedules ranging from three years to a maximum of 25 years with principal and interest payments due monthly and with all remaining principal due at maturity.

     Commercial real estate lending entails significant additional risks as compared with residential mortgage lending. Risks inherent in managing a commercial real estate portfolio relate to sudden or gradual drops in property values as well as changes in the economic climate that may detrimentally impact the borrower’s ability to repay. We attempt to mitigate these risks by carefully underwriting these loans. Our underwriting generally includes an analysis of the borrower’s capacity to repay, the current collateral value, a cash flow analysis and review of the character of the borrower and current and prospective conditions in the market. We generally limit loans in this category to 75%-85% of the value of the property and require personal and/or corporate guarantees. For loans of

this type in excess of $250,000, we monitor the financial condition and operating performance of the borrower through a review of annual tax returns and updated financial statements. In addition, we will meet with the borrower and/or perform site visits as required.

     Real Estate Construction Lending. This segment of our loan portfolio is predominately residential in nature and is comprised of loans of short duration, meaning maturities typically of nine months or less. Residential houses under construction and the underlying land for which the loan was obtained secure the construction loans. All of these loans are concentrated in our primary market area.

     Construction lending entails significant risks compared with residential mortgage lending. These risks involve larger loan balances concentrated with single borrowers with funds advanced upon the security of the land or home under construction, which is estimated prior to the completion of the home. Thus, it is more difficult to evaluate accurately the total loan funds required to complete a project and related loan-to-value ratios. To mitigate these risks, we generally limit loan amounts to 80% of appraised values and obtain first lien positions on the property. We generally only offer real estate construction financing to experienced builders and individuals who have demonstrated the ability to obtain a permanent loan “take-out.” We also perform a complete analysis of the borrower and the home under construction. This analysis includes a review of the cost to construct, the borrower’s ability to obtain a permanent “take out,” the cash flow available to support the debt payments and construction costs in excess of loan proceeds, and the value of the collateral. During construction, we advance funds on these loans on a percentage of completion basis. We inspect each project as needed prior to advancing funds during the term of the construction loan.

     Residential Real Estate Lending. We offer a variety of consumer-oriented residential real estate loans. The bulk of our portfolio is made up of home equity loans to individuals with a loan to value not exceeding 85%. We also offer fixed rate home improvement loans. Our home equity and home improvement loan portfolio gives us a diverse client base. Although most of these loans are in our primary market area, the diversity of the individual loans in the portfolio reduces our potential risk. Usually, we secure our home equity loans and lines of credit with a security interest in the borrower’s primary or secondary residence. Our initial underwriting includes an analysis of the borrower’s debt/income ratio which generally may not exceed 40%, collateral value, length of employment and prior credit history.

     Consumer Installment Lending.

     Luxury Boat Loans. We offer various types of secured and unsecured consumer loans. A primary aspect of our consumer lending is our financing for luxury boat purchases ($22.2 million or 97.37% of the consumer loans, excluding consumer real estate, and 21.18% of gross loans at December 31, 2005). Our average loan in the luxury boat loan category is approximately $150,000, with an 18 year term and a fixed interest rate. Our internal analysis and industry statistics indicate that the average life of these loans is approximately 42 months as the purchaser either trades or sells the vessel. These loans entail greater risks than residential mortgage lending because the boats that secure these loans are depreciable assets. Further, payment on these loans depends on the borrower’s continuing financial stability. Job loss, divorce, illness or personal bankruptcy may adversely impact the borrower’s ability to pay. To mitigate these risks, we have more stringent underwriting standards for these loans than for other installment loans. As a general guideline, the individuals’ debt service should not exceed 36% of their gross income, they must own their home, have stability of employment and residency, verifiable liquidity, satisfactory prior credit repayment history and the loan to value ratio may not exceed 85%. To ascertain value, we generally receive a survey of the boat from a qualified surveyor and/or a current purchase agreement and compare the determined value to published industry values. The majority of these boats are United States Coast Guard documented vessels and we obtain a lien on the vessel with a first preferred ship mortgage, where applicable, or a security interest on the title. As a result of these stringent guidelines, this segment of our portfolio has experienced minimal delinquency. Since inception of the portfolio in 1997, only two accounts have experienced 30-day delinquency with total losses in the portfolio of $20,000 from one account.

     Historically, we have generally paid a fee to a broker to originate a boat loan. We will continue to pay brokers for boat loans and will originate boat loans for our portfolio through Old Line Marine. We do not plan to increase our boat loan portfolio because of Old Line Marine.

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

     Consumer loans may present greater credit risk than residential mortgage loans because many consumer loans are unsecured or rapidly depreciating assets secure these loans. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance because of the greater likelihood of damage, loss or depreciation. Consumer loan collections depend on the borrower’s continuing financial stability. If a borrower suffers personal financial difficulties, the loan may not be repaid. Also, various federal and state laws, including bankruptcy and insolvency laws, may limit the amount we can recover on such loans. However, in our opinion, many of these risks do not apply to the luxury boat loan portfolio due to the credit quality and liquidity of the borrowers.

     Lending Limit. As of December 31, 2005, our legal lending limit for loans to one borrower was approximately $4,538,000. As part of our risk management strategy, we may attempt to participate a portion of larger loans to other financial institutions. This strategy allows Old Line Bank to maintain customer relationships yet reduce credit exposure. However, this strategy may not always be available.

Old Line Marine

     In February 2005, we established Old Line Marine as a division of Old Line Bank to serve as a boat loan broker and to originate loans for Old Line Bank. The primary loan origination location for this division is Annapolis, Maryland. We also service the New Jersey, Pennsylvania, Delaware, and Virginia markets. We conduct secondary market activity in our marine division as a broker and we earn a fee.

Investments and Funding

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

     We actively monitor our investment portfolio and the majority of the portfolio is generally classified as “available for sale.” In general, under such a classification, we may sell investment instruments as management deems appropriate. On a monthly basis, we “mark to market” the investment portfolio via equity as required by Statement of Financial Accounting Standards No. 115 (“SFAS 115”). Additionally, we use the investment portfolio to balance our asset and liability position. We invest in fixed rate or floating rate instruments as necessary to reduce our interest rate risk exposure.

Other Banking Products

     We offer our customers safe deposit boxes, wire transfer services, debit cards, ATM machines at four of our branch locations and credit cards through a third party processor. Additionally, we provide Internet banking capabilities to our customers. With our Internet banking service, our customers may view their accounts on-line and electronically remit bill payments. Our commercial account services include direct deposit of payroll for our commercial clients’ employees and an overnight sweep service.

Deposit Activities

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

     As our overall balance sheet position dictates, we may become more or less competitive in our interest rate structure. During 2005, we did not use brokered deposits. In the first quarter of 2006, we did begin using brokered certificate of deposits through the Promontory Interfinancial Network. Through this deposit matching network and its certificate of deposit account registry service (CDARS), we obtained the ability to offer our customers access to FDIC-insured deposit products in aggregate amounts exceeding current insurance limits. When we place funds through CDARS on behalf of a customer, we receive matching deposits through the network.

Competition

     The banking business is highly competitive. We compete with other commercial banks, savings associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating in our primary market area and elsewhere.

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

Employees

     As of March 1, 2006, Old Line Bank had 44 full time and 5 part time employees. No collective bargaining unit represents any of our employees and we believe that relations with our employees are good. Old Line Bancshares, Inc. has no employees.

Supervision and Regulation

     Old Line Bancshares, Inc. and Old Line Bank are subject to extensive regulation under state and federal banking laws and regulations. These laws impose specific requirements and restrictions on virtually all aspects of operations and generally are intended to protect depositors, not stockholders. The following discussion is only a summary and readers should refer to particular statutory and regulatory provisions for more detailed information. In addition, management cannot predict the nature or the extent of the effect on business and earnings that new federal or state legislation may have in the future.

Old Line Bancshares, Inc.

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

     Historically, the Federal Reserve Board was required to approve, among other things, the acquisition by a proposed bank holding company of control of more than five percent (5%) of the voting shares, or substantially all the assets, of any bank, or the merger or consolidation by a bank holding company with another bank holding company. The Riegle-Neale Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”) repealed many of the restrictions on interstate acquisitions of banks by bank holding companies in September, 1995. As a result of the Riegle-Neal Act, subject to certain time and deposit base requirements, we can acquire a bank located in Maryland or any other state, and a bank holding company located outside of Maryland can acquire any Maryland-based bank holding company or bank.

     Subsidiary banks of a bank holding company are subject to certain restrictions imposed by statute on any extensions of credit to the bank holding company or any of its subsidiaries, or investments in their stock or other securities, and on taking such stock or securities as collateral for loans to any borrower. Further, a bank holding company and any of its subsidiary banks are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit. In 1997, the Federal Reserve Board adopted amendments to its Regulation Y, creating exceptions to the Bank Holding Company Act’s anti-tying prohibitions that give bank subsidiaries of holding companies greater flexibility in packaging products and services with their affiliates.

     In accordance with Federal Reserve Board policy, Old Line Bancshares, Inc. is expected to act as a source of financial strength to Old Line Bank and to commit resources to support Old Line Bank in circumstances in which Old Line Bancshares, Inc. might not otherwise do so. The Federal Reserve Board may require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary (other than a non-bank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or non-bank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.

     The Federal Reserve Board imposes risk-based capital measures on bank holding companies in order to insure their capital adequacy.

     Old Line Bancshares, Inc., as a bank holding company, is subject to dividend regulations of the Federal Reserve System. In general, a small bank holding company that has a debt to equity ratio greater than 1:1 is not expected to pay corporate dividends until such time as its debt to equity ratio declines to 1:1 or less and its bank subsidiary is otherwise well managed, well capitalized and not under any supervisory order. Old Line Bancshares, Inc. is a small bank holding company, and does not have a debt to equity ratio that is greater than 1:1.

     On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act (“GLBA”). Effective March 11, 2000, pursuant to authority granted under the GLBA, a bank holding company may elect to

become a financial holding company and thereby engage in a broader range of financial and other activities than are permissible for traditional bank holding companies. In order to qualify for the election, all of the depository institution subsidiaries of the bank holding company must be well capitalized and well managed, as defined by regulation, and all of its depository institution subsidiaries must have achieved a rating of satisfactory or better with respect to meeting community credit needs.

     Pursuant to the GLBA, financial holding companies are permitted to engage in activities that are “financial in nature” or incidental or complementary thereto and not a substantial risk to the safety and soundness of the depository institution or the financial system in general, as determined by the Federal Reserve Board. The GLBA identifies several activities as “financial in nature,” including, among others, insurance underwriting and agency, investment advisory services, merchant banking and underwriting, and dealing or making a market in securities. Being designated a financial holding company will allow insurance companies, securities brokers and other types of financial companies to affiliate with and/or acquire depository institutions. Old Line Bancshares, Inc. does not currently intend to become a financial holding company.

     Under Maryland law, an existing bank holding company that desires to acquire a Maryland state-chartered bank or trust company, a federally-chartered bank with its main office in Maryland, or a bank holding company that has its principal place of business in Maryland, must file an application with the Maryland Commissioner of Financial Regulation. In approving the application, the Maryland Commissioner of Financial Regulation must consider whether the acquisition may be detrimental to the safety and soundness of the entity being acquired or whether the acquisition may result in an undue concentration of resources or a substantial reduction in competition in Maryland. The Maryland Commissioner of Financial Regulation may not approve an acquisition if, on consummation of the transaction, the acquiring company, together with all its insured depository institution affiliates, would control 30% or more of the total amount of deposits of insured depository institutions in Maryland. The Maryland Commissioner of Financial Regulation has authority to adopt by regulation a procedure to waive this requirement for good cause. In a transaction for which approval of the Maryland Commissioner of Financial Regulation is not required due to an exemption under Maryland law, or for which federal law authorizes the transaction without application to the Maryland Commissioner of Financial Regulation, the parties to the acquisition must provide written notice to the Maryland Commissioner of Financial Regulation at least 15 days before the effective date of the transaction.

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

Old Line Bank

     Old Line Bank is a Maryland chartered trust company (with all powers of a commercial bank), is a member of the Federal Reserve System (a “state member bank”) and the Bank Insurance Fund of the FDIC insures its deposit accounts up to the maximum legal limits of the FDIC. It is subject to regulation, supervision and regular examination by the Maryland Commissioner of Financial Regulation and the Federal Reserve Board. The regulations of these various agencies govern most aspects of Old Line Bank’s business, including required reserves against deposits, loans, investments, mergers and acquisitions, borrowing, dividends and location and number of branch offices. The laws and regulations governing Old Line Bank generally have been promulgated to protect depositors and the deposit insurance funds, and not for the purpose of protecting stockholders.

Branching and Interstate Banking

     The federal banking agencies are authorized to approve interstate bank merger transactions without regard to whether such transactions are prohibited by the law of any state, unless the home state of one of the banks has opted out of the interstate bank merger provisions of the Riegle-Neal Act by adopting a law after the date of enactment of the Riegle-Neal Act and prior to June 1, 1997 which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits such acquisitions. Such interstate bank

mergers and branch acquisitions are also subject to the nationwide and statewide insured deposit concentration limitations described in the Riegle-Neal Act.

     The Riegle-Neal Act authorizes the federal banking agencies to approve interstate branching de novo by national and state banks in states that specifically allow for such branching. The District of Columbia, Maryland and Virginia have all enacted laws that permit interstate acquisitions of banks and bank branches and permit out-of-state banks to establish de novo branches.

Gramm-Leach-Bliley Act

     The Gramm-Leach-Bliley Act (the “GLBA”) altered substantially the statutory framework for providing banking and other financial services in the United States of America. The GLBA, among other things, eliminated many of the restrictions on affiliations among banks and securities firms, insurance firms, and other financial service providers.

     The GLBA also provides protections against the transfer and use by financial institutions of consumers’ nonpublic personal information. A financial institution must provide to its customers, at the beginning of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. The privacy provisions generally prohibit a financial institution from providing a customer’s personal financial information to unaffiliated third parties unless the institution discloses to the customer that the information may be so provided and the customer is given the opportunity to opt out of such disclosure.

Capital Adequacy Guidelines

     The Federal Reserve Board and the FDIC have adopted risk based capital adequacy guidelines pursuant to which they assess the adequacy of capital in examining and supervising banks and in analyzing bank regulatory applications. Risk-based capital requirements determine the adequacy of capital based on the risk inherent in various classes of assets and off-balance sheet items.

     State member banks are expected to meet a minimum ratio of total qualifying capital (the sum of core capital (Tier 1) and supplementary capital (Tier 2)) to risk weighted assets of 8%. At least half of this amount (4%) should be in the form of core capital. In general, this requirement is similar to the capital that a bank must have in order to be considered “adequately capitalized” under the prompt corrective action regulations. See “Prompt Corrective Action.” Old Line Bank currently complies with this minimum requirement.

     Tier 1 Capital generally consists of the sum of common stockholders’ equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stock which may be included as Tier 1 Capital), less goodwill, without adjustment for changes in the market value of securities classified as “available for sale” in accordance with FAS 115. Tier 2 Capital consists of the following: hybrid capital instruments; perpetual preferred stock which is not otherwise eligible to be included as Tier 1 Capital; term subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics, with the categories ranging from 0% (requiring no risk-based capital) for assets such as cash, to 100% for the bulk of assets which are typically held by a commercial bank, including certain multi-family residential and commercial real estate loans, commercial business loans and consumer loans. Residential first mortgage loans on one to four family residential real estate and certain seasoned multi-family residential real estate loans, which are not 90 days or more past-due or non-performing and which have been made in accordance with prudent underwriting standards are assigned a 50% level in the risk-weighing system, as are certain privately-issued mortgage-backed securities representing indirect ownership of such loans. Off-balance sheet items also are adjusted to take into account certain risk characteristics.

     In addition to the risk-based capital requirements, the Federal Reserve Board has established a minimum 3.0% Leverage Capital Ratio (Tier 1 Capital to total adjusted assets) requirement for the most highly-rated banks, with an additional cushion of at least 100 to 200 basis points for all other banks, which effectively increases the minimum Leverage Capital Ratio for such other banks to 4.0% — 5.0% or more. The highest-rated banks are those that are not anticipating or experiencing significant growth and have well diversified risk, including no undue

interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, those which are considered a strong banking organization. A bank having less than the minimum Leverage Capital Ratio requirement shall, within 60 days of the date as of which it fails to comply with such requirement, submit a reasonable plan describing the means and timing by which the bank shall achieve its minimum Leverage Capital Ratio requirement. A bank which fails to file such plan is deemed to be operating in an unsafe and unsound manner, and could be subject to a cease-and-desist order. Any insured depository institution with a Leverage Capital Ratio that is less than 2.0% is deemed to be operating in an unsafe or unsound condition pursuant to Section 8(a) of the Federal Deposit Insurance Act (the “FDIA”) and is subject to potential termination of deposit insurance. However, such an institution will not be subject to an enforcement proceeding solely on account of its capital ratios if it has entered into and is in compliance with a written agreement to increase its Leverage Capital Ratio and to take such other action as may be necessary for the institution to be operated in a safe and sound manner. The capital regulations also provide, among other things, for the issuance of a capital directive, which is a final order issued to a bank that fails to maintain minimum capital or to restore its capital to the minimum capital requirement within a specified time period.

Prompt Corrective Action

     Under Section 38 of the FDIA, each federal banking agency is required to implement a system of prompt corrective action for institutions that it regulates. The federal banking agencies have promulgated substantially similar regulations to implement the system of prompt corrective action established by Section 38 of the FDIA. Under the regulations, a bank will be deemed to be: (i) “well capitalized” if it has a Total Risk Based Capital Ratio of 10.0% or more, a Tier 1 Risk Based Capital Ratio of 6.0% or more, a Leverage Capital Ratio of 5.0% or more and is not subject to any written capital order or directive; (ii) “adequately capitalized” if it has a Total Risk Based Capital Ratio of 8.0% or more, a Tier 1 Risk Based Capital Ratio of 4.0% or more and a Tier 1 Leverage Capital Ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of “well capitalized;” (iii) “undercapitalized” if it has a Total Risk Based Capital Ratio that is less than 8.0%, a Tier 1 Risk based Capital Ratio that is less than 4.0% or a Leverage Capital Ratio that is less than 4.0% (3.0% under certain circumstances); (iv) “significantly undercapitalized” if it has a Total Risk Based Capital Ratio that is less than 6.0%, a Tier 1 Risk Based Capital Ratio that is less than 3.0% or a Leverage Capital Ratio that is less than 3.0%; and (v) “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%.

     An institution generally must file a written capital restoration plan which meets specified requirements with an appropriate federal banking agency within 45 days of the date the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. A federal banking agency must provide the institution with written notice of approval or disapproval within 60 days after receiving a capital restoration plan, subject to extensions by the applicable agency.

     An institution that is required to submit a capital restoration plan must concurrently submit a performance guaranty by each company that controls the institution. Such guaranty will be limited to the lesser of (i) an amount equal to 5.0% of the institution’s total assets at the time the institution was notified or deemed to have notice that it was undercapitalized or (ii) the amount necessary at such time to restore the relevant capital measures of the institution to the levels required for the institution to be classified as adequately capitalized. Such a guaranty shall expire after the federal banking agency notifies the institution that it has remained adequately capitalized for each of four consecutive calendar quarters. An institution which fails to submit a written capital restoration plan within the requisite period, including any required performance guaranty, or fails in any material respect to implement a capital restoration plan, will be subject to the restrictions in Section 38 of the FDIA which are applicable to significantly undercapitalized institutions.

     A “critically undercapitalized institution” is to be placed in conservatorship or receivership within 90 days unless the FDIC formally determines that forbearance from such action would better protect the deposit insurance fund. Unless the FDIC or other appropriate federal banking regulatory agency makes specific further findings and certifies that the institution is viable and is not expected to fail, an institution that remains critically undercapitalized on average during the fourth calendar quarter after the date it becomes critically undercapitalized must be placed in receivership. The general rule is that the FDIC will be appointed as receiver within 90 days after a bank becomes critically undercapitalized unless extremely good cause is shown and the federal regulators agree to an extension. In general, good

cause is defined as capital that has been raised and is immediately available for infusion into the bank except for certain technical requirements that may delay the infusion for a period of time beyond the 90 day time period.

     Immediately upon becoming undercapitalized, an institution will become subject to the provisions of Section 38 of the FDIA, which (i) restrict payment of capital distributions and management fees; (ii) require that the appropriate federal banking agency monitor the condition of the institution and its efforts to restore its capital; (iii) require submission of a capital restoration plan; (iv) restrict the growth of the institution’s assets; and (v) require prior approval of certain expansion proposals. The appropriate federal banking agency for an undercapitalized institution also may take any number of discretionary supervisory actions if the agency determines that any of these actions is necessary to resolve the problems of the institution at the least possible long-term cost to the deposit insurance fund, subject in certain cases to specified procedures. These discretionary supervisory actions include: requiring the institution to raise additional capital, restricting transactions with affiliates, requiring divestiture of the institution or the sale of the institution to a willing purchaser, and any other supervisory action that the agency deems appropriate. These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions.

     Additionally, under Section 11(c)(5) of the FDIA, a conservator or receiver may be appointed for an institution where: (i) an institution’s obligations exceed its assets; (ii) there is substantial dissipation of the institution’s assets or earnings as a result of any violation of law or any unsafe or unsound practice; (iii) the institution is in an unsafe or unsound condition; (iv) there is a willful violation of a cease-and-desist order; (v) the institution is unable to pay its obligations in the ordinary course of business; (vi) losses or threatened losses deplete all or substantially all of an institution’s capital, and there is no reasonable prospect of becoming “adequately capitalized” without assistance; (vii) there is any violation of law or unsafe or unsound practice or condition that is likely to cause insolvency or substantial dissipation of assets or earnings, weaken the institution’s condition, or otherwise seriously prejudice the interests of depositors or the insurance fund; (viii) an institution ceases to be insured; (ix) the institution is undercapitalized and has no reasonable prospect that it will become adequately capitalized, fails to become adequately capitalized when required to do so, or fails to submit or materially implement a capital restoration plan; or (x) the institution is critically undercapitalized or otherwise has substantially insufficient capital.

     Currently, Old Line Bank is well capitalized under the prompt corrective actions regulations.

Regulatory Enforcement Authority

     Federal banking law grants substantial enforcement powers to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

Transactions with Affiliates and Insiders

     Maryland law imposes restrictions on certain transactions with affiliates of Maryland commercial banks. Generally, under Maryland law, a director, officer or employee of a commercial bank may not borrow, directly or indirectly, any money from the bank, unless the loan has been approved by a resolution adopted by and recorded in the minutes of the board of directors of the bank, or the executive committee of the bank, if that committee is authorized to make loans. If the executive committee approves such a loan, the loan approval must be reported to the board of directors at its next meeting. Certain commercial loans made to directors of a bank and certain consumer loans made to non-officer employees of the bank are exempt from the law’s coverage.

     In addition, Old Line Bank is subject to the provisions of Section 23A of the Federal Reserve Act, which limits the amount of loans or extensions of credit to, investments in, or certain other transactions with, affiliates, and limits the amount of advances to third parties collateralized by the securities or obligations of affiliates. Section 23A limits the aggregate amount of transactions with any individual affiliate to ten percent (10%) of the capital and surplus of Old Line Bank and also limits the aggregate amount of transactions with all affiliates to twenty percent

(20%) of capital and surplus. Loans and certain other extensions of credit to affiliates are required to be secured by collateral in an amount and of a type described in Section 23A, and the purchase of low quality assets from affiliates is generally prohibited.

     Old Line Bank also is subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution and or its subsidiaries, as those prevailing at the time for comparable transactions with non-affiliated entities. In the absence of comparable transactions, such transactions may only occur under terms and circumstances, including credit standards that in good faith would be offered to or would apply to non-affiliated companies.

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

Loans to One Borrower

     Old Line Bank is subject to the statutory and regulatory limits on the extension of credit to one borrower. Generally, the maximum amount of total outstanding loans that a Maryland chartered trust company may have to any one borrower at any one time is 15% of Old Line Bank’s unimpaired capital and surplus.

Liquidity

     Old Line Bank is subject to the reserve requirements imposed by the State of Maryland. A Maryland commercial bank is required to have at all times a reserve equal to at least 15% of its demand deposits. Old Line Bank is also subject to the reserve requirements of Federal Reserve Board Regulation D, which applies to all depository institutions. Specifically, as of December 31, 2005, amounts in transaction accounts above $7,800,000 and up to $48,300,000 must have reserves held against them in the ratio of three percent of the amount. Amounts above $48,300,000 require reserves of $1,215,000 plus 10 percent of the amount in excess of $48,300,000. The Maryland reserve requirements may be used to satisfy the requirements of Federal Reserve Regulation D. Old Line Bank is in compliance with its reserve requirements.

Dividends

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

Community Reinvestment Act

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

USA Patriot Act

     On October 26, 2001, President Bush signed into law comprehensive anti-terrorism legislation known as the USA Patriot Act of 2001 (the “USA Patriot Act”). Title III of the USA Patriot Act substantially broadened the scope of U.S. anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The U.S. Treasury Department (“Treasury”) has issued a number of implementing regulations that apply various requirements of the USA Patriot Act to financial institutions such as Old Line Bank. Those regulations impose new obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. Treasury is expected to issue a number of additional regulations that will further clarify the USA Patriot Act’s requirements.

     Failure of a financial institution to comply with the USA Patriot Act’s requirements could have serious legal and reputational consequences for the institution. Old Line Bank has adopted appropriate policies, procedures and controls to address compliance with the requirements of the USA Patriot Act under the existing regulations and will continue to revise and update its policies, procedures and controls to reflect changes required by the USA Patriot Act and Treasury’s regulations.

Forward Looking Statements

     Some of the matters discussed in this annual report including under the captions “Business of Old Line Bancshares, Inc.,” “Business of Old Line Bank,” “Risk Factors”, and “Management’s Discussion And Analysis Of Financial Condition And Results Of Operations” and elsewhere in this annual report include forward-looking statements. These forward-looking statements include statements regarding profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk and financial and other goals. 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. When you read a forward-looking statement, you should keep in mind the risk factors described below and any other information contained in this annual report which identifies a risk or uncertainty. Our actual results and the actual outcome of our expectations and strategies could be different from that described in this annual report because of these risks and uncertainties and you should not put undue reliance on any forward-looking statements. All forward-looking statements speak only as of the date of this filing, and we undertake no obligation to make any revisions to the forward-looking statements to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events.

Risk Factors

     You should consider carefully the following risks, along with other information contained in this Form 10-KSB. The risks and uncertainties described below are not the only ones that may affect us. Additional risks and uncertainties also may adversely affect our business and operations including those discussed in Item 6-Management’s Discussion and Analysis of Financial Condition and Results of Operations. If any of the following events actually occur, our business and financial results could be materially and adversely affected.

     We depend on the services of key personnel. The loss of any of these personnel could disrupt our operations and our business could suffer. Our success depends substantially on the skills and abilities of our senior management team, including Mr. Cornelsen, our President and Chief Executive Officer, Mr. Burnett our Senior Vice President and Chief Lending Officer, and Ms. Rush our Senior Vice President, Chief Financial Officer and Chief Credit Officer. They provide valuable services to us and would be difficult to replace. Although we have entered into employment agreements with these executives, the existence of such agreements does not assure that we will be able to retain their services.

     Also, our growth and success and our anticipated future growth and success, in a large part, is due and we anticipate will be due to the relationships maintained by our banking executives with our customers. The loss of services of one or more of these executives or other key employees could have a material adverse effect on our operations and our business could suffer. The three experienced commercial lenders that we recently hired are not a

party to any employment agreement with us and they could terminate their employment with us at any time and for any reason.

     Our growth and expansion strategy may not be successful. We intend to use the proceeds of the October 2005 public offering to support the further growth in the level of our assets and deposits and to add branches to our banking network. Our ability to grow depends upon our ability to open new branches, attract new deposits, identify loan and investment opportunities and maintain adequate capital levels. We may also grow through acquisitions of existing financial institutions or branches thereof. There are no guarantees that our expansion strategies will be successful.

     We recently hired three experienced commercial lenders from a large southeastern bank. We anticipate they will be successful growing our loan portfolio. However, these lending officers do not have a track record with us and we cannot guaranty that they will be successful. We will incur additional costs associated with these individuals which will increase our non-interest expense. Over time, we anticipate that the interest income generated by their efforts will more than offset the additional expense, but there can be no assurance that will be the case. Also, we may be required to make additional investments in equipment and personnel to manage the anticipated and/or actual loan growth, which would also increase our non-interest expense.

     During the second quarter of 2006, we intend to move our main office from Waldorf, Maryland in Charles County, Maryland to Bowie, Maryland in Prince George’s County and to open a branch in Bowie. During the first quarter of 2007, we intend to open a new branch in Crofton in Anne Arundel County, Maryland. In January 2008, we intend to open a branch in College Park in Prince George’s County. With respect to these branches or any other branches that we may open, we may not be able to correctly identify profitable or growing markets for such new branches. If we were to acquire another financial institution or branch thereof, we may not be able to integrate the institution or branch into our operations. Also, the costs to start up new branch facilities or to acquire existing financial institutions or branches thereof, and the additional costs to operate these facilities, will increase our non-interest expense. It may also be difficult to adequately and profitably manage the anticipated growth from the new branches or acquisitions and we may not be able to maintain the relatively low levels of charge-offs and nonperforming loans that we have experienced.

     If we grow too quickly and are not able to control costs and maintain asset quality, growth could materially adversely affect our financial performance.

     Our focus on commercial and real estate loans may increase the risk of credit losses. We offer a variety of loans including commercial business loans, commercial real estate loans, construction loans, home equity loans and consumer loans, which includes luxury boat financing. We secure many of our loans with real estate (both residential and commercial) in the Maryland suburbs of Washington, D.C. We believe our credit underwriting adequately considers the underlying collateral in the evaluation process, however a major change in the real estate market could have an adverse effect on our customers, which in turn could adversely impact us.

     Our marine brokerage division may not be successful. In February 2005, we established Old Line Marine as a division of Old Line Bank to serve as a boat loan broker and to originate loans for Old Line Bank. The establishment of this division increased non-interest expense by $196,000 for the year ended December 31, 2005 and increased non-interest revenue by $111,000 during the same period. We may not be successful in generating sufficient volume from this division to exceed the division’s costs. Also, the financial institutions to whom we broker loans will, among other things, evaluate our financial performance and the underlying performance of the loans we broker. If any of the investors to whom we broker loans terminate their relationships with us and we are not able to enter into new relationships with other investors it could adversely affect the success of this division.

     If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease. We maintain an allowance for loan losses that we believe is adequate for absorbing any potential losses in our loan portfolio. Management, through a periodic review and consideration of the loan portfolio, determines the amount of the allowance for loan losses. Although we believe the allowance for loan losses is adequate to absorb probable losses in our loan portfolio, we cannot predict such losses or that our allowance will be adequate in the future. If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb future losses, our earnings will suffer.

     Our profitability depends on interest rates and changes in monetary policy may impact us. Our results of operations depend to a large extent on our “net interest income,” which is the difference between the interest expense incurred in connection with our interest-bearing liabilities, such as interest on deposit accounts, and the interest income received from our interest-earning assets, such as loans and investment securities. Interest rates, because they are influenced by, among other things, expectations about future events, including the level of economic activity, federal monetary and fiscal policy, and geo-political stability, are not predictable or controllable. Additionally, competitive factors heavily influence the interest rates we can earn on our loan and investment portfolios and the interest rates we pay on our deposits. Community banks are often at a competitive disadvantage in managing their cost of funds compared to the large regional, super-regional or national banks that have access to the national and international capital markets. These factors influence our ability to maintain a stable net interest margin.

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

     The market value of our investments could negatively impact stockholders’ equity. Approximately 86.34% of our securities investment portfolio (and 8.24% of total assets) at December 31, 2005 has been designated as available for sale pursuant to Statement of Financial Accounting Standards (SFAS) No. 115 relating to accounting for investments. SFAS 115 requires that unrealized gains and losses in the estimated value of the available for sale portfolio be “marked to market” and reflected as a separate item in stockholders’ equity, net of tax. As of December 31, 2005, we had unrealized losses in our available for sale portfolio of $414,777 ($254,590 net of taxes). If the market value of the available for sale investment portfolio declines further, this will cause a corresponding decline in stockholders’ equity.

     Because Old Line Bank serves a limited market area in Maryland, an economic downturn in our market area could more adversely affect us than it affects our larger competitors that are more geographically diverse. Our current primary market area consists of the suburban Maryland (Washington, D.C. suburbs) counties of Prince George’s and Charles. We are expanding in Prince George’s County and Anne Arundel County, Maryland and may expand in contiguous northern and western counties, such as Montgomery County and Howard County, Maryland. However, broad geographic diversification is not currently part of our community bank focus. As a result, if our market area suffers an economic downturn, it may more severely affect our business and financial condition than it affects larger bank competitors. Our larger competitors serve more geographically diverse market areas, parts of which may not be affected by the same economic conditions that may exist in our market area.

     Old Line Bank faces substantial competition which could adversely affect our growth and operating results. Old Line Bank operates in a competitive market for financial services and faces intense competition from other financial institutions both in making loans and in attracting deposits. Many of these financial institutions have been in business for many years, are significantly larger, have established customer bases, have greater financial resources and lending limits than Old Line Bank, and are able to offer certain services that we are not able to offer.

     We face limits on our ability to lend. We are limited in the amount we can loan to a single borrower by the amount of our capital. Generally, under current law, we may lend up to 15% of our unimpaired capital and surplus to any one borrower. As of December 31, 2005, we were able to lend approximately $4.3 million to any one borrower. This amount is significantly less than that of many of our competitors and may discourage potential borrowers who have credit needs in excess of our legal lending limit from doing business with us. We generally try to accommodate larger loans by selling participations in those loans to other financial institutions, but this strategy is not always available. We may not be able to attract or maintain customers seeking larger loans and we may not be able to sell participations in such loans on terms we consider favorable.

     Our need to comply with extensive and complex governmental regulation could have an adverse effect on our business and our growth strategy. The banking industry is subject to extensive regulation by state and federal banking authorities. Many of these regulations are intended to protect depositors, the public or the FDIC insurance funds, not stockholders. Regulatory requirements affect our lending practices, capital structure, investment practices, dividend policy and many other aspects of our business. These requirements may constrain our rate of growth and changes in regulations could adversely affect us. The burden imposed by these federal and state regulations may place banks in general, and Old Line Bank specifically, at a competitive disadvantage compared to less regulated competitors. In addition, the cost of compliance with regulatory requirements could adversely affect our ability to operate profitably.

     In addition, because federal regulation of financial institutions changes regularly and is the subject of constant legislative debate, we cannot forecast how federal regulation of financial institutions may change in the future and impact our operations. Although Congress in recent years has sought to reduce the regulatory burden on financial institutions with respect to the approval of specific transactions, we fully expect that the financial institution industry will remain heavily regulated in the near future and that additional laws or regulations may be adopted further regulating specific banking practices.

     Our stock benefit plans will increase our expenses, which may reduce our profitability and stockholders’ equity. Pursuant to our compensation plans, we expect to grant additional stock options. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” which will apply to us beginning in 2006. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and requires such transactions be accounted for using a fair-value-based method and the resulting cost to be recognized in the financial statements over the option vesting periods. Recording compensation expense in our statement of income for stock options using the fair value method could have a significant negative effect on our reported financial results, particularly if we grant a significant number of options in future periods.

     The costs of being a public company are proportionately higher for small companies like us due to the requirement of the Sarbanes-Oxley Act. The Sarbanes-Oxley Act of 2002 and the related rules and regulations promulgated by Securities and Exchange Commission have increased the scope, complexity, and cost of corporate governance, reporting, and disclosure practices. These regulations are applicable to our company. We expect to experience increasing compliance costs, including costs related to internal controls, as a result of the Sarbanes-Oxley Act. These necessary costs are proportionately higher for a company of our size and will affect our profitability more than that of some of our larger competitors.

Item 2. Description of Property

     We acquired our headquarters, which is a full service banking branch and office facility located at 2995 Crain Highway in Waldorf, Maryland, in 1998 for $750,000, renovated the space at a cost of approximately $716,000, and moved our main office into it from our branch office located at 12080 Old Line Centre in Waldorf, Maryland. As an accommodation to the seller, we purchased this facility subject to a 99-year lease that we have paid in full. In 2004, we exercised the option to purchase the facility for $1.00. As further described below, we anticipate moving our headquarters from this location to the intersection of Pointer Ridge Road and Route 301 in Bowie, Maryland during the second quarter of 2006. We intend to retain our branch office at 2995 Crain Highway and plan to lease the remainder of the space in this building. We have not currently identified a tenant for this space.

     We continue to maintain a branch operation at the Old Line Centre location, and have done so since 1989. The lease, which commenced in August 1999, is a ten-year lease with two, five-year options. Payment terms on the lease are “triple net,” at $4,703 monthly with 1.5% annual increases.

     In 1995, we opened a branch at 15808 Livingston Road in Accokeek, Maryland in Prince George’s County in leased facilities. In March 2003, we purchased the Accokeek location for $155,877.

     Our Clinton, Maryland, Prince George’s County branch, located at 7801 Old Branch Avenue, was opened in September 2002 in leased space. Exclusive of the $825 in monthly rent, we pay no utilities or other expenses

associated with this facility. The lease incorporates increases in monthly rent beginning in October 2006 to $2,301, in October 2008 to $2,685 and 1.5% every year thereafter. The lease term is for a period of ten years, with three, five-year options.

     Our loan production office in College Park, Prince George’s County, Maryland is located in leased space on the fourth floor of a four story building located at 9658 Baltimore Avenue. The lease which commenced in August 2005 is for two years and six months. Payment terms on the lease are “triple net,” at $2,525 monthly, with 3% annual increases. We have also leased space for a branch on the first floor of this building commencing January 2008 at $5,000 monthly (“triple net”) with 3% annual increases. The term for this space is 10 years with two five year renewal terms.

     In the second quarter of 2006, we plan to move our main office facility from Waldorf, Maryland to the intersection of Pointer Ridge Road and U.S. Route 301 in Bowie, Maryland in Prince George’s County and to establish a branch in this facility. Pointer Ridge Office Investment, LLC, an entity 50% owned by us and in which we currently have a $837,436 investment, owns this property. Frank Lucente, a director of Old Line Bancshares, Inc. and Old Line Bank controls 25% of Pointer Ridge and controls the manager of Pointer Ridge. Pointer Ridge has acquired the property and is in the process of constructing a commercial office building containing approximately 40,000 square feet. We plan to lease approximately 50% of this building for our main office and a branch of Old Line Bank.

     In the first quarter of 2007, Old Line Bank plans to open a new branch in Crofton, Maryland in Anne Arundel County, located at 1641 Route 3 North, Crofton, Maryland. On July 7, 2004, Old Line Bank executed a lease agreement with Ridgley I, LLC, an unrelated entity, to lease 2,420 square feet of office space for a period of 10 years with three additional renewals for terms of 5 years. The lease commences 120 days after the landlord completes construction or the day Old Line Bank opens for business, whichever is sooner. Payment terms on the lease are $6,353 monthly with 2.5% annual increases. In addition to the monthly rent, we will pay any increase in taxes during the term of the lease and utilities. The space will be located in newly constructed space at the end of an existing strip center. We expect construction of the building in which the branch will be located to begin in the third or fourth quarter of 2006.

Item 3. Legal Proceedings

     From time to time, Old Line Bancshares, Inc. or Old Line Bank may be involved in litigation relating to claims arising out of its normal course of business. As of December 31, 2005, there were no material pending legal matters or litigation for Old Line Bank or Old Line Bancshares, Inc.

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

     No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2005.

PART II

Item 5. Market for Common Equity and Related Stock Matters

Common Stock Prices

     The table below shows the high and low sales information as reported on the Nasdaq Capital Market. The quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not represent actual transactions. The prices quoted were adjusted to reflect our 20% stock dividend paid March 24, 2005

		Sale Price Range
		High				Low
2004
First Quarter		$	10.00			$	9.03
Second Quarter			9.88				7.55
Third Quarter			9.58				7.88
Fourth Quarter			10.46				9.17
2005
First Quarter		$	12.50			$	9.79
Second Quarter			11.00				8.90
Third Quarter			11.00				9.60
Fourth Quarter			10.50				9.87

     As of December 31, 2005, there were 4,248,898.5 shares of common stock issued and outstanding held by approximately 296 stockholders of record. There were 172,620 shares of common stock issuable on the exercise of outstanding stock options 116,247 of which were exercisable. The remaining 56,373 are exercisable as follows:

Date Exercisable		# of Shares
August 1, 2006			6,400
December 31, 2006			18,508
August 1, 2007			6,400
December 31, 2007			12,265
August 1, 2008			6,400
August 1, 2009			6,400
Total			56,373

Dividends

     In February 2003, Old Line Bank paid a dividend of $0.075 per share. In March, June, September and December of 2004 and March and December of 2005, we paid a dividend of $0.025 per share, in June 2005, we paid a dividend of $0.024 per share and in September 2005 we paid a dividend of $0.026 per share.

     Our ability to pay dividends in the future will depend on the ability of Old Line Bank to pay dividends to us. Old Line Bank’s ability to continue paying dividends will depend on Old Line Bank’s compliance with certain dividend regulations imposed upon us by bank regulatory authorities. In addition, we will consider a number of other factors, including our income and financial condition, tax considerations, general business conditions and other factors before deciding to pay additional dividends in the future. There can be no assurance that we will continue to pay dividends to our stockholders.

Public Offering

     On October 17, 2005, our registration statements on Form SB-2 (SEC File No. 333-127792 and 333-129085) went effective with the Securities and Exchange Commission. Our offering of up to 2,096,538 shares of common stock, $0.01 par value per share, at $9.75 per share, commenced on October 18, 2005 and closed on October 21, 2005.

     The offering was underwritten on a best efforts basis by McKinnon & Company, Inc. We sold all of the shares offered, received gross proceeds of $20.4 million, and incurred $1.0 million in underwriting expenses and $241,675 in other expenses ($1.2 million in total expenses). As of December 31, 2005, we had expensed all of these costs. None of the expenses were directly or indirectly paid to any of our directors or officers, to any person that owns 10% or more of our common stock, or to any of our affiliates.

     From the effective date of the registration statements to December 31, 2005, we used the net offering proceeds as follows (000’s):

Net offering proceeds		$	19,178
Less:
Proceeds contributed to Old Line Bank			(15,687	)
Proceeds retained by Old Line Bancshares, Inc. for working capital		$	3,491

SELECTED FINANCIAL DATA

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

Year Ended December 31,		2005				2004				2003
		(Dollars in thousands, except per share data)
Income Statement Data:
Interest income		$	7,004			$	4,890			$	4,058
Interest expense			2,128				1,163				1,259
Net interest income			4,876				3,727				2,799
Provision for loan losses			204				220				162
Non-interest income			621				554				537
Non-interest expense			3,576				2,806				2,479
Income taxes			578				438				225
Net income			1,139				817				470
Per Share and Shares Outstanding Data:(1)
Basic net income		$	0.44			$	0.38			$	0.29
Fully diluted net income			0.44				0.38				0.28
Cash dividends declared			0.10				0.10				0.075
Book value at period end		$	7.89			$	6.33			$	6.08
Shares outstanding, period end			4,248,898.5				2,131,673				2,108,273
Average shares outstanding, basic			2,559,627				2,127,837				1,636,426
Average shares outstanding, diluted			2,588,952				2,163,915				1,674,360
Balance Sheet Data:
Total assets		$	169,028			$	113,569			$	89,536
Total loans, net			104,249				81,505				59,518
Total investment securities			16,130				17,817				19,185
Total deposits			119,672				88,965				69,325
Stockholders’ equity			33,516				13,494				12,828
Performance Ratios:
Return on average assets			0.85	%			0.82	%			0.58	%
Return on average equity			6.38	%			6.27	%			5.12	%
Net interest margin(2)			3.93	%			4.07	%			3.75	%
Asset Quality Ratios:
Allowance to period-end loans			.91	%			.91	%			0.91	%
Non-performing assets to total assets			.00	%			.00	%			0.00	%
Non-performing assets to provision for loan losses			.00	%			.00	%			0.00	%
Capital Ratios:
Tier I risk-based capital			27.5	%			15.4	%			19.4	%
Total risk-based capital			28.3	%			16.3	%			20.2	%
Leverage capital ratio			21.5	%			12.7	%			14.7	%
Total equity to total assets			20.0	%			12.0	%			14.4	%
Dividend payout ratio for period			23.5	%			26.1	%			17.1	%

     Item 6. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     All share amounts and dollar amounts per share with regard to the common stock have been adjusted, unless otherwise indicated, to reflect our 20% stock dividend paid on March 24, 2005.

Overview

     We are pleased to report that we once again achieved record earnings in 2005 of $1.1 million and earnings per share of $0.44 diluted and basic while exceeding $150 million in total assets. As outlined in the financial table below, we saw significant growth in net income, loans and deposits during the year. In addition to meeting our financial goals, we also accomplished several non-financial objectives that we believe will allow us to continue to support our future growth. Specifically, during the year we:

	•		Added a team of three experienced, highly skilled loan officers to our staff,
	•		Opened a new loan production office in College Park, Maryland,
	•		Executed the lease for a new branch location in College Park, Maryland,
	•		Established a boat loan origination division, Old Line Marine, to originate and broker luxury boat loans for a fee,
	•		Completed a public stock offering that generated net capital of $19.2 million and,
	•		Began construction of our new main office in Bowie, Maryland.

     We believe the new capital added in October 2005 will allow us to effectively service new and larger customer requirements, fund the infrastructure needed to support our growth and allow us to consider new opportunities to expand the organization. While we expect that this new capital may cause a decline in earnings per share in the short term, we believe that the effective deployment of these proceeds will vastly improve the long term rewards for our shareholders, employees and customers.

     Our only disappointment during the year was a delay in the establishment of the Crofton branch in Anne Arundel County, Maryland. As explained below, because of delays in obtaining the building permit for this location, we will not open this branch until at least the first quarter of 2007.

     The following summarizes the highlights of our financial performance for the twelve month period ended December 31, 2005 compared to the twelve month period ended December 31, 2004:

		Twelve months ended December 31,
		(Dollars in thousands)
		2005				2004				$ Change				% Change
Net income		$	1,139			$	817			$	322				39.41	%
Interest revenue			7,004				4,890				2,114				43.23
Interest expense			2,128				1,163				965				82.98
Net interest income after provision for loan losses			4,672				3,507				1,165				33.22
Non-interest revenue			621				554				67				12.09
Non-interest expense			3,576				2,806				770				27.44
Average interest earning assets			126,087				93,466				32,621				34.90
Average non interest bearing deposits			28,995				21,223				7,772				36.62
Average gross loans			90,085				69,701				20,384				29.24
Average interest bearing deposits			74,655				58,603				16,052				27.39
Interest Margin (1)			3.93	%			4.07	%			(0.14	)%			(3.44	)
Return on average equity			6.38	%			6.27	%			(0.11	)			(1.75	)
Earnings per share basic		$	0.44			$	0.38				0.06				15.79
Earnings per share diluted			0.44				0.38				0.06				15.79

Public Offering

     On October 21, 2005, we closed our public offering in which we sold 2,096,538 shares of common stock at a per share purchase price of $9.75. Our proceeds, after underwriters’ commissions and expenses, were $19.2 million. We used substantially all of the net offering proceeds to provide additional capital to Old Line Bank to support its growth and expansion. To date, we have invested these additional funds in liquid assets, specifically federal funds. Over time, we expect to deploy the additional funds into new loans. While the additional capital has had and should continue to have a positive impact on interest revenue and net interest income, we anticipate the increase in the number of shares will cause a negative impact on earnings per share until we can deploy these proceeds into loans.

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

          We believe a natural evolution of a community-focused bank like Old Line Bank is to expand the delivery channels via the branch network. We are planning to expand in Prince George’s County and Anne Arundel County, Maryland, and may expand in Charles County and contiguous northern and western counties, such as Montgomery County and Howard County, Maryland.

     Old Line Bancshares, Inc. owns a 50% equity investment in a real estate investment limited liability company named Pointer Ridge Office Investment, LLC. 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. Among other things, Pointer Ridge was organized to construct a commercial office building at the intersection of Pointer Ridge Road and Route 301 in Bowie, Maryland. Once completed, we intend to lease approximately half of this building for our main office (moving our existing main office from Waldorf, Maryland) and to operate a branch of Old Line Bank from this address.

     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 property. 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 $5.8 million to finance the construction of the building. Subject to the satisfaction of certain conditions precedent, the bank will agree 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 Banchsares, 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 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 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. Although the owner has informed us that he has resolved the engineering items, the owner has not yet received a building permit from Anne Arundel County. We expect the owner to begin construction in the third or fourth quarter of 2006 and we expect the branch to open in the first quarter of 2007.

     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 increase 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. During the fourth quarter of 2005, these individuals developed and established several new customer relationships for us that had a positive impact on deposit and loan growth. As a result of their efforts, we anticipate the bank will experience continued improvement in loan growth during 2006 and beyond. 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 $196,000 for the twelve months ended December 31, 2005 and increased non-interest revenue by $111,000 during the same period. During the twelve months ended December 31, 2005, this division had a negative impact on net income. We anticipate this division will reach profitability in 2006 and have a modest, positive impact on net income for the year.

     Other Opportunities

     We use the Internet and technology to augment our growth plans. Currently, we offer our customers image technology, telephone banking and Internet banking with on-line account access. We will continue to evaluate cost effective ways that technology can enhance our management, products and services.

     We plan to take advantage of strategic opportunities presented to us via mergers occurring in our marketplace. For example, we may purchase branches that other banks close or lease branch space from other banks. We currently have no specific plans regarding acquisitions of existing financial institutions or branches thereof.

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-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.

     2005 compared to 2004

     Net interest income after provision for loan losses for the year ended December 31, 2005 amounted to $4.7 million, which was $1.2 million or 34.29% greater than the 2004 level of $3.5 million. The increase was primarily attributable to a 34.87% or $32.6 million increase in total average interest earning assets to $126.1 million for the twelve months ended December 31, 2005 from $93.5 million for the twelve months ended December 31, 2004.

     Interest revenue increased from $4.9 million for the year ended December 31, 2004 to $7.0 million for the year ended December 31, 2005. Interest expense for all interest bearing liabilities amounted to $2.1 million in 2005, which was $964,700 higher than the 2004 level of $1.2 million. As discussed below and outlined in detail in the Rate/Volume Analysis, these changes were the result of substantial increases in earning assets and increasing market interest rates. The increase in earning assets was directly attributable to the increased legal lending limit, the addition of the three new loan officers in the College Park loan production office and increased business development efforts.

     Our net interest margin was 3.93% for the year ended December 31, 2005, as compared to 4.07% for the year ended December 31, 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 31 basis points from 5.31% in 2004 to 5.62% in

2005, and average interest-earning assets grew by $32.6 million. A 64 basis point increase of the yield on average interest-bearing liabilities from 1.80% in 2004 to 2.44% in 2005, and a $22.7 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 0.94% and on December 31, 2004 the federal funds rate was 1.97% and on December 31, 2005 it was 4.09%. The prime rate was 4.00% on January 1, 2004 and it was 5.25% on December 31, 2004 and on December 31, 2005 it was 7.25%.

     These increased interest rates allowed us to earn a 221 basis point higher average yield on our federal funds and a 46 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 64 basis points during the period. We expect improvement in our net interest margin during 2006 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.

     As the result of the addition of the three new loan officers in the College Park loan production office, increased recognition in the Prince George’s County market and with continued growth in deposits, we anticipate that we will continue to grow earning assets during 2006. We believe that the anticipated growth in earning assets, the change in the composition of earning assets as more funds are deployed to loans and the relatively low cost of funds will result in an increase in our interest income, although there is no assurance that this will be the case.

     2004 compared to 2003

     Net interest income after provision for loan losses for the year ended December 31, 2004 amounted to $3.5 million, which was $869,381 or 32.97% greater than the 2003 level of $2.6 million.

     Interest revenue increased from $4.1 million for the year ended December 31, 2003 to $4.9 million for the year ended December 31, 2004. The yield on interest earning assets was 5.31% in 2004, which was nine basis points less than the 2003 level of 5.40%.

     Average loans, net of allowance, were $69.0 million in 2004, compared to $51.2 million in 2003. The related interest income including fees from loans was $4.2 million in 2004, or $804,662 greater than the 2003 level of $3.4 million. The average yield on loans decreased to 5.95% in 2004 from 6.49% in 2003, as a result of the reduction in the prime rate. On December 31, 2002, the prime rate was 4.25%. By December 31, 2003, the prime rate had declined to 4.00% where it remained until July 2004. During this six month period of 2004, interest income and the average yield on the portfolio declined. During the period of July 2004 to December 2004, the prime rate increased to 5.00%. As a result, we began to see improvement in the loan yield, but this improvement was not sufficient to offset the earlier decline. Investment securities and other earning assets, such as federal funds sold, contributed $739,180 to interest income for the year ended December 31, 2004. This represents an increase of $27,181 over the 2003 level of $711,999. This increase was a result of higher average balances maintained in investment securities. These balances derived from the funds received in the equity offering and higher average deposit levels.

     Interest expense for all interest bearing liabilities amounted to $1.2 million in 2004, which was $95,538 lower than the 2003 level of $1.3 million. The cost of interest bearing liabilities was 1.80% in 2004 or 48 basis points lower than the 2003 level of 2.28%. The decrease in interest expense resulted from declining market interest rates exceeding the increase in interest bearing liabilities. Consistent with asset growth, average interest bearing funding sources (deposits and borrowed funds) grew to $64.6 million in 2004, which was $9.5 million greater than the 2003 level of $55.1 million. Average non-interest bearing deposits grew $4.6 million to $21.2 million at December 31, 2004 compared to $16.6 million at December 31, 2003.

     The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, stockholders’ equity and related income, expense and corresponding weighted average yields and rates. The average balances used in this table and other statistical data were calculated using average daily balances.

Average Balances, Interest and Yields

		2005															2004															2003
		Average												Average												Average
		balance				Interest				Yield				balance				Interest				Yield				balance				Interest				Yield
Assets:
Federal funds sold(1)		$	18,195,459			$	633,182				3.48	%		$	4,055,755			$	51,368				1.27	%		$	7,990,566			$	82,300				1.03	%
Interest-bearing deposits			57,260				2,124				3.71				551,093				16,746				3.04				629,041				14,759				2.35
Investment securities(1) (2)
U.S. Treasury			4,000,400				133,465				3.34				3,654,031				119,041				3.26				152,131				5,074				3.34
U.S. Agency			7,431,990				247,993				3.34				8,752,327				308,354				3.52				10,633,180				412,000				3.87
Mortgage-backed securities			2,146,501				84,139				3.92				2,988,771				118,088				3.95				2,721,922				101,186				3.72
Tax exempt securities			3,447,709				160,550				4.66				3,401,218				163,754				4.81				2,741,896				138,725				5.06
Other			1,607,775				45,912				2.86				1,015,507				35,097				3.46				492,883				24,242				4.92
Total investment securities			18,634,375				672,059				3.61				19,811,854				744,334				3.76				16,742,012				681,227				4.07
Loans:(3)
Commercial			13,050,801				999,552				7.66				9,224,604				648,870				7.03				6,421,338				528,249				8.23
Mortgage			54,257,380				3,582,824				6.60				39,958,732				2,388,944				5.98				27,023,348				1,731,030				6.41
Installment			22,776,395				1,190,587				5.23				20,517,755				1,112,861				5.42				18,209,333				1,091,574				5.99
Total loans			90,084,576				5,772,963				6.41				69,701,091				4,150,675				5.95				51,654,019				3,350,853				6.49
Allowance for loan losses			884,562				—								654,007				—								481,701				—
Total loans, net of allowance			89,200,014				5,772,963				6.47				69,047,084				4,150,675				6.01				51,172,318				3,350,853				6.55
Total interest-earning assets(1)			126,087,108				7,080,328				5.62				93,465,786				4,963,123				5.31				76,533,937				4,129,139				5.40
Noninterest-bearing cash			3,083,227												2,471,507												2,028,452
Premises and equipment			2,393,397												2,278,670												2,129,029
Other assets			3,102,641												1,108,945												1,040,509
Total assets(1)		$	134,666,373			$	7,080,328				5.26	%		$	99,324,908			$	4,963,123				5.00	%		$	81,731,927			$	4,129,139				5.05	%
Liabilities and Stockholders’ Equity:
Interest-bearing deposits
Savings		$	9,374,143			$	47,168				0.50			$	11,252,236			$	54,698				0.49			$	12,560,842			$	64,886				0.52
Money market and NOW			17,794,352				156,523				0.88				16,912,834				78,162				0.46				12,110,101				69,953				0.58
Other time deposits			47,486,890				1,587,004				3.34				30,438,116				800,697				2.63				26,375,442				928,560				3.52
Total interest-bearing deposits			74,655,385				1,790,695				2.40				58,603,186				933,557				1.59				51,046,385				1,063,399				2.08
Borrowed funds			12,624,230				337,258				2.67				6,036,503				229,696				3.81				4,053,425				195,392				4.82
Total interest-bearing liabilities			87,279,615				2,127,953				2.44				64,639,689				1,163,253				1.80				55,099,810				1,258,791				2.28
Non-interest-bearing deposits			28,995,265												21,222,852												16,643,727
			116,274,880				2,127,953				1.83				85,862,541				1,163,253				1.35				71,743,537				1,258,791				1.75
Other liabilities			536,458												431,255												795,882
Stockholders’ equity			17,855,035												13,031,112												9,192,508
Total liabilities and stockholders’ equity		$	134,666,373											$	99,324,908											$	81,731,927
Net interest spread(1)											3.18												3.51												3.11
Net interest income(1)						$	4,952,375				3.93	%						$	3,799,870				4.07	%						$	2,870,348				3.75	%

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

		Twelve months Ended December 31,												Twelve months Ended December 31,
		2005 compared to 2004												2004 compared to 2003
		Variance due to:												Variance due to:
		Total				Rate				Volume				Total				Rate				Volume
Interest Earning Assets:
Federal funds sold(1)		$	581,814			$	402,240			$	179,574			$	(30,932	)		$	9,597			$	(40,529	)
Interest bearing deposits			(14,622	)			391				(15,013	)			1,987				3,819				(1,832	)
Investment Securities(1)
U.S. Treasury			14,424				3,132				11,292				113,967				(2,996	)			116,963
U.S. Agency			(60,361	)			(13,885	)			(46,476	)			(103,646	)			(30,857	)			(72,789	)
Mortgage-backed securities			(33,949	)			(679	)			(33,270	)			16,902				6,975				9,927
Tax exempt securities			(3,204	)			(5,440	)			2,236				25,029				(8,332	)			33,361
Other			10,815				(9,677	)			20,492				10,855				(14,858	)			25,713
Loans:
Commercial			350,682				81,700				268,982				120,621				(110,087	)			230,708
Mortgage			1,193,880				338,821				855,059				657,914				(171,244	)			829,158
Installment			77,726				(44,692	)			122,418				21,287				(116,987	)			138,274
Total interest revenue(1)			2,117,205				751,911				1,365,294				833,984				(434,970	)			1,268,954
Interest-bearing liabilities
Savings			(7,530	)			1,673				(9,203	)			(10,188	)			(3,383	)			(6,805	)
Money market and NOW			78,361				74,306				4,055				8,209				(19,647	)			27,856
Other time deposits			786,307				337,924				448,383				(127,863	)			(270,869	)			143,006
Other borrowed funds			107,562				(143,430	)			250,992				34,304				(61,280	)			95,584
Total interest expense			964,700				270,473				694,227				(95,538	)			(355,179	)			259,641
Net interest income(1)		$	1,152,505			$	481,438			$	671,067			$	929,522			$	(79,791	)		$	1,009,313

     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 was $204,000 for the year ended December 31, 2005, as compared to $220,000 for the year ended December 31, 2004, a decrease of $16,000 or 7.27%. During the twelve 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.

     The provision for loan losses was $220,000 for the year ended December 31, 2004, as compared to $162,000 for the year ended December 31, 2003, an increase of $58,000 or 35.80%. 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.

     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 loan 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 0.91% of total loans at December 31, 2005, 2004 and 2003. We have 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:

Allowance for Loan Losses

Year Ended December 31,		2005				2004				2003
Balance, beginning of period		$	744,862			$	547,690			$	389,553
Provision for loan losses			204,000				220,000				162,000
Chargeoffs:
Commercial			—				(20,599	)			—
Mortgage			—				—				—
Consumer			(135	)			(18,408	)			(16,554	)
Total chargeoffs			(135	)			(39,007	)			(16,554	)
Recoveries:
Commercial			2,997				—				—
Mortgage			—				—				—
Consumer			2,982				16,179				12,691
Total recoveries			5,979				16,179				12,691
Net chargeoffs			5,844				(22,828	)			(3,863	)
Balance, end of period		$	954,706			$	744,862			$	547,690
Allowance for loan losses to gross loans			0.91	%			0.91	%			0.91	%
Ratio of net-chargeoffs during period to average loans outstanding during period			(0.006	%)			0.033	%			0.007	%

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

Allocation of Allowance for Loan Losses

December 31,		2005								2004								2003
						% of Loans								% of Loans								% of Loans
						in Each								in Each								in Each
		Amount				Category				Amount				Category				Amount				Category
Installment & others		$	6,995				0.57	%		$	7,120				0.72	%		$	9,840				1.29	%
Boat			148,045				21.22				148,411				25.35				141,826				31.04
Mortgage			483,245				60.21				401,585				60.27				278,329				53.89
Commercial			316,421				18.00				187,746				13.66				117,695				13.78
Total		$	954,706				100.00	%		$	744,862				100.00	%		$	547,690				100.00	%

     Non-interest Revenue

     2005 compared to 2004

     Non-interest revenue totaled $620,862 for the twelve months ended December 31, 2005, an increase of $66,661 or 12.03% from the 2004 amount of $554,201. Non-interest revenue for the twelve months ended December 31, 2005 included primarily fee income from service charges on deposit accounts, mortgage origination fees from a third party processor, credit card fees, ATM fees, letter of credit fees, and other loan fees. For the twelve months ended December 31, 2005, non-interest revenue also included $109,669 in broker origination fees from the marine division established in February 2005 and $78,358 of earnings on the $3.5 million investment in bank owned life insurance purchased in June 2005. The additions from the marine division and the bank owned life insurance were offset by an $86,834 reduction in miscellaneous loan fees and letter of credit fees, and a $10,365 reduction in mortgage origination fees. These reductions occurred because the dollar value of letters of credit that we issued decreased. We collected fewer miscellaneous fees on loans because we originated a lower number of construction loans and performed fewer inspections on properties under construction. Mortgage origination fees declined because of a rise in interest rates that caused a decrease in the refinancing of residential mortgages.

     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 and 2003. 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.

     In 2006, we anticipate the marine division will continue to increase income from broker origination fees. Because we anticipate the residential builders in our customer base will continue to construct new homes at approximately the same level as they did in 2005, we expect construction loan fees will remain stable. Additionally, we believe the demand in the commercial real estate market will remain stable. Therefore, other loan fees should remain constant. Because of the College Park loan production office and the new Bowie branch (which we anticipate will open in June 2006), we expect that customer relationships will grow. We anticipate this growth will cause an increase in service charges on deposit accounts.

     2004 compared to 2003

     Non-interest revenue for the twelve months ended December 31, 2004 and December 31, 2003 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. Non-interest revenue totaled $554,201 for the year ended December 31, 2004, or $17,122 or 3.19% higher than the 2003 amount of $537,079. The increase was primarily because of a $100,329 or 47.99% increase in other fees and commissions during the period offset by an $88,359 decline in gain on disposal of assets. Other fees and commissions consist of broker/origination fees, other loan fees and letter of credit fees. Other loan fees increased $133,549 to $224,883 for the twelve months ended December 31, 2004 compared to $91,334 for the twelve months ended December 31, 2003. This increase was primarily due to the increase in the dollar value of commitments accepted by customers during the period. Letter of credit fees increased $20,643 due to an increase in the dollar value of letters of credit issued. These increases were offset by a $61,857 decline in broker/origination fees. Broker fees declined because of a rise in interest rates that caused a decrease in the refinancing of residential mortgages. We had no gains on disposal of assets because we sold no assets during the period.

     Non-interest Expense

     2005 compared to 2004

     Non-interest expense was $3.6 million in 2005, which was $769,816 greater than the 2004 level of $2.8 million. Salaries and benefit costs amounted to $2.3 million in 2005, as compared to $1.7 million in 2004. During the past eighteen months, we increased staff to support our growth. In March 2004, we hired a new credit officer, in September 2004 a new branch manager, in February 2005 a new loan officer for the marine division, a new originator in the marine division in April 2005 and one in June 2005, and we hired three new loan officers for the College Park loan production office in August 2005. These items in addition to annual salary and bonus increases caused the increase in salaries and benefits.

     Occupancy expenses increased $33,352 or 16.46% in 2005. This increase was 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 $132,704 or 19.07% from $695,904 for the year ended December 31, 2004 to $828,608 for the year ended December 31, 2005. This was primarily the result 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 $14,341 during the year 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 $37,946 reduction in robbery, organizational and legal expenses and branch security costs. 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.

     In 2006, we anticipate non-interest expense will increase. In February 2005, we hired an individual to establish the boat brokerage division. In August 2005, we established the College Park loan production office and hired three loan officers. During the third or fourth quarter of 2006, we expect to begin hiring staff for the Crofton branch. We anticipate we will open this branch during the first quarter of 2007. During the second quarter of 2006, we plan to begin moving the Waldorf main office to Bowie, Maryland and expect to incur expenses related to this move. Also, during 2006, we will continue our efforts to comply with Sarbanes/Oxley Section 404 (relating to internal controls). We have one individual focused on this effort. We also will work to identify and, perhaps, open a new branch location. We expect to offset these increases with increases in non-interest income that derive from the boat brokerage business and continued increases in interest income through loan growth.

     2004 compared to 2003

     Non-interest expense was $2.8 million in 2004, which was $326,537 or 13.17% greater than the 2003 level of $2.5 million. Salaries and benefit costs amounted to $1.7 million in 2004, as compared to $1.4 million in 2003. Salaries and benefit expenses increased during the year because we hired a new credit officer in March 2004. Additionally, prior to September 2004, the individual responsible for overall branch administration was also

managing the Clinton branch. In September of 2004, we hired a new branch manager for Clinton. Salary and benefit expenses also increased because of annual payroll increases and bonuses.

     Occupancy expenses increased $3,060 in 2004 due to scheduled annual rental increases at the Old Line Centre branch.

     Other operating expenses increased $77,690 or 12.57% from $618,214 for the year ended December 31, 2003 to $695,904 for the year ended December 31, 2004. This increase occurred because of an approximately $30,000 increase in expenses associated with SEC filings, and Nasdaq fees incurred by the holding company that we did not have during the first nine months of 2003. Additionally, we incurred a $25,000 expense that represented the deductible on Old Line Bank’s robbery insurance policy because of a robbery in June. During the year, we also increased director compensation by $39,860. These increases were offset by an approximately $45,000 decrease in legal and organizational costs and a $25,000 reduction in security costs. During the year, we installed enhanced security equipment in all of our branches that caused the reduction in security costs. Data processing expenses increased by approximately $13,292 from $113,260 for the year ended December 31, 2003 compared to $126,552 for the period ended December 31, 2004. This increase occurred because of an increase in the number of customers and new services we began providing in 2004.

     Income Taxes

     2005 Compared to 2004

     Income tax expense was $577,651 (33.65% of pre-tax income) for 2005 as compared to $438,203 (34.92% of pre-tax income) for 2004.

     2004 Compared to 2003

     Income tax expense was $438,203 (34.92% of pre-tax income) for 2004 as compared to $224,616 (32.32% of pre-tax income) for 2003.

     Net Income

     2005 Compared to 2004

     Net income was $1,138,939 or $.44 basic and diluted earnings per common share for the year ended December 31, 2005, an increase of $322,298 or 39.47%, compared to net income of $816,641 for the same period during 2004. The increase in net income was the result of increases in net interest income of $1.2 million and non-interest revenue of $66,661, and a decrease in the provision for loan losses of $16,000. These changes were offset by an increase in non-interest expense of $769,816 and income taxes of $139,448.

     2004 Compared to 2003

     Net income was $816,641 or $0.38 basic and $0.38 diluted earnings per common share for the year ended December 31, 2004, an increase of $346,379 or 73.66%, compared to net income of $470,262 for the same period during 2003. The increase in net income was the result of increases in net interest income of $927,381 and non-interest revenue of $17,122, offset by increases in the provision of loan losses of $58,000, income tax expense of $213,587, and non-interest expense of $326,357.

Analysis of Financial Condition

     Investment Securities

     Our 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, Federal Home Loan Bank stock, Maryland Financial Bank stock and Atlantic Central

Bankers Bank stock. The portfolio provides a source of liquidity, collateral for repurchase agreements as well as a means of diversifying our earning asset portfolio. While we generally intend to hold the investment portfolio assets until maturity, we classify a significant portion of the portfolio as available for sale. We account for securities so classified at fair value and report the unrealized appreciation and depreciation as a separate component of stockholders’ equity, net of income tax effects. We account for securities classified in the held to maturity category at amortized cost. We invest 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 December 31, 2005 amounted to $16.1 million, a decrease of $1.7 million, or 9.55%, from the December 31, 2004 amount of $17.8 million. Available for sale investment securities decreased to $13.9 million at December 31, 2005 from $15.6 million at December 31, 2004. The decrease in the available for sale 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 funding. Held to maturity securities remained the same as reported on December 31, 2004 at $2.2 million on December 31, 2005. The carrying value of available for sale securities included net unrealized losses of $414,777 at December 31, 2005 (reflected as unrealized losses of $254,590 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, the increase in unrealized losses was a result of rising interest rates. As required under SFAS No. 115, we have evaluated securities with unrealized losses for an extended period of time and determined that these losses are temporary because we expect to hold them until maturity. As the maturity date moves closer and/or interest rates decline, the unrealized losses in the portfolio will decline or dissipate.

     The investment portfolio at December 31, 2004 amounted to $17.8 million, a decrease of $1.4 million, or 7.29%, from the December 31, 2003 amount of $19.2 million. Available for sale investment securities decreased to $15.6 million at December 31, 2004 from $17.4 million at December 31, 2003. Held to maturity securities increased to $2.2 million at December 31, 2004 from $1.8 million at December 31, 2003. The carrying value of available for sale securities included net unrealized losses of $141,229 at December 31, 2004 (reflected as unrealized losses of $90,386 in stockholders’ equity after deferred taxes) as compared to net unrealized losses of $109,732 ($69,914 net of taxes) as of December 31, 2003. In general, the increase in unrealized losses was a result of rising interest rates, the maturity of the securities or the fact that some of the securities were called.

     The following table sets forth a summary of the investment securities portfolio as of the periods indicated. Available for sale securities are reported at estimated fair value; held to maturity securities are reported at amortized cost.

Investment Securities
(Dollars in thousands)

December 31,		2005				2004				2003
Available For Sale Securities
U.S. Treasury		$	1,945			$	1,980			$	1,503
U.S. Agency			7,148				7,778				9,332
Tax exempt state, county and municipal			3,092				3,322				3,098
Mortgage-backed			1,741				2,532				3,448
Total Available for Sale Securities		$	13,926			$	15,612			$	17,381
Held To Maturity Securities
U.S. Treasury		$	2,002			$	2,003			$	1,804
Tax exempt state, county, and municipal			201				201				—
Total Held to Maturity Securities		$	2,203			$	2,204			$	1,804
Equity Securities		$	1,103			$	1,080			$	818

     The following table shows the maturities for the securities portfolio at December 31, 2005 and 2004.

Amortized Cost, Carrying Value and Average Yield

		Available for Sale												Held to Maturity
		Amortized				Market				Average				Amortized				Market				Average
December 31, 2005		Cost				Value				Yield				Cost				Value				Yield
Maturing
3 months or less		$	—			$	—							$	—			$	—
Over 3 months through 1 year			2,117,990				2,078,615				2.98	%			—				—
Over one to five years			11,191,747				10,834,907				3.28	%			2,002,061				1,948,047				3.40	%
Over five to ten years			1,031,151				1,012,589				3.41	%			—				—
Over ten years			—				—								201,384				197,596				4.91	%
		$	14,340,888			$	13,926,111							$	2,203,445			$	2,145,643
Pledged Securities		$	11,829,113			$	11,463,555

		Available for Sale												Held to Maturity
		Amortized				Market				Average				Amortized				Market				Average
December 31, 2004		Cost				Value				Yield				Cost				Value				Yield
Maturing
3 months or less		$	—			$	—							$	—			$	—
Over 3 months through 1 year			575,557				575,035				3.74	%			—				—
Over one to five years			11,789,877				11,668,087				3.22	%			2,002,773				1,997,891				3.40	%
Over five to ten years			3,388,206				3,369,289				3.66	%			—				—
Over ten years			—				—								201,517				196,815				4.91	%
		$	15,753,640			$	15,612,411							$	2,204,290			$	2,194,706
Pledged Securities		$	12,824,536			$	12,686,914

     Contractual maturities of mortgage-backed securities are not reliable indicators of their expected life because mortgage borrowers have the right to prepay mortgages at any time. Additionally, the issuer may call the callable agency securities listed above prior to the contractual maturity.

     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:

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. In March 2006, the members executed an Amendment to the Operating Agreement that named Chesapeake Custom Homes, LLC as Manager.

     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 is constructing a commercial office building containing approximately 40,000 square feet. Old Line Bancshares, Inc. plans to lease approximately 50% of the 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 and December 16, 2005 Old Line Bancshares, Inc. transferred additional capital contributions of $182,500 and $105,000, respectively, to Pointer Ridge. On December 31, 2005, Old Line Bancshares, Inc.’s total investment in Pointer Ridge was $837,436.

     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 on the property. The contract sum is four million one hundred eight thousand dollars ($4,108,000). Waverly began construction of the project in May 2005 and the building is partially complete. We anticipate Waverly will complete construction in May 2006.

     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 $5.8 million to finance the construction of the building. Subject to the satisfaction of certain conditions precedent, the bank 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.

     The loan agreement provides that on or before December 1, 2006, subject to the satisfaction of certain conditions precedent, Pointer Ridge may convert the construction loan to either a five-year or ten- year permanent loan. If converted, the permanent loan will accrue interest monthly at an interest rate equal to one month LIBOR plus 185 basis points per annum. The principal amount of the permanent loan will be repaid in 60 or 120 consecutive level monthly installments, as applicable, with a balloon payment of principal on the maturity date. Payments of principal will be based on a 25-year amortization.

     Pursuant to the terms of a guaranty between the bank and Old Line Bancshares, Inc. dated November 3, 2005, 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.

     Specifically, if Pointer Ridge (a) fails to complete the building free of liens except those permitted by any of the loan documents and by the completion date in accordance with the plans and specifications and all material laws, rules, regulations and requirements of all governmental authorities having jurisdiction, or (b) fails to keep the property free from all liens and claims that may be filed or made for performing work and labor thereon or furnishing materials therefor in connection with the construction thereof, or both, except to the extent any of the same are permitted by the loan documents, Old Line Bancshares, Inc., provided that the bank continues to advance sums under the loan agreement in the manner therein provided, would become primarily liable for the construction of the building in accordance with the terms of the loan agreement and for the payment of up to fifty percent (50%) of all costs and expenses incurred in completing the construction of the building. At December 31, 2005, Pointer Ridge had borrowed $1.8 million under the loan agreement at an interest rate of 6.22%.

     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 $22.7 million or 27.85% to $104.2 million at December 31, 2005 from $81.5 million at December 31, 2004. Commercial business loans increased by $7.7 million (68.75%), commercial real estate loans (generally owner-occupied) increased by $14.2 million (41.4%), residential real estate loans (generally home equity and fixed rate home improvement loans) increased by $1.3 million (15.29%), real estate construction loans decreased by $1.8 million (27.27%) and installment loans increased by $1.4 million (6.54%) from their respective balances at December 31, 2004.

     The loan portfolio, net of allowance, unearned fees and origination costs increased $22.0 million or 36.97% to $81.5 million at December 31, 2004 from $59.5 million at December 31, 2003. Commercial business loans increased by $2.9 million (34.94%), commercial real estate loans (generally owner-occupied) increased by $7.4 million (27.51%), residential real estate loans (generally home equity and fixed rate home improvement loans) increased by $4.9 million (136.11%), real estate construction loans increased by $4.8 million (266.67%) and installment loans increased by $2 million (10.31%) from their respective balances at December 31, 2003.

     During the fourth quarter of 2005, we began to see loan and deposit growth generated from the team of lenders we hired for the College Park loan production office in August 2005. We anticipate that these individuals, as well as the remainder of our staff, will continue to focus their efforts on business development in 2006 and continue to grow the loan portfolio. The October 2005 capital offering increased our legal lending limit to $4.5 million effective January 2006. We expect that this increased limit will also allow us to originate and retain loans with a higher dollar value.

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

Loan Portfolio
(Dollars in thousands)

December 31,		2005												2004								2003
Real Estate
Commercial		$	48,530				46.29	%		$	34,300				41.86	%		$	26,859				44.87	%
Construction			4,823				4.60				6,551				8.00				1,762				2.94
Residential			9,767				9.32				8,530				10.41				3,641				6.08
Commercial			18,871				18.00				11,190				13.66				8,251				13.78
Installment			22,842				21.79				21,356				26.07				19,355				32.33
		$	104,833				100.00	%		$	81,927				100.00	%		$	59,868				100.00	%
Allowance for loan losses			(955	)							(745	)							(547	)
Net deferred loan (fees) and costs			371								323								197
		$	104,249							$	81,505							$	59,518

The following table presents the maturities or repricing periods of selected loans outstanding at December 31, 2005:

		Loan Maturity Distribution at December 31, 2005
		1 year or less				1-5 years				After 5 years				Total
						(Dollars in thousands)
Real Estate
Commercial		$	16,628			$	28,119			$	3,783			$	48,530
Construction			4,823				—				—				4,823
Residential			8,245				1,058				464				9,767
Commercial			12,030				6,708				133				18,871
Installment			144				298				22,400				22,842
Total Loans		$	41,870			$	36,183			$	26,780			$	104,833
Fixed Rates			6,070				26,556				24,075				56,701
Variable Rates			35,800				9,627				2,705				48,132
Total Loans		$	41,870			$	36,183			$	26,780			$	104,833