UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2007

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

Old Line Bancshares, Inc.

(Exact name of registrant as specified in its charter)

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

1525 Pointer Ridge Place		20716
Bowie, Maryland		(Zip Code)
(Address of principal executive offices)

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

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

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

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

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

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

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ     No o

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

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

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

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

The aggregate market value of the common equity held by non-affiliates was $37,218,680 as of June 29, 2007, based on a sales price of $9.75 per share of Common Stock, which is the sales price at which the Common Stock was last traded on June 29, 2007 as reported by the NASDAQ Stock Market LLC.

The number of shares outstanding of the issuer’s Common Stock was 4,049,951 as of February 29, 2008.

Portions of the Proxy Statement for the 2008 Annual Meeting of Stockholders of Old Line Bancshares, Inc., to be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year, are incorporated by reference in Part III of this Annual Report on Form 10-K.

 

 

OLD LINE BANCSHARES, INC.

ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007

TABLE OF CONTENTS

				Page #
Part I
Item 1.		Business			1
Item 1A.		Risk Factors			18
Item 1B.		Unresolved Staff Comments			21
Item 2.		Properties			21
Item 3.		Legal Proceedings			22
Item 4.		Submission of Matters to a Vote of Security Holders			22
Part II
Item 5.		Market for Registrant’s Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities			23
Item 6.		Selected Financial Data			25
Item 7.		Management’s Discussion and Analysis of Financial Condition And Results of Operations			26
Item 7A.		Quantitative and Qualitative Disclosure About Market Risk			54
Item 8.		Financial Statements and Supplementary Data			57
		Report of Independent Registered Public Accounting Firm
		Consolidated Balance Sheets December 31, 2007, 2006 and 2005
		Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005
		Consolidated Statement of Changes in Stockholders’ Equity For the years ended December 31, 2007, 2006 and 2005
		Consolidated Statements of Cash Flows For the years ended December 31, 2007, 2006 and 2005
		Notes to Consolidated Financial Statements
Item 9.		Changes in and Disagreements with Accountants on Accounting And Financial Disclosure			86
Item 9A.		Controls and Procedures			86
Item 9B.		Other Information			86
PART III
Item 10.		Directors, Executive Officers and Corporate Governance			87
Item 11.		Executive Compensation			87
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			87
Item 13.		Certain Relationships and Related Transactions and Director Independence.			88
Item 14.		Principal Accounting Fees and Services			88
PART IV
Item 15.		Exhibits, Financial Statements Schedules			89

PART I

Item 1. 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. The primary business of Old Line Bancshares, Inc. is to own all of the capital stock 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 to own all of the capital stock of Old Line Bank. We also have an approximately $806,000 investment in a real estate investment limited liability company named Pointer Ridge Office Investment, LLC (“Pointer Ridge”). We own 50% of Pointer Ridge.

     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.

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

Recent Business Developments

     Branch Expansion Developments

     In June 2007, we opened a new branch in Greenbelt (Prince George’s County), Maryland. Initially, we opened this branch on the 1^st floor of an office building located at 6301 Ivy Lane, Greenbelt, Maryland. Upon completion of construction of a bank building, we plan to move this branch to the southwest corner of the intersection of Kenilworth Avenue and Ivy Lane, Greenbelt, Maryland. In April 2007, we hired the Branch Manger for this location and hired the remainder of the staff in May and September of 2007.

     In July 2007, we identified a site for a second branch location in Bowie, Maryland. Currently, the landlord is preparing a pad site. Assuming the landlord completes the preparation of the pad site and meets all of the conditions of the lease, we plan to lease the pad site and construct a branch. The pad site is located in the Fairwood Office Park in Bowie, Maryland. We anticipate we will open this branch in late 2008 or early 2009.

     In addition, in March 2008, we opened a new branch in College Park (Prince George’s County), Maryland at 9658 Baltimore Avenue, College Park Maryland. This branch is in the same building as the loan production office that houses our team of loan officers. We hired the Branch Manager and staff for this location in February 2008.

      Additional Personnel — Commercial, Construction and Commercial Real Estate Lending

     In September 2007, we hired a new Vice President of Commercial Lending for our Waldorf office. This individual’s professional background includes a twenty year career with a large, regional financial institution where she earned successive promotions and had numerous professional accomplishments. We believe that her experience and success in the banking industry will further enhance Old Line Bank’s service and commitment to the southern Maryland market.

     In April 2007, we hired a new Senior Vice President of Commercial Lending. This individual is a skilled commercial lender who has worked in the Anne Arundel and Prince George’s County markets for over 25 years. We believe that with his qualifications and through his long term associations with businesses and prominent individuals, he will develop new lending and deposit opportunities for us in these markets. Initially, he will work from our Bowie headquarters.

     We hired a Senior Vice President of Commercial Lending, in August 2006, who has over 30 years of lending experience and is a significant addition to our lending team. This individual operated from a loan production office in Gaithersburg (Montgomery County), Maryland. This lender’s expertise and market knowledge allowed us to expand our presence into southern Montgomery County and the District of Columbia. In February 2008, this individual resigned his position with the bank and we plan to terminate our lease on the Gaithersburg office. We do not expect that this individual’s departure will negatively impact our loan growth in a material manner.

     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.

     High gasoline prices and general concerns about the economy caused weakness in the marine industry. Because of the losses experienced in this division and because we do not foresee an imminent improvement in the marine industry, in September of 2007, we closed this division and released the employees associated with it.

     Addition to the Board of Directors

     In February 2007, we announced the appointment of John M. Suit, II to our Board of Directors. Mr. Suit formerly served as President and Chief Executive Officer of Farmers National Bancorp and Farmers National Bank of Maryland from 1989-1996 and later as Chairman of the Board of Farmers Bank of Maryland from 1996-2003. Most recently, following the 2003 Branch Bank and Trust (BB&T) acquisition of Farmers Bank of Maryland, Mr. Suit was a senior advisor and Senior Vice President for BB&T.

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, Anne Arundel, Charles and northern St. Mary’s. The economy in our current primary market area has focused on real estate development, high technology, retail and the government sector.

     In the second quarter of 2006, we moved our headquarters location from Waldorf, Maryland to the Pointer Ridge location in Bowie, Maryland in Prince George’s County and we established a new branch at the Pointer Ridge location. 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 five branch locations in Prince George’s County including our newest branch, which opened in 2008. In August 2005, we opened a loan production office in College Park, Prince George’s County. In March, 2008 we opened a branch in the office building in which the loan production office is located and a new branch in Greenbelt, Prince George’s County in June, 2007. We expect to open an additional branch in Bowie, Prince George’s County in late 2008 or early 2009.

     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.

     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 Bowie, Maryland main office. In August 2004, we received regulatory authority to open the branch. We anticipated that construction of the building in which we plan to locate the branch would begin during the second or third quarter of 2006 and we expected to open the branch in the first quarter of 2007. However, the owner of the property was unable to complete the requirements contained in the lease and begin construction of the branch. Construction at this location began in late 2007. We expect to open this branch during the fourth quarter of 2008 or the first quarter of 2009.

     We plan to open an additional branch in Annapolis, Anne Arundel County in 2008. 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 condition 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 consists of funds advanced for construction of single family residences, multi-family housing and commercial buildings. These loans have short durations, meaning maturities typically of nine months or less. Residential houses, multi-family dwellings and commercial buildings under construction and the underlying land for which the loan was obtained secure the construction loans. 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 the project under construction. The value of the project is estimated prior to the completion of construction. 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 commercial entities or individuals who have demonstrated the ability to obtain a permanent loan “take-out.” We also perform a complete analysis of the borrower and the project under construction. This analysis includes a review of the cost to construct, the borrower’s ability to obtain a permanent “take out,” the cash flow available to support the debt payments and construction costs in excess of loan proceeds, and the value of the collateral. During construction, we advance funds on these loans on a percentage of completion bases. 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. We do not have any sub-prime residential real estate loans.

     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 ($17.6 million or 95.14% of the consumer loans, excluding consumer real estate, and 8.66% of gross loans at December 31, 2007). Our average loan in the luxury boat loan category is approximately $150,000, with a 17 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 three accounts have experienced 30-day delinquency with total losses in the portfolio of $20,000 from one account.

     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, 2007, our legal lending limit for loans to one borrower was approximately $4.9 million. As part of our risk management strategy, we may attempt to participate a portion of larger loans to other financial institutions. This strategy allows Old Line Bank to maintain customer relationships yet reduce credit exposure. However, this strategy may not always be available.

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. In 2007, high gasoline prices and an anemic economy negatively impacted the performance of the marine division. Because of losses experienced in this division and because we did not foresee an imminent improvement in the marine industry, in September 2007, we closed this division and released the employees associated with it.

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 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 through an adjustment to stockholders’ equity net of taxes 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 all 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, an overnight sweep service and remote deposit capture 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. Prior to 2006, we did not use brokered deposits. In the first quarter of 2006, we did begin using brokered certificates of deposit 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. In the fourth quarter of 2006 and during 2007, we also purchased brokered certificates of deposit from other sources.

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, 2008, Old Line Bank had 53 full time and five 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.

     The Federal Reserve Board must approve, among other things, the acquisition by a bank holding company of control of more than 5% of the voting shares, or substantially all the assets, of any bank, or 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.

     Pursuant to authority granted under the Gramm-Leach-Bliley Act of 1999 (“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.

     The following references to the laws and regulations which regulate Old Line Bank are brief summaries thereof, do not purport to be complete, and are qualified in their entirety by reference to such laws and regulations.

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 GLBA substantially altered 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 Tier 1 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 SFAS 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 must, 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 will achieve its minimum Leverage Capital Ratio requirement. A bank which fails to file such a plan is deemed to be operating in an unsafe and unsound manner, and could be subject to a cease-and-desist order. 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 will 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.

     Immediately upon becoming undercapitalized, an institution becomes 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 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.

     A “critically undercapitalized institution” will 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.

     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

     The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) included substantial enhancement to the enforcement powers available to federal banking regulators, including the Federal Reserve Board. 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. FIRREA significantly increased the amount of and grounds for civil money penalties and requires, except under certain circumstances, public disclosure of final enforcement actions by the federal banking agencies.

     The FDIC has adopted a risk-based deposit insurance assessment system. The FDIC assigns an institution to one of three capital categories based on the institution’s financial information, as of the reporting period ending seven months before the assessment period, consisting of (i) well capitalized, (ii) adequately capitalized or (iii) undercapitalized, and one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution’s primary federal regulator and information that the FDIC determines to be relevant to the institution’s financial condition and the risk posed to the deposit insurance funds. An institution’s assessment rate depends on the capital category and supervisory subcategory to which it is assigned. Assessment rates for BIF deposits currently range from 5 basis points to 43 basis points. Old Line Bank was assigned to a capital and supervisory subcategory that had an assessment rate of 5 basis points in 2007 and has not yet been assigned to a capital and supervisory subcategory for 2008. The FDIC is authorized to raise the assessment rates in certain circumstances, including to maintain or achieve a designated reserve ratio for BIF deposits. The FDIC has exercised its authority to raise rates in the past and may raise insurance premiums in the future. If the FDIC takes such action, it could have an adverse effect on the earnings of Old Line Bank.

     Under the Federal Deposit Insurance Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Maryland Regulatory Assessment

     The Maryland Commissioner of Financial Regulation in the Department of Labor, Licensing and Regulation assesses state chartered banks to cover the expense of regulating banking institutions. The Commissioner assesses each banking institution the sum of $1,000, plus $0.08 for each $1,000 of assets of the institution over $1,000,000, as disclosed on the banking institution’s most recent financial report.

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 and 23B of the Federal Reserve Act and Regulation W of the Federal Reserve Bank (collectively, “Regulation W”), which limit 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. Regulation W limits the aggregate amount of transactions with any individual affiliate to 10% of the capital and surplus of Old Line Bank and also limits the aggregate amount of transactions with all affiliates to 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 Regulation W, and the purchase of low quality assets from affiliates is generally prohibited.

     Regulation W, among other things, prohibits an institution from engaging in certain transactions with certain affiliates (as defined in the Federal Reserve Act) 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. In addition, under Regulation W:

	•		a bank and its subsidiaries may not purchase a low-quality asset from an affiliate;
	•		covered transactions and other specified transactions between a bank or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices; and
	•		with some exceptions, each loan or extension of credit by a bank to an affiliate must be secured by collateral with a market value ranging from 100% to 130%, depending on the type of collateral, of the amount of the loan or extension of credit.

     Regulation W generally excludes non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the Federal Reserve Board decides to treat these subsidiaries as affiliates.

     Old Line Bank also is subject to the restrictions contained in Sections 22(g) and 22(h) of the Federal Reserve Act and the Federal Reserve Board’s Regulation O thereunder (collectively, “Regulation O”), which govern loans and extensions of credit to executive officers, directors and principal stockholders. Under Regulation O, loans to a director, an executive officer or a greater-than-10% stockholder of a bank as well as certain affiliated interests of any of the foregoing may not exceed, together with all other outstanding loans to such person and affiliated interests, the loans-to-one-borrower limit applicable to national banks (generally 15% of the institution’s unimpaired capital and surplus), and all loans to all such persons in the aggregate may not exceed the institution’s unimpaired capital and unimpaired surplus. Regulation O also prohibits the making of loans in an amount greater than $25,000 or 5% of capital and surplus but in any event not over $500,000, to directors, executive officers and greater-than-10% stockholders of a bank, and their respective affiliates, unless such loans are approved in advance by a majority of the Board of Directors of the bank with any interested director not participating in the voting. Further, Regulation O requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as those that are offered in comparable transactions to unrelated third parties unless the loans are made pursuant to a benefit or compensation program that is widely available to all employees of the bank and does not give preference to insiders over other employees. Regulation O also prohibits a depository institution from paying overdrafts over $1,000 of any of its executive officers or directors unless they are paid pursuant to written pre-authorized extension of credit or transfer of funds plans.

     All of Old Line Bank’s loans to its and Old Line Bancshares, Inc.’s executive officers, directors and greater-than-10% stockholders, and affiliated interests of such persons, comply with the requirements of Regulation W and Regulation O.

     We have entered into banking transactions with our directors and executive officers and the business and professional organizations in which they are associated in the ordinary course of business. We make any loans and loan commitments 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, 2007, amounts in transaction accounts above $9.3 million and up to $43.9 million must have reserves held against them in the ratio of three percent of the amount. Amounts above $43.9 million require reserves of $1.1 million plus 10 percent of the amount in excess of $43.9 million. 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, among other things, evaluating mergers, acquisitions and applications to open a branch or facility. The CRA also requires all institutions to make public disclosure of their CRA ratings. Old Line Bank received a “Satisfactory” rating in its latest CRA examination.

USA Patriot Act

     The USA Patriot Act of 2001 (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 Patriot Act requires financial institutions, including banks, to establish anti-money laundering programs, including employee training and independent audit requirements, meet minimum standards specified by the Act, follow minimum standards for customer identification and maintenance of customer identification records, and regularly compare customer lists against lists of suspected terrorists, terrorist organizations and money launderers. The U.S. Treasury Department (“Treasury”) has issued a number of implementing regulations that apply to 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 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.

     The costs or other effects of the compliance burdens imposed by the Patriot Act or future anti-terrorist, homeland security or anti-money laundering legislation or regulations cannot be predicted with certainty.

Check 21

     The Check Clearing for the 21st Century Act, also known as “Check 21,” gives “substitute checks,” such as a digital image of a check and copies made from that image, the same legal standing as the original paper check. Some of the major provisions include:

	•		allowing check truncation without making it mandatory;
	•		requiring that every financial institution communicate to accountholders in writing a description of its substitute check processing program and their rights under the law;
	•		retaining in place the previously mandated electronic collection and return of checks between financial institutions only when individual agreements are in place;
	•		requiring that when accountholders request verification, financial institutions produce the original check (or a copy that accurately represents the original) and demonstrate that the account debit was accurate and valid; and
	•		requiring recrediting of funds to an individual’s account on the next business day after a consumer proves that the financial institution has erred.

Consumer Credit Reporting

     The Fair and Accurate Credit Transactions Act amended the federal Fair Credit Reporting Act. These amendments to the Fair Credit Reporting Act (the “FCRA Amendments”) include, among other things:

•

requirements for financial institutions to develop policies and procedures to identify relevant patterns, practices, and specific forms of activity that are “red flags” signaling potential identity theft and, upon the request of a consumer, place a fraud alert in the consumer’s credit file stating that the consumer may be the victim of identity theft or other fraud;

	•		for entities that furnish information to consumer reporting agencies (which would include us), requirements to implement procedures and policies regarding the accuracy and integrity of the furnished information, and regarding the correction of previously furnished information that is later determined to be inaccurate; and
	•		a requirement for mortgage lenders to disclose credit scores to consumers.

     The FCRA Amendments also prohibit a business that receives consumer information from an affiliate from using that information for marketing purposes unless the consumer is first provided a notice and an opportunity to direct the business not to use the information for such marketing purposes (the “opt-out”), subject to certain exceptions. We do not share consumer information among our affiliated companies for marketing purposes, except as allowed under exceptions to the notice and opt-out requirements. Because none of our affiliates is currently sharing consumer information with any other affiliate for marketing purposes, the limitations on sharing of information for marketing purposes do not have a significant impact on us.

Federal Deposit Insurance Reform

     The Federal Deposit Insurance Reform Act of 2005 (“FDIRA”) among other things, changed the Federal deposit insurance system by:

	•		raising the coverage level for retirement accounts to $250,000;
	•		indexing deposit insurance coverage levels for inflation beginning in 2012;
	•		prohibiting undercapitalized financial institutions from accepting employee benefit plan deposits;
	•		merging the Bank Insurance Fund and Savings Association Insurance Fund into a new Deposit Insurance Fund (the “DIF”); and
	•		providing credits to financial institutions that capitalized the FDIC prior to 1996 to offset future assessment premiums.

     FDIRA also authorizes the FDIC to revise the current risk-based assessment system, subject to notice and comment and caps the amount of the DIF at 1.50% of domestic deposits. The FDIC must issue cash dividends, awarded on a historical basis, for the amount of the DIF over the 1.50% ratio. Additionally, if the DIF exceeds 1.35% of domestic deposits at year-end, the FDIC must issue cash dividends, awarded on a historical basis, for half of the amount of the excess.

Other Regulations

     Interest and other charges we collect or contract for are subject to state usury laws and federal laws concerning interest rates. For example, under the Service Members Civil Relief Act, which amended the Soldiers’ and Sailors’ Civil Relief Act of 1940, a lender is generally prohibited from charging an annual interest rate in excess of 6% on any obligation of a borrower who is on active duty with the United States military.

     Our loan operations are also subject to federal laws applicable to credit transactions, such as the following:

	•		The Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
	•		The Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
	•		The Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
	•		The Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and

•

The rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

     Our deposit operations are subject to the following:

	•		The Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and
	•		The Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to implement that Act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

Proposed Legislation and Regulatory Actions

     New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations, and competitive relationships of the nation’s financial institutions. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

Effect of Governmental Monetary Policies

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

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, including with respect to anticipated expansion and the opening of new branches, growth of customer relationships and anticipated operating results, include forward-looking statements. These forward-looking statements include statements regarding revenues, expenses and profitability, liquidity, asset, loan and deposit growth, use of brokered deposits, payment on non-accrual loans, allowance for loan losses, interest rate sensitivity, market risk, impact of new hires and personnel departures, our guarantee agreement on certain of Pointer Ridge’s obligations, and business, 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.

ITEM 1A. Risk Factors

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

     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 Executive Vice President and Chief Lending Officer, and Ms. Rush, our Executive 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 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 experienced commercial lenders that we have hired are not a party to any employment agreement with us and they could terminate their employment with us at any time and for any reason.

     Our growth and expansion strategy may not be successful. Our ability to grow depends upon our ability to 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. Also, in order to effectively manage our anticipated and/or actual loan growth we may need to make additional investments in equipment and personnel, which would also increase our non-interest expense.

     We plan to open a new branch in Annapolis in Anne Arundel County, Maryland during the second or third quarter of 2008. We also expect to open a new branch in Crofton in Anne Arundel County, Maryland during 2008 or 2009. Additionally, we intend to open a branch in Bowie in Prince George’s County in 2008 or 2009. 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. While we believe our credit underwriting adequately considers the underlying collateral in the evaluation process, and although the recent real estate downturn has not adversely impacted us, further weakness in the real estate market could adversely effect our customers, which in turn could adversely impact us.

     Our concentrations of loans in various categories may also increase the risk of credit losses. We currently invest more than 25% of our capital in various loan types and industry segments, including commercial real estate loans, marine loans and loans to the hospitality industry (hotels/motels). While recent declines in the local commercial real estate market have not had any adverse impact on the collateral securing our loans, a further deterioration in the commercial real estate market could cause deterioration in the collateral securing these loans and/or a decline in our customers’ earning capacity. This could negatively impact us.

     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 be sure 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. We have designated approximately 80.32% of our securities investment portfolio (and 3.83% of total assets) at December 31, 2007 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, 2007, we had unrealized losses in our available for sale portfolio of $49,127 ($29,749 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, Anne Arundel, Charles and northern St. Mary’s. 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 continues to suffer 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. If Old Line Bank cannot attract deposits and make loans at a sufficient level, its operating results will suffer, as will its opportunities for growth.

     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, 2007, we were able to lend approximately $4.9 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. 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 we implemented in January 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 has in 2006 and 2007 and could continue to 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 1B. Unresolved Staff Comments

     Not applicable as we are not an accelerated filer or large accelerated filer.

Item 2. Properties

     In July 2006, we moved our main office facility from Waldorf, Maryland to 1525 Pointer Ridge Place, Bowie, Maryland in Prince George’s County and established a branch in this facility. Pointer Ridge Office Investment, LLC, an entity 50% owned by us and in which we currently have an $805,971 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. On June 6, 2006, we executed leases for 2,557 square feet on the 1^st floor of the building for a new branch office, 5,449 square feet on the 3^rd floor and 11,053 square feet on the 4^th floor of this building for our new headquarters. The leases which commenced on July 1, 2006, are for thirteen years, with two, five-year renewal options. The current basic monthly payment terms on the leases are for payments of $41,967 with 3% annual increases. The basic monthly payments include our pro-rata share of taxes, insurances and common area maintenance on the building with any deficiencies incurred incorporated into the following year’s basic monthly payments.

     In 2004, we finalized our purchase of our then current full service banking branch and office facility located at 2995 Crain Highway in Waldorf, Maryland. In July 2006, we moved our headquarters from this location to 1525 Pointer Ridge Place, Bowie, Maryland. We have retained our branch office at 2995 Crain Highway. A realtor currently leases from us the remainder of the space in this building.

     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 for ten years with two, five-year renewal options. Payment terms on the lease are $4,773 monthly with 1.5% annual increases. We pay our pro-rata share of common area maintenance, taxes and insurance on the building.

     We own our branch at 15808 Livingston Road in Accokeek, Maryland in Prince George’s County.

     Our Clinton, Maryland, Prince George’s County branch, located at 7801 Old Branch Avenue, was opened in September 2002 in leased space. In November 2006, the monthly rent at this facility increased from $825 to $2,301. Exclusive of the monthly rent, we pay no utilities or other expenses associated with this facility. The lease incorporates additional increases in monthly rent 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 renewal 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 $2,754 monthly, with 3% annual increases. We also lease space for a branch on the first floor of this building. This lease commenced January 2008 at $5,000 monthly with 3% annual increases. The term for this space is 10 years with two five year renewal terms. We pay our pro-rata share of taxes, insurance and common area maintenance associated with the building

     In August 2004, we announced plans to open a branch in Crofton, Maryland. Due to engineering and resultant permit delays, construction on the building in which we plan to lease for our branch did not begin until late 2007. At this time, we anticipate this branch will open in the fourth quarter of 2008 or first quarter of 2009.

     Our loan production office in Gaithersburg, Montgomery County, Maryland is located in a leased space in an office building located at 12165 Darnestown Road, Gaithersburg, Maryland. In February 2008, the loan officer located in this office resigned. We plan to terminate our lease on this office. The total monthly lease payment for this facility is $500 a month and there are no termination fees.

     In June 2007, we opened a branch in Greenbelt, Maryland. We lease 2,700 square feet of space on the 1^st floor of an office building located at 6301 Ivy Lane, Greenbelt, Prince George’s County, Maryland. We pay taxes, insurance, and common area maintenance based on our pro-rata share of the building plus a fixed basic monthly rent of $5,175 with 3% annual increases. The lease has an initial term of five years. After providing nine months written notice and paying a termination fee, Old Line Bank may terminate the lease after the 2^nd anniversary of the commencement date. We have the right to extend the term of the lease for three additional five year terms.

     On January 31, 2007, Old Line Bank also entered into a lease agreement to lease approximately 33,000 square feet of ground area located at the southwest corner of the intersection of Kenilworth Avenue and Ivy Lane in Greenbelt, Prince George’s County, Maryland. Old Line Bank will construct a free standing bank building on the land. The lease commences on the earlier to occur of (i) the date on which Old Line Bank first opens for business at the premises, or (ii) 785 days after January 31, 2007. The lease has an initial term of 30 years with two successive renewal periods of ten years. The initial monthly installments on this lease are $8,750. Old Line Bank plans to move the 6301 Ivy Lane, Greenbelt, Maryland branch into this new facility.

     During 2008, we plan to open new branch locations in Annapolis in Anne Arundel, County, Maryland and in Bowie, Maryland. We have identified an Annapolis location, but have not finalized lease terms on this location. We anticipate we will open this branch in the 2^nd or 3^rd quarter of 2008.

     In July 2007, we identified a site for a second branch location in Bowie, Maryland. Currently, the landlord is preparing a pad site. Assuming the landlord completes the preparation of the pad site and meets all of the conditions of the lease, we plan to lease the pad site and construct a branch on the pad site. The pad site is located in the Fairwood Office Park in Bowie, Maryland. We plan to open this branch in late 2008 or early 2009.

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, 2007, we did not have any 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, 2007.

PART II

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

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.

		Sale Price Range
		High				Low
2006
First Quarter		$	12.00			$	10.36
Second Quarter			12.00				11.50
Third Quarter			11.92				11.00
Fourth Quarter			11.70				10.50
2007
First Quarter		$	11.05			$	9.80
Second Quarter			11.09				9.60
Third Quarter			10.25				8.50
Fourth Quarter			9.60				7.50

     As of December 31, 2007, there were 4,075,849 shares of common stock issued and outstanding held by approximately 263 stockholders of record. There were 216,920 shares of common stock issuable on the exercise of outstanding stock options 171,320 of which were exercisable. The remaining 45,600 are exercisable as follows:

Date Exercisable		# of Shares
January 25, 2008			8,400
May 7, 2008			2,000
August 1, 2008			6,400
November 1, 2008			1,200
January 25, 2009			8,400
May 7, 2009			2,000
August 1, 2009			6,400
November 1, 2009			1,200
May 7, 2010			2,000
November 1, 2010			1,200
May 7, 2011			2,000
November 1, 2011			1,200
May 7, 2012			2,000
November 1, 2012			1,200
Total			45,600

Dividends

     We have paid the following dividends:

		2007				2006
March		$	0.030			$	0.025
June			0.030				0.030
September			0.030				0.030
December			0.030				0.030
Total		$	0.120			$	0.115

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

Issuer Purchases of Equity Securities

     We announced on August 17, 2007 that our board of directors had authorized our repurchase of up to 300,000 shares of our common stock. The following table outlines the purchases we made of our shares of common stock during the fourth quarter of the year ended December 31, 2007.

										Total Number
										of				Maximum Number
										Shares Purchased				of Shares That
										as				May
		Total Number								Part of Publicly				Yet Be Purchased
		of				Average Price				Announced Plan				Under the Plan or
Date		Shares Purchased				Paid per Share(1)				or Program				Programs
October 1-31, 2007			—			$	—				—				300,000
November 1-30, 2007			131,450				8.87				131,450				168,550
December 1-31, 2007			54,500				8.39				54,500				114,050
Total Fourth Quarter			185,950			$	8.73				185,950				114,050

     At December 31, 2007, there are 114,050 shares of common stock that we may yet repurchase as part of our publicly announced plan.

Item 6. Selected Financial Data

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

December 31,		2007				2006				2005
		(Dollars in thousands, except per share data)
Income Statement Data:
Interest revenue		$	14,554			$	11,023			$	7,004
Interest expense			6,263				3,730				2,128
Net interest income			8,291				7,293				4,876
Provision for loan losses			318				339				204
Non-interest revenue			1,173				1,029				621
Non-interest expense			6,774				5,561				3,576
Income taxes			789				848				578
Net income			1,583				1,574				1,139
Per Share and Shares Outstanding Data:
Basic net income		$	0.37			$	0.37			$	0.44
Diluted net income			0.37				0.37				0.44
Cash dividends declared			0.12				0.115				0.10
Book value at period end		$	8.50			$	8.18			$	7.89
Shares outstanding, period end			4,075,849				4,253,699				4,248,899
Average shares outstanding, basic			4,237,266				4,250,240				2,559,627
Average shares outstanding, diluted			4,243,304				4,275,886				2,585,170
Balance Sheet Data:
Total assets		$	245,211			$	218,131			$	169,028
Total loans, net			201,942				150,417				104,249
Total investment securities			11,695				16,921				16,130
Total deposits			177,812				169,672				119,672
Stockholders’ equity			34,631				34,816				33,516
Performance Ratios:
Return on average assets			0.69	%			0.86	%			0.85	%
Return on average equity			4.46	%			4.58	%			6.38	%
Net interest margin (1)			3.98	%			4.37	%			3.93	%
Asset Quality Ratios:
Allowance to period-end loans			0.78	%			0.85	%			0.91	%
Non-performing assets to total assets			0.43	%			0.00	%			0.00	%
Non-performing assets to allowance for loan losses			67.86	%			0.00	%			0.00	%
Capital Ratios:
Tier I risk-based capital			15.6	%			20.5	%			27.5	%
Total risk-based capital			16.3	%			21.2	%			28.3	%
Leverage capital ratio			14.6	%			17.5	%			21.5	%
Total equity to total assets			14.1	%			16.0	%			19.8	%
Dividend payout ratio for period			31.9	%			31.1	%			23.5	%

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

Overview

     Despite the challenging interest rate, credit and economic environment, we are pleased to report stable earnings, sound financial performance and that we ended the year with over $245 million in total assets. As outlined in the financial table below, net income for the year ended December 31, 2007 remained comparable to that reported for the year ended December 31, 2006. Net interest income after provision for loan losses and non-interest revenue increased during the period. We saw considerable growth in loans during the year and continued to maintain the quality in the loan portfolio. As expected, the opening of the Greenbelt and Bowie branches in June 2007 and July 2006, respectively, and the establishment of our new headquarters in July 2006 caused non-interest expense to increase during the year. We believe these investments in infrastructure and branches provide the foundation on which we expect to achieve our strategic objective of becoming the premier community bank on the eastern side of Washington, D.C. and allow us to improve the long term rewards for our shareholders, employees and customers. Although our industry and we faced many challenges this year, we achieved most of our objectives. Specifically, we:

	•		Grew average gross loans $47.1 million or 37.38%,
	•		Maintained asset quality,
	•		Invested an additional $4 million in bank owned life insurance,
	•		Grew average interest bearing deposits 41.29% and non-interest bearing deposits 2.48%,
	•		Appointed a new individual to our Board of Directors,
	•		Hired a new commercial lender to service the Anne Arundel County market,
	•		Hired a new commercial lender to service the Charles County market,
	•		Repurchased 185,950 shares of our common stock at an average share price of $8.73,
	•		Opened our 6th branch location at 6301 Ivy Lane, Greenbelt, Maryland,
	•		Received confirmation that construction began on our Crofton, Maryland branch.

     The major disappointment during 2007 was the need to close the marine division. High gasoline prices and an anemic economy negatively impacted the performance of the marine division during the year. For the year ended December 31, 2007, the division posted a pre-tax loss of approximately $122,000 versus a pre-tax profit of $6,000 for the year ended December 31, 2006. Because of losses in this division and because we did not foresee an imminent improvement in this division, in September 2007, we closed this division and released the employees associated with it. We do not plan to grow our marine portfolio in 2008.

     We believe that it was an accomplishment to maintain earnings while incurring the expenses associated with the opening of the Greenbelt branch during the second quarter as well as the costs incurred from our investments in infrastructure during the 2^nd and 3^rd quarters of 2006 and continued softness in the marine industry.

     The following summarizes the highlights of our financial performance for the twelve month period ended December 31, 2007 compared to the twelve month period ended December 31, 2006:

		Twelve months ended December 31,
		(Dollars in thousands)
		2007				2006				$ Change				% Change
Net income		$	1,583			$	1,574			$	9				0.57	%
Interest revenue			14,554				11,023				3,531				32.03
Interest expense			6,263				3,730				2,533				67.91
Net interest income after
provision for loan losses			7,973				6,954				1,019				14.65
Non-interest revenue			1,173				1,029				144				13.99
Non-interest expense			6,774				5,561				1,213				21.81
Average interest earning assets			210,557				169,436				41,121				24.27
Average noninterest bearing deposits			34,561				33,723				838				2.48
Average gross loans			173,003				125,927				47,076				37.38
Average interest bearing deposits			140,877				99,709				41,168				41.29
Interest Margin (1)			3.98	%			4.37	%
Return on average equity			4.46	%			4.58	%
Basic earnings per common share		$	0.37			$	0.37			$	—				0.00	%
Diluted earnings per common share			0.37				0.37				—				0.00	%

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.

     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 plan 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. As discussed in Item 1, Business, we have opened additional branches during 2007 and the first quarter of 2008 and plan to open additional branches during 2008 and 2009.

     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. We plan to continue to identify and establish new branch locations that will support our long term growth plans.

      Expansion of Commercial, Construction and Commercial Real Estate Lending

     We hired a new Vice President of Commercial Lending for our Waldorf office and a new Senior Vice President of Commercial Lending during 2007. We also hired a Senior Vice President of Commercial Lending, in August 2006, who resigned in February 2008.

     As we expected, the increase in personnel during the second half of 2006 and in 2007 caused an increase in salary and benefit expenses in the year ended December 31, 2007 compared to the year ended December 31, 2006. These individuals also contributed to our loan and deposit growth. As a result of their efforts, we anticipate the Old Line Bank will experience continued improvement in loan growth during 2008 and beyond.

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.

      2007 compared to 2006

     Net interest income after provision for loan losses for the year ended December 31, 2007 amounted to $8.0 million, which was $1.0 million or 14.29% greater than the 2006 level of $7.0 million. The increase was primarily attributable to a 24.32% or $41.2 million increase in total average interest earning assets to $210.6 million for the twelve months ended December 31, 2007 from $169.4 million for the twelve months ended December 31, 2006.

     Interest revenue increased from $11.0 million for the year ended December 31, 2006 to $14.6 million for the year ended December 31, 2007. As discussed below and outlined in detail in the Rate/Volume Analysis, these changes were the result of substantial increases in earning assets primarily caused by loan growth. The growth in average loans was directly attributable to the increased business development efforts of the entire Old Line Bank lending team. Additionally, we believe that the move to our new Bowie headquarters and the opening of the Bowie and Greenbelt branches provided us with increased name recognition and new opportunities that also contributed to our growth. Interest expense for all interest bearing liabilities amounted to $6.3 million in 2007, which was $2.6 million higher than the 2006 level of $3.7 million.

     Our net interest margin was 3.98% for the year ended December 31, 2007, as compared to 4.37% for the year ended December 31, 2006. The decrease in the net interest margin is the result of several components. The yield on average interest-earning assets increased during the period 39 basis points from 6.57% in 2006 to 6.96% in 2007, and average interest-earning assets grew by $41.2 million. A 70 basis point increase of the yield on average interest-bearing liabilities from 3.28% in 2006 to 3.98% in 2007, and a $43.8 million increase in interest bearing liabilities offset these improvements.

     The yield on average interest-earning assets improved primarily because there were a higher percentage of funds invested in higher yielding commercial and mortgage loans during the period. In the prior year, these funds were invested in federal funds and lower yielding investments. There was also a 31 basis point increase in the average federal funds rate during the period and a 27 basis point increase in the yield on investments.

     Increases in market interest rates and an increase in the percentage of average balances maintained in interest bearing deposits relative to total deposits caused the cost of average interest bearing liabilities to increase 70 basis points during the period. As a result of continued growth in the loan portfolio, and re-pricing of certificates of deposit, we expect the net interest margin will improve in 2008. We will offer promotional campaigns to attract deposits or seek brokered deposits, if required, to maintain an acceptable loan to deposit ratio.

     Because of the three loan officers in the College Park loan production office, increased recognition in the Prince George’s County market, the new loan officers in Charles and Anne Arundel Counties, the addition of the Bowie and Greenbelt branches, the new addition to the Board of Directors and with continued growth in deposits, we anticipate that we will continue to grow earning assets during 2008. 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 net interest income, although there is no assurance that this will be the case.

      2006 compared to 2005

     Net interest income after provision for loan losses for the year ended December 31, 2006 increased $2.3 million or 48.94% to $7.0 million from $4.7 million for the same period in 2005. The increase was primarily attributable to an increase in total average interest earning assets. The proceeds from the capital offering together with loan growth caused the increase in average interest earning assets.

     Interest revenue increased from $7.0 million for the twelve months ended December 31, 2005 to $11.0 million for the same period in 2006. Interest expense for all interest bearing liabilities amounted to $3.7 million for the twelve months ended December 31, 2006 versus $2.1 million for the twelve months ended December 31, 2005. 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 earnings assets continued to be 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 from the entire Old Line Bank lending team. Additionally, we believe that the move to our new Bowie headquarters and the opening of the Bowie branch provided us with increased name recognition that also contributed to our growth.

     Our net interest margin was 4.37% for the twelve months ended December 31, 2006, as compared to 3.93% for the twelve months ended December 31, 2005. The increase in the net interest margin is the result of several components. The yield on average interest-earning assets improved during the period 95 basis points from 5.62% in 2005 to 6.57% in 2006, and average interest-earning assets grew by $43.3 million. An 84 basis point increase of the yield on average interest-bearing liabilities from 2.44% in 2005 to 3.28% in 2006, and a $26.2 million increase in interest bearing liabilities partially 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, 2006, the prime rate was 7.25% by December 31, 2006 it had increased to 8.25%. On January 1, 2005, it was 5.25% and on December 31, 2005 it was 7.25%. The yield also improved because loans, net of allowance comprised 73.59% of total average interest earning assets in 2006 versus 70.74% in 2005.

     The increased interest rates allowed us to earn a 152 basis point higher average yield on our federal funds and an 80 basis point higher average yield on our loan portfolio. The increased market interest rates, the introduction of the CDARS product in February 2006, and the purchase of $10.1 million in brokered certificates of deposit in the 3^rd quarter of 2006 caused the cost of average interest bearing liabilities to increase 84 basis points during the period.

     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

		2007												2006												2005
		Average												Average												Average
		balance				Interest				Yield				balance				Interest				Yield				balance				Interest				Yield
Assets:
Federal funds sold(1)		$	21,525,420			$	1,142,707				5.31	%		$	26,348,931			$	1,318,670				5.00	%		$	18,195,459			$	633,182				3.48	%
Interest bearing deposits			498,630				25,556				5.13				1,753				23				1.31				57,260				2,124				3.71
Investment securities(1)(2)
U.S. Treasury			3,621,923				121,196				3.35				4,000,200				133,465				3.34				4,000,400				133,465				3.34
U.S. government agency			7,347,989				302,119				4.11				8,039,268				284,778				3.54				7,431,990				247,993				3.34
Mortgage backed securities			1,247,089				48,946				3.92				1,658,240				65,186				3.93				2,146,501				84,139				3.92
Municipal securities			3,240,786				159,015				4.91				3,324,982				163,691				4.92				3,447,709				160,550				4.66
Other			1,477,894				84,859				5.74				1,367,533				81,109				5.93				1,607,775				45,912				2.86
Total investment securities			16,935,681				716,135				4.23				18,390,223				728,229				3.96				18,634,375				672,059				3.61
Loans:
Commercial			44,125,513				3,654,176				8.28				25,996,077				2,180,477				8.39				13,050,801				999,552				7.66
Mortgage			108,513,579				8,039,542				7.41				77,545,669				5,713,871				7.37				54,257,380				3,582,824				6.60
Installment			20,363,658				1,074,436				5.28				22,385,611				1,185,854				5.30				22,776,395				1,190,587				5.23
Total loans			173,002,750				12,768,154				7.38				125,927,357				9,080,202				7.21				90,084,576				5,772,963				6.41
Allowance for loan losses			1,405,182				—								1,232,674				—								884,562				—
Total loans, net of allowance			171,597,568				12,768,154				7.44				124,694,683				9,080,202				7.28				89,200,014				5,772,963				6.47
Total interest earning assets(1)			210,557,299				14,652,552				6.96				169,435,590				11,127,124				6.57				126,087,108				7,080,328				5.62
Non-interest bearing cash			3,800,713												3,848,386												3,083,227
Premises and equipment			4,186,529												2,984,349												2,393,397
Other assets			10,030,452												6,314,672												3,102,641
Total assets(1)		$	228,574,993											$	182,582,997											$	134,666,373
Liabilities and Stockholders’ Equity:
Interest bearing deposits Savings		$	8,250,010				55,660				0.67			$	8,693,260				60,720				0.70			$	9,374,143				47,168				0.50
Money market and NOW			28,382,013				588,824				2.07				22,453,969				343,202				1.53				17,794,352				156,523				0.88
Other time deposits			104,244,760				5,045,070				4.84				68,561,412				2,815,904				4.11				47,486,890				1,587,004				3.34
Total interest bearing deposits			140,876,783				5,689,554				4.04				99,708,641				3,219,826				3.23				74,655,385				1,790,695				2.40
Borrowed funds			16,423,688				573,405				3.49				13,831,772				509,851				3.69				12,624,230				337,258				2.67
Total interest bearing liabilities			157,300,471				6,262,959				3.98				113,540,413				3,729,677				3.28				87,279,615				2,127,953				2.44
Non-interest bearing deposits			34,561,334												33,723,186												28,995,265
			191,861,805				6,262,959				3.26				147,263,599				3,729,677				2.53				116,274,880				2,127,953				1.83
Other liabilities			1,249,573												941,585												536,458
Stockholders’ equity			35,463,615												34,377,813												17,855,035
Total liabilities and stockholders’ equity		$	228,574,993											$	182,582,997											$	134,666,373
Net interest spread(1)											2.98												3.29												3.18
Net interest income(1)						$	8,389,593				3.98	%						$	7,397,447				4.37	%						$	4,952,375				3.93	%

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,
		2007 compared to 2006												2006 compared to 2005
						Variance due to:												Variance due to:
		Total				Rate				Volume				Total				Rate				Volume
Interest Earning Assets:
Federal funds sold(1)		$	(175,963	)		$	76,447			$	(252,410	)		$	685,488			$	401,747			$	283,741
Interest bearing deposits			25,533				259				25,274				(2,101	)			(42	)			(2,059	)
Investment Securities(1)
U.S. Treasury			(12,269	)			388				(12,657	)			—				—				—
U.S. government agency			17,341				43,200				(25,859	)			36,785				16,502				20,283
Mortgage backed securities			(16,240	)			(103	)			(16,137	)			(18,953	)			187				(19,140	)
Municipal securities			(4,676	)			(543	)			(4,133	)			3,141				8,860				(5,719	)
Other			3,750				(2,646	)			6,396				35,197				42,068				(6,871	)
Loans:
Commercial			1,473,699				(28,003	)			1,501,702				1,180,925				189,317				991,608
Mortgage			2,325,671				31,493				2,294,178				2,131,047				594,020				1,537,027
Installment			(111,418	)			(4,717	)			(106,701	)			(4,733	)			15,705				(20,438	)
Total interest revenue (1)			3,525,428				115,775				3,409,653				4,046,796				1,268,364				2,778,432
Interest-bearing liabilities
Savings			(5,060	)			(2,027	)			(3,033	)			13,552				16,956				(3,404	)
Money market and NOW			245,622				141,257				104,365				186,679				145,674				41,005
Other time deposits			2,229,166				568,932				1,660,234				1,228,900				525,011				703,889
Borrowed funds			63,554				(28,049	)			91,603				172,593				140,352				32,241
Total interest expense			2,533,282				680,113				1,853,169				1,601,724				827,993				773,731
Net interest income(1)		$	992,146			$	(564,338	)		$	1,556,484			$	2,445,072			$	440,371			$	2,004,701

      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. We add back recoveries on loans previously charged to the allowance.

     The provision for loan losses was $318,000 for the year ended December 31, 2007, as compared to $339,000 for the year ended December 31, 2006, a decrease of $21,000 or 6.19%. We decreased the provision for loan losses because for over seven years we have had minimal past dues and charge-offs. After completing the analysis outlined below, we determined during the twelve month period that we had no significant changes in economic factors, personnel, policies or practices during the period that would directly impact the quality of the loan portfolio and warrant a higher provision. We further determined that we have completed two years of experience with the majority of our new lending personnel and a higher legal lending limit and have not experienced any change in our delinquency patterns.

     The provision for loan losses was $339,000 for the year ended December 31, 2006, as compared to $204,000 for the year ended December 31, 2005, an increase of $135,000 or 66.18%. During the twelve month period, we increased the provision for loan losses because of the 44.34% growth in our loan portfolio, particularly the commercial real estate segment, our higher legal lending limit, and the volume of loans generated by the College Park lending team that we hired in August 2005.

     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; the Federal Financial Institutions Examination Council’s Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions and the Interagency Policy Statement on the Allowance for Loan and Lease Losses provided by the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration and Office of Thrift Supervision.

     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. We consider qualitative or environmental factors that are likely to cause estimated credit losses associated with our existing portfolio to differ from historical loss experience. These factors include, but are not limited to, changes in lending policies and procedures, changes in the nature and volume of the loan portfolio, changes in the experience, ability and depth of lending management and the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in our existing portfolio.

     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. At December 31, 2007, we had two non-accrual loans totaling $1.1 million and one loan in the amount of approximately $6,000 past due 30 days at year end. We have not designated a specific allowance for either of these non-accrual loans. We have no other loans past due more than 60 or 90 days. We also do not have any substantive loans comprised of sub-prime mortgages.

     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 is 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 0.78% of total loans at December 31, 2007, 0.85% at December 31, 2006, and 0.91% at December 31, 2005. We have no exposure to foreign countries or foreign borrowers. Based on our analysis and the satisfactory historical performance of the loan portfolio, we believe this allowance appropriately reflects the inherent risk of loss in our portfolio.

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

Allowance for Loan Losses

Year Ended December 31,		2007				2006				2005
Balance, beginning of period		$	1,280,396			$	954,706			$	744,862
Provision for loan losses			318,000				339,000				204,000
Chargeoffs:
Commercial			(6,064	)			(15,772	)			—
Installment			(6,085	)			(2,685	)			(135	)
Total chargeoffs			(12,149	)			(18,457	)			(135	)
Recoveries:
Commercial			—				—				2,997
Installment			490				5,147				2,982
Total recoveries			490				5,147				5,979
Net (chargeoffs) recoveries			(11,659	)			(13,310	)			5,844
Balance, end of period		$	1,586,737			$	1,280,396			$	954,706
Allowance for loan losses to gross loans			0.78	%			0.85	%			0.91	%
Ratio of net-chargeoffs during period to average loans outstanding during period			0.007	%			0.011	%			(0.006	%)

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

Allocation of Allowance for Loan Losses

December 31,		2007								2006								2005
						% of Loans								% of Loans								% of Loans
						in Each								in Each								in Each
		Amount				Category				Amount				Category				Amount				Category
Installment & others		$	10,236				0.46	%		$	8,939				0.45	%		$	6,995				0.57	%
Boat			106,405				8.66				169,093				14.29				148,045				21.22
Mortgage			1,080,897				63.56				869,101				61.55				483,245				60.21
Commercial			389,199				27.32				233,263				23.71				316,421				18.00
Total		$	1,586,737				100.00	%		$	1,280,396				100.00	%		$	954,706				100.00	%

     Non-interest Revenue

     2007 compared to 2006

     The following table outlines the changes in non-interest revenue for the twelve month periods.

		December 31,				December 31,				$				%
		2007				2006				Change				Change
Service charges on deposit accounts		$	292,610			$	266,235			$	26,375				9.91	%
Marine division broker origination fees			272,349				391,738				(119,389	)			(30.48	)
Earnings on bank owned life insurance			340,853				145,880				194,973				133.65
Income (loss) on investment in real estate LLC			24,100				56,278				(32,178	)			(57.18	)
Other fees and commissions			243,402				168,913				74,489				44.10
Total non-interest revenue		$	1,173,314			$	1,029,044			$	144,270				14.02	%

     Service charges on deposit accounts increased due to increases in the number of customers and the services they use. Because of high gasoline prices, inclement weather and general concerns about the economy, the marine industry experienced declining sales during 2007. In September 2007, we discontinued the operations of the marine division and there were minimal broker origination fees earned during the 4^th quarter of 2007. Earnings on bank owned life insurance increased because we invested an additional $4 million in February 2007. Pointer Ridge began leasing its building to tenants in July 2006 and it had minimal expenses in 2006. In 2007, expenses associated with operating the building increased. As a result, Pointer Ridge’s profitability declined in 2007. Other fees and commissions increased primarily because in April 2007, we began leasing the Waldorf office space that we vacated in July 2006 and because of increases in miscellaneous and loan income received from the increased volume of closings on loans and letters of credit.

     Because of the new lenders we have hired and the new College Park, Bowie and Greenbelt branches that we have opened, we expect that customer relationships will continue to grow during 2008. We anticipate this growth will cause an increase in service charges on deposit accounts. As a result of our decision to cease operations in the marine division, we will not have any fee income from the marine division in 2008. We believe the demand in the commercial real estate market will remain stable in 2008 and we will have an additional number of opportunities to provide financing of these facilities. Therefore, other loan fees which are included in other fees and commissions should remain constant. We expect our earnings on bank owned life insurance will increase during 2008 primarily because of the additional $4 million investment in February 2007. We anticipate the income from Pointer Ridge will remain stable in 2008 and will produce break-even profitability. As a result, we expect our earnings in Pointer Ridge during 2008, if any, will be nominal.

     2006 compared to 2005

     The following table outlines the changes in non-interest revenue for the twelve month periods.

		December 31,				December 31,				$				%
		2006				2005				Change				Change
Service charges on deposit accounts		$	266,235			$	241,619			$	24,616				10.19	%
Marine division broker origination fees			391,738				109,669				282,069				257.20
Earnings on bank owned life insurance			145,880				78,358				67,522				86.17
Income (loss) on investment in real estate LLC			56,278				(64	)			56,342
Other fees and commissions			168,913				191,280				(22,367	)			(11.69	)
Total non-interest revenue		$	1,029,044			$	620,862			$	408,182				65.74	%

     Non-interest revenue totaled $1.0 million for the twelve months ended December 31, 2006, an increase of $408,182 or 65.74% from the 2005 amount of $620,862. Non-interest revenue for the twelve months ended December 31, 2006 and December 31, 2005 included fee income from service charges on deposit accounts, broker origination fees from the marine division, income from our investment in real estate LLC (Pointer Ridge) and other fees and commissions.

     For the twelve months ended December 31, 2006, service charges on deposit accounts increased $24,616, marine division broker origination fees increased $282,069, and earnings on bank owned life insurance increased $67,522. Service charges on deposit accounts increased due to increases in the number of customers and the services they used. The marine division’s broker origination fees increased due to the increase in the number of transactions and the average dollar amount of the transactions that the division brokered. Earnings on bank owned life insurance increased because we purchased the investment in June 2005 and had a full year of earnings in 2006 versus a half year of earnings in 2005. Pointer Ridge began leasing its building to tenants in June 2006 and our interest in the earnings for the twelve month period increased $56,342. Other fees and commissions decreased $22,367 because we collected fewer loan fees on construction loans during the year.

     Non-interest Expense

     2007 compared to 2006

     Non-interest expense for the twelve months ended December 31, 2007 was $6.8 million as compared to $5.6 million for the same period in 2006. The following chart outlines the changes in non-interest expenses for the period.

		December 31,				December 31,				$				%
		2007				2006				Change				Change
Salaries		$	3,045,932			$	2,720,022			$	325,910				11.98	%
Employee benefits			953,554				732,447				221,107				30.19
Occupancy			934,277				533,020				401,257				75.28
Equipment			248,182				197,644				50,538				25.57
Data processing			221,107				176,928				44,179				24.97
Other operating			1,371,499				1,201,303				170,196				14.17
Total non-interest expenses		$	6,774,551			$	5,561,364			$	1,213,187				21.81	%

     Salary and benefit expenses increased because of general salary increases and because of the new staff for the Bowie and Greenbelt branches, three new loan officers, and additions to corporate and branch staff. Stock based compensation expense also contributed to the increase and was $66,456 higher during the year ended December 31, 2007 than year ended December 31, 2006 because there were more vested options outstanding to an increased number of directors and employees.

     Occupancy expense increased because of the new corporate headquarters that we opened in July 2006, the addition of the new Bowie branch in July 2006 and the new Greenbelt branch in June 2007. Data processing increased because of the new locations, new services provided by our data processor, and contractual increases. Other operating expenses increased because of increases in director fees, janitorial, business development, travel, advertising, stationery, office, and security expenses.

     In 2008, we anticipate non-interest expenses will increase. We will incur increased rent expense related to the new Greenbelt location that opened in June 2007 and the new College Park location that opened in March 2008. We will also have additional salary and operational expenses associated with the opening of the College Park branch. Because we expect to open the Bowie and Crofton branches in late 2008 or early 2009, we anticipate these branches will also increase salaries, rent, and operational expenses. The closing of the marine division and reductions in staff that occurred in 2007 will offset some of these increases.

     2006 compared to 2005

     The following table outlines the non-interest expenses for the years ended December 31, 2006 and 2005.

		December 31,				December 31,				$				%
		2006				2005				Change				Change
Salaries		$	2,720,022			$	1,933,631			$	786,391				40.67	%
Employee benefits			732,447				333,788				398,659				119.43
Occupancy			533,020				235,979				297,041				125.88
Equipment			197,644				111,560				86,084				77.16
Data processing			176,928				132,209				44,719				33.82
Other operating			1,201,303				828,608				372,695				44.98
Total non-interest expenses		$	5,561,364			$	3,575,775			$	1,985,589				55.53	%

     Non-interest expense for the year ended December 31, 2006 was $5.6 million versus $3.6 million for the same period in 2005. The $2.0 million or 55.56% increase was primarily attributable to a $1.2 million increase in salary and benefit expense, a $297,041 increase in occupancy expense, an $86,084 increase in equipment expense, a $44,719 increase in data processing costs and a $372,695 increase in other operating expenses.

     Salary and benefit expenses increased because of general salary increases and because of the new individuals hired in the marine division, the College Park loan production office, the new staff for the Bowie branch, the new loan officer in Gaithersburg, the new business development officer and additions to corporate and branch staff. At March 1, 2007, we had 52 full time and 4 part time employees compared to 44 full time and 5 part time employees at March 1, 2006. The recognition of stock based compensation awards in our financial statements also increased benefit expenses approximately $107,000.

     Occupancy expense increased because of the new corporate headquarters, the addition of the new Bowie branch in July 2006, and the establishment of the College Park loan production office in August 2005. Data processing increased because of the new locations, new services provided by our data processor, and contractual increases. Other operating expenses increased because of a $67,262 increase in business development and advertising costs, a $41,518 increase in courier costs, an approximately $45,000 increase in costs associated with the move to Bowie and opening of the Bowie branch and a $40,380 increase in broker fees paid by the marine division to outside referral sources.

     Income Taxes

     2007 Compared to 2006

     Income tax expense was $789,053 (33.26% of pre-tax income) for the year ended December 31, 2007 compared to $848,196 (35.02% of pre-tax income) for the same period in 2006. The decrease in the effective tax rate is primarily due to the tax-exempt income generated by the bank owned life insurance and the $12,141 tax benefit associated with the portion of the stock based compensation expense that was related to the issuance of non-qualified options.

     2006 Compared to 2005

     Income tax expense was $848,196 (35.02% of pre-tax income) for the twelve months ended December 31, 2006 as compared to $577,651 (33.65% of pre-tax income) for the same period in 2005. The increase in the effective tax rate is primarily due to the recognition of the stock based compensation expense of approximately $107,000 which is a non-deductible expense offset by an increase in interest income from tax exempt investments.

     Net Income

     2007 Compared to 2006

     For the year ended December 31, 2007 and 2006, net income was $1.6 million or $0.37 per basic and diluted common share. Although net income remained unchanged, there was a $1.0 million increase in net interest income after provision for loan losses, a $59,143 decrease in income taxes, and a $144,270 increase in non-interest revenue, offset by a $1.2 million increase in non-interest expense compared to the same period in 2006.

     2006 Compared to 2005

     Net income was $1.6 million or $0.37 basic and diluted earning per common share for the twelve month period ending December 31, 2006, an increase of $434,912 or 38.19% compared to net income of $1.1 million or $0.44 basic and diluted earnings per common share for the same period in 2005. The increase in net income was the result of a $2.3 million increase in net interest income after provision for loan losses and a $408,182 increase in non-interest revenue. A $2.0 million increase in non-interest expense and a $270,545 increase in income tax expense for the period compared to the same period in 2005 offset the increase in income. Earnings per share decreased on basic and diluted basis because of the increase in the number of average shares outstanding that derived from the public offering in October 2005.

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, 2007 amounted to $11.7 million, a decrease of $5.2 million, or 30.77%, from the December 31, 2006 amount of $16.9 million. Available for sale investment securities decreased to $9.4 million at December 31, 2007 from $14.1 million at December 31, 2006. The decrease in the available for sale investment portfolio occurred because some of these assets matured and we purchased federal funds or deployed the proceeds into loans. Held to maturity securities decreased to $2.3 million on December 31, 2007 as compared to $2.8 million on December 31, 2006 because of maturing investments during the period. The carrying value of available for sale securities included net unrealized losses of $49,127 at December 31, 2007 (reflected as unrealized losses of $29,749 in stockholders’ equity after deferred taxes) as compared to net unrealized losses of $280,092 ($171,921 net of taxes) as of December 31, 2006. In general, the decrease in unrealized losses was a result of the maturity of securities, declining interest rates and a shortening of the remaining term until maturity. 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, 2006 amounted to $16.9 million, an increase of $791,842, or 4.91%, from the December 31, 2005 amount of $16.1 million. Available for sale investment securities increased to $14.1 million at December 31, 2006 from $13.9 million at December 31, 2005. The increase in the available for sale investment portfolio occurred because some of these assets matured and we purchased new securities. Held to maturity securities increased to $2.8 million on December 31, 2006 as compared to $2.2 million on December 31, 2005. The carrying value of available for sale securities included net unrealized losses of $280,092 at December 31, 2006 (reflected as unrealized losses of $171,921 in stockholders’ equity after deferred taxes) as compared to net unrealized losses of $414,777 ($254,590 net of taxes) as of December 31, 2005. In general, the decrease in unrealized losses was a result of the maturity of securities and a shortening of the remaining term until maturity.

     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,		2007				2006				2005
Available For Sale Securities
U.S. Treasury		$	998			$	1,962			$	1,945
U.S. government agency			4,472				7,839				7,148
Municipal securities			2,914				2,889				3,092
Mortgage backed securities			1,009				1,429				1,741
Total Available for Sale Securities		$	9,393			$	14,119			$	13,926
Held To Maturity Securities
U.S. Treasury		$	2,001			$	2,001			$	2,002
U.S. government agency			—				500				—
Municipal securities			301				301				201
Total Held to Maturity Securities		$	2,302			$	2,802			$	2,203
Equity Securities		$	2,080			$	1,576			$	1,103