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                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934
(Fee required)

         For the fiscal year ended    December 31, 1998
                                   -----------------------
         Commission file number:   0-23090
                                 -----------

                               CARROLLTON BANCORP
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                 (Name of Small Business Issuer in Its Charter)

                     MARYLAND                              52-1660951
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 (State or Other Jurisdiction of Incorporation         (I.R.S. Employer
  or Organization)                                     Identification No.)

344 NORTH CHARLES STREET, SUITE 300
BALTIMORE, MARYLAND                                         21201-4301
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(Address of Principal Executive Offices)                    (Zip Code)

       (410) 536-4600
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 (Issuer's Telephone Number)

         Securities registered under Section 12(b) of the Exchange Act:

                                                  NAME OF EACH EXCHANGE
         TITLE OF EACH CLASS                       ON WHICH REGISTERED 
         -------------------                      ---------------------

                   NONE                                     NONE
----------------------------------------------         -------------------

         Securities registered under Section 12(g) of the Exchange Act:

                                  COMMON STOCK
--------------------------------------------------------------------------------
                                (Title of Class)

         Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.

Yes   X      No        
    ------      -------

         Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /x/

         Issuer's revenues for its most recent fiscal year.  $30,116,590.

         Aggregate market value of the voting stock held by non-affiliates:
         $37,593,397.

         State the number of shares outstanding of each of the issuer's classes
of common equity, as


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of the latest practicable date. 1,412,672 shares as of March 16, 1999.

         Transitional Small Business Disclosure Format (check one):

Yes          No    X   
    ------      -------


                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None.

                                     PART I

                         ITEM 1: DESCRIPTION OF BUSINESS

GENERALLY. Carrollton Bancorp (the "Company") is a bank holding company
registered as such under the Bank Holding Company Act of 1956, as amended, and
was organized on January 11, 1990. Carrollton Bank (the "Bank") is a commercial
bank and the principal subsidiary of the Company. The Bank was chartered by an
act of the General Assembly of Maryland (Chapter 727) approved April 10, 1900.
The Bank is engaged in a general commercial and retail banking business.

SERVICE AREA. The service area for the Bank is defined principally by geographic
area. The Bank's twelve bank branches are located in Baltimore City, Baltimore
County, Anne Arundel County, and Carroll County, Maryland. The Bank attracts
deposits and generates loan activity throughout this area primarily through its
branch network. In addition, the Bank has made loans in Harford County, Howard
County and Prince George's County, Maryland, and in Southern Pennsylvania. 
The Bank also has deposit customers who live in Harford County and Howard 
County, Maryland. The Bank also operates an ATM network of 120 machines in 
Maryland, Virginia, Pennsylvania and Delaware, and performs credit card 
servicing for merchants throughout Maryland. The Bank also sponsors national 
retailers in various electronic networks operating as regional switches for 
electronic transactions throughout the country.

DESCRIPTION OF SERVICES. The Bank provides a broad range of consumer and
commercial banking products and services to individuals, businesses,
professionals and governments. The services and products have been designed in
such a manner as to appeal to consumers and business principals.

         The loan portfolio of the Bank consists primarily of loans for which
the cash flow of the borrower serves as the principal source of debt service and
loan retirement, with secondary emphasis on asset-collateral and other forms of
secondary support. In this regard, many small businesses require short-term
inventory financing which can be supported by cash flow and individual assets.
The Bank also engages in asset-based lending, traditional real estate loans and
general consumer loans to individuals. The loan portfolio is approximately 35%
adjustable rate loans and 65% fixed rate in terms of its repricing mix.

         The Bank has established and implemented lending policies and
procedures, underwriting guidelines and internal control systems in order to
conduct its business in a sound and prudent manner. Potential loan customers are
carefully evaluated in order to assess risk and to expedite any later loan
approval process. The Bank monitors and assesses the performance of the smaller
businesses to which it provides funding.



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         The following is a partial listing of the types of services and
products which the Bank offers:

                  -   Commercial loans for businesses, including those for
                      working capital purposes, equipment purchases and accounts
                      receivable and inventory financing.

                  -   Commercial and residential real estate loans for
                      acquisition, refinancing and construction.

                  -   Selected consumer loans including automobile loans,
                      residential mortgages, home equity loans and lines of
                      credit.

                  -   Loans guaranteed by the United States Small Business
                      Administration.

                  -   Money market deposits, demand deposits and NOW
                      accounts and certificates of deposit.

                  -   Letters of credit and remittance services.

                  -   Credit and charge card services.

                  -   Merchant credit card deposit processing.

                  -   Brokerage services for stocks, bonds, mutual funds
                      and annuities.

                  -   A 24-hour ATM Network.

                  -   After-hours depository services.

                  -   Safe deposit boxes.

                  -   Other services, such as direct deposit services,
                      travelers checks and IRA accounts.

         Customer service hours for the Bank are fully competitive with other
institutions in the market area. The Bank also acts as a reseller of services
purchased from other financial institutions for customers requiring services not
offered directly by the Bank.

LENDING ACTIVITIES. The Bank makes various types of loans to borrowers based on,
among other things, an evaluation of the borrowers' net asset value, cash flow,
security and indicated ability to repay. Loans to consumers include residential
mortgages, home equity loans, home improvement loans, overdraft loans, credit
card loans, and installment loans for automobiles, boats and recreational
vehicles. The Bank also makes loans secured by deposit accounts and common
stocks. The Bank's commercial loan product line includes first mortgage loans,
time and demand loans, lines and letters of credit, and asset based financing.



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The Notes to the Consolidated Financial Statements contained in Part II, Item 7
show the classification by type of loan for the whole portfolio.

         First and second residential mortgage loans, made principally through a
subsidiary of the Bank, Carrollton Mortgage Services Inc., ("CMSI") enable
customers to purchase or refinance residential properties. These loans are
secured by liens on the residential property. All first mortgage loans with a
loan to value greater then 80% have private mortgage insurance coverage equal to
or greater than the amount required under the Federal National Mortgage
Association guidelines. CMSI offers a wide variety of adjustable rate and fixed
rate mortgage products. The borrower is required to meet the income and debt
criteria consistent with the underwriting standards of the Federal National
Mortgage Association and Federal Home Loan Mortgage Corporation. CMSI also
reviews the credit history of each applicant. CMSI offers a community homebuyer
program for qualified purchasers whose income is less than or equal to 115% of
the median income for the Baltimore Metropolitan Statistical Area. Under this
program, CMSI will finance 100% of the purchase price, plus up to $5,000 toward
closing costs. The customer must pay their pre-paids out of their own funds, and
must have two months cash reserves. The borrower(s) must also obtain homebuyer
counseling. While the primary emphasis of this program is first time homebuyer,
low to moderate income move-up borrowers may still qualify for the program. It
is intended for those homeowners that will not experience a significant gain on
the sale of their current residence. They cannot own any other real estate at
the time of settlement of the community homebuyer loan. Residential loans are
considered low risk based on the type of collateral (residential property) and
the underwriting standards used. The Bank experienced net losses on residential
mortgage loans during 1996 of $34,000. There were no losses during 1997 and
1998. There were $164,000 of residential mortgage loans delinquent more than 90
days at December 31, 1998. There are no discernible delinquency or loss trends
relating to residential mortgage loans known to management.

         Home equity lines of credit are typically second mortgage loans
(sometimes first mortgages) secured by the borrower's primary residence
structured as a revolving borrowing line with a maximum loan amount. Customers
write checks to access the line. Generally, the Bank has a second lien on the
property behind the first mortgage lien holder. The Bank has a number of
different equity loan products that it offers. Borrowers can choose between
fixed rate loans or loans tied to the prime rate with margins ranging from 0% to
1.5%. The Bank will finance up to 90% of the value of the home in combination
with the first mortgage loan balance and depending on the rate and program. As
with first mortgage residential loans, borrowers are required to meet certain
income and debt ratios. The Bank also has a program which will finance up to
125% of the value of the home, subject to stricter income and debt ratios, with
a maximum loan amount of $25,000. Home equity loans carry a higher level of risk
than first mortgage residential loans because of the second lien position on the
property behind the first mortgage, and because a higher loan to value ratio is
used in the underwriting of the loan. However, the overall risk of loss on home
equity loans is also considered low due to the underlying values of the
collateral. The Bank experienced net losses on home equity loans during 1996 of
$19,000, and net recoveries on home equity loans during 1997 of $12,000. There
were no losses or recoveries on home equity loans during 1998. There were
approximately $82,000 of home equity loans delinquent more than 90 days at
December 31, 1998. There are no discernible delinquency or loss trends relating



                                       4
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to home equity loans known to management.

         Commercial and investment mortgage loans are first mortgage loans made
to individuals or to businesses to finance acquisitions of plant or earning
assets, such as rental property. These loans are secured by a first mortgage
lien on the commercial property, and may be further secured by other property or
other assets depending on the variability of the value of the mortgaged
property. In most instances, these loans are guaranteed personally by the
principals. The Bank typically looks for cash flow from the business at least
equal to 100% coverage of the business debt service, and to income-producing
property to be self-supporting generally with a minimum debt service coverage
ratio of 120% to 125%. Commercial mortgage loans carry more risk than
residential real estate loans. First, commercial mortgage loans tend to be
larger in size, and the properties tend to exhibit more fluctuation in value.
Second, the repayment of the loan is primarily dependent on the success of the
business itself, or the tenants in the case of income producing property.
Economic cycles can affect the success of a business depending on the type of
business. Therefore, business risk to the Bank's customer is involved. The Bank
experienced net losses on commercial mortgage loans in 1998 of $81,000. The Bank
did not experience any losses on commercial mortgage loans during 1997 and 1996.
There were $1,046,000 of commercial mortgage loans past due more than 90 days at
December 31, 1998. This balance was paid off in January, 1999. There are no
known discernible delinquency or loss trends relating to commercial mortgage
loans.

         Construction and land development loans are loans to finance the
acquisition and development of parcels of land and to construct residential
housing or commercial property. The Bank's financing of these types of
transactions principally relates to projects for residential housing development
and construction. The Bank typically will finance 70% to 75% of the discounted
future value of these projects, or 80% of value or 90% of cost, whichever is
less, on a single-family detached home. The loan is collateralized by the
project or real estate itself, and other assets or guarantees of the principals
in most cases. Repayment to the Bank is anticipated from the proceeds of sale of
the final units, or permanent mortgage financing on a residential construction
loan for a single borrower. These types of loans carry a higher degree of risk
than a commercial mortgage loan because often the end result is an anticipated
future event, the timing of which is not always controllable. Interest rates,
buyer preferences, and desired locations are all subject to change during the
period from the time of the loan commitment to final delivery of the final unit,
all of which can change the economics of the project. In addition, real estate
developers to whom these loans are typically made are subject to the business
risk of operating a business in a competitive environment. The Bank did not
experience any losses on construction and land development loans during 1998,
1997 or 1996. There were no construction and land development loans past due
more than 90 days at December 31, 1998. There are no discernible delinquency or
loss trends relating to construction and land development loans known to
management.

         Time and demand loans and lines of credit are loans to businesses for
relatively short periods of time, usually not more than one year. These loans
are made for any valid business purpose. These loans may be secured by assets of
the borrower or guarantor, but also may be unsecured based on the personal
guarantee of the principal. If secured, loans may be



                                       5
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made for up to 100% of the value of the collateral. Time and demand loans and
lines of credit are more risky than secured commercial real estate lending
transactions. The businesses to which these loans are made are subject to normal
business risk, and cash flows of the business may be subject to economic cycles.
In addition, the value of the collateral may fluctuate, or the collateral may be
used for other purposes if not subject to Uniform Commercial Code filings. If
guaranteed by the principal, the net worth and assets of the principal may be
dissipated by demands of the business, or due to other factors. The Bank had net
losses of $236,000 and $24,000 in 1998 and 1997, respectively, and net
recoveries of $6,000 in 1996. There were $232,000 of time and demand and line of
credit loans delinquent more than 90 days at December 31, 1998. There are no
discernible delinquency or loss trends relating to time and demand loans or
lines of credit known to management.

         Home improvement loans are loans made to borrowers to complete
improvements to their homes including such projects as room additions, swimming
pool installations or new roofs. Home improvement loans include those made
directly to customers and those made indirectly or originated through an
approved home improvement dealer. The Bank makes unsecured home improvement
loans to a maximum amount of $12,500, and any loan above that limit is secured
by a deed of trust. Borrowers are required to own their home, and to meet
certain income and debt ratio requirements. The Bank also reviews the credit
history of all applicants. Because they are unsecured or secured by a deed of
trust, these loans are more risky than first mortgage residential lending. This
risk is mitigated somewhat based on the fact that the loans are used to improve
the borrower's home, typically a borrower's most significant asset. In addition,
the income-and-debt-ratio requirement helps determine the borrower's current
ability to repay the loan. In 1998, 1997 and 1996, the Bank had net charge-offs
of home improvement loans of approximately $4,000, $49,000 and $34,000,
respectively. There were no home improvement loans delinquent more than 90 days
at December 31, 1998. There are no discernible loss or delinquency trends
relating to home improvement loans known to management.

         The remainder of the consumer loan portfolio is composed of installment
loans for automobiles, boats and recreational vehicles, credit card lines,
overdraft protection lines, and loans secured by deposit accounts or stocks. The
largest portion of this group is installment loans for automobiles and other
vehicles. The Bank will finance 85% of the cost of a new car purchase, or the
maximum loan amount as determined by the National Automobile Dealers Association
(NADA) publication for used cars. The Bank will finance 85% of the cost of a new
boat or RV, or the maximum loan amount determined by the NADA Boat/RV Guide for
used Boats and RVs. These loans are secured by the vehicle purchased. Borrowers
must meet certain income and debt ratio requirements, and a credit review is
performed on each applicant. These types of loans are subject to the risk that
the value of the vehicle will decline faster than the amount due on the loan.
However, the income-to-debt ratio requirement helps determine the borrower's
current ability to repay. The Bank had net losses on automobile loans in 1998,
1997 and 1996 of $1,000, $5,000 and $11,000, respectively. There were no
automobile or other vehicle loans past due more than 90 days at December 31,
1998. There are no discernible delinquency or loss trends relating to automobile
or other vehicle loans known to management.

         Credit card, overdraft lines and other personal loans are unsecured
lending



                                       6
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arrangements. These loans or lines of credit are made to allow customers to
easily make purchases of consumer goods. The line amounts are subject to fairly
low limits based on an assessment of the customer's credit history and income
and debt ratios. If the lines are handled as agreed, they will typically be
automatically renewed each year. Because they are unsecured, these loans carry a
higher level of risk than secured lending transactions. The Bank attempts to
mitigate significant risk by establishing fairly low credit limits. Net
charge-offs in 1998, 1997 and 1996 were approximately $209,000, $113,000, and
$98,000, respectively. There were approximately $12,000 of credit card,
overdraft loans and other personal loans past due more than 90 days at December
31, 1998. There are no discernible delinquency or loss trends relating to credit
card or overdraft lines known to management, however, the increased losses for
the three year period relate primarily to a higher level of personal bankruptcy
filings.

         Loans secured by savings accounts in the Bank and stock and bond
certificates are very secure forms of lending. The Bank will advance funds for
up to 100% of balances in savings or certificates of deposit accounts in the
Bank. The Bank will advance funds up to 70% of the market value of actively
traded stock certificates and bonds or 60% of the market value of listed but not
actively traded stocks and bonds. Loans secured by stocks and bonds are subject
to margin calls to maintain the loan to value ratio. Collateral is not released
until the loan is repaid, and the borrower is generally required to pay interest
monthly. There were no losses on loans secured by savings accounts or stock and
bond certificates during 1998, 1997 or 1996. There were no loans secured by
savings accounts or stock and bond certificates past due more than 90 days at
December 31, 1998. There are no discernible delinquency or loss trends relating
to loans secured by savings accounts or stock and bond certificates known to
management.

         Reference is also made to Note 4 of the Notes to Consolidated Financial
Statements included on page F-13 in this Report for the composition of the loan
portfolio by type of loan. This Note will indicate the relative size of the
various types of loans to the portfolio in total. Reference is made to the
Statistical Disclosures on page 18 of this Report for an allocation of the
allowance for loan losses by type of loan which also indicates management's
assessment of the degree of risk that each type of loan carries.

         The Bank is the principal originator of the loans it makes, with the
exception of residential mortgage loans and home equity loans and lines of
credit. These types of loans are predominately loans purchased from a network of
brokers or other types of originators with whom the Bank does business. The Bank
has begun to sell loans into the secondary market and therefore derives a small
amount of noninterest income from serviced loans. These income amounts are not
significant to the amounts of noninterest income derived from other sources.

         Reference is made to Note 4 of the Notes to Consolidated Financial
Statements which contains the amounts of nonaccrual and delinquent loans at
December 31, 1998.

INVESTMENT ACTIVITIES. The Bank maintains a portfolio of investment securities
to provide liquidity and income. The current portfolio amounts to about 20% of
total assets, and is invested primarily in U.S. Treasury, U.S. Government
Agency, state and municipal bonds, and



                                       7
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mortgage backed securities with maturities varying from 1999 to 2023. Reference
is made to Note 3 of the Notes to Consolidated Financial Statements included on
page F-11 of this Report and to the Statistical Disclosures on page 18 for
additional information concerning the investment portfolio.

DEPOSIT SERVICES. The Bank offers a wide range of both personal and commercial
types of deposit accounts and services as a means of gathering funds. Types of
deposit accounts available include noninterest bearing demand checking, interest
bearing checking (NOW accounts), savings, money market, certificates of deposit,
individual retirement accounts, and Christmas Club accounts. These accounts
carry varying fee structures depending on the level of services desired by the
customer and varying interest rates depending on the balance in the account
maintained by the customer. Commercial deposit customers may also choose an
overnight investment account which automatically invests excess balances
available in demand accounts on a daily basis in repurchase agreements. The
Bank's customer base for deposits is primarily retail in nature. The Bank does
offer certificates of deposit over $100,000 to its retail and commercial
customers. The Bank does not currently solicit these types of deposits through
deposit brokers or otherwise, but may do so in the future to meet liquidity
needs. The balance of accounts over $100,000 is not significant, and these
accounts are offered principally as accommodations to existing customers.

         Reference is also made to Note 8 of the Notes to Consolidated Financial
Statements included on page F-17 of this Report for additional information
concerning deposits on the Bank.

BROKERAGE ACTIVITIES. Carrollton Financial Services, Inc., a subsidiary of the
Bank, provides full service brokerage services for stocks, bonds, mutual funds
and annuities. For 1998, commission and other income totaled $926,160 and income
after taxes was $191,074.

SOURCES OF BUSINESS. The major focus of the Bank's marketing efforts is both on
individual consumers and on small to medium-sized businesses and professionals
in the Bank's service area. The Bank's ability to generate deposits, loans and
service income is dependent upon the growth of its market and the development
and execution of a marketing strategy. Marketing primarily involves the print,
television and radio media, and sponsorships of various prominent events in the
Bank's market area. Direct mail is used on a sporadic basis, and direct calling
on business customers is performed by branch and commercial lending personnel.
The Bank's customers also promote the bank through word of mouth referral. In
its marketing efforts, the Bank emphasizes the advantages of dealing with a
locally-owned institution which provides personalized service and is sensitive
to the particular needs of consumers and businesses.

COMPETITION. The Bank faces strong competition in all areas of its operations.
This competition comes from entities operating in Baltimore City, Baltimore
County, Anne Arundel County and Carroll County, and includes branches of some of
the largest banks in Maryland. Its most direct competition for deposits
historically has come from other commercial banks, savings banks, savings and
loan associations and credit unions. The Bank also competes for deposits with
money market funds, mutual funds and corporate and government securities. The
Bank competes with the same banking entities for loans, as well as mortgage
banking



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companies and other institutional lenders. The competition for loans varies from
time to time depending on certain factors, including, among others, the general
availability of lendable funds and credit, general and local economic
conditions, current interest rate levels, conditions in the mortgage market and
other factors which are not readily predictable. Some of the Bank's competitors
have greater assets and operating capacity than the Bank.

ASSET MANAGEMENT. The Bank makes available several types of loan services to its
customers as described above, depending on customer needs. Recent emphasis has
been made on originating short-term (one year or less), variable rate commercial
loans and variable rate home equity lines of credit, with the balance of its
funds invested in consumer/installment loans and real estate loans, both
commercial and residential. The addition of a mortgage subsidiary in late 1997
resulted in growth in residential mortgage lending during 1998, and this is
expected to continue. In addition, a portion of the Bank's assets is invested in
high-grade securities and other investments in order to provide income,
liquidity and safety. Such investments include U.S. government and U.S.
government agency securities, mortgage-backed securities and collateralized
mortgage obligations, as well as advances of federal funds to other member banks
of the Federal Reserve System. Subject to the effects of taxes, the Bank also
invests in tax-exempt state and municipal securities with a minimum rating of
"A" by a recognized ratings agency. The Bank's primary source of funds is
customer deposits. Increased usage of wholesale funding sources over the past
two years has been necessary to support growth in the loan portfolio.

         The risk of non-repayment (or deferred payment) of loans is inherent in
the business of commercial banking, regardless of the type of loan or borrower.
The Bank's efforts to expand its loan portfolio to small and medium-sized
businesses may result in the Bank undertaking certain lending risks which are
somewhat different from those involved in loans made to larger businesses. The
Bank's management evaluates all loan applications and seeks to minimize the
exposure to credit risks through the use of thorough loan application, approval
and monitoring procedures. However, there can be no assurance that such
procedures significantly reduce all risks.

EMPLOYEES. As of December 31, 1998, the Bank and its subsidiaries had 161 full
time equivalent employees, 37 of whom were officers. Each officer generally has
responsibility for one or more loan, banking, customer contact, operations, or
subsidiary functions. Non-officer employees are employed in a variety of
administrative capacities. Management does not anticipate any inordinate
difficulty in recruiting and training such additional officers and employees as
it may need in the future. Management believes that relations with its employees
are good.

SUPERVISION AND REGULATION

SUPERVISION AND REGULATION OF THE COMPANY. As a bank holding company, the
Company is subject to the Bank Holding Company Act of 1956, as amended (the
"BHCA"). The BHCA is administered by the Board of Governors of the Federal
Reserve System (the "Board of Governors"), and the Company is required to file
with the Board of Governors such reports and information as may be required
pursuant to the BHCA. The Board of Governors also may examine the Corporation
and any of its nonbank subsidiaries. The BHCA requires every bank



                                       9
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holding company to obtain the prior approval of the Board of Governors before:
(i) it or any of its subsidiaries (other than a bank) acquires substantially all
of the assets of any bank; (ii) it acquires ownership or control of any voting
shares of any bank if after such acquisition it would own or control, directly
or indirectly, more than five percent of the voting shares of such bank; or
(iii) it merges or consolidates with any other bank holding company.

         Under the BHCA, a bank holding company is generally prohibited from
engaging in, or acquiring direct or indirect control of more than five percent
of the voting shares of any company engaged in, non-banking activities. A major
exception to this prohibition is for activities the Board of Governors finds, by
order or regulation, to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Some of the activities
that the Board of Governors has determined by regulation to be properly incident
to the business of a bank holding company are: making or servicing loans and
certain types of leases; engaging in certain investment advisory and discount
brokerage activities; performing certain data processing services; acting in
certain circumstances as a fiduciary or as an investment or financial advisor;
ownership of certain types of savings associations; engaging in certain
insurance activities; and making investments in certain corporations or projects
designed primarily to promote community welfare. The Board of Governors has
added ownership of certain types of savings associations to the list of
permissible activities of a bank holding company.

         Certain provisions of the Federal Deposit Insurance Corporation
Improvements Act of 1991 ("FDICIA") also may impact the operations of the
Company. FDICIA requires that the Board of Governors adopt regulations
establishing safety and soundness standards for bank holding companies relating
to: (i) internal controls, information systems and internal audit systems; (ii)
loan documentation; (iii) credit underwriting; (iv) interest rate exposure; (v)
asset growth; and (vi) compensation and benefit standards for officers,
directors, employees and principal shareholders. The Board of Governors proposed
regulations to implement this requirement in April 1993. Final regulations were
to become effective by December 1,1993. FDICIA also requires any bank holding
company which controls an undercapitalized insured bank to act as a "source of
strength" to such bank. See "Holding Company Guaranty" below. Finally, FDICIA
permits the appropriate federal bank regulatory agency to require a bank holding
company to divest itself of a bank subsidiary in certain circumstances. See
"Prompt Corrective Action" below.

         The Company is an "affiliate" of the Bank under the Federal Reserve
Act, which imposes certain restrictions on: (i) loans by the Bank to the
Company; (ii) investments in the stock or securities of the Company; and (iii)
the Bank taking stock or securities of the Company as collateral for loans by it
to a borrower. See "Transactions with Affiliates" below.

         The Company also is an affiliate of the Bank under the Maryland
Financial Institutions Article of the Annotated Code of Maryland (the "Financial
Institutions Article"). As such, the Commissioner of Financial Regulation for
the State of Maryland (the "Commissioner") has the same authority to examine the
business of the Company that it has to examine the business of the Bank.



                                       10
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         Federal law generally prohibits the current acquisition of banks or
bank holding companies in Maryland by out-of-state banks or bank holding
companies, although the Financial Institutions Article allows regional
interstate banking by permitting banking organizations in certain states to
acquire Maryland banking organizations if Maryland banking associations are
allowed to acquire banking organizations in their states. As a result of this
provision, banking organizations in other states, most significantly North
Carolina, Pennsylvania and Virginia, have entered the Maryland market through
acquisitions of Maryland institutions. Those acquisitions are subject to federal
and Maryland approval. The so-called "Douglas Amendment" to the Bank Holding
Company Act was amended effective September 29, 1995 to allow an "adequately
capitalized and adequately managed" bank holding company to acquire a bank or
substantially all of its assets located in any other state regardless of whether
the acquisition is expressly authorized under state law.

         President Clinton also signed into law a bill which, among other
things, allows interstate branching by banking organizations June 1, 1997,
subject to each states' separate decision to allow interstate branch banking
within the state. As a result of such legislation, it is anticipated that
competition by financial institutions within Maryland may increase due to
entrance into the market place by branches of out-of-state banks. Such
legislation could also spur increased acquisition activity of Maryland
institutions by out-of-state organizations. During the 1995 legislative session,
the State of Maryland passed legislation to allow interstate branch banking
within Maryland.

SUPERVISION AND REGULATION OF THE BANK. The Bank is the only direct subsidiary
of the Company. The Bank operates as a banking institution incorporated under
the laws of the State of Maryland and is subject to examination by the
Commissioner. The Bank is not a member of the Federal Reserve System (an
"insured nonmember bank") and as such, its primary federal regulator is the
Federal Deposit Insurance Corporation (the "FDIC"). Deposits in the Bank are
insured by the FDIC. The Commissioner and the FDIC regulate or monitor all areas
of the Bank's operations, including reserves, loans, loans to directors,
officers or principal shareholders, loans to one borrower, capital, investments,
borrowings, deposits, mergers, issuance of securities, payment of dividends,
interest rates payable on deposits, interest rates or fees chargeable on loans,
establishment of branches, corporate reorganizations and maintenance of books
and records.

         EXAMINATIONS. Pursuant to FDICIA, and subsequent amendments thereto,
examinations of insured nonmember banks having assets of $250,000,000 or more
must be conducted no less frequently than every 12 months, and examinations of
insured nonmember banks having assets of less than $250,000 must be conducted no
less frequently than every 18 months. The Bank is subject to assessments by the
FDIC to cover the costs of such examinations. As a result of such examinations,
the FDIC may revalue assets of the Bank and require establishment of specific
reserves in amounts equal to the difference between such revaluation and the
book value of the assets.

         SAFETY AND SOUNDNESS. The FDIC is authorized to promulgate regulations
to ensure the safe and sound operations of insured nonmember banks and may
impose various requirements and restrictions on the activities of insured
nonmember banks. Additionally, under FDICIA, the FDIC was required to prescribe
safety and soundness regulations no later



                                       11
<PAGE>


than December 1, 1993 relating to: (i) internal controls, information systems,
and internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate exposure; (v) asset growth; and (vi) compensation and benefit
standards for officers, directors, employees and principal shareholders.

         LOANS AND DEPOSIT PRODUCTS. Interest and certain other charges
collected or contracted for by the Bank are subject to state usury and consumer
protection laws and certain federal laws concerning interest rates. The Bank's
loan operations are also subject to certain federal laws applicable to credit
transactions, such as the Truth-in-Lending Act (governing disclosures of credit
terms to consumer borrowers), the Equal Credit Opportunity Act (prohibiting
discrimination on the basis of race, creed or other prohibited factors in
extending credit), the Fair Credit Reporting Act (governing the use of
information from and provision of information to credit reporting agencies and
others), the Fair Debt Collection Practices Act (governing the manner in which
consumer debts may be collected), and the rules and regulations of the various
federal agencies charged with the responsibility of implementing such federal
laws. The deposit operations of the Bank also are subject to the Electronic
Funds Transfer Act (governing 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), the Truth-in-Savings Act
(governing disclosures of terms applicable to deposit accounts), the Expedited
Funds Availability Act (governing the availability of certain funds deposited
into transaction accounts), and the rules and regulations of the Board of
Governors implementing such acts.

         Pursuant to FDICIA, the FDIC has adopted regulations prescribing
standards for extensions of credit by insured nonmember banks secured by liens
on or interests in real estate and made for the purpose of financing the
construction of a building or other improvements to real estate. The FDIC
regulations require insured nonmember banks to establish and maintain written
internal real estate lending policies consistent with safe and sound banking
practices and appropriate to the size of the bank. These policies must include
loan portfolio diversification standards, prudent underwriting standards
(including clear and measurable loan-to-value limits), loan administration
procedures, and documentation, approval and reporting requirements to monitor
compliance with the policies. Finally, the regulations require insured nonmember
banks to monitor conditions in its real estate market to ensure that its lending
policies continue to be appropriately based on current market conditions.

         CAPITAL REQUIREMENTS. Under regulations promulgated by the FDIC,
insured nonmember banks currently are required to maintain "core" or "tier 1"
capital of at least 3% of total assets (the "Leverage Ratio"). For all but the
most highly rated banks, the minimum Leverage Ratio requirement will be 4% to 5%
of total assets. Tier 1 capital consists of: (i) common shareholders' equity,
noncumulative perpetual preferred stock and minority interests in consolidated
subsidiaries; (ii) minus intangible assets (other than certain purchased
mortgage and credit card servicing rights); (iii) minus certain losses, and
minus investments in certain securities subsidiaries.

         In addition, each insured nonmember bank also must maintain a "tier 1
risk-based capital ratio" of 4%. The "tier 1 risk-based capital ratio" is
defined in FDIC regulations as the ratio of tier 1 capital to "risk-weighted
assets." A bank's total risk-weighted assets are



                                       12
<PAGE>


determined by: (i) converting each of its off-balance sheet items to an
on-balance sheet credit equivalent amount; (ii) assigning each on-balance sheet
asset and the credit equivalent amount of each off-balance sheet item to one of
the five risk categories established in the FDIC's regulations; and (iii)
multiplying the amounts in each category by the risk factor assigned to that
category. The sum of the resulting amounts constitutes total risk-weighted
assets.

         Finally, each insured nonmember bank is required to maintain a "total
risk-based capital ratio" of at least 8%. The "total risk-based capital ratio"
is defined in FDIC regulations as the ratio of total qualifying capital to
risk-weighted assets (as defined above). Total capital, for purposes of the
risk-based capital requirement, consists of the sum of tier 1 capital (as
defined for purposes of the Leverage Ratio) and supplementary capital.
Supplementary capital includes such items as cumulative perpetual preferred
stock, long-term and intermediate-term preferred stock, term subordinated debt
and general valuation loan and lease loss allowances (but only in an amount of
up to 1.25% of total risk-weighted assets). The maximum amount of supplementary
capital that may be counted towards satisfaction of the total capital
requirement is limited to 100% of core capital. Additionally, term subordinated
debt and intermediate-term preferred stock only may be included in supplementary
capital up to 50% of tier 1 capital.

         Capital requirements higher than the generally applicable minimum
requirements may be established for a particular insured nonmember bank if the
FDIC determines that the bank's capital is or may become inadequate in view of
its particular circumstances. Individual minimum capital requirements may be
imposed where a bank is receiving special supervisory attention, has a high
degree of exposure to interest rate risk, or poses other safety or soundness
concerns. Deficient capital may result in the suspension of an institution's
deposit insurance.

         Under FDICIA, the FDIC was required to revise its risk-based capital
standard no later than June 19, 1993 to ensure that such standard takes adequate
account of: (i) interest rate risk; (ii) concentration of credit risk; and (iii)
the risk of nontraditional activities and to adequately reflect the actual
performance and expected risk of loss on multifamily mortgages. Although the
FDIC, together with the Office of the Comptroller of the Currency and the Board
of Governors published a joint notice of proposed rule making addressing the
interest rate risk issue, no final action has occurred with respect thereto nor
has the FDIC taken any action to date with respect to concentration of credit
risk, the risk of nontraditional activities or the expected risk on multifamily
mortgages.

         PROMPT CORRECTIVE ACTION. Under FDIC regulations, any insured nonmember
bank that receives notice from the FDIC that it is undercapitalized,
significantly undercapitalized or critically undercapitalized must file a
capital restoration plan with the FDIC addressing, among other things, the
manner in which the bank will increase its capital to comply with all applicable
capital standards. Under the prompt corrective action regulation adopted by the
FDIC, an institution will be considered: (i) "well capitalized" if the
institution has a total risk-based capital ratio of 10% or greater, a tier 1
risk-based capital ratio of 6% or greater, and a Leverage Ratio of 5% or greater
(provided the institution is not subject to an order, written agreement, capital
directive or prompt corrective action to meet and maintain a specified



                                       13
<PAGE>


capital level for any capital measure); (ii) "adequately capitalized" if the
institution has a total risk-based capital ratio of 8% or greater, a tier 1
risk-based capital ratio of 4% or greater, and a Leverage Ratio of 4% or greater
(3% or greater if the institution is rated composite 1 in its most recent report
of examination); (iii) "undercapitalized" if the institution has a total
risk-based capital ratio of less than 8%, or a tier 1 risk-based capital ratio
of less than 4%, or a Leverage Ratio of less than 4% (3% if the institution is
rated composite 1 in its most recent report of examination); (iv) "significantly
undercapitalized" if the institution has a total risk-based capital ratio of
less than 6%, or a tier 1 risk-based capital ratio of less than 3%, or a
Leverage Ratio that is less than 3%; and (v) "critically undercapitalized" if
the institution has a ratio of tangible equity to total assets that is less than
2%. The regulation also permits the FDIC to determine that an institution should
be placed in a lower category based on the existence of an unsafe and unsound
condition or on other information, such as the institution's examination report,
after written notice.

         The degree of regulatory intervention mandated by FDICIA and the prompt
corrective action regulation is tied to an insured nonmember bank's capital
category, with increasing scrutiny and more stringent restrictions being imposed
as a bank's capital declines. The prompt corrective actions specified by FDICIA
for undercapitalized banks include increased monitoring and periodic review of
capital compliance efforts, a requirement to submit a capital restoration plan,
restrictions on dividends and total asset growth, and limitations on certain new
activities (such as opening new branches and engaging in acquisitions and new
lines of business) without FDIC approval. Banks that are significantly
undercapitalized or critically undercapitalized may be required to raise
additional capital so that the bank will be adequately capitalized or be
acquired by, or combined with, another bank if grounds exist for appointing a
receiver. Further, the FDIC may restrict such banks from (i) entering into any
material transaction without the prior approval of the FDIC; (ii) making
payments on subordinated debt; (iii) extending credit for any highly leveraged
transaction; (iv) making any material change in accounting methods; (v) engaging
in certain affiliate transactions; (vi) paying interest on deposits in excess of
the prevailing rates of interest in the region where the institution is located;
(vii) paying excess compensation or bonuses; and (viii) accepting deposits from
correspondent depository institutions. In addition, the FDIC may require that
such banks: (a) hold a new election for directors, dismiss any director or
senior executive officer who held office for more than 180 days immediately
before the institution became undercapitalized, or employ qualified senior
executive officers; and (b) divest or liquidate any subsidiary which the FDIC
determines poses a significant risk to the institution.

         Any company which controls a significantly undercapitalized insured
nonmember bank may be required to: (i) divest or liquidate any affiliate other
than an insured depository institution; or (ii) divest the bank if the FDIC
determines that divestiture would improve the bank's financial condition and
future prospects. Generally a conservator or receiver must be appointed for a
critically undercapitalized bank no later than 90 days after the bank becomes
critically undercapitalized, subject to a limited exception for banks which are
in compliance with an approved capital restoration plan and which the FDIC
certifies as not likely to fail. Additionally, the FDIC may impose such other
restrictions on a capital-deficient bank as the FDIC deems necessary or
appropriate for the safety and soundness of the bank, its depositors and
investors, including limitations on investments and lending activities. The
failure by a bank to materially comply with an approved capital plan constitutes
an unsafe or unsound



                                       14
<PAGE>


practice.

         HOLDING COMPANY GUARANTY. FDICIA and the regulations promulgated by the
FDIC pursuant thereto also require any company that has control of an
"undercapitalized" insured nonmember bank, in conjunction with the submission of
a capital restoration plan by the bank, to guarantee that the bank will comply
with the plan and provide appropriate assurances of performance. The aggregate
liability of any such controlling company under such guaranty is limited to the
lesser of: (i) 5% of the bank's assets at the time it became undercapitalized;
or (ii) the amount necessary to bring the bank into capital compliance at the
time the bank fails to comply with the terms of its capital plan.

         BROKERED AND OTHER DEPOSITS. Under applicable FDIC regulations, only
well-capitalized depository institutions may solicit, accept, renew or roll over
any brokered deposit. Adequately-capitalized depository institutions may accept,
renew or roll over brokered deposits only after obtaining a waiver from the
FDIC. Adequately-capitalized institutions are subject to limits on rates of
interest they may pay on brokered deposits. Undercapitalized institutions are
subject to limits on rates of interest they may pay on deposits in general.

         LIMITATION ON BANK ACTIVITIES. The scope of activities in which an
insured nonmember bank may engage and the permissible investments which an
insured nonmember bank may make are subject to federal and Maryland law.
Further, pursuant to FDICIA and the regulations of the FDIC promulgated pursuant
thereto, an insured nonmember bank may engage only in those activities, and make
only those investments, as are permissible for national banks. National banks
generally are permitted to engage in certain enumerated banking functions and
all such activities as are incidental thereto. Further, national banks, and as a
result of FDICIA, insured nonmember banks are severely limited as to the types
of debt and equity securities in which such banks may invest.

         TRANSACTIONS WITH AFFILIATES. Transactions engaged in by an insured
nonmember bank or one of its subsidiaries with affiliates of such bank are
subject to the affiliate transactions restrictions contained in Section 23A and
23B of the Federal Reserve Act in the same manner and to the same extent as such
restrictions apply to transactions engaged in by a Federal Reserve System member
bank or one of its subsidiaries with affiliates of that member bank. Section 23A
of the Federal Reserve Act imposes both quantitative and qualitative
restrictions on transactions engaged in by a member bank or one of its
subsidiaries with an affiliate, while Section 23B of the Federal Reserve Act
requires, among other things, that all transactions with affiliates be on terms
substantially the same, or at least as favorable to the member bank or the
subsidiary, as the terms that would apply, or would be offered in, a comparable
transaction with an unaffiliated party.

         Loans made by an insured nonmember bank to its directors, executive
officers and principal shareholders, to the directors, executive officers and
principal shareholders of its affiliates, or to the related interests of any of
the foregoing (collectively, "insiders") must comply with Maryland law and the
requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and certain
of the regulations of the Board of Governors promulgated pursuant thereto,
except to the extent more stringent requirements are established by the FDIC.
Among other things, Sections 22(g) and 22(h) of the Federal Reserve Act require
that all



                                       15
<PAGE>


loans to insiders be made on substantially the same terms as those prevailing at
the time for comparable transactions with unaffiliated borrowers and not involve
more than the normal risk of repayment or present other unfavorable features.
Maryland law further requires that such loans with limited exceptions be
approved by the board of directors or executive committee and be reviewed every
six months by the board. Additionally, the aggregate amount of loans or
extensions of credit outstanding to any insider may not exceed the loans to one
borrower limitation applicable to national banks. Further, FDICIA limits the
aggregate amount of loans or extension of credit outstanding to all insiders to
100% of the amount of unimpaired capital and unimpaired surplus of the
institution.

         REGULATORY RESTRICTIONS ON THE PAYMENT OF DIVIDENDS BY THE BANK TO THE
COMPANY. FDICIA restricts the ability of federally-insured banks to pay any
dividend (other than a dividend in the form of additional shares, or options to
purchase additional shares, of the bank) if, after paying the dividend, the bank
would be undercapitalized.

         COMMUNITY REINVESTMENT. The Community Reinvestment Act (the "CRA") and
the regulations of the FDIC promulgated pursuant thereto require each insured
nonmember bank to delineate its local community, adopt a CRA statement listing
the local community and the types of credit the bank is prepared to extend in
that community and to make its CRA statement available for public inspection.
The FDIC periodically evaluates performance and compliance with the CRA
statement. The failure to adequately perform community reinvestment activities
could result in the denial of applications to acquire banking and non-banking
institutions, establish branches, obtain deposit insurance for newly-chartered
banks, or to relocate the main office or a branch office of a bank.

         INSURANCE OF DEPOSITS. The Bank's deposits are insured by the FDIC
through the Bank Insurance Fund (the "BIF") up to a maximum of $100,000 for each
insured depositor. The insurance premium payable by each BIF member is based on
the institution's assessment base (generally total deposit accounts subject to
certain adjustments). The premiums are paid in quarterly assessments. The FDIC
promulgated regulations establishing a risk-based assessment system commencing
in 1993.

         Under the risk-based assessment system, each institution is assigned to
one of three capital groups and to one of three supervisory subgroups for
purposes of determining an assessment rate. The capital group is determined by
the institution's regulatory capital position. The supervisory subgroup
assignments are based on a determination by the FDIC's Director of the Division
of Supervision. Institutions can request a review of the supervisory subgroup
assignment. Under this formula, well-capitalized institutions classified as
Subgroup "A" (financially sound institutions with only a few minor weaknesses)
will pay the most favorable assessment rate of 0%, subject to a minimum
assessment, while undercapitalized institutions classified as Subgroup "C"
(institutions which pose a substantial probability of loss to the BIF unless
corrective action is taken) will pay the least favorable assessment rate of
0.27%. In addition, as a result of federal legislation during 1996, BIF insured
financial institutions are assessed for repayment of the Financing Corporation
(FICO) bonds. The currently assessed annual FICO BIF rate is .013% of deposits.
The Company's subsidiary bank total insurance premium (FDIC and FICO combined)
is currently the minimum required by the FDIC and amounts to approximately
$30,000 annually based on the Bank's current



                                       16
<PAGE>


deposit level.

         Insurance of deposits may be terminated by the FDIC after notice and
hearing, upon a finding by the FDIC that an insured nonmember bank has engaged
in unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, rule, regulation, order or
condition imposed by, or written agreement with, the FDIC. Additionally, the
FDIC may temporarily suspend insurance on new deposits received by an insured
nonmember bank that has no tangible capital and no goodwill includible in core
capital.

INCOME TAXES. The Company and its subsidiaries are required to file annual
income tax returns with both the Internal Revenue Service (the "IRS") and the
taxing authorities in any state in which they are qualified to do business.
Because the Bank is under $500 million in asset size, it is permitted to use the
reserve method of tax accounting for determining bad debt deductions for income
tax purposes. At December 31, 1998, the Bank had a tax bad debt reserve of
$608,000 and a book bad debt reserve of $2.4 million. The Bank has provided a
deferred tax asset on its books for the difference between its tax and book bad
debt reserves. If the Bank were to grow to a size of $500 million or greater, it
would be required to recapture its tax bad debt reserve over a four year period
and pay taxes on that amount. For financial accounting purposes, the payment of
these taxes would be offset by an increase in the deferred tax asset related to
the difference between tax and book bad debt reserves, potentially subject to a
total deferred tax asset limitation based on reasonable recovery under current
accounting literature.

         Although the Company currently pays income taxes based on current
marginal rates, the Bank has a portfolio of state and municipal securities which
earn interest which is not taxed for federal income tax purposes. For that
reason, the Bank may be subject to the Alternative Minimum Tax ("AMT")
provisions of the Internal Revenue Code. The AMT provisions in general limit the
benefit available from investing in tax free obligations, and require companies
to pay the higher of taxes computed at 34% of income less the tax free income,
or 20% of total income. Any amounts paid under the AMT are carried over and are
available as a credit in future years.

SECURITIES LAWS. The Company and certain of its directors, officers and
shareholders are subject to the Securities Act of 1934 and a broad range of both
federal and state securities laws including, by way of example, the obligation
to file annual, quarterly and other periodic reports with the appropriate
authorities, soliciting proxies and conducting shareholders' meetings in
accordance with the 1934 Act's proxy rules, and complying with the reporting and
"short-swing" profit recovery provisions imposed by 1934 Act Section 16.

MONETARY POLICIES. Banking is a business which depends on interest rate
differentials. In general, the differences between the interest paid by a bank
on its deposits and other borrowings and the interest received by the bank on
loans extended to its customers and securities held in its investment portfolio
constitute the major portion of a bank's earnings. Consequently, the earnings
growth of the Bank is influenced by economic conditions generally, both domestic
and foreign, and also on the monetary and fiscal policies of the United States
and its agencies, particularly the Federal Reserve Board, which regulates the



                                       17
<PAGE>


supply of money through various means, including open market transactions in
United States government securities. The nature and timing of changes in such
policies and their impact on the Bank cannot be predicted, although this
instrument of monetary policy may cause volatile fluctuations in short term
interest rates, and it can have a direct, adverse effect on the operating
results of financial institutions generally. Consequently, Federal Reserve
monetary policies have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the
future.

         During the last several years, federal legislation and actions by
various federal regulatory authorities have significantly increased the
competition among commercial banks, savings and loan associations, savings bank,
and other financial institutions through, among other things, the elimination of
virtually all rate ceilings on interest-bearing deposits.



                         ITEM 2: DESCRIPTION OF PROPERTY

         Both the Bank's main branch and certain of the Company's executive and
administrative offices are located in the Bank's headquarters building which it
owns in downtown Baltimore, Maryland. The Bank owns buildings for three of its
other branch office locations as well. The Bank leases space for the remaining
eight branches, and for its operations center which primarily houses back-office
functions. Current lease terms expire in 1999 through 2014 and contain renewal
options ranging from 5 to 20 years.

         The Bank has purchased the furniture and fixtures required for its
headquarters, operations center and branch network. The Bank has purchased the
computer/teller equipment in its branch network and the equipment used for
administrative functions. The Bank purchased new computer equipment used in the
data processing department which supports its operations in early 1998.

                            ITEM 3: LEGAL PROCEEDINGS

         There are no pending legal proceedings in which the Company or any of
its subsidiaries is a defendant for claims or damages which exceed $50,000.


           ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

         Not applicable.

                             STATISTICAL DISCLOSURES

         The following statistical information should be read in conjunction
with the Audited Consolidated Financial Statements contained in Section F of
this document and Management's Discussion and Analysis of Financial Condition
and Results of Operations beginning on page 34 of this document. The following
statistical information contained herein is presented to help the reader gain
additional insight to information and discussion



                                       18
<PAGE>


presented in the Audited Consolidated Financial Statements and in Management's
Discussion and Analysis.

     ITEM 1: DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY;
                    INTEREST RATES AND INTEREST DIFFERENTIAL

AVERAGE BALANCES, INTEREST AND YIELDS

         The following chart contains average balance sheet information for
1998, 1997 and 1996, and indicates the related interest income or expense and
calculated yield. Non-accruing loans are included in the average balance amounts
of the applicable portfolio, but only the amount of interest actually recorded
as income on non-accrual loans is included in the interest income column.















                                       19
<PAGE>


                     Average Balances, Interest, and Yields

<TABLE>
<CAPTION>

                                                                               1998
                                                         ------------------------------------------------
                                                         AVERAGE BALANCE            INTEREST        YIELD
                                                         ---------------            --------        -----
<S>                                                       <C>                     <C>               <C>
ASSETS

   Federal funds sold                                     $  1,762,230            $    115,545      6.56%

   Investment securities

      U.S. Treasury                                          1,963,488                 134,260       6.84

      U.S. Government agency                                24,681,036               1,678,398       6.80

      State and municipal                                   24,570,127               1,755,723       7.15

      Mortgage-backed securities                            14,277,000                 915,588       6.41

      Other                                                  4,838,476                 268,689       5.55
                                                          ------------            ------------      -----

                                                            70,330,127               4,752,658       6.76
                                                          ------------            ------------      -----

   Loans

      Demand and time                                       26,357,879               2,610,069       9.90

      Residential mortgage                                 114,356,278               8,907,738       7.79

      Commercial mortgage and construction                  37,011,680               3,518,657       9.51

      Installment and credit card                            9,718,837                 906,869       9.33

      Lease financing                                        3,764,111                 311,465       8.27
                                                          ------------            ------------      -----

                                                           191,208,785              16,254,798       8.50
                                                          ------------            ------------      -----

   Total interest-earning assets                           263,301,142              21,123,001       8.02

   Non-interest-bearing cash                                22,365,140

   Bank premises and equipment                               6,816,953

   Other assets                                              5,029,286

   Allowance for loan losses                                (2,250,497)

   Unrealized gains on available for sale securities         1,669,556
                                                          -------------           ------------

                                                          $296,931,580             $21,123,001
                                                          ------------            ------------
                                                          ------------            ------------


LIABILITIES AND SHAREHOLDERS' EQUITY

   Interest-bearing deposits

      Savings and NOW                                     $ 73,497,430             $ 1,566,593       2.13%

      Money market                                          55,545,497               2,404,556       4.33

      Other time                                            69,855,240               3,950,261       5.65
                                                          ------------            ------------      -----

                                                           198,898,167               7,921,410       3.98 

      Borrowed funds                                        32,087,248               1,675,313       5.22
                                                          ------------            ------------      -----

                                                           230,985,415               9,596,723       4.15

   Non-interest-bearing deposits                            32,968,381

   Other liabilities                                         2,339,801

   Shareholders' equity                                     30,637,983
                                                          ------------            ------------
                                                          ------------

      Total liabilities and equity                        $296,931,580             $ 9,596,723
                                                          ------------            ------------
                                                          ------------            ------------

NET YIELD ON INTEREST-EARNING ASSETS                      $263,301,142            $ 11,526,278      4.38%
                                                          ------------            ------------
                                                          ------------            ------------
</TABLE>


Interest on investments and loans is presented on a fully taxable equivalent
basis, using regular income tax rates.



                                       20
<PAGE>


                     Average Balances, Interest, and Yields
                                   (Continued)


<TABLE>
<CAPTION>

                                                                               1997
                                                         ------------------------------------------------
                                                         AVERAGE BALANCE            INTEREST        YIELD
                                                         ---------------            --------        -----
<S>                                                       <C>                     <C>               <C>

ASSETS
   Federal funds sold                                     $  2,879,315            $    158,874      5.52%
   Interest-bearing deposits                                         -                       -          -

   Investment securities
      U.S. Treasury                                          3,664,192                 255,452       6.97
      U.S. Government agency                                36,833,642               2,534,690       6.88
      State and municipal                                   21,046,244               1,515,037       7.20
      Mortgage-backed securities                            22,295,487               1,462,834       6.56
      Other                                                  4,123,865                 259,251       6.29
                                                         -------------             -----------      -----
                                                            87,963,430               6,027,264       6.85
                                                         -------------             -----------      -----
   Loans
      Demand and time                                       29,086,133               2,969,332      10.21
      Mortgage and construction                            117,434,568               9,936,247       8.46
      Installment and credit card                           12,678,653               1,163,251       9.17
                                                         -------------             -----------      -----
                                                           159,199,354              14,068,830       8.84
                                                         -------------             -----------      -----
   Total interest-earning assets                           250,042,099              20,254,968       8.10

   Non-interest-bearing cash                                17,516,297
   Bank premises and equipment                               5,400,850
   Other assets                                              4,387,500
   Allowance for loan losses                                (2,289,402)
   Unrealized gains on available for sale securities           509,357
                                                         -------------            ------------

      Total assets                                        $275,566,701             $20,254,968
                                                         -------------            ------------
                                                         -------------            ------------

LIABILITIES AND SHAREHOLDERS' EQUITY
   Interest-bearing deposits
      Savings and NOW                                     $ 71,913,572             $ 1,632,158       2.27%
      Money market                                          58,261,504               2,580,236       4.43
      Other time                                            68,450,581               3,915,808       5.72
                                                         -------------            ------------      -----
                                                           198,625,657               8,128,202       4.09
      Borrowed funds                                        16,221,009                 847,610       5.23
                                                         --------------             ----------      -----
                                                           214,846,666               8,975,812       4.18
   Non-interest-bearing deposits                            30,438,957
   Other liabilities                                         1,321,627

</TABLE>




                                       21
<PAGE>


<TABLE>


<S>                                                       <C>                     <C>               <C>
   Shareholders' equity                                     28,959,451
                                                         -------------             -----------

      Total liabilities and equity                        $275,566,701             $ 8,975,812
                                                         -------------             -----------
                                                         -------------             -----------
NET YIELD ON INTEREST-EARNING ASSETS                      $250,042,099             $11,279,156      4.51%
                                                         --------------             ----------      -----
                                                         --------------             ----------      -----


</TABLE>

Interest on investments and loans is presented on a fully taxable equivalent
basis, using regular income tax rates.




                                       22
<PAGE>


                     Average Balances, Interest, and Yields
                                   (Continued)
<TABLE>
<CAPTION>

                                                                               1996
                                                         ------------------------------------------------
                                                         AVERAGE BALANCE            INTEREST       YIELD
                                                         ---------------            --------       -----
<S>                                                       <C>                     <C>              <C>
ASSETS
   Federal funds sold                                       $  2,000,000         $   107,404       5.37%
   Interest-bearing deposits                                      80,328               4,781       5.95
   Investment securities
      U.S. Treasury                                            6,287,274             406,733       6.47
      U.S. Government agency                                  40,287,442           2,568,964       6.38
      State and municipal                                     17,076,309           1,221,347       7.15
      Mortgage-backed securities                              23,609,276           1,563,854       6.62
      Other                                                    2,829,995             148,756       5.26
                                                             ------------         ----------       ----
                                                              90,090,296           5,909,654       6.56
                                                             ------------         ----------       ----
   Loans
      Demand and time                                         26,141,357           2,708,450      10.36
      Mortgage and construction                              104,423,480           8,860,566       8.49
      Installment and credit card                             15,730,078           1,349,889       8.58
                                                            -------------         ----------       ----
                                                             146,294,915          12,918,905       8.83
                                                            -------------        -----------       ----
   Total interest-earning assets                             238,465,539          18,940,744       7.94

   Non-interest-bearing cash                                  15,289,149 
   Bank premises and equipment                                 4,324,119 
   Other assets                                                5,054,500 
   Allowance for loan losses                                  (2,256,400)
   Unrealized gains on available for sale securities              26,752
                                                            -------------        -----------

      Total assets                                          $260,903,659         $18,940,744
                                                            -------------        -----------
                                                            -------------        -----------

LIABILITIES AND SHAREHOLDERS' EQUITY
   Interest-bearing deposits
      Savings and NOW                                       $ 70,472,716         $ 1,740,092       2.47%
      Money market                                            61,690,578           2,669,164       4.33
      Other time                                              63,379,561           3,698,671       5.84
                                                            -------------        -----------       ----
                                                             195,542,855           8,107,927       4.15 
      Borrowed funds                                           8,512,282             440,815       5.18
                                                            -------------         ----------       ----
                                                             204,055,137           8,548,742       4.19
   Non-interest-bearing deposits                              28,169,827
   Other liabilities                                           1,510,893
   Shareholders' equity                                       27,167,802
                                                            -------------         ----------


</TABLE>



                                       23
<PAGE>


<TABLE>


<S>                                                       <C>                     <C>              <C>

      Total liabilities and equity                          $260,903,659        $  8,548,742
                                                            -------------         ----------
                                                            -------------         ----------
NET YIELD ON INTEREST-EARNING ASSETS                        $238,465,539        $ 10,392,002       4.36%
                                                            -------------         ----------       -----
                                                            -------------         ----------       -----


</TABLE>

Interest on investments is presented on a fully taxable equivalent basis, using
regular income tax rates.









                                       24
<PAGE>


RATE AND VOLUME VARIANCE

         The following chart shows the changes in interest income and interest
expense for the last two years resulting from changes in volume and changes in
rates.

<TABLE>
<CAPTION>
                                                  1998 Compared to 1997                      1997 Compared to 1996
                                                Change Due to Variance In                   Change Due to Variance In
                                           Rates         Volumes         Total         Rates          Volumes         Total
                                           -----         -------         -----         -----          -------         -----
<S>                                    <C>            <C>            <C>            <C>            <C>            <C>
INTEREST EARNED ON

 Federal funds sold                    $    18,309    $   (61,638)   $   (43,329)   $     4,249    $    47,221    $    51,470

 Interest-bearing deposits                    --             --             --             --           (4,781)        (4,781)

 Investment securities

  U.S. Treasury                             (2,626)      (118,566)      (121,192)        18,410       (169,691)      (151,281)

  U.S. Government agency                   (20,016)      (836,276)      (856,292)       185,961       (220,235)       (34,274)

  State and municipal                      (12,985)       253,671        240,686          9,748        283,942        293,690

  Mortgage backed securities               (21,143)      (526,103)      (547,246)       (13,996)       (87,024)      (101,020)

  Other                                    (35,487)        44,925          9,438         42,484         68,011        110,495
                                       -----------    -----------    -----------    -----------    -----------    -----------

                                           (92,257)    (1,182,349)    (1,274,606)       242,607       (124,997)       117,610
                                       -----------    -----------    -----------    -----------    -----------    -----------

 Loans

  Demand and time                         (158,710)       110,209        (48,501)       (14,331)       125,876        111,545

  Residential mortgage                    (184,754)     2,552,026      2,367,272         31,688        727,685        759,373

  Commercial mortgage and                  (54,424)       177,300        122,876        (58,252)       374,560        316,308
construction

  Installment and credit card               15,178       (271,560)      (256,382)        75,223       (261,861)      (186,638)

  Lease financing                            1,797         (1,094)           703          9,568        139,769        149,337
                                       -----------    -----------    -----------    -----------    -----------    -----------

                                          (380,913)     2,566,881      2,185,968         43,896     1,106,029   1,149,925
                                       -----------    -----------    -----------    -----------    -----------    -----------

    Total interest earned                 (454,861)     1,322,894        868,033        290,752      1,023,472      1,314,224
                                       -----------    -----------    -----------    -----------    -----------    -----------

INTEREST EXPENSE ON

 Deposits

  Savings and NOW                         (101,512)        35,947        (65,565)      (143,511)        35,577       (107,934)

  Money market                             (55,396)      (120,284)      (175,680)        59,438       (148,366)       (88,928)

  Other time                               (45,902)        80,355         34,453        (78,796)       295,933        217,137

 Borrowed funds                             (1,369)       829,072        827,703          7,593        399,202        406,795
                                       -----------    -----------    -----------    -----------    -----------    -----------

    Total interest expense                (204,179)       825,090        620,911       (155,276)       582,346        427,070
                                       -----------    -----------    -----------    -----------    -----------    -----------


    Net interest income                $  (250,682)   $   497,804    $   247,122    $   446,028    $   441,126    $   887,154
                                       -----------    -----------    -----------    -----------    -----------    -----------
                                       -----------    -----------    -----------    -----------    -----------    -----------

</TABLE>


Interest on investments and loans is presented on a fully taxable equivalent
basis. The change in rate/volume has been allocated wholly to the change in
rates for both years presented.



                                       25
<PAGE>


                          ITEM 2: INVESTMENT PORTFOLIO

AMORTIZED COST OF INVESTMENTS

         Reference is made to Note 3 of Notes to Consolidated Financial 
Statements on page F-11 for the amortized cost of investments at the end of 
1998 and 1997. The carrying value of investments at the end of 1996 was as 
follows:

<TABLE>

<S>                                                    <C>
AVAILABLE FOR SALE
U.S. Government agency                                 $ 32,310,225
Mortgage backed securities                               22,439,662
State and municipal                                      11,688,950
Federal Home Loan Bank Stock                                799,200
Equity securities                                         2,723,915
                                                       ------------

                                                       $ 69,961,952
                                                       ------------
                                                       ------------
HELD TO MATURITY
U.S. Treasury                                          $  4,295,866
U.S. Government agency                                    3,793,612
Mortgage backed securities                                  832,114
State and municipal                                       7,344,224
Foreign bonds                                                50,000
                                                       ------------

                                                       $ 16,315,816
                                                       ------------
                                                       ------------

</TABLE>


Note: Investments classified as available for sale are carried at market value
whereas investments classified as held to maturity are carried at amortized
cost.




                                       26
<PAGE>


MATURITY AND WEIGHTED AVERAGE YIELDS

         The following charts show the maturity distribution for amortized cost
and weighted average yields of debt securities in the Company's investment
portfolio at December 31, 1998. Separate charts are presented for securities
classified as available for sale and held to maturity. Because the amortized
cost is shown and not market value, the totals of the available for sale
securities will not agree with the amount shown on the Consolidated Balance
Sheet for 1998 in Part II, Item 7.


<TABLE>
<CAPTION>
                                                               MATURITY DISTRIBUTION - AMORTIZED COST
                                                               --------------------------------------

                                                                        Available for Sale
                                                                        ------------------
Description                          Less Than 1 Year        1 to 5 Years      5 to 10 Years        Greater Than 10 Years
-----------                          ----------------        ------------      -------------        ---------------------
<S>                                  <C>                     <C>               <C>                  <C>
U.S. Treasury                                $     --        $    500,567       $         --                 $         --
U.S. Government agency                             --           6,946,791         13,500,732                           --
Mortgage backed securities (1)                 93,496           2,727,590            340,969                    5,960,616
State and municipal                                --           2,688,020          5,303,732                   11,160,676
                                     ----------------        ------------      -------------                -------------

                                             $ 93,496        $ 12,862,968       $ 19,145,433                 $ 17,121,292
                                     ----------------        ------------      -------------                -------------


</TABLE>


<TABLE>
<CAPTION>

                                                                        Held to Maturity
                                                                        ----------------

Description                          Less Than 1 Year        1 to 5 Years      5 to 10 Years        Greater Than 10 Years
-----------                          ----------------        ------------      -------------        ---------------------
<S>                                  <C>                     <C>               <C>                  <C>
U.S. Treasury                                $499,818          $  799,038         $       --                    $      --
U.S. Government Agency                             --                  --                 --                           --
Mortgage backed securities (1)                     --                  --                 --                           --
State and municipal                           150,000           2,636,862          3,971,193                      280,000
Foreign                                            --                  --                 --                       50,000
                                            ---------        ------------      -------------                    ---------

                                             $649,818          $3,435,900         $4,598,414                    $ 330,000
                                            ---------        ------------      -------------                    ---------
                                            ---------        ------------      -------------                    ---------


</TABLE>


(1) Mortgage backed securities are included in the maturity distribution table
based on the average life of the security using anticipated prepayment rates.



                                       27
<PAGE>





<TABLE>
<CAPTION>
                                                             WEIGHTED AVERAGE YIELD
                                                             ----------------------

                                                                Available for Sale
                                                                ------------------

Description                            Less Than 1 Year      1 to 5 Years      5 to 10 Years    Greater than 10 Years
-----------                            ----------------      ------------      -------------    ---------------------
<S>                                    <C>                   <C>               <C>              <C>
U.S. Treasury                                      --               5.39%                 --                --
U.S. Government agency                             --               6.08%              6.32%
Mortgage backed securities                      5.99%               6.22%              6.08%             6.42%
State and municipal (1)                            --               6.51%              7.40%             7.42%
                                            ---------            --------             ------            ------

                                                5.49%               6.17%              6.61%             7.07%
                                            ---------            --------             ------            ------
                                            ---------            --------             ------            ------
</TABLE>

<TABLE>
<CAPTION>
                                                                 Held to Maturity
                                                                 ----------------

Description                            Less than 1 Year        1 to 5 Years      5 to 10 Years       Greater than 10 Years
-----------                            ----------------        ------------      -------------       ---------------------
<S>                                    <C>                     <C>               <C>                 <C>  
U.S. Treasury                                   6.43%               5.75%                 --                --
U.S. Government Agency                             --                  --                 --                --
Mortgage backed securities                         --                  --                 --                --
State and municipal (1)                        12.12%               7.13%              8.12%             8.56%
Foreign                                            --                  --                 --             5.50%
                                           ----------         -----------         ----------           -------

                                                7.74%               6.81%              8.12%             8.10%
                                            ---------            --------             ------            ------
                                            ---------            --------             ------            ------

</TABLE>

(1) Yields on state and municipal obligations are computed on a tax equivalent
basis using a 34% federal income tax rate.

There are no securities of any issuer in the investment portfolio which exceeds
ten percent of shareholders' equity.

                             ITEM 3: LOAN PORTFOLIO

CLASSIFICATION OF LOANS

         Reference is made to Note 4 of Notes to Consolidated Financial
Statements on page F-13 for the classification of loans at the end of 1998 and
1997. In addition to that information, the following information concerning
loans is presented.

<TABLE>
<CAPTION>
                                                              1996                  1995                   1994    
                                                              ----                  ----                   ----
<S>                                                       <C>                   <C>                    <C>         
Real Estate:
   Residential                                            $ 82,576,975          $ 70,754,025           $ 69,158,861
   Commercial                                               30,761,597            29,019,857             26,751,432
   Construction & land development                           1,942,861             2,904,008                780,254
Demand and time                                             19,937,561            18,718,070             14,911,369
Installment & credit card                                   13,410,083            15,041,537             16,317,472
Lease financing                                             3,365,075                      -                      -
                                                            ----------            ----------             ----------

</TABLE>


                                       28
<PAGE>


<TABLE>

<S>                                                       <C>                   <C>                    <C>
                                                           151,994,152           136,437,497            127,919,388

Allowance for loan losses                                    2,241,148             2,243,472              1,931,345
                                                            ----------            ----------             ----------
Loans, net                                                $149,753,004          $134,194,025           $125,988,043
                                                          ------------          ------------           ------------
                                                          ------------          ------------           ------------
</TABLE>


MATURITIES AND INTEREST RATE SENSITIVITIES
------------------------------------------

         The maturities and sensitivities to changes in interest rates for
commercial demand and time loans and real estate - construction loans at
December 31, 1998 is presented below:


<TABLE>
<CAPTION>
                                                                      Contractually Due
                                                                      -----------------

                                           One year or      After one year through           After five years
                                               less                five years                
                                           -----------      ----------------------           ----------------
                                                             Variable       Fixed        Variable         Fixed
                                                             --------       ------       --------         -----
<S>                                          <C>              <C>            <C>            <C>            <C>
Construction and land development            $227,800           -             -              -              -
Commercial demand and time                  $20,957,194         -             -              -              -

</TABLE>

RISK ELEMENTS

         Reference is made to Note 4 of Notes to Consolidated Financial
Statements on page F-13 for nonaccrual, past due and restructured loans at the
end of 1998, 1997 and 1996. In addition to that information, the following
information concerning risk elements is presented.

<TABLE>
<CAPTION>

                                          1995                  1994
                                          ----                  ----
<S>                                      <C>                    <C>
Nonaccrual                               $ 447,073              $256,858
Restructured                               834,341                    --
                                      ------------            ----------

                                       $ 1,281,414              $256,858
                                      ------------            ----------
                                      ------------            ----------

Accruing loans past due more than
 90 days                                 $ 121,893              $ 22,898
                                      ------------            ----------
                                      ------------            ----------
</TABLE>


         Other than those previously mentioned, as of December 31, 1998, there
is one loan amounting to $742,349 about which management has serious doubts 
as to the borrower's ability to comply with present loan repayment terms. 
While the loan has ranged from current to 60 days past due over the last 
year, the borrower's business has been deteriorating steadily. Any further 
deterioration in the borrower's business would cause management to question 
how much longer the borrower could sustain the cash flow necessary to service 
the debt. There are no other interest-bearing assets that would be required 
to be reported under this section if such assets were loans.



                                       29
<PAGE>


                     ITEM 4: SUMMARY OF LOAN LOSS EXPERIENCE

         The following charts show the level of loan losses recorded by the
Company for the past five years, management's allocation of the allowance for
loan losses by type of loan as of the end of each year, and other statistical
information. The allocation of the allowance reflects management's analysis of
economic risk potential by type of loan, and is not intended as a forecast of
loan losses.

ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31
Description                                     1998          1997           1996           1995            1994
-----------                                     ----          ----           ----           ----            ----
<S>                                       <C>           <C>            <C>            <C>             <C>       
Balance at beginning of year              $2,302,981    $2,241,148     $2,243,472     $1,931,345      $1,902,507
Charge-offs:
   Commercial                                294,432        35,914              -              -           4,318
   Real Estate:
      Residential                                  -             -         52,613              -          69,452
      Commercial                             102,300             -              -              -               -
      Construction                                 -             -              -              -               -
   Installment                               276,951       221,855        218,950       172,375          151,108
                                             -------       -------        -------       --------         -------
                                             673,683       257,769        271,563       172,375          224,878
                                             -------       -------        -------       --------         -------
Recoveries:
   Commercial                                 57,710        12,051              -              -          23,466
   Real Estate:
      Residential                                  -             -          2,000         10,134          29,155
      Commercial                              22,258             -          6,406              -               -
      Construction                                 -             -              -              -               -
   Installment                                63,466        67,551         73,333       474,368           75,095
                                              ------        ------         ------       --------          ------
                                             143,434        79,602         81,739       484,502          127,716
                                             -------        ------         ------       --------         -------

Net charge-offs                              530,249       178,167        189,824      (312,127)          97,162
                                             -------       -------        -------      ---------          ------
Provision charged to operations              615,000       240,000        187,500             -          126,000
                                             -------       -------        -------      ---------          ------
Balance at end of the year                $2,387,732    $2,302,981     $2,241,148    $2,243,472       $1,931,345
                                          ----------    ----------     ----------     ----------      ----------
                                          ----------    ----------     ----------     ----------      ----------

Ratio of net charge-offs to average             .28%          .11%           .13%           .00%            .08%
loans outstanding
</TABLE>



                                       30
<PAGE>


The provision charged to operations for 1996, 1997 and 1998 is discussed in the
section on Management's Discussion and Analysis of Financial Condition and
Results of Operations beginning on page 34 of this document. The Company's
provisions in 1995 and 1994 related to the level of net losses incurred and to
loan portfolio growth in each year.

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES


Allocated Amount of the Allowance--Years Ended December 31

<TABLE>
<CAPTION>
Portfolio                1998           1997            1996           1995           1994
---------                ----           ----            ----           ----           ----
<S>                      <C>            <C>             <C>           <C>           <C>       
Commercial(a)           $  739,235     $  423,782     $  563,820      $  289,203    $  388,420
Real Estate:
 Residential               508,999        565,113        433,873         531,480       436,614
 Commercial                955,747        682,604        386,825         357,384       278,181
 Construction                6,767          9,311          7,610          15,805        15,605
Installment                116,312        211,704        269,147         219,159       181,315
Unallocated                 60,672        410,467        579,873         830,441       631,210
                            ------        -------        -------      ----------    ----------

                        $2,387,732     $2,302,981     $2,241,148      $2,243,472    $1,931,345
                        ----------     ----------     ----------      ----------    ----------
                        ----------     ----------     ----------      ----------    ----------

</TABLE>




Percent of Loans in Each Category to Total Loans--Years Ended December 31

<TABLE>
<CAPTION>
Portfolio                 1998          1997            1996       1995       1994
---------                 ----          ----            ----       ----       ----
<S>                      <C>          <C>              <C>         <C>        <C>  
Commercial (a)           14.7%        15.5%            15.3%       17.8%      11.7%
Real Estate:
 Residential             63.0%        57.2%            54.4%       49.1%      54.1%
 Commercial              16.0%        20.0%            20.2%       18.6%      20.9%
 Construction              .6%         1.1%             1.3%        2.3%        .6%

Installment               5.7%         6.2%             8.8%       12.2%      12.7%
                        -----        -----            -----       -----      ----- 
                        100.0%       100.0%           100.0%      100.0%     100.0%
                        -----        -----            -----       -----      ----- 
                        -----        -----            -----       -----      ----- 


</TABLE>

(a)  Commercial loans includes lease financing.


                                       31
<PAGE>



                                ITEM 5: DEPOSITS

         Reference is made to the tables for Average Balances, Interest and
Yields under Item 1 of this section on page 19. Reference is made to Note 8 of
Notes to Consolidated Financial Statements on page F-17 for additional
information concerning deposits.



                       ITEM 6: RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>

Description                                1998               1997             1996
-----------                                ----               ----             ----
<S>                                       <C>                 <C>              <C> 
Return on average assets                    1.00%               .78%             .78%
Return on average equity                    9.71%              7.39%            7.47%
Dividend payout ratio                      27.63%             35.07%           28.99%
Average equity to average assets           10.32%             10.51%           10.41%

</TABLE>


                          ITEM 7: SHORT-TERM BORROWINGS

         Reference is made to Note 10 of Notes to Consolidated Financial
Statements on page F-18 for a description of the general terms of short-term
borrowings, and for information related to repurchase agreements.

         Other short term borrowings, consisting of the combined amounts for
Advances from the Federal Home Loan Bank and Notes Payable-U.S. Treasury, are as
follows.

<TABLE>
<CAPTION>

Other short-term borrowings:                        1998           1997           1996
                                                    ----           ----           ----
<S>                                             <C>            <C>            <C>
Total outstanding at period-end                 $35,414,906    $11,706,255    $ 6,646,478
Average amount outstanding during period         19,414,143      9,121,290      3,780,494
Maximum amount outstanding at any period-end     35,414,906     19,416,627      8,702,977
Weighted average interest rate at period-end           5.11%          5.55%          6.16%
Weighted average interest rate for the period          5.68%          5.68%          5.42%

</TABLE>




                                       32
<PAGE>


                                     PART II

        ITEM 5: MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

TRADING AND DIVIDENDS

         As of December 31, 1998, there were approximately 528 shareholders of
record of the Company. Since May 1994, the Company's Common Stock has traded on
the Nasdaq National Market Tier of The Nasdaq Stock Market under the symbol
"CRRB". Currently, there are two broker-dealers who make a market in the Common
Stock.

         The table below sets forth the high and low sales price for each
quarter in the last two years, and cash dividends paid per share, adjusted to
reflect the effect of the 5% stock dividend declared by the Company in January,
1998.

<TABLE>
<CAPTION>

Period                                         Price Per Share               Cash Dividends Paid
                                                                             Per Share
------                                         ---------------               -------------------
                                1997                      1998               1997         1998
                                ----                      ----               ----         ----
                        High           Low         High          Low
                        ----           ---         ----          ---
<S>                     <C>           <C>         <C>          <C>           <C>          <C> 
1st Quarter             $37.50        $33.33      $23.23       $20.42        $.14         $.12
2nd Quarter              39.00         35.25       27.63        22.15         .14          .12
3rd Quarter              38.25         32.50       28.35        24.77         .15          .13
4th Quarter              34.31         32.50       34.78        27.87         .15          .13

</TABLE>


         The ability of the Company to pay dividends in the future will be
dependent on the earnings, if any, financial condition and business of the
Company, as well as other relevant factors, such as regulatory requirements. No
assurance can be given either that the Company's future earnings, if any, will
be of sufficient level to enable it to pay dividends, or that if such earnings
are sufficient, that the Company will not decide to retain such earnings for
general working capital and other funding needs. In addition, the Company is
highly dependent on dividends received from the Bank to enable it to pay
dividends to shareholders. No assurance can be given that the Bank will continue
to generate sufficient earnings to enable it to pay dividends to the Company, or
that it will continue to meet regulatory capital requirements which, if not met,
could prohibit payment of dividends to the Company.





                                       33
<PAGE>


 ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

                            1998 as compared to 1997

                                    EARNINGS

Summary

         Carrollton Bancorp reported net income for 1998 of $2,974,000, or $2.07
per share, representing a 39% increase over 1997 net income of $2,139,000, or
$1.46 per share. Part of the earnings increase resulted from a nonrecurring,
one-time gain on an equity position that was sold in the third quarter of 1998.
This nonrecurring gain amounted to $1,250,000, or $.87 per share, on an after
tax basis. The loan portfolio grew 23% to $210,800,000 as a result of
residential mortgage production. The loan portfolio growth resulted in a 4%
increase in interest income over 1997. Non-interest income from fees continued
its trend, increasing by 28% over 1997. In addition to fees generated by the ATM
network of 120 machines, income from merchant services and national point of
sale sponsorships grew significantly during 1998. Included in expense growth in
1998 were the variable cost components of fee income which grew in relation to
fee growth.

Net Interest Income

         Net interest income is the principal source of earnings for a banking
company. It represents the difference between the interest income earned on
loans and other investments, and the interest paid on deposits and borrowed
funds. For analysis, net interest income is measured on a fully taxable
equivalent basis. To determine the taxable equivalent basis, an adjustment is
made to income from investments in state and municipal securities which achieve
a federal or state tax benefit, to dividends from equity stocks which achieve a
dividend exclusion, and to certain loans which are tax exempt.

         In 1998, net interest income on a taxable equivalent basis increased by
$247,000 over 1997 to $11.5 million as a result of increased volume in the loan
portfolio and a reduction of the rates paid on deposit accounts. On average, the
loan portfolio increased 20% over 1997 while the investment portfolio decreased
by 20%. The yield on the loan portfolio decreased from 8.84% in 1997 to 8.50% in
1998. The prime rate decreases in late 1998 and a very competitive loan market
caused the loan yield to fall. The yield on investment securities also decreased
to 6.76% in 1998 from 6.85% in 1997. The securities portfolio yield declined as
a result of general declines in market rates from 1997. The growth in the loan
portfolio overshadowed the falling yields to cause total interest income on a
tax equivalent basis to rise from $20.3 million in 1997 to $21.1 million in
1998.

Interest expense increased $0.6 million to $9.6 million in 1998 from $9.0
million in 1997. Interest expense increased primarily due to increased
borrowings, which increased on average by 98%. Interest expense on deposits
decreased from 1997 to 1998 as the cost of interest-bearing deposits fell from
4.09% in 1997 to 3.98% in 1998. The cost of borrowed funds was about the same at
5.22% in 1998 and 5.23% in 1997. The table for Rate and Volume



                                       34
<PAGE>


Variance Analysis shows the increase in interest expense resulted from increased
volume of borrowings. The growth in interest-bearing liabilities supported loan
portfolio growth.

Provision for Loan Losses

         The provision for loan losses was $615,000 for 1998 compared to
$240,000 for 1997. Non accrual, restructured, and delinquent loans over 90 days
to total loans increased to 1.02% at the end of 1998 compared to .61% in 1997.
This rise was from increased delinquencies and non-accrual loans. The ratio of
loan losses to average loans also increased in 1998 to .28% compared to .11% for
1997. This increase was attributable to various commercial loan losses
recognized.

         On a monthly basis, management reviews all loan portfolios to determine
trends and monitor asset quality. For consumer loan portfolios, this review
generally consists of reviewing delinquency levels on an aggregate basis with
timely follow-up on accounts that become delinquent. In commercial loan
portfolios, delinquency information is monitored and periodic reviews of
business and property leasing operations are performed on an individual loan
basis to determine potential collection and repayment problems.


Non-Interest Income

         For 1998, non-interest income excluding securities gains and gains on
loan sales increased by 28% over 1997. Brokerage commissions increased $57,000
or 7% in 1998 due to the continued strong stock market. Other fees and
commissions increased $1.5 million principally as a result of increased merchant
services income and ATM fees. Merchant services income rose due to an increase
in the number of merchants receiving credit card deposit services. ATM fee
income growth came about from an increase in the convenience fee and by
additional machines placed in service.

         Net securities gains in 1998 were $2,404,000 compared to $175,000 in
1997. The gains in 1998 included $2,036,000 on the sale of an equity position in
a non-public company that operated as a regional switch for electronic banking
transactions, such as ATM and point of sale transactions. Other equity gains
from the restructuring of an equity portfolio by an outside manager amounted to
$273,000. The remaining net gains of $95,000 were generated on sales of debt
securities with a book value of $9.4 million. The debt security sales were
undertaken to move into issues that are state tax exempt in Maryland.

         The Company also began in this year to sell loans generated by its
mortgage unit, as well as other loans held in its portfolio. These transactions
generated gains of $448,000 on principal balances sold of $24,377,000. At
December 31, 1998, the Company serviced loans totaling $5,379,000.


Non-Interest Expenses

         In 1998, non-interest expenses increased by $2.7 million or 20%.
Salaries and



                                       35
<PAGE>


benefits increased by $692,000, or 12% due to staff additions and merit
increases. Full time equivalent staff increased from 157 positions at the end of
1997 to 161 positions at December 31, 1998. Most of this increase is
attributable to the branch opened in the White Marsh area in February, 1998. In
certain areas of the Company, staff reductions occurred through attrition and
the positions were eliminated. Occupancy expenses increased $78,000 over 1997
due to rents incurred for the new branch, and expenses related to the
headquarters office building purchased and occupied in late 1997. These expenses
were offset by a reduction in expenses from 1997 for the write-off of leasehold
improvements in a branch that was required to be relocated. Furniture and
equipment expense increased for depreciation on the imaging equipment and ATM
machines purchased in late 1997 and early 1998, plus the related maintenance
contracts expense. Other operating expenses increased $1.6 million, or 32%.
Approximately half of this increase relates to increased volumes of fee
generating activities, in particular merchant services and ATM transactions. As
fee income grows in those areas, related expenses will grow, but the Company
earns a spread. Many other expenses also increased during 1998 related to the
Company's growth, such as data processing, marketing, carrier services,
telephone and postage.


Income Tax Provision

            For 1998, the effective tax rate for the Company increased to 27% as
compared to 24% for 1997. This increase was primarily due to an increase in
income before taxes. During 1998, the Company increased the benefit from tax
exempt income by increasing its investment in municipal bonds. In addition, the
Maryland tax laws for banks were revised in 1996 to provide an exemption from
state tax on the income earned on certain qualifying investments, which was 100%
effective for 1998 compared to 75% effective for 1997. However, the increased
benefit from investment income was not sufficient to offset the increase in
taxes due to a higher pre-tax income amount.


                               FINANCIAL CONDITION


Summary

         Total assets of the Company increased by 10% to $317.9 million at
December 31, 1998 versus $287.9 million at the end of 1997. Investment
securities declined to $65.1 million at December 31, 1998. Total loans at
December 31, 1998 grew 23% to $210.8 million as compared to $170.8 million at
the end of 1997. Interest earning assets increased to $274.0 million and were
86.2% of total assets at December 31, 1998.


Investment Securities

         Securities decreased from $83.6 million at December 31, 1997 to $65.1
million at December 31, 1998. The portfolio consists mainly of U.S. Treasury
securities, U.S. Government agency securities, mortgage-backed securities, and
state and municipal



                                       36
<PAGE>


obligations. The income from state and municipal obligations is exempt from
federal income tax. Certain agency securities are exempt from state income
taxes. The Company uses its investment portfolio as a source of both liquidity
and earnings.

         The Company liquidated $9.4 million of available for sale securities
during 1998. These transactions were principally undertaken to increase yield or
provide liquidity. The security which generated the significant gain on sale in
the third quarter was classified as available for sale, but had no published
market value and was therefore carried at cost.


Loans

         Total loans increased $40 million or 23% from 1997 to $210.8 million at
December 31, 1998. Approximately 82% of the growth came from residential loan
production by the mortgage unit, which was added in late 1997. The remaining
growth was in equity loans and lines of credit with other consumer products
declining during the year. Both the residential mortgage and equity loan units
are principally wholesale operations. The commercial lines of business declined
in the aggregate by 1%. Commercial loans equaled 29% of total loans at the end
of the year and amounted to $62 million. Consumer loans amounted to $149 million
and were 71% of total loans.

Allowance for Loan Losses

         At December 31, 1998, the allowance for loan losses was $2.4 million, a
slight increase from the end of 1997. At December 31, 1998, the ratio of the
allowance to total loans was 1.13% as compared to 1.35% at December 31, 1997.
This ratio fell as a result of portfolio growth. The ratio of net loan losses to
average loans outstanding for 1998 was .28% as compared to .11% for 1997. The
ratio of non-accrual loans, restructured loans, plus loans delinquent more than
90 days to total loans increased to 1.02% at December 31, 1998 from .45% at the
end of 1997. The ratio of real estate secured loans to total loans increased to
82% at the end of 1998 from 78% at the end of 1997.

         Management believes that it has adequately assessed the risk of loss in
the loan portfolios based on a subjective evaluation and has provided an
allowance which is appropriate based on that assessment. Because the allowance
is an estimate based on current conditions, any change in the economic
conditions of the Company's market area or change within a borrower's business
could result in a revised evaluation which could alter the Company's earnings.

Funding Sources

         Total deposits at December 31, 1998 increased by $2.6 million to $237.0
million from the end of 1997. Interest-bearing accounts decreased by $1.9
million and non-interest bearing deposits increased by $4.4 million. Deposit
growth is attributed primarily to new account relationships resulting from the
opening of a new branch in a new market area, and implementation of a retail
division sales force.



                                       37
<PAGE>


         Other borrowings increased significantly in 1998 to fund loan growth.
Advances from the Federal Home Loan Bank increased to $35 million at the end of
1998 compared to $9 million at the end of 1997, and this increase principally
funded residential mortgage loan growth. Borrowings for federal funds purchased
and securities sold under agreements to repurchase increased by $1.8 million at
December 31, 1998.

Capital

         At December 31, 1998, shareholders' equity was $30.9 million, an
increase of $1.1 million over 1997. The Company paid shareholders dividends
totaling $822,000, and net income for 1998 was $3.0 million. In addition, the
Company purchased and retired common stock for $1.0 million in 1998.
Stockholders' equity amounted to 9.71% of total assets at December 31, 1998 as
compared to 10.35% at the end of 1997. The decrease in this ratio was caused by
asset growth in the balance sheet, but is still at a very strong level.

         Bank holding companies and banks are required by the Federal Reserve
and FDIC to maintain minimum levels of Tier 1 (or Core) and Tier 2 capital
measured as a percentage of assets on a risk-weighted basis. Capital is
primarily represented by stockholders' equity, adjusted for the allowance for
loan losses and certain issues of preferred stock, convertible securities, and
subordinated debt, depending on the capital level being measured. Assets and
certain off-balance sheet transactions are assigned to one of five different
risk-weighting factors for purposes of determining the risk-adjusted asset base.
The minimum levels of Tier 1 and Tier 2 capital to risk-adjusted assets are 4%
and 8%, respectively, under the regulations.

         In addition, the Federal Reserve and the FDIC require that bank holding
companies and banks maintain a minimum level of Tier 1 (or Core) capital to
average total assets excluding intangibles for the current quarter. This measure
is known as the leverage ratio. The current regulatory minimum for the leverage
ratio for institutions to be considered adequately capitalized is 4%, but could
be required to be maintained at a higher level based on the regulator's
assessment of an institution's risk profile. The following chart shows the
regulatory capital levels for the Company at December 31, 1998 and 1997. The
Company's subsidiary bank also exceeded the FDIC required minimum capital levels
at those dates by a substantial margin. Based on the levels of capital, the
Company and the bank are well capitalized.

<TABLE>
<CAPTION>
                                                 At December 31
                                        Carrollton            Carrollton
                                         Bancorp                  Bank
Ratio                      Minimum   1998       1997         1998      1997
-----                      -------   ----       ----         ----      ----
<S>                        <C>        <C>        <C>          <C>       <C> 
Leverage Ratio             4%         9.4%       9.4%         8.1%      8.4%
Risk-based Capital:
         Tier 1 (Core)     4%        15.0%      15.9%        13.3%     14.2%
         Tier 2 (Total)    8%        16.8%      17.1%        14.6%     15.5%

</TABLE>



                                       38
<PAGE>


Liquidity

         Liquidity management ensures that funds are available when required to
meet deposit withdrawals, loan commitments, and operating expenses. These funds
are supplied by deposits, loan repayments, security maturities and can be raised
by liquidating assets or through additional borrowings. Securities classified as
available for sale can be liquidated or pledged to secure borrowed funds to
provide necessary liquidity. In addition, the Company has unsecured lines of
credit outstanding under which it could borrow $7 million, secured lines of $6
million, and has borrowing capacity with the Federal Home Loan Bank of $45
million which is collateralized by a blanket security interest in the Company's
residential first mortgage loans.

         At December 31, 1998, the Company had outstanding loan commitments and
unused lines of credit totaling $85.9 million. Of this total, management places
a high probability for funding within 1 year on approximately $21.4 million. The
remaining amount is mainly unused home equity lines of credit and credit card
lines on which management places a low probability for required funding.


Interest Rate Risk

         The level of income of a financial institution can be affected by the
repricing characteristics of its assets and liabilities due to changes in
interest rates. This is referred to as interest rate risk. Financial
institutions allocate significant time and resources to managing interest rate
risk because of the impact that interest rate changes can have on the net
interest margin and earnings. Management continues to seek reasonable ways to
reduce its exposure to interest rate shifts. A static gap analysis is used by
the Company as one tool to monitor interest rate risk. A static gap analysis
measures the difference, or the "gap", between the amount of assets and
liabilities repricing within a given time period. The Company also performs rate
shock analyses which estimate changes in the net interest margin for parallel
rising and falling interest rate environments. Management also calculates and
monitors other ratios on a monthly basis that provide additional information
relating to certain aspects of asset/liability management. This information,
together with information about forecasted future interest rate trends, is used
to manage the Company's asset and liability positions. Management uses this
information as a factor in decisions made about maturities for investment of
cash flows, classification of investment securities purchases as available for
sale or held to maturity, emphasis of variable rate or fixed rate loans and
short or longer term deposit products in marketing campaigns, and deposit
account pricing to alter asset and liability repricing characteristics.

         At December 31, 1998, the Company was in a slightly liability sensitive
position amounting to 1.8% of assets within a one year time horizon. This is
within the targets as established by the Asset/Liability Management Policy
approved by the Board of Directors. Although the Company was at a slightly
negative asset/liability position at December 31, 1998, the Company can
experience significant volatility in its asset/liability position by virtue of
its funding of longer term mortgage loans with relatively short repricing
borrowings while it works to sell the loans. Management works to structure
borrowing terms that more closely



                                       39
<PAGE>


match asset repricing characteristics, keeping in mind the overall balance sheet
strategy of the Company. Theoretically, a liability sensitive position is
preferable in a falling interest rate climate since more liabilities will
reprice downward as interest rates fall than will assets, and an asset sensitive
position is preferable in a rising rate environment.

         The following chart shows the static gap position for interest
sensitive assets and liabilities of the Company as of December 31, 1998. The
chart is as of a point in time, and reflects only the contractual terms of the
loan or deposit accounts in assigning assets and liabilities to the various
repricing periods except that deposit accounts with no contractual maturity,
such as money market, NOW and savings accounts, have been adjusted based on
account age. All accounts open less than two years are reflected in the one year
time horizon in the gap table. Accounts that have been open between two and five
years are reflected in the 1 to 2 year time horizon in the table. Accounts open
over five years are reflected in the 2 to 5 year horizon. In addition, the
maturities of investments shown in the gap table will differ from contractual
maturities due to anticipated calls of certain securities based on current
interest rates. While this chart indicates the opportunity to reprice assets and
liabilities within certain time frames, it does not reflect the fact that
interest rate changes occur in disproportionate increments for various assets
and liabilities.

      PERIOD FROM DECEMBER 31, 1998 IN WHICH ASSETS AND LIABILITIES REPRICE
----------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                    0 to 90      91 to 365    greater than1 to 2  greater than 2 to 5     greater than 5
($000)                                 days           days    years                             years              years
------------                           ----           ----    -----                             -----              -----
<S>                                  <C>      <C>                   <C>                  <C>                   <C>
ASSETS:

Short term investments          $        22

Securities                           16,922   $     11,677          $      2,862         $     15,278          $  18,394

Loans                                99,782         23,332                17,159               33,492             37,036
                               ------------   ------------          ------------         ------------          ---------

                                    116,726         35,009                20,021               48,770             55,430
                               ------------   ------------          ------------         ------------          ---------

LIABILITIES:

Deposits                             58,053         66,184                34,305               39,651                968

Borrowings                           33,231                                                    10,000              5,000
                               ------------   ------------          ------------         ------------          ---------

                               $     91,284   $     66,184          $     34,305         $     49,651          $   5,968
                               ------------   ------------          ------------         ------------          ---------

Gap position:

   Period                      $     25,442   $   (31,175)          $   (14,284)         $      (881)          $  49,462

   % of Assets                         8.0%         (9.8%)                (4.5%)               (0.3%)              15.6%

   Cumulative                  $     25,442   $    (5,753)          $   (20,017)         $   (20,898)          $  28,564

   % of Assets                         8.0%         (1.8%)                (6.3%)               (6.6%)               9.0%

Cumulative risk sensitive
assets to risk sensitive
liabilities                            1.28          0.96                  0.90                 0.91                1.12

</TABLE>



                                       40
<PAGE>


New Accounting Pronouncements

         The Financial Accounting Standards Board (FASB) issued three standards
during 1998, and one in early 1999. Statement No. 132, EMPLOYERS' DISCLOSURES
ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS--AN AMENDMENT OF FASB
STATEMENTS NO. 87, 88 AND 106, is effective for the accompanying financial
statements, and the Company has complied with the provisions of this statements
where applicable. Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, and Statement No. 134, ACCOUNTING FOR MORTGAGE-BACKED
SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY
A MORTGAGE BANKING ENTERPRISE, become effective for fiscal quarters beginning
after June 15, 1999 and December 15, 1998, respectively. Statement No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position, and measure
those instruments at fair value. Statement No. 134 amends Statements No. 65 and
115 regarding accounting for mortgage backed securities. Statement No. 135,
RESCISSION OF FASB STATEMENT NO 75 AND TECHNICAL CORRECTIONS, is effective for
fiscal years beginning after February 15, 1999, and rescinds FASB Statement No.
75. Management does not expect these statements to have any material effect on
the Company's financial position or results of operations.



The Year 2000 Issue

         The following information is provided as a "Year 2000 Readiness
Disclosure" in compliance with the Year 2000 Information and Readiness
Disclosure Act of 1998.

         The Year 2000 issue relates to computer programs that use only two
digits to identify a year in the date field. Unless corrected, these programs
could read the year 2000 as the year 1900, and likely would adversely affect any
number of calculations that are made using that date field. Financial
institutions are highly computerized organizations, and the year 2000 issue
represents a significant risk to the industry. The Company faces the same risks
as the industry. The potential risk of any major loan or deposit systems failure
of the year 2000 issue are that loan interest and balances could not be
accurately calculated, billed and collected, and deposit interest and balances
could not be accurately calculated and paid to customers. These failures could
have a significant impact on a financial institutions operations and liquidity.

         The Company adopted a Year 2000 Action Plan ("the Plan") during 1997.
This Plan is consistent with the mandates and guidelines set forth by the FDIC
and the FFIEC. As part of the Plan, the Company formed a committee of the Board
of Directors for purposes of oversight of management's efforts in addressing
this issue. Within the Company, a committee of senior managers was formed to
address this issue. The management committee identified five major phases of an
action plan: Awareness, Assessment, Renovation, Validation, and Implementation.



                                       41
<PAGE>


         The awareness phase is a continuing effort to educate employees,
customers, business partners and vendors of the impact of the Year 2000 issue.
The effort is well under way through communication with the appropriate
constituencies and training for all employees.

         During the assessment phase, which was completed by March 31, 1998, a
detailed listing was compiled of all hardware, software, equipment, and vendors
owned or used by the Company. Each item was assigned a priority based on its
importance to the operations of the company and the risk associated with
non-compliance. All manufacturers, software providers and vendors were requested
to provide information relating to the readiness of their product or process for
the Year 2000. The critical areas were identified as the core banking system of
deposits and loans, the ATM network, the loan documentation and compliance
software, and the proof and transit operating systems. The Company has also
assessed non-information technology systems as well, including the alarm systems
at the various locations of the Company.


         On completion of the assessment phase, any hardware or software that
was determined not year 2000 compliant was slated for replacement or renovation.
During the renovation phase, the appropriate fixes or patches were put in place
to make these items compliant.

         The validation phase consisted of testing all hardware and software for
Year 2000 readiness. A testing committee was established within the Company to
oversee this process. Validation of the core banking systems has been completed.
In November and December, 1998, test transactions were processed to validate
changes made to the core banking system of deposits and loans of our primary
data processing third party service provider. Validation tests were also run on
the loan documentation and compliance software. The tests were a success, and no
Year 2000 problems were indicated. However, future testing to assure integration
with other key systems of the Company is anticipated for early 1999. In
addition, validation of the proof and transit operating system is to be
completed by March, 1999. All of the Company's ATM machines have been upgraded
to be compliant with year 2000 requirements, and are also being tested in early
1999. The validation and renovation, if necessary, of other material operation
and support systems will continue through June, 1999. If these systems are found
to be non-compliant, they will be renovated, modified or replaced with
validation tests conducted to assure future compliance.

         Contingency planning for all mission critical functions is underway and
will be completed by June 1999. Management's current estimate at this time of
the worst case scenario that may occur would be that the branch banking network,
including deposit processing, could be off-line immediately following year end,
1999. This off-line processing would have minimal impact if the length of time
that this condition existed is limited. To plan for this scenario, the company
will provide every branch with the necessary data to process transactions at
their locations. In addition, to accommodate all branches, the deposit servicing
center located at the operations center will have a complete trial balance of
all accounts for all branch locations.



                                       42
<PAGE>


         Of concern to management is the amount of funds which may be necessary
in the branches and in ATM machines at the end of 1999 in the event customers
desire to withdraw extra cash over the millennium change. The Company is
currently working to estimate the most likely level of cash requirements, the
source of these funds, and the required level of security and insurance for this
additional cash. It may be necessary to build significant levels of cash at the
end of 1999 which could reduce earning assets or increase borrowings for a
period of time, thereby negatively affecting earnings. In addition, it may be
necessary to purchase commitments from current cash sources to guarantee funds
availability, and to purchase commitments from vendors who transport cash.

         Another concern is the ability of commercial loan customers to repay
the Company if their business is negatively impacted by this issue. Loan
underwriting for the past year has included issues relating to the customer's
preparedness for the Year 2000, and their reliance on computers in their
business operations. The loan group has worked also to assess the preparedness
of customers whose loans pre-existed current underwriting standards, and
determine what potential problems may exist.

         Total costs associated with the plan will primarily include costs
incurred to upgrade the existing software and hardware not currently Year 2000
compliant. The company expects that these costs would be incurred in the normal
course of business as software and hardware is ordinarily upgraded to keep pace
with technological advances, but estimates that $40,000 has been incurred to
date which could be related to the Year 2000 issue. This excludes the cost
allocated by the Company's primary data processing third party service provider,
whose costs to date for Year 2000 issues are $25,000. The Company has spent
approximately $50,000 on software to make its ATM's Year 2000 compliant and
approximately $3,000 on education and seminars for Company personnel. The
Company does not track internal costs for personnel devoted to Year 2000 issues;
however, three individuals have spent significant time on the project, and many
other individuals have spent numerous hours to ensure the Company will be
compliant. Actual costs, including personnel related costs, are not expected to
exceed $500,000 over a period of eighteen months, some of which would be
capitalized and amortized to future periods. This does not include any negative
impact on earnings for significant liquidity needs at the end of 1999, which
cannot be reasonably estimated at this time.


                            1997 AS COMPARED TO 1996

                                    EARNINGS

Summary

         Carrollton Bancorp reported net income for 1997 of $2,139,000, or $1.46
per share (as adjusted for a 5% stock dividend declared in January, 1998),
representing a 5.5% increase over 1996 net income of $2,028,000, or $1.39 per
share (as adjusted). The loan portfolio grew 12.4% to $170,800,000 which
resulted in a 6% increase in the net interest margin. Non-interest income
continued its strong growth trend, increasing by 46% over



                                       43
<PAGE>


1996. In addition to fees generated by the ATM network of 85 machines, income
from merchant services and national point of sale sponsorships grew
significantly during 1997. Included in expense growth in 1997 was a
non-recurring charge for relocation of a branch, and start up expenses for a
mortgage subsidiary.

Net Interest Income

         In 1997, net interest income on a taxable equivalent basis increased by
$887,000 over 1996 to $11.3 million as a result of increased volume in the loan
portfolio, an improvement in the yield on securities, and a reduction of the
rates paid on deposit accounts. On average, the loan portfolio increased 9% over
1996 while the investment portfolio decreased by 3%. The yield on the loan
portfolio held at 8.84% in 1997 compared to 8.83% in 1996. The prime rate
increase in March, 1997 helped maintain the yield of the loan portfolio in a
very competitive loan market. The yield on investment securities increased to
6.85% in 1997 from 6.56% in 1996. The Company continued to invest in agency
issues with imbedded options (callable agency securities) to increase the yield
on the securities portfolio. In addition, purchases of municipal bonds during
late 1996 and the first half of 1997 helped improve the yield in 1997. These
factors resulted in a rise in total interest income on a tax equivalent basis
from $18.9 million in 1996 to $20.3 million in 1997.

         Interest expense increased $0.5 million to $9.0 million in 1997 from
$8.5 million in 1996. Interest expense increased primarily due to increased
borrowings. Interest expense on deposits increased only slightly from 1996 to
1997. The cost of interest-bearing deposits fell to 4.09% in 1997 from 4.15% in
1996. The cost of borrowed funds increased slightly from 5.18% in 1996 to 5.23%
in 1997. The table for Rate and Volume Variance Analysis shows the increase in
interest expense resulted from increased borrowings. The growth in
interest-bearing liabilities supported loan portfolio growth.

Provision for Loan Losses

         The provision for loan losses was $240,000 for 1997 compared to
$187,500 for 1996. Nonaccrual, restructured, and delinquent loans over 90 days
to total loans stayed level at .61% in 1997 and .63% in 1996. Restructured loans
decreased from 1996 to 1997 while nonaccrual loans increased. 

Non-Interest Income

         For 1997, non-interest income excluding securities gains increased by
43.5% over 1996. Service charges on deposit accounts increased $60,000 or 4.7%
as a result of increased numbers of accounts. Brokerage commissions rose $25,000
or 3.0% in 1997 due to the continued strong stock market. Other fees and
commissions increased $1.6 million due to increases in ATM fee income generated
by instituting an ATM surcharge fee, by additional machines placed in service,
by an increase in the number of merchants receiving credit card deposit
services, and as a result of an increase in point of sale/debit card activities.

         Net securities gains in 1997 were $175,000 compared to $57,000 in 1996.
The gains in 1997 came principally from the restructuring of an equity portfolio
which was moved



                                       44
<PAGE>


to outside management. These gains amounted to $142,000. The remaining net gains
of $33,000 were generated on sales of securities with a book value of $3.8
million. Security sale transactions were generally undertaken to increase
portfolio yield or to provide liquidity, but were not significant activities for
the Company in 1997.

Non-Interest Expenses

         In 1997, non-interest expenses increased by $2.3 million or 21.4%.
Salaries and benefits increased by $697,000, or 13.8% due to staff additions and
merit increases. Full time equivalent staff increased from 144 positions at the
end of 1996 to 157 positions at December 31, 1997. Most of this increase is
attributable to the new mortgage unit added in November, 1997. Other staff
additions occurred in the branch system in preparation of opening a new branch
in February, 1998, and in the electronic banking area to support the merchant
services business growth. Occupancy expenses increased $246,000, or 18.6%. This
included a non-recurring charge of $91,000 related to the relocation of a
branch. In addition, two leased branch locations opened in 1996 were leased for
the full year of 1997. The Company also purchased a building in April, 1997 and
is in the process of relocating various departments from leased facilities.
Furniture and equipment expense increased due to the equipment and furnishings
in the branches opened in 1996 and depreciated for a full year in 1997, and in
the building acquired in April, 1997. These increases were partially offset by
the change in the useful life of ATM machines from five to ten years. Other
operating expenses increased $1.3 million, or 34.6%. Approximately half of this
increase relates to increased volumes of fee generating activities, in
particular merchant services and ATM transactions. As fee income grows in those
areas, related expenses will grow, but the Company earns a spread. Many other
expenses also increased modestly during 1997 related to the Company's growth.
During 1997, the Company experienced a significant increase in robbery and fraud
losses as well as expenses related to security. These trends occurred throughout
the financial services industry.

Income Tax Provision

         For 1997, the effective tax rate for the Company decreased to 24.1% as
compared to 27.2% for 1996. During 1997, the Company increased the benefit from
tax exempt income by increasing its investment in municipal bonds. In addition,
the Maryland tax laws for banks were revised to provide an exemption from state
tax on the income earned on certain qualifying investments. The change in the
state tax laws is being phased in over a three year period beginning in 1996. In
1997, the benefit of this change was 75% compared to 50% in 1996. The full
benefit is available in 1998.

                               FINANCIAL CONDITION

Summary

         Total assets of the Company increased by 7.8% to $287.9 million at
December 31, 1997 versus $267.2 million at the end of 1996. Investment
securities declined slightly to $83.6 million at December 31, 1997. Total loans
at December 31, 1997 grew 12.4% to $170.8 million as compared to $152.0 million
at the end of 1996. Interest earning assets



                                       45
<PAGE>


increased to $254.4 million and were 87.7% of total assets.

Short Term Investments

         Short term investments decreased $700,000 from the end of 1996. The
decrease resulted because short term investments were used to fund loans.

Investment Securities

         Securities decreased from $86.3 million at December 31, 1996 to $83.6
million at December 31, 1997. The portfolio consists mainly of U.S. Treasury
securities, U.S. Government agency securities, mortgage-backed securities, and
state and municipal obligations. The income from state and municipal obligations
is exempt from federal income tax. The Company uses its investment portfolio as
a source of both earnings and liquidity.

         The Company liquidated $4.3 million of available for sale securities
during 1997. These transactions were principally undertaken to increase yield or
provide liquidity.


Loans

         Total loans increased $18.8 million or 12.4% from 1996 to $170.8
million at December 31, 1997. Approximately 25% of the growth resulted from
increased commercial loan relationships. Commercial loans and leases increased
by $3.2 million to $26.5 million, while commercial mortgage loans increased by
$3.4 million to $36.1 million. Commercial loans equaled 37% of total loans at
the end of the year.

         The Company's consumer loan portfolio in total also grew in 1997
principally as a result of an emphasis on home equity lines of credit. At
December 31, 1997, residential real estate loans, including home equity loans,
increased to $97.7 million from $82.6 million at the end of 1996. Home equity
loans purchased through broker relationships was the main source for this
increase. Management continues to introduce alternative customer service
channels to increase the consumer loan portfolio. Consumer loans amounted to 63%
of total loans at December 31, 1997 and totaled $108.3 million.


Allowance for Loan Losses

         At December 31, 1997, the allowance for loan losses was $2.3 million, a
slight increase from the end of 1996. At December 31, 1997, the ratio of the
allowance to total loans was 1.35% as compared to 1.47% at December 31, 1996.
This ratio fell as a result of portfolio growth. The ratio of net loan losses to
average loans outstanding for 1997 was .11% as compared to .13% for 1996. The
ratio of nonaccrual loans, restructured loans, plus loans delinquent more than
90 days to total loans decreased to .61% at December 31, 1997 from .63% at the
end of 1996.

Funding Sources



                                       46
<PAGE>


         Total deposits at December 31, 1997 increased by $8.7 million to $234.5
million from the end of 1996. Interest-bearing accounts increased by $5.5
million and non-interest bearing deposits increased by $3.2 million. Deposit
growth is attributed primarily to new account relationships and interest credits
retained.

         Other borrowings increased significantly in 1997 to fund loan growth.
Advances from the Federal Home Loan Bank increased to $9.0 million at the end of
1997 compared to $5.0 million at the end of 1996. Borrowings for federal funds
purchased and securities sold under agreements to repurchase increased by $5.7
million at December 31, 1997. Part of this increase occurred as the Company
accessed other available short term borrowing lines.

Capital

         At December 31, 1997, shareholders' equity was $29.8 million, an
increase of $1.7 million over 1996. The Company paid shareholders dividends
totaling $750,000, and net income for 1997 was $2.1 million. Stockholders'
equity amounted to 10.35% of total assets at December 31, 1997 as compared to
10.51% at the end of 1996. The decrease in this ratio was caused by asset growth
in the balance sheet.

         Bank holding companies and banks are required by the Federal Reserve
and FDIC to maintain minimum levels of Tier 1 (or Core) and Tier 2 capital
measured as a percentage of assets on a risk-weighted basis. Capital is
primarily represented by stockholders' equity, adjusted for the allowance for
loan losses and certain issues of preferred stock, convertible securities, and
subordinated debt, depending on the capital level being measured. Assets and
certain off-balance sheet transactions are assigned to one of five different
risk weighting factors for purposes of determining the risk-adjusted asset base.
The minimum levels of Tier 1 and Tier 2 capital to risk-adjusted assets are 4%
and 8%, respectively, under the regulations.

         In addition, the Federal Reserve and the FDIC require that bank holding
companies and banks maintain a minimum level of Tier 1 (or Core) capital to
average total assets excluding intangibles for the current quarter. This measure
is known as the leverage ratio. The current regulatory minimum for the leverage
ratio for institutions to be considered adequately capitalized is 4%, but could
be required to be maintained at a higher level based on the regulator's
assessment of an institution's risk profile. The following chart shows the
regulatory capital levels for the Company at December 31, 1997 and 1996. The
Company's subsidiary bank also exceeded the FDIC required minimum capital levels
at those dates by a substantial margin. Based on the levels of capital, the
Company and the bank are well capitalized.

<TABLE>
<CAPTION>

                                                   At December 31,
   Ratio                     Minimum           1997               1996
   -----                     -------           ----              -----
<S>                          <C>               <C>               <C>  
   Leverage Ratio                 4%            9.4%             10.0%
   Risk-based Capital:
            Tier 1 (Core)         4%           15.9%             16.8%
            Tier 2 (Total)        8%           17.1%             18.0%

</TABLE>



                                       47
<PAGE>


Liquidity

   Liquidity management ensures that funds are available when required to meet
deposit withdrawals, loan commitments, and operating expenses. These funds are
supplied by deposits, loan repayments, security maturities and can be raised by
liquidating assets or through additional borrowings. Securities classified as
available for sale can be liquidated or pledged to secure borrowed funds to
provide necessary liquidity. In addition, the Company has unsecured lines of
credit outstanding under which it could borrow $7 million, secured lines of $6.0
million, and has borrowing capacity with the Federal Home Loan Bank of $30
million which is collateralized by a blanket security interest in the Company's
residential first mortgage loans.

   At December 31, 1997, the Company had outstanding loan commitments and unused
lines of credit totaling $78.0 million. Of this total, management places a high
probability for funding within 1 year on approximately $13.8 million. The
remaining amount is mainly unused home equity lines of credit and credit card
lines on which management places a low probability for required funding.


Interest Rate Risk

   The level of income of a financial institution can be affected by the
repricing characteristics of its assets and liabilities due to changes in
interest rates. This is referred to as interest rate risk. Financial
institutions allocate significant time and resources to managing interest rate
risk because of the impact that interest rate changes can have on the net
interest margin and earnings. Management continues to seek reasonable ways to
reduce its exposure to interest rate shifts. A static gap analysis is used by
the Company as one tool to monitor interest rate risk. A static gap analysis
measures the difference, or the "gap", between the amount of assets and
liabilities repricing within a given time period. The Company also performs rate
shock analyses which estimate changes in the net interest margin for parallel
rising and falling interest rate environments. Management also calculates and
monitors other ratios on a monthly basis that provide additional information
relating to certain aspects of asset/liability management. This information,
together with information about forecasted future interest rate trends, is used
to manage the Company's asset and liability positions. Management uses this
information as a factor in decisions made about maturities for investment of
cash flows, classification of investment securities purchases as available for
sale or held to maturity, emphasis of variable rate or fixed rate loans and
short or longer term deposit products in marketing campaigns, and deposit
account pricing to alter asset and liability repricing characteristics.

   At December 31, 1997, the Company was in a liability sensitive position
amounting to 3.8% of assets within a one year time horizon. This is within the
targets as established by the Asset/Liability Management Policy approved by the
Board of Directors. In a theoretical environment, a liability sensitive position
is preferable in a falling interest rate climate since more liabilities will
reprice downward as interest rates fall than will assets.

   The following chart shows the static gap position for interest sensitive
assets and liabilities of the Company as of December 31, 1997. The chart is as
of a point in time, and reflects



                                       48
<PAGE>


only the contractual terms of the loan or deposit accounts in assigning assets
and liabilities to the various repricing periods except that deposit accounts
with no contractual maturity, such as money market, NOW and savings accounts,
have been adjusted based on account age. All accounts open less than two years
are reflected in the one year time horizon in the gap table. Accounts that have
been opened between two and five years are reflected in the 1 to 2 year time
horizon in the table. Accounts opened between five and ten years are reflected
in the 2 to 5 year horizon, and accounts opened over 10 years are reflected in
the over 5 year time horizon. Management has taken a conservative approach by
using a lower time horizon in the gap table than the age of the account. In
addition, the maturities of investments shown in the gap table will differ from
contractual maturities due to anticipated calls of certain securities based on
current interest rates. While this chart indicates the opportunity to reprice
assets and liabilities within certain time frames, it does not reflect the fact
that interest rate changes occur in disproportionate increments for various
assets and liabilities.

<TABLE>
<CAPTION>

                                         Period from December 31, 1997 in
                                       which assets and liabilities reprice
                                       -------------------------------------
                                  0 to 90       91 to 365        greater 1 to 2      greater than 2 to 5      greater than 5
($000)                               days            days                 years                    years               years
------------                      -------       ---------       ---------------      -------------------      --------------
<S>                               <C>           <C>             <C>                  <C>                      <C>
ASSETS:
Securities                        $15,756         $23,028               $11,090                  $14,025             $19,709
Loans                              71,348          13,249                13,019                   28,545              44,673
                                   ------          ------                ------                   ------              ------
                                   87,104          36,277                24,109                   42,570              64,382
                                   ------          ------                ------                   ------              ------
LIABILITIES:
Deposits                           61,954          54,771                24,795                   28,363              31,161
Borrowings                         16,730           1,000                                          5,000
                                   ------          ------                ------                   ------              ------
                                  $78,684         $55,771               $24,795                  $33,363             $31,161
                                  -------         -------                -------                  ------              -------
Gap position:
   Period                          $8,420        ($19,494)                ($686)                  $9,207             $33,221
   % of Assets                       2.9%           (6.8%)                (0.2%)                    3.2%               11.5%
   Cumulative                      $8,420        ($11,074)             ($11,760)                 ($2,553)            $30,668
   % of Assets                       2.9%           (3.8%)                (4.1%)                   (0.9%)              10.7%
Cumulative risk sensitive
assets to risk sensitive
liabilities
                                     1.11             .92                   .93                      .99                1.14

</TABLE>



                                       49
<PAGE>

                          ITEM 7: Financial Statements

                         REPORT OF INDEPENDENT AUDITORS


TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
CARROLLTON BANCORP AND SUBSIDIARY
BALTIMORE, MARYLAND


WE HAVE AUDITED THE ACCOMPANYING CONSOLIDATED BALANCE SHEETS OF CARROLLTON
BANCORP AND SUBSIDIARY AS OF DECEMBER 31, 1998 AND 1997, AND THE RELATED
CONSOLIDATED STATEMENTS OF INCOME, CHANGES IN SHAREHOLDERS' EQUITY, AND CASH
FLOWS FOR THE THREE YEARS ENDED DECEMBER 31, 1998. THESE CONSOLIDATED FINANCIAL
STATEMENTS ARE THE RESPONSIBILITY OF THE COMPANY'S MANAGEMENT. OUR
RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE FINANCIAL STATEMENTS BASED ON
OUR AUDITS.

WE CONDUCTED OUR AUDITS IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITING
STANDARDS. THOSE STANDARDS REQUIRE THAT WE PLAN AND PERFORM THE AUDIT TO OBTAIN
REASONABLE ASSURANCE ABOUT WHETHER THE FINANCIAL STATEMENTS ARE FREE OF MATERIAL
MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A TEST BASIS, EVIDENCE SUPPORTING
THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL STATEMENTS. AN AUDIT ALSO INCLUDES
ASSESSING THE ACCOUNTING PRINCIPLES USED AND SIGNIFICANT ESTIMATES MADE BY
MANAGEMENT, AS WELL AS EVALUATING THE OVERALL FINANCIAL STATEMENT PRESENTATION.
WE BELIEVE THAT OUR AUDITS PROVIDE A REASONABLE BASIS FOR OUR OPINION.

IN OUR OPINION, THE CONSOLIDATED FINANCIAL STATEMENTS REFERRED TO ABOVE PRESENT
FAIRLY, IN ALL MATERIAL RESPECTS, THE FINANCIAL POSITION OF CARROLLTON BANCORP
AND SUBSIDIARY AS OF DECEMBER 31, 1998 AND 1997, AND THE RESULTS OF THEIR
OPERATIONS AND THEIR CASH FLOWS FOR THE THREE YEARS ENDED DECEMBER 31, 1998, IN
CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.



/s/ Rowles & Company, LLP
-------------------------



BALTIMORE, MARYLAND
FEBRUARY 11, 1999



                                       F-1
<PAGE>

                        CARROLLTON BANCORP AND SUBSIDIARY

                           Consolidated Balance Sheets
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                                                                       December 31
                                                                                           1998           1997
------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>            <C>
ASSETS
Cash and due from banks                                                                $ 32,524,320   $ 25,063,180
Federal funds sold                                                                           22,145           --
Investment securities
   Available for sale                                                                    56,745,748     71,782,023
   Held to maturity (approximate market value of
      $8,737,125 and $12,092,724)                                                         8,386,910     11,825,605
Loans held for sale                                                                       3,493,960
Loans less allowance for loan losses of
   $2,387,732 and $2,302,981                                                            204,919,155    168,531,267
Bank premises and equipment                                                               6,894,713      5,973,203
Accrued interest receivable                                                               2,060,746      2,147,801
Other assets                                                                              2,806,292      2,584,313
                                                                                       ------------   ------------
                                                                                       $317,853,989   $287,907,392
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
   Non-interest-bearing                                                                $ 37,817,737   $ 33,426,327
   Interest-bearing                                                                     199,161,288    201,044,078
                                                                                       ------------   ------------
   Total deposits                                                                       236,979,025    234,470,405
Federal funds purchased and securities sold under agreements to repurchase
                                                                                         12,816,453     11,024,441
Notes payable - U.S. Treasury                                                               414,906      2,706,255
Advances from Federal Home Loan Bank                                                     35,000,000      9,000,000
Accrued interest payable                                                                    235,696        204,617
Deferred income taxes                                                                       426,947         92,105
Other liabilities                                                                         1,108,434        617,335
                                                                                       ------------   ------------
                                                                                        286,981,461    258,115,158
                                                                                       ------------   ------------
Shareholders' equity
Common stock, par value $10.00 per share; authorized 5,000,000 shares;
issued and outstanding 1,414,744 in 1998 and 1,454,275 in 1997

                                                                                         14,147,440     14,542,750
Surplus                                                                                   7,559,137      8,593,801
Retained earnings                                                                         7,964,293      5,811,861
Accumulated other comprehensive income                                                    1,201,658        843,822
                                                                                       ------------   ------------
                                                                                         30,872,528     29,792,234
                                                                                       ------------   ------------
                                                                                       $317,853,989   $287,907,392
                                                                                       ------------   ------------
                                                                                       ------------   ------------

</TABLE>

  THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                        F-2

<PAGE>



                        CARROLLTON BANCORP AND SUBSIDIARY

                        Consolidated Statements of Income
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
        Years Ended December 31
                                                                                                1998           1997            1996
------------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
<S>                                                                                      <C>            <C>             <C>        
   Interest and fees on loans                                                            $16,196,046    $14,038,685     $12,898,277
   Interest and dividends on securities:
       Taxable interest income                                                             2,619,672      4,142,274       4,539,551
       Nontaxable interest income                                                          1,207,758      1,046,628         844,158
       Dividends                                                                             110,140        118,360          54,542
   Interest on federal funds sold and other interest income                                  225,586        247,635         182,377
                                                                                          ----------     ----------      ----------
      Total interest income                                                               20,359,202     19,593,582      18,518,905
                                                                                          ----------     ----------      ----------

INTEREST EXPENSE
   Deposits                                                                                7,921,410      8,128,202       8,107,927
   Other                                                                                   1,675,312        847,610         440,815
                                                                                          ----------     ----------      ----------
      Total interest expense                                                               9,596,722      8,975,812       8,548,742
                                                                                          ----------     ----------      ----------
      Net interest income                                                                 10,762,480     10,617,770       9,970,163
PROVISION FOR LOAN LOSSES                                                                    615,000        240,000         187,500
                                                                                          ----------     ----------      ----------
   Net interest income after provision for loan losses                                    10,147,480     10,377,770       9,782,663

OTHER OPERATING INCOME
   Service charges on deposit accounts                                                     1,305,099      1,323,396       1,263,484
   Brokerage commissions                                                                     921,048        863,797         839,289
   Other fees and commissions                                                              4,678,062      3,201,713       1,660,464
   Security gains                                                                          2,404,348        175,377          56,904
   Gains on loan sales                                                                       448,831         10,216              --
                                                                                          ----------     ----------      ----------
      Total other income                                                                   9,757,388      5,574,499       3,820,141
                                                                                          ----------     ----------      ----------

OTHER EXPENSES
   Salaries                                                                                5,261,730      4,708,188       4,073,251
   Employee benefits                                                                       1,183,459      1,044,119         982,507
   Occupancy                                                                               1,645,755      1,567,594       1,321,776
   Furniture and equipment                                                                 1,279,403        932,892         814,559
   Other operating expenses                                                                6,456,389      4,882,434       3,626,248
                                                                                          ----------     ----------      ----------
      Total other expenses                                                                15,826,736     13,135,227      10,818,341
                                                                                          ----------     ----------      ----------
Income before income taxes                                                                 4,078,132      2,817,042       2,784,463
INCOME TAXES                                                                               1,103,783        677,550         756,040
                                                                                          ----------     ----------      ----------
NET INCOME                                                                                $2,974,349     $2,139,492     $ 2,028,423
                                                                                          ----------     ----------      ----------
                                                                                          ----------     ----------      ----------
NET INCOME PER SHARE - BASIC                                                              $     2.07     $     1.46     $      1.39
                                                                                          ----------     ----------      ----------
                                                                                          ----------     ----------      ----------
NET INCOME PER SHARE - DILUTED                                                            $     2.07     $     1.46     $      1.39
                                                                                          ----------     ----------      ----------
                                                                                          ----------     ----------      ----------

</TABLE>


   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.




                                            F-3



<PAGE>


                        CARROLLTON BANCORP AND SUBSIDIARY

           Consolidated Statements of Changes in Shareholders' Equity

<TABLE>
<CAPTION>

                                           Common Stock
                                           ------------
                                                                                                   Accumulated
                                        Shares         Par Value         Surplus                      Other
                                                                                       Retained   Comprehensive       Comprehensive
                                                                                       earnings      Income                  income
                                     ---------       -----------      ----------    ----------    -------------       -------------
<S>                                  <C>             <C>              <C>           <C>                <C>     
 BALANCE, DECEMBER 31, 1995          1,328,565       $13,285,650      $6,079,950    $7,056,446         $395,981
 Net income                                                   --              --     2,028,423               --          $2,028,423
 Change in net unrealized                                     --              --            --         (188,033)           (188,033)
 holding gains (losses) on                                                                                            --------------
 available for sale securities
 Comprehensive income                                                                                                    $1,840,390
                                                                                                                      --------------

                                                                                                                      --------------
 Stock dividend, 5%                     66,182           661,820         893,716    (1,555,536)              --
 Cash dividends, $0.40 per share                              --              --      (587,967)              --
                                     ---------       -----------      ----------    ----------    -------------

 BALANCE, DECEMBER 31, 1996          1,394,747        13,947,470       6,973,666     6,941,366          207,948
 Net income                                                   --              --     2,139,492               --          $2,139,492
 Change in net unrealized
 holding gains (losses) on                                    --              --            --          635,874             635,874
 available for sale securities                                                                                        --------------

 Comprehensive income                                                                                                    $2,775,366
                                                                                                                      --------------
                                                                                                                      --------------
 Shares acquired and cancelled          (9,476)          (94,760)       (208,472)           --               --
 Stock dividend, 5%                     69,004           690,040       1,828,607    (2,518,647)              --
 Cash dividends, $0.51 per share                              --              --      (750,350)              --
                                     ---------       -----------      ----------    ----------    -------------
 BALANCE, DECEMBER 31, 1997          1,454,275        14,542,750       8,593,801     5,811,861          843,822
 Net income                                                   --              --     2,974,349               --          $2,974,349
 Change in net unrealized                                     --              --            --          357,836             357,836
 holding gains (losses) on
 available for sale securities
 Comprehensive income                                                                                                    $3,332,185
                                                                                                                      -------------
                                                                                                                      -------------
                                                                                                                      -------------
 Shares acquired and cancelled         (39,531)         (395,310)    (1,034,664)            --               --
 Cash dividends, $0.57 per share                              --             --       (821,917)              --
                                   -----------   --------------- ---------------    -----------   -------------
 BALANCE, DECEMBER 31, 1998          1,414,744       $14,147,440     $7,559,137      $7,964,293      $1,201,658
                                   -----------   --------------- ---------------    -----------   -------------       -------------
                                   -----------   --------------- ---------------    -----------   -------------       -------------

</TABLE>

                                      F-4
<PAGE>


   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.



                                      F-5
<PAGE>


                        CARROLLTON BANCORP AND SUBSIDIARY

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------
Years Ended December 31                                                1998            1997            1996
-----------------------------------------------------------------------------------------------------------
<S>                                                            <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Interest received                                           $ 20,506,896    $ 19,407,645    $ 18,614,576
   Fees and commissions received                                  6,429,072       5,354,162       3,730,618
   Interest paid                                                 (9,565,643)     (8,978,860)     (8,578,177)
   Cash paid to suppliers and employees                         (13,817,726)    (12,553,563)     (9,912,396)
   Income taxes paid                                             (1,082,194)       (549,109)       (725,103)
                                                               ------------    ------------    ------------
                                                                  2,470,405       2,680,275       3,129,518
                                                               ------------    ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES
   Proceeds from maturities of securities held to maturity        3,926,155       4,482,897       7,900,000
   Purchases of securities held to maturity                        (499,688)           --          (298,688)
   Proceeds from sales of securities available for sale          11,817,767       4,336,419       2,642,196
   Proceeds from maturities of securities available for sale     34,661,946      16,471,626      15,525,721
   Purchases of securities available for sale                   (28,055,686)    (21,414,652)    (25,880,858)
   Proceeds from sale of loans                                   24,377,361            --              --
   Net decrease in interest-bearing deposits                           --              --           100,000
   Loans made, net of principal collected                       (55,801,920)     (5,351,561)     (7,109,287)
   Purchase of loans                                             (9,071,839)    (13,666,702)     (8,637,192)
   Purchases of premises and equipment                           (2,098,608)     (1,985,537)     (1,523,435)
                                                               ------------    ------------    ------------
                                                                (20,744,512)    (17,127,510)    (17,281,543)
                                                               ------------    ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES
   Net increase (decrease) in time deposits                      (3,578,200)      7,541,439       4,446,031
   Net increase in other deposits                                 6,086,820       1,143,886       4,129,751
   Net increase in other borrowed funds                          25,500,663      10,787,475       7,351,761
   Common stock repurchase and retirement                        (1,429,974)       (303,232)           --
   Dividends paid                                                  (821,917)       (750,350)       (587,967)
                                                               ------------    ------------    ------------
                                                                 25,757,392      18,419,218      15,339,576
                                                               ------------    ------------    ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS                         7,483,285       3,971,983       1,187,551
Cash and cash equivalents at beginning of year                   25,063,180      21,091,197      19,903,646
                                                               ------------    ------------    ------------
Cash and cash equivalents at end of year                       $ 32,546,465    $ 25,063,180    $ 21,091,197
                                                               ------------    ------------    ------------
                                                               ------------    ------------    ------------

</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                      F-6


<PAGE>


                        CARROLLTON BANCORP AND SUBSIDIARY

                      Consolidated Statements of Cash Flows
                                   (Continued)

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------
Years Ended December 31                                    1998           1997           1996
---------------------------------------------------------------------------------------------
<S>                                                 <C>            <C>            <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
   Net income                                       $ 2,974,349    $ 2,139,492    $ 2,028,423
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
   Provision for loan losses                            615,000        240,000        187,500
   Depreciation and amortization                      1,079,583        876,362        710,176
   Deferred income taxes                                109,694        216,457        100,039
   Amortization of premiums and discounts                60,639          5,190          6,685
   Gain on disposal of securities                    (2,404,348)      (175,377)       (56,904)
   Gain on sale of loans                               (448,831)          --             --
   (Increase) decrease in:
      Accrued interest receivable                        87,055       (191,127)        88,986
      Other assets                                     (124,914)       105,737       (214,490)
   Increase (decrease) in:
      Accrued interest payable                           31,079         (3,048)       (29,435)
      Income taxes payable                              (88,105)      (166,246)       (69,102)
      Other liabilities                                 579,204       (367,165)       377,640
                                                    -----------    -----------    -----------
                                                    $ 2,470,405    $ 2,680,275    $ 3,129,518
                                                    -----------    -----------    -----------
                                                    -----------    -----------    -----------


</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                      F-7
<PAGE>







                        CARROLLTON BANCORP AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        The accounting and reporting policies reflected in the financial
    statements conform to generally accepted accounting principles and to
    general practices within the banking industry. Management makes estimates
    and assumptions that affect the reported amounts of assets and liabilities
    and disclosures of commitments and contingent liabilities at the date of the
    financial statements and revenues and expenses during the year. Actual
    results could differ from those estimates.

    BUSINESS

        The Company provides commercial banking and brokerage services to
    businesses and individuals in Baltimore and surrounding areas of central
    Maryland, and also makes residential mortgage loans in Virginia,
    Pennsylvania and Delaware.

    PRINCIPLES OF CONSOLIDATION

        The consolidated financial statements include the accounts of Carrollton
    Bancorp (the Company) and its subsidiary Carrollton Bank (the Bank).
    Intercompany balances and transactions have been eliminated.

        The Parent Only financial statements of the Company account for the Bank
    using the equity method of accounting.

    CASH EQUIVALENTS

        For purposes of reporting cash flows, cash and cash equivalents include
    cash on hand, amounts due from banks, and federal funds sold. Generally,
    federal funds are purchased and sold for one-day periods.

    INVESTMENT SECURITIES

        Investment securities in the portfolio are classified as either
    available for sale or held to maturity. The Company does not currently
    conduct short term purchase and sale transactions of investment securities
    which would be classified as trading securities.

        The Company classifies investments as available for sale based
    principally on the Company's asset/liability position and potential
    liquidity needs. These securities are available for sale in response to
    changes in market interest rates or in the event the Company needs funds to
    meet loan demand or deposit withdrawals. Securities classified as available
    for sale are carried at market value. The unrealized holding gain or loss,
    net of taxes, related to securities classified as available for sale is
    reflected as a component of shareholders' equity. Gains or losses on
    securities sales are determined by the specific-identification method.

        The remaining securities in the investment portfolio are classified as
    held to maturity. These securities are carried at amortized cost. The
    Company has the ability and the intent to hold these securities to maturity.

    LOANS HELD FOR SALE

        Loans held for sale are carried at the lower of aggregate cost or market
    value. Market value is determined based on outstanding investor commitments
    or, in the absence of such commitments, based on current investor yield
    requirements. Gains and losses on loan sales are determined using the
    specific-identification method.



                                      F-8
<PAGE>


                        CARROLLTON BANCORP AND SUBSIDIARY

                   Notes to Consolidated Financial Statements
                                   (Continued)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    LOANS AND ALLOWANCE FOR LOAN LOSSES

        Loans are stated at face value, plus deferred origination costs, less
    unearned discount, deferred origination fees, and the allowance for loan
    losses. Interest on loans is credited to income based on the principal
    amounts outstanding. Origination fees and costs are deferred and amortized
    to income over the estimated terms of the loans. Accrual of interest is
    discontinued generally when the collection of principal or interest reaches
    90 days past due, or earlier if collection becomes uncertain based upon the
    financial weakness of the borrower or the realizable value of the
    collateral. Nonaccrual loans are returned to accrual status when all past
    due principal and interest has been collected, and the remainder of the loan
    is judged to be fully collectible. Loans are considered impaired when, based
    on current information, management considers it unlikely that the collection
    of principal and interest payments will be made according to contractual
    terms. Generally, loans are not reviewed for impairment until the accrual of
    interest has been discontinued. If collection of principal is evaluated as
    doubtful, all payments are applied to principal.

        The allowance for loan losses represents an estimate which, in
    management's judgment, will be adequate to absorb probable losses on
    existing loans and other extensions of credit that may become uncollectible.
    Management's judgment in determining the adequacy of the allowance is based
    on evaluations of the collectibility of loans. These evaluations take into
    consideration such factors as changes in the nature and volume of the loan
    portfolio, current economic conditions that may affect the borrowers'
    ability to pay, overall portfolio quality, and review of specific problem
    areas. Actual loan performance may differ from estimates used by management.

    BANK PREMISES AND EQUIPMENT

        Bank premises and equipment are recorded at cost less accumulated
    depreciation and amortization. Depreciation and amortization are computed
    over the estimated useful lives using the straight-line method. Leasehold
    improvements are amortized over the terms of the leases or the estimated
    useful lives of the improvements, whichever is shorter. Accumulated
    depreciation includes a provision for a decline in the value of land
    recorded in prior years.

    INTANGIBLE ASSETS

        Intangible assets are predominantly the premium paid for deposits
    acquired. The premium is being amortized to expense on the straight line
    basis over 15 years. The Company capitalizes the value of loan servicing
    retained on loan sales, and amortizes the value over the estimated life of
    the portfolio of loans serviced. The amortization period is adjusted
    quarterly for changes in the prepayment speed of the loans serviced.

    INCOME TAXES

        The provision for income taxes includes taxes payable for the current
    year and deferred income taxes. The Company recognizes deferred tax assets
    and liabilities for the expected future tax consequences of events that have
    been included in the financial statements or tax returns. Under this method,
    deferred tax assets and liabilities are determined based on the



                                      F-9
<PAGE>


    difference between the financial statement and tax bases of assets and
    liabilities using enacted tax rates in effect for the year in which the
    differences are expected to reverse. Deferred tax assets may also
    include tax credit carryovers that the Company expects to offset
    against future tax obligations.

    PER SHARE DATA

      Basic net income per common share and dividends per common share are
    determined by dividing net income and dividends by the average shares of
    common stock outstanding giving retroactive effect to any stock dividends
    declared. Diluted earnings per share is determined by adjusting average
    shares of common stock outstanding by the potentially dilutive effects of
    stock options outstanding. The dilutive effects of stock options are
    computed by using the "treasury stock" method.

    COMPREHENSIVE INCOME

      The Company adopted Statement No. 130 of the Financial Accounting
Standards Board, REPORTING COMPREHENSIVE INCOME, in 1998. Comprehensive income
includes net income and the unrealized gain (loss) on investment securities
available for sale. The statements of changes in shareholders' equity have been
restated to include comprehensive income for the three years ended December 31,
1998.

    RECLASSIFICATION

        Certain information related to an estimate of shares outstanding as a
    result of the stock dividend declared on January 22, 1998 have been adjusted
    in the December 31, 1997 Consolidated Balance Sheet and Statement of Changes
    in Shareholders' Equity to reflect the actual number of shares issued.


2. RESTRICTIONS ON CASH AND DUE FROM BANKS

    Banks are required to carry cash reserves with the Federal Reserve Bank or
maintain cash on hand of specified percentages of deposit balances. The Bank's
normal amount of cash on hand, which averaged $14,800,000 during 1998, is
sufficient to satisfy the reserve requirements.

    In order to cover the costs of services provided by correspondent banks, the
Company maintains compensating balance arrangements at these correspondent
banks, or pays fees in the event the credit earned on balances is not sufficient
to cover activity charges. During 1998 and 1997, the Company maintained average
compensating balances of approximately $1,369,000 and $1,607,000, respectively,
of which $1,000,000 in each year was maintained at the Federal Reserve Bank. In
addition, the Company paid $31,144, $18,298, and $11,673 respectively, in
account charges in 1998, 1997 and 1996.




                                      F-10
<PAGE>


                        CARROLLTON BANCORP AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

3. INVESTMENT SECURITIES

      Investment securities are summarized as follows:

<TABLE>
<CAPTION>

      December 31, 1998                           Amortized Cost    Unrealized Gains    Unrealized Losses      Market Value
      -----------------                           --------------    ----------------    -----------------      ------------
<S>                                                    <C>                  <C>                     <C>           <C>      
      Available for sale

          U.S. Treasury                              $   500,567          $    4,588             $     --       $   505,155

          U.S. Government Agency                      20,447,524              66,123               58,110        20,455,537

          Mortgage backed securities                   9,122,671              97,861                1,507         9,219,025

          State and municipal                         19,152,428             683,530               17,554        19,818,404

          Federal Home Loan Bank stock                 1,750,000                  --                   --         1,750,000

          Equity securities                            3,814,822           1,365,035              182,230         4,997,627
                                                     -----------          ----------             --------       -----------

                                                     $54,788,012          $2,217,137             $259,401       $56,745,748
                                                     -----------          ----------             --------       -----------
                                                     -----------          ----------             --------       -----------

      Held to Maturity

          U.S. Treasury                               $1,298,856            $ 24,524             $     --        $1,323,380

          State and municipal                          7,038,054             325,691                   --         7,363,745

          Foreign bonds                                   50,000                  --                   --            50,000
                                                     -----------          ----------             --------       -----------

                                                      $8,386,910            $350,215             $     --        $8,737,125
                                                     -----------          ----------             --------       -----------
                                                     -----------          ----------             --------       -----------

      DECEMBER 31, 1997

      Available for sale

         U.S. Government agency                      $29,913,564          $   77,210             $ 56,333       $29,934,441

         Mortgage backed securities                   20,228,300             433,818               20,998        20,641,120

         State and municipal                          15,605,559             406,458                7,707        16,004,310

         Federal Home Loan Bank stock                  1,448,200                  --                   --         1,448,200

         Equity securities                             3,211,649             823,752              281,449         3,753,952
                                                     -----------          ----------             --------       -----------

                                                     $70,407,272          $1,741,238             $366,487       $71,782,023
                                                     -----------          ----------             --------       -----------
                                                     -----------          ----------             --------       -----------

      Held to maturity

         U.S. Treasury                                $2,798,169            $ 22,988                $ 435        $2,820,722

         U.S. Government agency                        1,499,990                  --                3,640         1,496,350

         Mortgage backed securities                      426,155                 903                   --           427,058

         State and municipal                           7,051,291             247,316                   13         7,298,594

         Foreign bonds                                    50,000                  --                   --            50,000
                                                     -----------          ----------             --------       -----------

                                                     $11,825,605            $271,207               $4,088       $12,092,724
                                                     -----------          ----------             --------       -----------
                                                     -----------          ----------             --------       -----------

</TABLE>



                                      F-11
<PAGE>


                        CARROLLTON BANCORP AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

3. INVESTMENT SECURITIES (CONTINUED)

    Contractual maturities of debt securities at December 31, 1998 and 1997 are
shown below. Actual maturities may differ from contractual maturities because
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties.

<TABLE>
<CAPTION>

                                                              DECEMBER 31, 1998
                                           Available for sale                     Held to maturity
                                     Amortized Cost    Market Value      Amortized Cost      Market Value
<S>                                      <C>               <C>                <C>              <C>
Maturing
Within one year                          $        --       $       --         $  649,818       $   654,891
Over one to five years                    10,135,379       10,183,677          3,435,899         3,523,508
Over five to ten years                    18,804,464       19,019,048          3,971,193         4,203,355
Over ten years                            11,160,676       11,576,371            330,000           355,371
Mortgage backed securities                 9,122,671        9,219,025                  -                 -
                                         -----------      -----------         ----------        ----------
                                         $49,223,190      $49,998,121         $8,386,910        $8,737,125
                                         -----------      -----------         ----------        ----------
                                         -----------      -----------         ----------        ----------

</TABLE>

<TABLE>
<CAPTION>

                                                              DECEMBER 31, 1997
                                           Available for sale                   Held to maturity
Maturing                              Amortized Cost     Market Value     Amortized Cost      Market Value
--------                              --------------     ------------     --------------      ------------
<S>                                      <C>               <C>                <C>              <C>
Within one year                           $6,899,376       $6,886,724         $3,499,587       $3,507,135
Over one to five years                    13,713,878       13,724,080          2,822,213        2,856,690
Over five to ten years                    15,592,207       15,737,853          4,598,412        4,791,864
Over ten years                             9,313,662        9,590,094            479,238          509,977
Mortgage backed securities                20,228,300       20,641,120            426,155          427,058
                                         -----------      -----------         ----------        ----------
                                         $65,747,423      $66,579,871        $11,825,605      $12,092,724
                                         -----------      -----------         ----------        ----------
                                         -----------      -----------         ----------        ----------

</TABLE>



    At December 31, 1998 and 1997, securities with a cost basis of $14,909,829
(market value of $14,928,176), and $10,548,160 (market value of $10,561,905)
were pledged as collateral for government deposits and for securities sold under
repurchase agreements.

    In 1998, 1997, and 1996, the Company realized gains on sales of securities
of $2,407,223, $193,580, and $63,467, respectively, and losses of $2,875,
$18,203, and $6,563. Income taxes on net security gains were $928,556, $67,731,
and $21,976 in 1998, 1997, and 1996, respectively.




                                      F-12
<PAGE>


                        CARROLLTON BANCORP AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

4. LOANS

    Major classifications of loans are as follows:

<TABLE>
<CAPTION>

                                                                 1998                 1997
                                                            --------------       ---------
<S>                                                          <C>                   <C>
Real estate

   Residential                                               $ 137,646,465     $ 97,681,753

   Commercial                                                   37,227,415       34,247,855

   Construction and land development                               227,800        1,862,298

Demand and time                                                 20,957,194       22,586,144

Lease financing                                                  3,233,883        3,872,327

Installment and credit card                                      8,014,130       10,583,871
                                                                ----------      -----------

                                                               207,306,887      170,834,248

Allowance for loan losses                                        2,387,732        2,302,981
                                                               -----------      -----------

Loans, net                                                    $204,919,155     $168,531,267
                                                               -----------      -----------
                                                               -----------      -----------

</TABLE>


    The Bank makes loans to customers located in Maryland, Virginia,
Pennsylvania and Delaware. Although the loan portfolio is diversified, its
performance will be influenced by the regional economy.

    The maturity and rate repricing distribution of the loan portfolio is as
follows:

<TABLE>

<S>                                            <C>                <C>
Repricing or maturing within one year          $ 77,447,888       $ 84,013,124

Maturing over one to five years                  47,262,745         41,563,765

Maturing over five years                         82,596,254         45,257,359
                                               ------------       ------------

                                               $207,306,887       $170,834,248
                                               ------------       ------------
                                               ------------       ------------

</TABLE>


    Loan balances have been adjusted by the following deferred amounts:

<TABLE>

<S>                                                           <C>                <C>
Deferred origination costs and premiums                       $ 1,997,384        $ 1,458,422 

Deferred origination fees and unearned discounts                 (972,936)          (918,322)
                                                              ------------       ------------

Net deferred (fees) costs                                     $ 1,024,448       $    540,100
                                                              ------------       ------------
                                                              ------------       ------------

</TABLE>


    Transactions in the allowance for loan losses were as follows:

<TABLE>
<CAPTION>

                                               1998               1997                1996
                                               ----               ----                ----
<S>                                      <C>                <C>                 <C>       
Beginning balance                        $2,302,981         $2,241,148          $2,243,472

Provision charged to operations             615,000            240,000             187,500

Recoveries                                  143,434             79,602              81,739
                                         ----------         ----------          ----------

                                          3,061,415          2,560,750           2,512,711
Loans charged off                           673,683            257,769             271,563
                                         ----------         ----------          ----------

Ending balance                           $2,387,732         $2,302,981          $2,241,148
                                         ----------         ----------          ----------
                                         ----------         ----------          ----------
</TABLE>




                                      F-13

<PAGE>



                        CARROLLTON BANCORP AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

4. LOANS (CONTINUED)

    At December 31, 1998, 1997, and 1996, the accrual of interest has been
discontinued on loans of $205,074, $84,312, and $447,073, respectively. The
amount of interest income that would have been recorded in 1998, 1997 and 1996
on non-accrual loans if those loans had been handled in accordance with their
contractual terms totaled $29,395, $10,339 and $34,479. The amount of interest
income actually recorded on non-accrual loans totaled $16,841, $6,880 and
$13,068 for 1998, 1997 and 1996, respectively.

    At both December 31, 1998 and 1997, the Company had an impaired loan
amounting to $408,565 that was classified as impaired because it had been
restructured to accept interest only payments for a period of time. The average
balance of impaired loans amounted to $408,565, $412,915, and $828,155 in 1998,
1997, and 1996, respectively. The Company has not provided for a specific
allowance for impaired loans. During 1998, 1997 and 1996, the Company received
total payments on impaired loans of $7,612, $53,947, and $121,910, respectively.
Of these amounts, $7,612, $49,698, and $101,688 was recorded as interest income
for 1998, 1997 and 1996, respectively. The remainder was applied to reduce
principal.

    Amounts past due 90 days or more, excluding nonaccrual loans are as follows:
<TABLE>
<CAPTION>

                                         1998                  1997                   1996
                                     ------------          ------------           --------
<S>                                    <C>                  <C>                       <C> 
Mortgage                               $1,293,078           $   263,059           $     --
Demand and time                           232,167                    --             30,604
Installment and credit card                11,557                 5,872             32,384
                                     ------------          ------------           --------
                                       $1,536,802           $   268,931           $ 62,988
                                     ------------          ------------           --------
                                     ------------          ------------           --------

</TABLE>


5. CREDIT COMMITMENTS

    Outstanding loan commitments, unused lines and letters of credit were as
follows:
<TABLE>
<CAPTION>

                                                       1998                1997
                                                    ----------          -------
<S>                                                <C>                  <C>
Loan commitments
   Mortgage loans                                  $16,589,977         $ 4,726,038
   Construction and land development                 2,375,000           2,339,201
   Commercial loans                                    300,000           3,952,974
   Installment loans                                    43,186           1,165,040
                                                 -------------       -------------
                                                   $19,308,163         $12,183,253
                                                 -------------       -------------
                                                 -------------       -------------

Unused lines of credit
   Home equity lines                               $49,051,584         $50,636,921
   Commercial lines                                 13,753,319          10,506,283

</TABLE>



                                      F-14
<PAGE>


<TABLE>

<S>                                                  <C>                 <C> 
   Unsecured consumer lines                          2,259,443           3,219,138
                                                 -------------       -------------
                                                   $65,064,346         $64,362,342
                                                 -------------       -------------
                                                 -------------       -------------
Letters of credit                                $   1,487,000       $   1,416,000
                                                 -------------       -------------
                                                 -------------       -------------

</TABLE>



    Loan commitments and lines of credit are agreements to lend to a customer as
long as there is no violation of any condition to the contract. Loan commitments
generally have interest rates fixed at current market amounts, fixed expiration
dates, and may require payment of a fee. Lines of credit generally have variable
interest rates. Such lines do not represent future cash requirements because it
is unlikely that all customers will draw upon their lines in full at any time.
Letters of credit are commitments issued to guarantee the performance of a
customer to a third party.

    The Company's exposure to credit loss in the event of nonperformance by the
borrower is the contract amount of the commitment. Loan commitments, lines and
letters of credit are made on the same terms, including collateral, as
outstanding loans. The Company is not aware of any accounting loss it would
incur by funding the above commitments.


6. RELATED PARTY TRANSACTIONS

    The Company's executive officers and directors, or other entities to which
they are related, enter into loan transactions with the Bank in the ordinary
course of business. The terms of these transactions are similar to the terms
provided to other borrowers entering into similar loan transactions and do not
involve more than normal risk of collectibility. At December 31, 1998, 1997 and
1996, the amounts of such loans outstanding were $2,533,672, $2,776,990, and
$6,031,967, respectively. During 1998, 1997 and 1996 additions to loans
outstanding were $1,619,154, $1,194,850, and $1,066,260, respectively, and
repayments of loans were $1,862,472, $4,449,827, and $884,083.

7. BANK PREMISES AND EQUIPMENT

    A summary of bank premises and equipment is as follows:
<TABLE>
<CAPTION>

                                                    1998                      1997
                                                  ----------               ----------
<S>                                               <C>                      <C>
Land and improvements                             $  464,474               $  464,474
Bank buildings                                     2,791,241                2,484,216
Leasehold improvements                             2,916,925                2,864,581
Equipment and fixtures                             8,295,848                6,785,462
                                                  ----------               ----------
                                                  14,468,488               12,598,733
Accumulated depreciation and amortization          7,573,775                6,625,530
                                                  ----------               ----------
                                                  $6,894,713               $5,973,203
                                                  ----------               ----------
                                                  ----------               ----------

</TABLE>


    Depreciation and amortization of bank premises and equipment was $1,025,796,
$841,833, and $678,786 for 1998, 1997, and 1996, respectively. Amortization of
intangible assets, excluding amortization of deposit premiums, was $53,787,
$33,617 and $31,390, for 1998, 1997, and 1996, respectively.



                                      F-15
<PAGE>


    At December 31, 1998, the Company has a commitment to purchase additional
ATM machines amounting to $735,000.

    The Company increased the depreciable life of ATM machines in March, 1997
from five to ten years based on its actual experience. This change reduced
depreciation expense that would have been recorded in 1997 on ATM machines by
$114,000. The Company uses a 10 year life currently for all ATM machines.




                                      F-16


<PAGE>

8. DEPOSITS

    Major classifications of interest-bearing deposits are as follows:

<TABLE>
<CAPTION>

                                                             1998                      1997
                                                         ------------              --------
<S>                                                      <C>                       <C>         
NOW and SuperNOW                                         $ 33,191,119              $ 29,091,540
Money market                                               51,714,305                55,292,824
Savings                                                    44,592,752                43,418,402
Certificates of deposit of $100,000 or more                10,072,456                12,181,703
Other time deposits                                        59,590,656                61,059,609
                                                         ------------              ------------
                                                         $199,161,288              $201,044,078
                                                         ------------              ------------
                                                         ------------              ------------


    Certificates of deposit of $100,000 or more mature as follows:

Three months or less                                       $7,479,658                $9,632,870
Over three through twelve months                            1,874,337                 1,822,548
Over one to five years                                        718,461                   726,285
                                                         ------------              ------------

                                                          $10,072,456               $12,181,703
                                                         ------------              ------------
                                                         ------------              ------------
</TABLE>


    Interest expense associated with certificates of deposit of $100,000 or more
was $531,200, $453,459, and $388,157 for the years ended December 31, 1998,
1997, and 1996, respectively.

Other time deposits mature as follows:

<TABLE>
<CAPTION>

                                                                 1998               1997
                                                                 ----               ----
<S>                                                       <C>             <C>        
Maturing within one year                                  $47,606,008     $48,587,645
Maturing over one to five years                            11,967,224      12,137,806
Maturing over five years                                       17,424         334,158
                                                           ----------     -----------

                                                          $59,590,656     $61,059,609
                                                           ----------     -----------
                                                           ----------     -----------
</TABLE>

9. BRANCH ACQUISITION

On June 23, 1995, the Company acquired a branch office from First Union National
Bank of Maryland. This branch had total deposits at the date of acquisition of
$22,765,077. The Company also acquired related real estate and equipment of
$530,000 and loans of $17,303. The deposit premium of $1,847,663 is being
amortized using the straight line method over 15 years. Amortization expense
recorded amounted to $123,180 for 1998, 1997 and 1996, respectively. The
remaining unamortized balance at December 31, 1998 was $1,416,533. This amount
is included in other assets in the 


                                      F-17
<PAGE>

Consolidated Balance Sheets.


10. BORROWINGS

    Federal funds purchased and securities sold under agreements to repurchase
represent both transactions with customers for correspondent or commercial
account cash management services, and borrowings by the Company under lines of
credit with other institutions. The transactions with customers are overnight
borrowing arrangements with interest rates discounted from the federal funds
sold rate. Securities underlying the customer repurchase agreements are
maintained in the Company's control. Additional information is as follows:

<TABLE>
<CAPTION>

                                                           1998                  1997                    1996
                                                           ----                  ----                    ----
<S>                                                 <C>                   <C>                      <C>       
Total outstanding at period end                     $12,816,453           $11,024,441              $5,296,743
Average amount outstanding during period             11,138,269             7,098,332               4,731,779
Maximum amount outstanding at any month end          15,425,304            11,024,441               9,254,123
Weighted average interest rate at period end              4.07%                 4.82%                   4.64%
Weighted average interest rate for the period             5.18%                 4.56%                   4.80%
</TABLE>


    Notes payable - U.S. Treasury are Federal Treasury Tax and Loan deposits
accepted by the Bank from its customers to be remitted to the Federal Reserve
Bank on a periodic basis. The Company pays interest on these deposits at a
slight discount to the federal funds sold rate.

    Advances from the Federal Home Loan Bank (FHLB) of Atlanta amounted to
$35,000,000 and $9,000,000 at December 31, 1998 and 1997, respectively. Advances
averaged $18,733,330 and $8,282,192 for 1998 and 1997, respectively, with
weighted average costs of 5.68% for 1998 and 5.75% for 1997. At December 31,
1998, the advances carried a weighted average interest rate of 5.25%, and
matured at dates ranging from September 2, 1999 through March 26, 2008. At
December 31, 1997, the advances carried a weighted average interest rate of
5.83% and matured at various dates through September 24, 2002. The Bank has a
total secured line of $45 million with the FHLB for which the Bank granted the
FHLB a blanket security interest in its residential first mortgage loans.

    As noted above, the Company borrows under available unsecured federal funds
lines of credit of $7 million and secured lines of credit of $6 million with
other institutions. The balance outstanding under these lines was $1,075,000 and
$4,500,000 at December 31, 1998 and 1997, respectively. These lines bear
interest at the then current federal funds rate of the correspondent bank.




                                      F-18
<PAGE>

                        CARROLLTON BANCORP AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)



11. OTHER OPERATING EXPENSES

    Other operating expenses include the following:

<TABLE>
<CAPTION>
                                                   1998                    1997                 1996
                                               ------------            ------------         --------
<S>                                            <C>                     <C>                    <C>       
ATM services                                   $  1,366,754            $  1,272,969           $  762,617
Merchant credit card services                     1,234,137                 577,500              238,268
Marketing                                           730,554                 280,733              343,535
Data processing services                            677,113                 551,878              488,465
Printing, stationery, and supplies                  315,911                 260,121              284,912
Telephone                                           212,148                 128,871              120,437
Postage and freight                                 187,508                 167,828              149,200
Professional services                               185,950                 133,749              119,643
Deposit premium amortization                        123,180                 123,180              123,180
Directors' fees                                     116,750                 116,126               97,239
Liability insurance                                  76,123                  91,357               78,064
FDIC assessment                                      27,565                  27,893                2,000
Other                                             1,202,696               1,150,229              818,688
                                                -----------             -----------           ----------

                                                 $6,456,389              $4,882,434           $3,626,248
                                                -----------             -----------           ----------
                                                -----------             -----------           ----------
</TABLE>


12. STOCK OPTIONS

The Company adopted a stock option incentive plan in 1998 which provides for the
granting of common stock options to directors and key employees. These stock
option awards contain a serial feature whereby one third of the options granted
vest and can be exercised after each year. Option prices are equal to the
estimated fair market value of the common stock at the date of the grant.
Options expire ten years after the date of grant if not exercised.

Information with respect to options outstanding is as follows for the year ended
December 31:

<TABLE>
<CAPTION>
                                               1998
<S>                                       <C>          <C>
                                         Shares        Option Price Range
Outstanding at beginning of year                 -
</TABLE>



                                      F-19
<PAGE>


<TABLE>
<CAPTION>

                                               1998

    <S>                                   <C>           <C> 
    Granted                                  35,200      $35.08 to $38.00
    Exercised                                     -
    Expired/Canceled                              -
                                          ----------
 Outstanding at end of year                   35,200     $35.08 to $38.00
                                          ----------
 Exercisable at December 31                       -
                                          ----------

</TABLE>


The value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the year ended December 31, 1998:

Dividend yield              1.53% to 1.65%
Expected volatility         30%
Risk free rate               5.50%
Expected lives              10 years


The Company uses the intrinsic value method to account for stock based
compensation plans. Because the option price of stock options granted was equal
to the market price of the common stock at the date of grant for all options
granted, no compensation expense related to the options was recognized. If the
Company had applied a fair value based method to recognize compensation cost for
the options granted, net income and net income per share would have been changed
to the following pro forma amounts for the year ended December 31, 1998:

     Net income                       $2,769,375

     Earnings per share-basic             $1.92
     Earnings per share-diluted           $1.92



13.  NET INCOME PER SHARE

The calculation of net income per common share is as follows for the years ended
December 31:

<TABLE>
<CAPTION>

                                                    1998              1997            1996
                                                    ----              ----            ----

Basic:
<S>                                                 <C>              <C>               <C>       
  Net income (applicable to common stock)           $2,974,349       $2,139,492        $2,028,423
  Average common shares outstanding                  1,439,106        1,463,009          1,463,764
  Basic net income per share                           $2.07             $1.46              $1.39

Diluted:

Net income (applicable to common stock)              $2,974,349         $2,139,492        $2,028,423
  Average common shares outstanding                   1,439,106          1,463,009         1,463,764
</TABLE>



                                      F-20
<PAGE>

<TABLE>

<S>                                                  <C>                <C>                 <C>    
Stock option adjustment                                -                     -              - 
                                                     ---------          ---------           ---------
  Average common shares outstanding -diluted         1,439,106          1,463,009           1,463,764
  Diluted net income per share                          $2.07              $1.46               $1.39
</TABLE>


14. COMPREHENSIVE INCOME

Comprehensive income is defined as net income plus transactions and other
occurrences which are the result of nonowner changes in equity. For the Company,
nonowner equity changes are comprised of unrealized gains or losses on debt
securities that will be accumulated with net income in determining comprehensive
income. Presented below is a reconcilement of net income to comprehensive income
for the years ended December 31:

<TABLE>
<CAPTION>

                                                                    1998                     1997                    1996

<S>                                                               <C>                      <C>                    <C>
Net Income                                                       $2,974,349               $2,139,492            $2,028,423
Other comprehensive income:
  Unrealized holding gains (losses) during the period             2,987,333                1,211,340              (249,438)
  Less: Adjustment for security gains                            (2,404,348)                (175,377)              (56,904)
                                                                -----------               ----------              --------
Other comprehensive income before tax                               582,985                1,035,963              (306,342)
Income taxes on comprehensive income                               (225,149)                (400,089)              118,309
                                                                 ----------                ---------              -------
Other comprehensive income after tax                                357,836                  635,874              (188,033)
                                                                  ---------                ---------             ---------

Comprehensive income                                             $3,332,185               $2,775,366            $1,840,390
                                                                 ----------               ----------            ----------
                                                                 ----------               ----------            ----------

</TABLE>



15. CAPITAL STANDARDS

    The Federal Reserve Board and the Federal Deposit Insurance Corporation
(FDIC) have adopted risk-based capital standards for banking organizations.
These standards require ratios of capital to assets for minimum capital adequacy
and to be classified as well capitalized under prompt corrective action
provisions. As of December 31, 1998 and 1997, the capital ratios and minimum
capital requirements are as follows.

<TABLE>
<CAPTION>
                                                                         Minimum Capital            
                                                                                                      To be well
                                                      Actual                   Adequacy               Capitalized
 (In Thousands)                               Amount           Ratio     Amount           Ratio    Amount          Ratio
                                              ------           -----     ------           -----    ------          -----
<S>                                          <C>              <C>       <C>              <C>      <C>             <C>  
 DECEMBER 31, 1998
 Total Capital (to risk-weighted assets)
   Consolidated                               $31,523,051      16.75%    $15,051,740      8.0%     $18,814,675     10.0%
   Carrollton Bank                            $26,321,708      14.64%    $14,379,727      8.0%     $17,974,659     10.0%
 Tier 1 Capital  (to risk-weighted assets)
</TABLE>


                                      F-21
<PAGE>

<TABLE>
<S>                                           <C>              <C>       <C>              <C>      <C>             <C> 
   Consolidated                               $28,254,337      15.02%    $ 7,525,870      4.0%     $11,288,805     6.0%
   Carrollton Bank                            $23,933,976      13.32%    $ 7,189,864      4.0%     $10,784,795     6.0%
 Tier 1 Capital (to average assets)
   Consolidated                               $28,254,337       9.39%    $12,029,943      4.0%     $15,037,429     5.0%
   Carrollton Bank                            $23,933,976       8.09%    $11,832,024      4.0%     $14,790,030     5.0%

</TABLE>



<TABLE>
<CAPTION>
 DECEMBER 31, 1997
<S>                                           <C>              <C>       <C>              <C>      <C>             <C>  
 Total Capital (to risk-weighted assets)
   Consolidated                               $29,564,359      17.14%    $13,796,196      8.0%     $17,245,245     10.0%
   Carrollton Bank                            $26,294,558      15.49%    $13,577,812      8.0%     $16,972,265     10.0%
 Tier 1 Capital  (to risk-weighted assets)
   Consolidated                               $27,408,699      15.89%    $ 6,898,098      4.0%     $10,347,147     6.0%
   Carrollton Bank                            $24,173,028      14.24%    $ 6,788,906      4.0%     $10,183,359     6.0%
 Tier 1 Capital (to average assets)
   Consolidated                               $27,408,699       9.43%    $11,623,994      4.0%     $14,529,992     5.0%
   Carrollton Bank                            $24,173,028       8.43%    $11,470,803      4.0%     $14,342,254     5.0%
</TABLE>

Tier 1 capital consists of capital stock, surplus, and undivided profits. Total
capital includes a limited amount of the allowance for credit losses. In
calculating risk-weighted assets, specified risk percentages are applied to each
category of asset and off-balance sheet items.

Failure to meet the capital requirements could affect the Company's ability to
pay dividends and accept deposits and may significantly affect the operations of
the Company.

As of December 31, 1998, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum total risk based, Tier 1 risk based, and Tier 1 leverage ratios as set
forth in the table. There are no conditions or events since that notification
that management believes have changed the Bank's category.



                                      F-22
<PAGE>
16. PENSION PLANS

    The Company has a defined benefit pension plan covering substantially all of
the employees. Benefits are based on years of service and the employee's highest
average rate of earnings for the three consecutive years during the last five
full years before retirement. The Company's funding policy is to contribute
annually the amount recommended by the Plan's independent actuarial consultants.
Assets of the plan are held in a trust fund managed by an insurance company.
Approximately 61% of the trust assets are invested in an immediate participation
guarantee fund, and the balance is invested in equity funds.

The following table sets forth the financial status of the plan:

<TABLE>
<CAPTION>
                                                                    1998            1997             1996
                                                                ------------    ------------     --------

<S>                                                             <C>               <C>           <C>          
Change in benefit obligation:

   Benefit obligation at beginning of year                      $5,707,644        $4,888,812      $4,942,444   

   Service cost                                                    313,141           262,076         211,181

   Interest cost                                                   402,508           372,592         351,902   

   Actuarial gain                                                   40,515           445,744        (370,971) 

   Benefits paid                                                  (247,962)         (261,580)       (245,744)
                                                             ---------------     -----------      ----------


   Benefit obligation at end of year                            $6,215,846        $5,707,644      $4,888,812
                                                             ---------------     -----------      ----------
                                                             ---------------     -----------      ----------


Change in plan assets:                                                                                       

   Fair value of plan assets at beginning of year               $5,021,786        $4,288,052      $3,846,702

   Actual return on plan assets                                    858,086           615,025         380,840

   Employer contribution                                           329,737           380,289         306,254
 
   Benefits paid                                                  (247,962)         (261,580)       (245,744)
                                                            ---------------       -----------      ----------


   Fair value of plan assets at end of year                     $5,961,647        $5,021,786      $4,288,052
                                                            ---------------      -----------      ----------
                                                            ---------------      -----------      ----------



   Funded status                                                 $(254,199)        $(685,858)      $(600,760)

   Unrecognized net actuarial loss                                 218,677           595,081         388,935

   Unrecognized prior service cost                                 302,820           353,885         404,950
</TABLE>

                                      F-23
<PAGE>

<TABLE>

<S>                                                                 <C>             <C>             <C>      
   Unrecognized net transition (asset)                              (52,983)        (99,462)        (145,941)
                                                             ---------------     -----------      ----------


   Prepaid benefit cost                                          $  214,315      $  163,646         $ 47,184
                                                             ---------------     -----------      ----------
                                                             ---------------     -----------      ----------


Assumptions used in measuring the projected 
benefit obligation were as follows:

   Discount rates                                                      7.00%           7.25%            7.75%

   Rates of increase in compensation levels                            5.50%           5.50%            5.50%

   Long-term rate of return on assets                                  9.00%           9.00%            9.00%

Net pension expense includes the following components:

   Service cost                                                   $ 313,141       $ 262,076        $ 211,181  

   Interest cost                                                    402,508         372,592          351,902  

   Actual return on assets                                         (441,167)       (375,427)        (337,765)

   Net amortization and deferral                                      4,586           4,586           29,675
                                                             ---------------     -----------      ----------


   Net pension expense                                            $ 279,068       $ 263,827        $ 254,993
                                                             ---------------     -----------      ----------
                                                             ---------------     -----------      ----------
</TABLE>


    The Company has a contributory thrift plan qualifying under Section 401(k)
of the Internal Revenue Code. Employees with one year of service are eligible
for participation in the plan. The Company's contributions to this plan,
included in expenses, were $85,518, $72,205 and $63,542, for 1998, 1997, and
1996, respectively.

17. CONTINGENCIES

    The Company is involved in various legal actions arising from normal
business activities. Management believes that the ultimate liability or risk of
loss resulting from these actions will not materially affect the Company's
financial position.

18. INCOME TAXES

    The components of income tax expense are as follows:

<TABLE>
<CAPTION>

                                                      1998              1997               1996
                                                  ------------      ------------       --------
<S>                                                  <C>               <C>               <C>       
Current
   Federal                                          $ 823,249         $ 407,013          $ 540,934 
   State                                              170,841            54,080            115,067
                                                   ----------          --------          ---------
                                                      994,090           461,093            656,001 
Deferred                                              109,693           216,457            100,039
                                                   ----------          --------          ---------

                                                   $1,103,783          $677,550          $ 756,040
                                                   ----------          --------          ---------
                                                   ----------          --------          ---------
</TABLE>

    The components of the deferred tax charge (benefits) were as follows:

<TABLE>
<S>                                                                      <C>               <C>                 <C>       
Provision for loan losses                                                $  (32,731)       $  (71,113)         $ (72,412)
</TABLE>



                                      F-24
<PAGE>

<TABLE>
<S>                                                                           <C>              <C>                 <C>   
Deferred origination fees and costs                                           75,896           139,393             72,457
Deferred compensation plan                                                    (8,805)           (8,139)           (12,497)
Depreciation                                                                  45,523            94,002             73,331
Discount accretion                                                            (2,096)            1,449              2,107
Retirement benefits                                                           31,848            60,247             37,053
Ground rent losses                                                                58               618                  -
                                                                            --------         ---------        -----------

                                                                            $109,693          $216,457           $100,039
                                                                            --------         ---------        -----------
                                                                            --------         ---------        -----------

</TABLE>


    The components of the net deferred tax asset (liability) were as follows:
<TABLE>
<S>                                                                       <C>                <C>               <C>        
Deferred tax assets
   Allowance for loan losses                                              $  687,007         $  654,276        $  583,163 
   Accrued retirement benefits                                                     -                  -            15,123 
   Deferred compensation plan                                                184,575            175,770           167,631 
   Allowance for ground rent losses                                           53,443             53,501            54,119 
                                                                          ----------           --------          -------- 
                                                                             925,025            883,547           820,036
                                                                          ----------           --------          -------- 
Deferred tax liabilities
   Accrued retirement benefits                                               (76,972)           (45,124)                 -
   Deferred origination fees and costs                                      (265,200)          (189,304)          (49,913)
   Unrealized gains on available for sale investment securities             (756,078)          (530,929)         (130,840)
   Depreciation                                                             (238,909)          (193,386)          (99,385)
   Discount accretion                                                        (12,794)           (14,890)          (13,440)
   FHLB Stock dividends                                                       (2,019)            (2,019)           (2,019)
                                                                          ----------           --------          -------- 
                                                                          (1,351,972)          (975,652)         (295,597)
                                                                          ----------           --------          -------- 
</TABLE>


                                      F-25
<PAGE>

<TABLE>
<S>                                                                        <C>                 <C>               <C>     
Net deferred tax asset (liability)                                         $(426,947)          $(92,105)         $524,439
                                                                          ----------           --------          -------- 
                                                                          ----------           --------          -------- 
</TABLE>



    The differences between the federal income tax rate of 34 percent and the
effective tax rate for the Company are reconciled as follows:

<TABLE>
<CAPTION>
                                                                   1998          1997        1996
                                                                   ----          ----        ----
<S>                                                                <C>           <C>         <C>  
Statutory federal income tax rate                                  34.0%         34.0%       34.0%
Increase (decrease) resulting from:
   Tax-exempt income                                              (10.5)        (12.8)      (10.0)
   State income taxes, net of federal income tax benefit            2.9           2.2         3.0 
   Other                                                             .7            .7          .2
                                                                   ----          ----        ---- 

                                                                   27.1%         24.1%       27.2%
                                                                   ----          ----        ---- 
                                                                   ----          ----        ---- 

</TABLE>


19. LEASE COMMITMENTS

    The Company leases various branch and general office facilities to conduct
its operations. The leases have remaining terms which range from a period of 4
months to 15 years. Most leases contain renewal options which are generally
exercisable at increased rates. Some of the leases provide for increases in the
rental rates at specified times during the lease terms, prior to the expiration
dates.

    The leases generally provide for payment of property taxes, insurance, and
maintenance costs by the Company. The total rental expense for all real property
leases amounted to $716,525, $666,851, and $634,376 for 1998, 1997, and 1996,
respectively.

    Lease obligations will require rent payments as follows:
<TABLE>
<CAPTION>

                 PERIOD                   MINIMUM RENTALS

                  <S>                     <C>
                  1999                    $   513,504

                  2000                        468,849

                  2001                        419,659

                  2002                        386,337

                  2003                        373,150

            Remaining years                 2,091,124
                                            ---------


                                           $4,252,623
                                           ----------
                                           ----------
</TABLE>


20. PARENT COMPANY FINANCIAL INFORMATION

                                      F-26
<PAGE>

    The balance sheets for 1998 and 1997 and statements of income and cash flows
for Carrollton Bancorp (Parent Only) for 1998, 1997, and 1996, are presented
below:

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
December 31                                                               1998               1997
-------------------------------------------------------------------------------------------------------
<S>                                                                      <C>               <C>
Assets

   Cash                                                                  $  6,341          $  26,098 

   Interest-bearing deposits in subsidiary                                423,711            285,983 

   Investment in subsidiary                                            25,826,162         25,955,896 

   Investment securities available for sale                             4,997,626          3,659,917 

   Other assets                                                             5,130             19,869
                                                                       -----------       -----------

                                                                      $31,258,970        $29,947,763
                                                                       -----------       -----------
                                                                       -----------       -----------


Liabilities and Shareholders' Equity

   Liabilities                                                          $ 386,442          $ 155,529
                                                                        ----------         ---------

Shareholders' Equity

   Common Stock                                                        14,147,440         14,542,750 

   Surplus                                                              7,559,137          8,593,801 

   Retained earnings                                                    7,964,293          5,811,861 

   Accumulated other comprehensive income                               1,201,658            843,822
                                                                       -----------       -----------


                                                                       30,872,528         29,792,234
                                                                       -----------       -----------

                                                                      $31,258,970        $29,947,763
                                                                       -----------       -----------
                                                                       -----------       -----------
</TABLE>

                              STATEMENTS OF INCOME


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31                                                                     1998            1997           1996     
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>             <C>              <C>      
Income
   Dividends from subsidiary                                                              $1,617,751      $1,370,657       $670,631 
   Interest and dividends                                                                    129,491         126,014         83,954 
   Security gains                                                                          2,308,818         142,363         39,377
                                                                                          ----------      ----------     ----------
                                                                                           4,056,060       1,639,034        793,962 
Expenses                                                                                     116,517          83,464         66,161
                                                                                          -----------      ----------    ----------
Income before income taxes and equity in undistributed net income of subsidiary            3,939,543       1,555,570        727,801 
Income tax expense                                                                           870,763          40,381          8,585
                                                                                          ----------      ----------     ----------
                                                                                           3,068,780       1,515,189        719,216 

Equity in undistributed net income of subsidiary                                            (94,431)         624,303      1,309,207
                                                                                          -----------      ----------    ----------
Net income                                                                                $2,974,349      $2,139,492     $2,028,423
                                                                                          ----------      ----------     ----------
                                                                                          ----------      ----------     ----------
</TABLE>


                                      F-27
<PAGE>



                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31                                                                      1998           1997        1996    
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>            <C>           <C>      
Cash flows from operating activities

   Cash dividends from subsidiary                                                         $1,617,751     $1,370,657    $670,631 

   Interest and dividends received                                                           143,268        107,107      44,577 

   Cash paid to suppliers                                                                   (112,818)       (83,909)    (32,241)

   Income taxes paid                                                                        (889,950)       (90,974)     (9,612)
                                                                                           ---------        --------    ------- 

                                                                                             758,251      1,302,881     673,355
                                                                                           ---------       ---------    ------- 

Cash flows from investing activities

   Net (increase) decrease in interest-bearing deposits                                     (429,852)       290,652   1,033,117

   Proceeds from sales of securities available for sale                                    2,630,807        492,636      68,008

   Purchases of securities available for sale                                               (727,072)    (1,006,764) (1,191,238)
                                                                                           ---------     -----------   -------- 

                                                                                           1,473,883       (223,476)    (90,113)
                                                                                           ---------        --------   -------- 


Cash flows from financing activities

   Dividends paid                                                                           (821,917)     (750,350)    (587,967)

   Common stock repurchase and retirement                                                 (1,429,974)     (303,232)           -
                                                                                          ----------     ---------     --------

                                                                                          (2,251,891)   (1,053,582)    (587,967)
                                                                                          -----------    ---------     --------

Net (decrease) increase in cash                                                              (19,757)       25,823       (4,725)

Cash at beginning of year                                                                     26,098           275        5,000
                                                                                          -----------     --------     --------


Cash at end of year                                                                         $  6,341      $ 26,098       $  275
                                                                                           ---------       --------      ------
                                                                                           ---------       --------      ------


Reconciliation of net income to net cash provided by operating activities
Net income                                                                                $2,974,349    $2,139,492   $2,028,423
Adjustments to reconcile net income to net cash provided by operating activities
   Equity in undistributed income of subsidiary                                               94,431      (624,303)  (1,309,207)
   Security gains                                                                         (2,308,818)     (142,363)     (39,377)
   Decrease (increase) in accounts receivable                                                 14,739       (19,386)        (483)
   Increase (decrease) in accounts payable                                                   (16,450)      (50,559)      (6,001)
                                                                                            ---------     ---------    --------

                                                                                            $758,251    $1,302,881     $673,355
                                                                                            ---------    ----------    --------
                                                                                            ---------    ----------    --------
</TABLE>


21. FAIR VALUE OF FINANCIAL INSTRUMENTS

    The estimated fair values of the Company's financial instruments are
summarized below. The fair values of a significant portion of these financial
instruments are estimates derived using present value techniques prescribed by
the FASB and may not be indicative of the net realizable or liquidation values.
Also, the calculation of estimated fair values is based on market conditions at
a specific point in time and may not reflect current or future fair values.

                                DECEMBER 31, 1998            December 31, 1997


                                      F-28
<PAGE>

<TABLE>
<CAPTION>


                                                        Carrying Amount        Fair Value     Carrying Amount        Fair Value
                                                        ---------------        ----------     ---------------        -----------
<S>                                                        <C>                <C>                <C>                 <C>        
Financial assets

   Cash and due from banks                                 $  32,524,320      $ 32,524,320       $  25,063,180       $25,063,180

   Federal funds sold                                             22,145            22,145                   -                 -

   Investment securities (total)                              65,132,658        65,482,873          83,607,628        83,874,747

   Loans, net                                                204,919,155       209,945,276         168,531,267       169,305,234

   Accrued interest receivable                                 2,060,746         2,060,746           2,147,801         2,147,801

Financial liabilities

   Noninterest-bearing deposits                             $ 37,817,737      $ 37,817,737        $ 33,426,327       $33,426,327

   Interest-bearing deposits                                 199,161,288       200,230,465         201,044,078       202,019,117

   Federal funds purchased                                     2,545,640         2,545,640           5,265,753         5,265,753

   Notes payable - U.S. Treasury                                 414,906           414,906           2,706,255         2,706,255

   Securities sold under agreements to repurchase             10,270,813        10,270,813           5,758,688         5,758,688

   Advances from the Federal Home Loan Bank                   35,000,000        35,276,070           9,000,000         8,870,702

   Accrued interest payable                                      235,696           235,696             204,617           204,617
</TABLE>

    The fair values of U.S. Treasury and Government agency securities and listed
equity securities are determined using market quotations. For state and
municipal securities, the fair values are estimated using a matrix that
considers yield to maturity, credit quality, and marketability.

    The fair value of fixed-term loans is estimated to be the present value of
scheduled payments, and anticipated prepayments in the case of residential
mortgages, discounted using interest rates currently in effect for loans of the
same class and term. The fair value of variable-rate loans is estimated to equal
the carrying amount. The valuations of fixed-term and variable-rate loans are
adjusted for possible loan losses.

    The fair value of interest-bearing checking, savings, and money market
deposit accounts is equal to the carrying amount. The fair value of
fixed-maturity time deposits is estimated based on interest rates currently
offered for deposits of similar remaining maturities.

    It is not practicable to estimate the fair value of outstanding loan
commitments, unused lines, and letters of credit.

                                      F-29
<PAGE>


                        CARROLLTON BANCORP AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

22.  SEGMENT INFORMATION

The Company has reportable segments that are strategic business units offering
complimentary products and services to the core business of banking. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company provides the accounting
for all segments and charges a management fee for this service to the other
segments. The Company has also lent money to various segments with terms similar
to those offered third parties.

Segment information for the Company is as follows:


<TABLE>
<CAPTION>

                            Commercial/   Electronic                    Mortgage       Segment 
                            Retail Bank   Banking       Brokerage       Unit           Totals           Eliminations   Consolidated
<S>                        <C>                 <C>          <C>           <C>            <C>            <C>            <C>        
  Interest income          $20,336,274     $       -      $ 5,112       $1,837,418     $22,178,804    $(1,819,602)      $20,359,202
  Interest expense          (9,626,450)     (333,925)           -       (1,455,949)    (11,416,324)     1,819,602        (9,596,722)
                            ----------      --------      --------        ---------      ----------     ---------        ----------
  Net interest income       10,709,824      (333,925)       5,112          381,469      10,762,480              -        10,762,480
  Provision   for   loan
  losses                      (570,000)            -            -          (45,000)       (615,000)             -          (615,000)
  Other income               4,502,718     4,141,367      921,048          192,255       9,757,388              -         9,757,388
  Intersegment income           49,694             -            -                -          49,694        (49,694)                -
  Operating expenses       (11,144,772)   (3,826,799)    (614,860)        (289,999)    (15,876,430)        49,694       (15,826,736)
                          ------------    -----------    ---------        ---------    ------------       --------      -----------
  Income before tax          3,547,464       (19,357)     311,300          238,725       4,078,132              -         4,078,132
  Tax provision               (898,836)        7,476     (120,226)         (92,197)     (1,103,783)                      (1,103,783)
                             ---------        -------    ---------        ---------     -----------       --------      -----------
                                                                                                                -

  Net income (loss)         $2,648,628      $(11,881)    $191,074        $ 146,528      $2,974,349       $      -        $2,974,349
                            ----------      --------     ---------        ---------     ----------        --------      -----------
                            ----------      --------     ---------        ---------     ----------        --------      -----------


  Segment assets          $304,271,843   $13,804,997     $288,326      $42,958,314    $361,323,480    $(43,469,491)    $317,853,989
  Expenditures       for
  segment  purchases  of
  premises,    equipment
  and software              $1,732,065      $341,198      $17,685          $60,534      $2,151,482                       $2,151,482
</TABLE>



Other income for the commercial/retail bank includes $2,404,348 in gains on
security sales.

A reconciliation of total segment assets to consolidated total assets follows:

<TABLE>
<S>                                                              <C>         
    Total segment assets                                         $361,323,480
    Elimination of intersegment loans                             (42,025,412)
    Elimination of intersegment deposit accounts                   (1,444,079)
                                                                  -----------

                                                                 $317,853,989
                                                                 ------------
                                                                 ------------

</TABLE>



                                      F-30
<PAGE>

                        CARROLLTON BANCORP AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

23. CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Year Ended December 31, 1998:

<TABLE>
<CAPTION>

                                           First Quarter         Second Quarter           Third Quarter         Fourth Quarter
                                           -------------         --------------           -------------         --------------
<S>                                          <C>                    <C>                     <C>                    <C>        
Interest income                              $4,959,960             $5,129,817              $5,294,807             $4,974,618 

Interest expense                             (2,330,595)            (2,465,265)             (2,514,257)            (2,286,605)
                                             -----------            -----------             -----------            -----------

Net interest income                           2,629,365              2,664,552               2,780,550              2,688,013 

Provision for loan losses                       (75,000)               (90,000)               (315,000)              (135,000)

Security gains (losses)                          88,514                195,995               2,063,947                 55,892 

Gains on loan sales                                   -                      -                 253,630                195,201

Other income                                  1,461,790              1,668,305               1,812,040              1,962,074 

Operating expenses                           (3,509,586)            (3,864,671)             (4,093,229)            (4,359,250)
                                             -----------            -----------             -----------            -----------

Income before taxes                             595,083                574,181               2,501,938                406,930 

Tax provision                                  (115,576)              (110,691)               (844,130)               (33,386)
                                             -----------            -----------             -----------            -----------


Net income                                     $479,507               $463,490              $1,657,808               $373,544
                                             -----------            -----------             -----------            -----------
                                             -----------            -----------             -----------            -----------

Earnings per share                                $0.33                  $0.32                   $1.16                  $0.26
                                             -----------            -----------             -----------            -----------
                                             -----------            -----------             -----------            -----------

Cash dividends per share                          $0.14                  $0.14                   $0.15                  $0.15
                                             -----------            -----------             -----------            -----------
                                             -----------            -----------             -----------            -----------


Market prices:  high                             $37.50                 $39.00                  $38.25                 $34.31


                      low                        $33.33                 $35.25                  $32.50                 $32.50
                                             -----------            -----------             -----------            -----------
                                             -----------            -----------             -----------            -----------


Year Ended December 31, 1997:

                                           First Quarter         Second Quarter           Third Quarter         Fourth Quarter

Interest income                              $4,602,900             $4,823,428              $5,039,018             $5,128,236 

Interest expense                             (2,111,845)            (2,178,463)             (2,303,541)            (2,381,963)
                                             -----------            -----------             -----------            -----------

Net interest income                           2,491,055              2,644,965               2,735,477              2,746,273 

Provision for loan losses                       (60,000)               (60,000)                (60,000)               (60,000)

Security gains (losses)                          28,885                 72,349                  32,566                41,577 

Other income                                  1,186,521              1,312,812               1,478,922              1,420,867 

Operating expenses                           (2,981,579)            (3,124,891)             (3,338,212)            (3,690,545)
                                             -----------            -----------             -----------            -----------

Income before taxes                             664,882                845,235                 848,753                458,172 

Tax provision                                  (161,882)              (230,528)               (221,163)               (63,977)
                                             -----------            -----------             -----------            -----------


Net income                                     $503,000               $614,707                $627,590               $394,195
                                             -----------            -----------             -----------            -----------
                                             -----------            -----------             -----------            -----------

Earnings per share                                $0.34                  $0.42                   $0.43                  $0.27
                                             -----------            -----------             -----------            -----------
                                             -----------            -----------             -----------            -----------

Cash dividends per share                          $0.12                  $0.12                   $0.13                  $0.13
                                             -----------            -----------             -----------            -----------
                                             -----------            -----------             -----------            -----------


Market prices:  high                              $23.23                 $27.63                  $28.35                 $34.78


                      low                         $20.42                 $22.15                  $24.77                 $27.87
                                             -----------            -----------             -----------            -----------
                                             -----------            -----------             -----------            -----------
</TABLE>

All earnings per share amounts have been adjusted to reflect the 5% stock
dividend declared in January, 1998.



                                      F-31


<PAGE>


              ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

         At no time whatsoever during the Company's two most recent fiscal 
years or any subsequent interim period, has an independent accountant who was 
previously engaged as the principal accountant to audit the Company's 
financial statements, or an independent accountant who was previously engaged 
to audit a significant subsidiary and on whom the principal accountant 
expressed reliance in its report, resigned, declined to stand for 
reelection or been dismissed.

                                    PART III

      ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
                COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

         The Directors and Executive Officers of the Corporation are as follows:


DIRECTORS WHOSE TERMS EXPIRE IN 1999

STEVEN K. BREEDEN.......... Mr. Breeden, age 40, has served as a director of
Carrollton Bank, a Maryland state chartered commercial bank, and the principal
subsidiary of the Company (the "Bank") since June 1994, and of the Company since
October 1995. Mr. Breeden is currently Vice President and Secretary of Security
Development Corporation, a real estate development company, a position he has
held for the past five years (2).

THELMA T. DALEY............. Dr. Daley, age 67, has served as a director of the
Bank since November 1995, and of the Company since May 1998. Dr. Daley 
currently serves as Assistant Professor at Loyola College in the Graduate 
School. She was formerly a Coordinator of Guidance and Counseling for the 
Baltimore County Public Schools.

SAMUEL M. DELL, JR.......... Mr. Dell, age 90, has served as a director of 
the Bank since 1974 and of the Company since its inception in 1990. He is the 
founder of Crest Contracting Company, Inc., and has been its President and 
Treasurer since 1948. Mr. Dell is also the found of Carrollton Equipment 
Company, and has been a partner of Dellcrest Realty Company, a real estate 
investment partnership, since 1977.

LEO A. O'DEA............... Mr. O'Dea, age 68, has served as a director of the
Bank since 1983 and of the Company since its inception in 1990. Mr. O'Dea was
elected Chairman of the Company in February 1994. He was President of Hamilton &
Spiegel, Inc., a sheet metal contractor, from 1979 until his retirement in 1997.
(2)


DIRECTORS WHOSE TERMS EXPIRE IN 2000

ALBERT R. COUNSELMAN....... Mr. Counselman, age 50, has served as a director of
the Bank since April 1985, and of the Company since its inception in 1990. He
has been President of Riggs,



                                       50
<PAGE>


Counselman, Michaels & Downes, Inc., an insurance brokerage firm, since
September 1987, and served in various executive positions with that firm from
1972 to September 1987. (1)(2)

JOHN P. HAUSWALD........... Mr. Hauswald, age 76, has served as a director of
the Bank since 1964 and of the Company since its inception in 1990. He was,
until his retirement in October 1989, President of The Hauswald Bakery. Since
October 1989, he has been President of The Hauswald Company, Inc. (1) (2)

SAMUEL D. MILLER........... Mr. Miller, age 60, has served as a director of the
Bank and the Company since December 1992. He retired as Executive Vice President
of the Bank in February 1999 after 29 years of service.

WILLIAM C. ROGERS, JR...... Mr. Rogers, age 72, has served as a director of the
Bank since 1955 and of the Company since its inception in 1990. He has been a
partner in the law firm of Rogers, Moore and Rogers, counsel to the Bank, since
1970. He has been Chairman of the Board of The Security Title Guarantee
Corporation of Baltimore since 1970 and a director since 1952, and was President
from 1970 until March 1989. Mr. Rogers is President of Maryland Mortgage Company
where he has been a director since 1953. He is also President of Moreland
Memorial Park Cemetery, Inc. where he has been a director since 1959. He is the
brother of John Paul Rogers, a director of the Bank and the Company.


DIRECTORS WHOSE TERMS EXPIRE IN 2001

DALLAS R. ARTHUR............. Mr. Arthur, age 54, has served as a director of
Carrollton Bank, and the Company since October 1991. He has been President of
both the Company and the Bank since October 1993, and Chief Executive Officer of
both the Company and the Bank since February 1994. Mr. Arthur was Executive Vice
President of the Bank from October 1991 until October 1993, and had served as
First Senior Vice President of the Bank from December 1990 until October 1991.
Mr. Arthur has been with the Bank since 1964.

C. EDWARD HOERICHS........... Mr. Hoerichs, age 87, has served as a director of
the Bank since 1970 and of the Company since its inception in 1990. He is the
founder of Edward Hoerichs & Sons, Inc., a mechanical contracting firm, and was
its President from 1975 to its dissolution in 1993.

ALLEN QUILLE................ Mr. Quille, age 79, has served as a director of the
Bank since 1976 and of the Company since its inception in 1990. He has been
President of Quille's Parking, Inc. since 1933. Mr. Quille has also been
Secretary of Quille-Crown Parking of Maryland since 1983, and Secretary of The
Forum Caterers since 1983. (1)

JOHN PAUL ROGERS............. Mr. Rogers, age 63, has served as a director of
the Bank since 1970 and of the Company since its inception in 1990. Mr. Rogers
has been Chairman of the Bank since February 1994. He was a partner in the law
firm of Rogers, Moore and Rogers, counsel to the Bank, from 1970 until December
1992. Mr. Rogers was senior title officer of The Security Title Guarantee
Corporation of Baltimore from May 1991 until December 1992, having served as
President from March 1989 until May 1991, and as Executive Vice President from
March 1970 until March 1989. He is a Director of Maryland Mortgage Company and
The Security Title Guarantee Corporation of Baltimore. He is the brother of
William C. Rogers, Jr., a director of the Bank and the Company.



                                       51
<PAGE>


------------------------
(1) -- Member of the Audit Committee
(2) -- Member of the Compensation Committee




               OTHER EXECUTIVE OFFICERS AND DIRECTORS OF THE BANK

Certain information regarding directors and significant employees of the Bank
other than those previously mentioned is set forth below.

ROBERT A. ALTIERI.......... Mr. Altieri, age 37, has been Senior Vice President
- Lending of the Bank since June 1994 and previously was Vice President -
Commercial Lending since September 1991.

EDWARD R. BOOTEY........... Mr. Bootey, age 52, has been Senior Vice President -
Automation & Technology since October, 1995, and was Senior Vice President -
Operations of the Bank from June 1994 to October 1995. Mr. Bootey previously
served as Vice President - Operations from January 1991. He served as Assistant
Vice President - Operations from December 1987 until January 1991.

JEFFREY E. BROWN........... Mr. Brown, age 57, has been Vice President -
Consumer Lending of the Bank since July 1991, and was Assistant Vice President -
Consumer Lending from March 1990 until July 1991. He was Vice President -
Consumer Lending of Sharon Federal Savings Bank, F.S.B. from August 1988 until
March 1990, and served in various management positions with the Bank of
Baltimore from March 1968 to August 1988.

DAVID L. COSTELLO, III...... Mr. Costello, age 47, has been Senior Vice
President and Chief Financial Officer of the Bank since June 1994. Mr. Costello
has served as Treasurer of the Company since October 1993.

GARY M. JEWELL.............. Mr. Jewell, age 52, has been Senior Vice President
and Retail Delivery Group Manager since July 1998. He was previously Senior Vice
President Electronic Banking from March 1996 to July 1998. Prior to joining
Carrollton Bank, Mr. Jewell was Director of Product Management and Point of Sale
Services for the MOST EFT network in Reston, Virginia from March 1995 to March
1996 and prior to that Director/Manager of Merchant Services for the Farmers and
Mechanics National Bank from 1993 to March 1995.

BOARD COMMITTEES

The Board of Directors of the Company met 10 times and the Board of Directors of
the Bank met 24 times during the year ended December 31, 1998. The Board of
Directors of the Bank meets twice a month. No director attended fewer than 75%
of the total number of meetings of both Boards and committees to which they were
assigned during the year ended December 31, 1998.

As of this date, the Board of Directors does not have a standing nominating



                                       52
<PAGE>


committee.

The Audit Committee held 5 meetings during 1998. Its current members are Messrs.
Counselman, Hauswald and Quille. Only nonemployee directors are eligible to
serve on the Audit Committee. The duties of the Audit Committee include
reviewing the annual financial statements of the Company and the scope of the
independent annual audit and internal audits. It also reviews the independent
accountant's letter to management concerning the effectiveness of the Company's
internal financial and accounting controls and management's response to that
letter. In addition, the Committee reviews and recommends to the Board the firm
to be engaged as the Company's independent accountants. The Committee may also
examine and consider other matters relating to the financial affairs of the
Company as it determines appropriate.
The Compensation Committee met 6 times during 1998. Its current members are 
Messrs. Breeden, Counselman, Hauswald, and O'Dea. The purpose of the 
Compensation Committee is to review and approve major compensation and 
benefit policies of the Company and the Bank. In addition, the committee 
recommends to the Board the compensation to be paid to all officers of the 
Bank.


                COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and persons who own more than ten percent of the
Company's Common Stock ("a Section 16 Insider") to file monthly and annual
reports with both the Securities and Exchange Commission and the National
Association of Securities Dealers. Based on a review of the reports submitted to
the Company, the Company believes that all Section 16(a) reporting requirements
applicable to the Company's directors, officers and 10% shareholders were
satisfied on a timely basis.



                         ITEM 10: EXECUTIVE COMPENSATION

The following table sets forth the compensation paid or allocated for services
rendered to the Company in all capacities during the years ended December 31,
1996, 1997 and 1998 to the chief executive officer of the Company. The
compensation of the other members of executive management is not required to be
provided because the base compensation of each of such individuals does not
exceed $100,000.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
      Name and Principal Position           Year         Salary ($)        Long-Term Incentive Plan     Bonus ($)
                                                                         Stock Option Grants (Shares)
-----------------------------------------------------------------------------------------------------------------
<S>                                         <C>           <C>                       <C>                  <C>
Dallas R. Arthur, President and Chief       1998          $126,757                  8,000                  -0-
Executive Officer                           1997          $119,911                   -0-                   -0-
                                            1996          $109,140                   -0-                   -0-
-----------------------------------------------------------------------------------------------------------------

</TABLE>

-------------------
The Company has no employment agreements, termination of employment, or
change-in-control



                                       53
<PAGE>


agreements or understandings with any of its directors, executive officers or
any other party whatsoever, except that the President of Carrollton Mortgage
Services, Inc., a new subsidiary of the Bank, has an employment contract that
provides for a termination settlement of $50,000 if terminated by the Bank.


DIRECTORS' FEES

Directors who are not employees of the Bank receive a monthly fee of $850 for
Board meetings, and $150 per committee meeting attended. The Chairman of the
Board of the Bank receives a monthly fee of $1,050. Directors do not receive
additional fees for their service as directors of the Company. Employee
directors are not compensated for attendance at Board meetings.







                                       54
<PAGE>


     ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of December 31, 1998, certain information
concerning shares of the Common Stock of the Company beneficially owned by (i)
the chief executive officer of the Company; (ii) all directors and nominees for
directors of the Company and the Bank; (iii) all directors and officers of the
Company and the Bank as a group; and (iv) other significant shareholders.

<TABLE>
<CAPTION>

                                                        Amount And
                                              Nature of Beneficial
Name and Address of Beneficial Owner(1)                Ownership(1)              Percent of Class
                                                                                        (1)
--------------------------------------        ---------------------              ----------------
<S>                                           <C>                                <C>
DIRECTORS:
Dallas R. Arthur                                             1,652   (2)                     *
Steven K. Breeden                                            1,910                           *
Albert R. Counselman                                        13,183                           *
Thelma T. Daley                                                 55                           *
Samuel M. Dell, Jr.                                          7,441                           *
John P. Hauswald                                             5,901   (3)                     *
C. Edward Hoerichs                                           2,233                           *
Samuel D. Miller                                               702   (4)                     *
Leo A. O'Dea                                                 5,603   (5)                     *
Allen Quille                                                 1,945                           *
John Paul Rogers                                            97,704   (6)(8)                6.91%
William C. Rogers, Jr.                                     128,686   (7)(8)(9)             9.10%
All Directors and Executive Officers of the
Company as a group (17 persons)
                                                           267,015                        18.90%
OTHER SIGNIFICANT SHAREHOLDER:
Edward Q. Rogers                                            71,470   (10)                  5.05%

</TABLE>

------------------
* Less than 1%

(1) Unless otherwise indicated, the named person has sole voting and investment
power with respect to all shares.

(2) Includes 839 shares owned jointly by Mr. Arthur and his wife. Excludes 488
shares owned



                                       55
<PAGE>


by Mr. Arthur's wife.

(3) Includes 5,745 shares owned jointly by Mr. Hauswald and his wife. Excludes
5,269 shares owned by Mr. Hauswald's wife.

(4) Includes 574 shares owned jointly by Mr. Miller and his wife. Excludes 203
shares owned by Mr. Miller's wife.

(5) Excludes 7,867 shares owned by Mr. O'Dea's wife.

(6) Includes 988 shares owned by a trust for the benefit of Elizabeth B.
Seuferling, for which Mr. Rogers serves as trustee.

(7) Includes 3,247 shares owned by the Moreland Memorial Park Cemetery, Inc.,
5,875 shares owned by the Moreland Memorial Park Cemetery, Inc. Perpetual Care
Fund, 1,613 shares owned by Moreland Memorial Park, Inc. Bronze Perpetual Care
Fund, and 16,207 shares owned by the Moreland Memorial Park, Inc. Perpetual Care
Trust Agreement for which William C. Rogers, Jr. serves as a trustee.

(8) Includes 31,952 shares owned by The Security Title Guarantee Corporation of
Baltimore and 4,753 shares owned by Maryland Mortgage Company, of which John
Paul Rogers is a director, and of which William C. Rogers, Jr. is Chairman and
President, respectively, as well as a director.

(9) Includes 64,299 shares owned jointly by Mr. Rogers and his wife. Excludes
5,713 shares owned by Mr. Roger's wife.

(10) Includes 32,937 shares owned jointly by Mr. Rogers and his wife. Also
includes 31,952 shares owned by The Security Title Guarantee Corporation of
Baltimore and 4,753 shares owned by Maryland Mortgage Company, of which Mr.
Rogers is a principal shareholder. Excludes 42,411 shares owned by Mr. Roger's
wife which, if included, would result in Mr. Rogers beneficially owning a total
of 112,053 shares or 7.92% of shares outstanding.

(11) All directors, executive officers and other significant shareholders may be
contacted at the Company's corporate offices by addressing correspondence to the
appropriate person, care of Carrollton Bancorp, 344 North Charles Street, Suite
300, Baltimore, Maryland 21201.



                                       56
<PAGE>


             ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During the past year the Bank has had banking transactions in the ordinary
course of its business with: (i) its directors and nominees for directors; (ii)
its executive officers; (iii) its 5% or greater shareholders; (iv) members of
the immediate family of its directors, nominees for directors or executive
officers and 5% shareholders; and (v) the associates of such persons on
substantially the same terms, including interest rates, collateral, and
repayment terms on loans, as those prevailing at the same time for comparable
transactions with others. The extensions of credit by the Bank to these persons
have not and do not currently involve more than the normal risk of
collectibility or present other unfavorable features. At December 31, 1998, the
balance of loans outstanding to directors, executive officers, owners of 5% or
more of the outstanding Common Stock, and their associates, including loans
guaranteed by such persons, aggregated $2,533,672, which represented
approximately 8.2% of the Company's equity capital accounts.

William C. Rogers, Jr., a director of both the Company and the Bank, is a
partner of the law firm of Rogers, Moore and Rogers which performs legal
services for the Company and its subsidiaries. Management believes that the
terms of these transactions were at least as favorable to the Company as could
have been obtained elsewhere.

Albert R. Counselman, a director of both the Company and the Bank, is President
of Riggs, Counselman, Michaels & Downes, Inc., an insurance brokerage firm
through which the Company and the Bank place various insurance policies. The
Company and the Bank paid total premiums for insurance policies placed by Riggs,
Counselman, Michaels & Downes, Inc. in 1998 of $110,528. Management believes
that the terms of these transactions were at least as favorable to the Company
as could have been obtained elsewhere.



                                       57
<PAGE>


                                     PART IV
                 ITEM 13: EXHIBITS LIST AND REPORTS ON FORM 8-K

a) List of Exhibits:

<TABLE>
<CAPTION>

Exhibit Number    Description
--------------    ------------
<S>               <C>                                                 
3(i)              Articles of Incorporation of Carrollton Bancorp *

3(ii)             By-Laws of Carrollton Bancorp *

10.1              Lease dated January 24, 1989 by and between Hill Management
                  Services, Inc. and The Carrollton Bank of Baltimore. *

10.2              Lease dated July 21, 1989 by and between Hill Management
                  Services, Inc. and The Carrollton Bank of Baltimore. *

10.3              Lease dated October 30, 1959 between Arbutus Shopping Plaza,
                  Inc. and The Carrollton Bank of Baltimore, as amended. *

10.4              Lease dated August 3, 1976 between Arbutus Shopping Plaza,
                  Inc. and The Carrollton Bank of Baltimore. *

10.5              Lease dated March 28, 1968 by and between Charles Towers
                  Partnership and The Carrollton Bank of Baltimore. *

10.6              Lease dated November 18, 1983 by and between Charles Towers
                  Partnership and The Carrollton Bank of Baltimore. *

10.7              Lease dated May 20, 1971 by and between Home Mutual Life
                  Insurance Company and The Carrollton Bank of Baltimore. *

10.8              Lease dated April 17, 1974 by and between Liberty Plaza
                  Enterprises, Inc. and The Carrollton Bank of Baltimore. *

10.9              Lease dated July 19, 1988 by and between Northway Limited
                  Partnership and The Carrollton Bank of Baltimore. *

10.10             Lease dated August 11, 1994 by and between Kensington
                  Associates Limited Partnership and Carrollton Bank. **

10.11             Lease dated October 11, 1994 by and between Ridgeview
                  Associates Limited Partnership and Carrollton Bank. **

21.1              Subsidiaries of Carrollton Bancorp

23                Consent of Accountant
</TABLE>

*        Incorporated by reference from Registration Statement dated January 12,
         1990 on SEC Form S-4 (1933 Act File No.: 33-33027).

**       Incorporated by reference from Annual Report on Form 10-KSB for the
         fiscal year ended December 31, 1994 (1934 Act File No.:0-23090).

b) Reports on Form 8-K:

         No reports on Form 8-K were filed during the last quarter of the period
covered by this report.



                                       58
<PAGE>


                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                                CARROLLTON BANCORP


March 25, 1999                  By:/s/ Dallas R. Arthur
                                   ---------------------------
                                   Dallas R. Arthur
                                   President and Chief Executive Officer

         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacity and on the dates indicated.

                                Principal Executive Officer


March 25, 1999                  By:/s/ Dallas R. Arthur
                                   ----------------------------
                                   Dallas R. Arthur
                                   President and Chief Executive Officer


                                   Principal Financial and Accounting Officer


March 25, 1999                  By:/s/ David L. Costello, Iii
                                   ----------------------------
                                   David L. Costello, III
                                   Treasurer


                                Board of Directors


March 25, 1999                     /s/ Dallas R. Arthur
                                   ---------------------------------
                                   Dallas R. Arthur
                                   Director


March 25, 1999                     /s/ Steven K. Breeden
                                   ---------------------------------
                                   Steven K. Breeden
                                   Director




                                      II-1
<PAGE>


March 25, 1999                     
                                   -----------------------------
                                   Albert R. Counselman
                                   Director


March 25, 1999                     
                                   -----------------------------
                                   Thelma T. Daley
                                   Director


March 25, 1999                     
                                   --------------------------------
                                   Samuel M. Dell, Jr.
                                   Director


March 25, 1999                     
                                   ------------------------------
                                   John P. Hauswald
                                   Director


March 25, 1999                     /s/ C. Edward Hoerichs
                                   ------------------------------
                                   C. Edward Hoerichs
                                   Director


March 25, 1999                     
                                   ---------------------------------
                                   Samuel D. Miller
                                   Director


March 25, 1999                     /s/ Leo A. O'dea
                                   ---------------------------------
                                   Leo A. O'Dea
                                   Director


March 25, 1999                     /s/ Allen Quille
                                   -------------------------------
                                   Allen Quille
                                   Director


March 25, 1999                     /s/ John Paul Rogers
                                   -------------------------------
                                   John Paul Rogers
                                   Director

March 25, 1999                     /s/ William C. Rogers, Jr.
                                   -------------------------------
                                   William C. Rogers, Jr.
                                   Director



                                      II-2
<PAGE>


                                  EXHIBIT INDEX
<TABLE>
<CAPTION>

                                                                                             Sequentially
Exhibit                                                                                      Numbered
Number           Description                                                                 Page
-------          -----------                                                                 ------------
<S>              <C>                                                                         <C>
3(i)             Articles of Incorporation of Carrollton Bancorp                                *
3(ii)            By-Laws of Carrollton Bancorp                                                  *
10.1             Lease dated January 24, 1989 by and between Hill Management Services, Inc.     *
                 and The Carrollton Bank of Baltimore.
10.2             Lease dated July 21, 1989 by and between Hill Management Services, Inc. and    *
                 The Carrollton Bank of Baltimore.
10.3             Lease dated October 30, 1959 between Arbutus Shopping Plaza, Inc. and The      *
                 Carrollton Bank of Baltimore, as amended.
10.4             Lease dated August 3, 1976 between Arbutus Shopping Plaza, Inc. and The        *
                 Carrollton Bank of Baltimore.
10.5             Lease dated March 28, 1968 by and between Charles Towers Partnership and The   *
                 Carrollton Bank of Baltimore.
10.6             Lease dated November 18, 1983 by and between Charles Towers Partnership and    *
                 The Carrollton Bank of Baltimore.
10.7             Lease dated May 20, 1971 by and between Home Mutual Life Insurance Company     *
                 and The Carrollton Bank of Baltimore.
10.8             Lease dated April 17, 1974 by and between Liberty Plaza Enterprises, Inc.      *
                 and The Carrollton Bank of Baltimore.
10.9             Lease dated July 19, 1988 by and between Northway Limited Partnership and      *
                 The Carrollton Bank of Baltimore.
10.10            Lease dated August 11, 1994 by and between Kensington Associates Limited       **
                 Partnership and Carrollton Bank.
10.11            Lease dated October 11, 1994 by and between Ridgeview Associates Limited       **
                 Partnership and Carrollton Bank.
21.1             Subsidiaries of Carrollton Bancorp
23               Consent of Accountant

</TABLE>


* Incorporated by reference from Registration Statement dated January 12, 1990
on SEC Form S-4 (1933 Act File No.: 33-33027).

** Incorporated by reference from Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994 (1934 Act File No.: 0-23090).



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