U.S. SECURITIES AND EXCHANGE COMMISSION

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WASHINGTON, D.C. 20549

FORM 10-K

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

For
the fiscal year ended December 31, 2004

Commission
file number: 0-23090

Carrollton
Bancorp

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(Name
of Issuer in Its Charter)

|Maryland(State or Other Jurisdiction of Incorporation or Organization)                          |  | 52-1660951(I.R.S. Employer Identification No.)
|----------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|344 North Charles Street, Suite 300
Baltimore, Maryland(Address of Principal Executive Offices) |  | 21201-4301(Zip Code)                          
|(410) 536-4600(Issuer's Telephone Number)                                                       |  |                                               
|Securities registered under Section 12(b) of the Exchange Act:                                 
|Title of Each Class
None                                                                        |  | Name of Each Exchange
on Which Registered
None

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

Common
Stock

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(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 ý    No o

Indicate by checkmark if disclosure of delinquent filers in response to Item 405 of Regulation S-K 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-K
or any amendment to this Form 10-K.    o

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act). Yes o    No ý

As of February 28, 2005, the aggregate market value of the voting stock held by non-directors and executive officers: $32,239,682.

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 2,849,773 shares as of March 4, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to shareholders in connection with the 2005 Annual Meeting of Shareholders scheduled to be held on April 19, 2005 are incorporated by reference into
Part III.

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PART I

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ITEM 1: DESCRIPTION OF BUSINESS

General. Carrollton Bancorp (the "Company"), a bank holding company registered under the
Bank Holding Company Act of 1956, as amended, was organized on January 11, 1990, and is headquartered in Baltimore, Maryland. 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 and, as of December 31, 2004, had a total of ten branch locations in Maryland with two branch locations in Baltimore City; three branch locations in Anne Arundel County; and
five branches in Baltimore County. The Company's eleventh branch opened in Harford County in January 2005. The Bank's wholly owned subsidiaries are Carrollton Mortgage Services, Inc.
("CMSI"), which is used primarily to originate and sell residential mortgage loans and Carrollton Financial Services, Inc. ("CFS"), which provides brokerage services. Carrollton Community
Development Corporation ("CCDC") is a 96.4% owned subsidiary of the Bank which promotes, develops and improves the housing and economic conditions of people in Maryland, particularly the Metropolitan
Baltimore area.

The
Bank also operates a network of ATMs in Maryland, Virginia, and West Virginia and sponsors national retailers who accept ATM cards for purchases in various electronic
networks.

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



Customer
service hours for the Bank are competitive with other institutions in the market area. The Bank also acts as a reseller of services purchased from third party vendors 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 ability to repay. Loans to consumers include home equity lines of credit, home improvement loans, overdraft lines
of credit, 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. The Notes to the Consolidated Financial Statements contained in Part II, Item 8
report the classification by type of loan for the whole portfolio.

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First
and second residential mortgage loans, made principally through the Bank's subsidiary, 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. Residential loans are considered low risk based on the type of collateral (residential property) and the underwriting standards used. The Bank
experienced $746 in losses in 2004 and $8,087 in recoveries on residential mortgage loans in 2004. The Bank experienced losses of $8,709 and recoveries of $0 in 2003. The Bank experienced no losses or
recoveries in 2002. There were $312,563 of residential mortgage loans delinquent more than 90 days at December 31, 2004. 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, depending on the rate and program. The Bank maintains in its portfolio loans financed
under a program that financed 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, 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 losses on home equity loans of $7,000 and recoveries of $0 during 2004. The
Bank experienced losses on home equity loans during 2003 of $8,189 and recoveries of $0. The Bank experienced losses on home equity loans during 2002 of $160,591 and recoveries of $67,705. There were
$323,955 of home equity loans delinquent more than 90 days at December 31, 2004. There are no discernible delinquency or loss trends relating 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 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.
Commercial mortgage loans tend to be larger in size, and the properties tend to exhibit more fluctuation in value. 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. The Bank experienced net losses of $0, $0, and $112,718 on commercial mortgage
loans during 2004, 2003, and 2002, respectively. There were $325,094 of commercial mortgage loans past due more than 90 days at December 31, 2004. 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
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. 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 or
recoveries on construction and land development loans during 2004, 2003, or 2002. There were no construction and land development loans past due more than 90 days at December 31, 2004.
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 may be unsecured based on the personal guarantee of the principal. If secured, loans may be made for up to 100% of the
value of the collateral. Time and demand loans and lines of credit are more risky than 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,

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or
due to other factors. The Bank had losses of $192,440 and recoveries of $67,111 on time and demand loans in 2004. The Bank had losses of $200,173 and recoveries of $58,034 on time and demand loans
in 2003. The Bank had losses of $21,904 and recoveries of $2,475 on time and demand loans in 2002. There were $1,038,830 of time and demand and line of credit loans delinquent more than 90 days
at December 31, 2004. 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 $15,000. 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-to-debt-ratio requirement helps determine the borrower's current ability to repay the loan. The Bank had charge-offs of home improvement loans of
$10,020, $3,170, and $24,472 in 2004, 2003 and 2002, respectively. There were recoveries of $14,898, $21,922, and $10,912 in 2004, 2003, and 2002, respectively. There were no home improvement loans
delinquent more than 90 days at December 31, 2004. There are no discernible loss or delinquency trends relating to home improvement loans known to management.

The
remainder of the consumer loan portfolio is comprised of installment loans for automobiles, boats and recreational vehicles ("RV"), 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 90% 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 no losses on automobile loans in 2004, 2003, or 2002, and recoveries of $0, $369, and $1,400 in 2004, 2003 and
2002, respectively. There were no automobile or other vehicle loans past due more than 90 days at December 31, 2004. There are no discernible delinquency or loss trends relating to
automobile or other vehicle loans known to management.

Overdraft
lines and other personal loans are unsecured lending arrangements. These loans or lines of credit are made to allow customers to easily make purchases of consumer goods. 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 2004, 2003, and 2002 were $43,470, $34,000, and $59,000, respectively. There were $801 of
overdraft loans and other personal loans past due more than 90 days at
December 31, 2004. There are no discernible delinquency or loss trends relating to overdraft lines and other personal loans known to management.

Loans
secured by savings accounts and stock and bond certificates are secured lending arrangements. The Bank will advance funds for up to 95% of balances in savings or certificate of
deposit accounts. The Bank will advance funds up to 60% of the market value of actively traded stock certificates and bonds or 50% 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 2004, 2003, or 2002. Recoveries on loans secured by stocks and bonds were $411,
$0, and $0 in 2004, 2003, and 2002, respectively. There were no loans secured by savings accounts or stock and bond certificates past due more than 90 days at December 31, 2004. There
are no discernible delinquency or loss trends relating to loans secured by savings accounts or stock and bond certificates known to management.

The
Bank is the principal originator of the loans it makes, at this time. In prior periods, residential mortgage loans and home equity loans and lines of credit were predominantly
purchased from a network of brokers or other types of originators with whom the Bank does business. The Bank has sold some loans in 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.

CMSI
originates adjustable and fixed-rate residential mortgage loans at terms and conditions and with documentation that permit their sale in the secondary mortgage market.
CMSI's practice is to immediately sell substantially all residential mortgage loans in the secondary market with servicing released.

CCDC
was established in 1995 for the purpose of promoting, developing, and improving the housing and economic conditions of people in Maryland with particular emphasis in the
Metropolitan Baltimore area. CCDC

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promotes
through loans, investments, and other transactions, efforts to increase housing for low and moderate-income individuals.

Investment Activities. The Company maintains a portfolio of investment securities to
provide liquidity and income. The current portfolio amounts to about 13% of total assets, and is invested primarily in U.S. government agency securities, state and municipal bonds, corporate bonds,
and mortgage-backed securities with maturities varying from 2005 to 2013, as well as equity securities.

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. Deposit accounts available include noninterest-bearing demand checking, interest-bearing checking (NOW accounts), savings, money market,
certificates of deposit, and individual retirement accounts. Deposit accounts carry varying fee structures depending on the level of services desired by the customer. Interest rates vary 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 also offers certificates of deposit over $100,000 to its retail and
commercial customers. The Bank has used deposit brokers in the past and 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.

The
Company offers Certificate of Deposit Registry Service ("CDARS") deposits to its customers. This is a program which allows for customers that wish to invest more than the amounts
that would normally be covered by FDIC insurance with the Bank. The program is a nationwide one that allows participating banks to "swap" customer deposits so that no customer has greater than the
insurable maximum in one bank, but the customer only deals with his/her own bank.

In
addition to traditional deposit services, the Bank offers telephone banking services, internet banking services and internet bill paying services to its customers.

Brokerage Activities. CFS provides full service brokerage services for stocks, bonds,
mutual funds and annuities. For 2004, commission income totaled $624,000 and net income was $95,000.

Market. The Company considers its core markets to be the communities within the Baltimore
Metropolitan Statistical Area ("Baltimore MSA"), particularly Baltimore City and the counties of Baltimore, Anne Arundel and Harford. Lending activities are more broad and include areas outside of the
Baltimore MSA. CMSI operates in Delaware, Pennsylvania, Virginia and West Virginia in addition to its core Maryland operations.

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, Harford 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 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.

Current
federal law allows the acquisition of banks by bank holding companies nationwide. Further, federal and Maryland law permit interstate banking. Recent legislation has broadened
the extent to which financial services companies, such as investment banks and insurance companies, may control commercial banks. As a consequence of these developments, competition in the Bank's
principal market may increase, and a further consolidation of financial institutions in Maryland may occur.

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. 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 agency securities, corporate bonds,
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. 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.

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Employees. As of December 31, 2004, the Bank and its subsidiaries had 165 full
time equivalent employees, 48 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.

CRITICAL ACCOUNTING POLICIES

The Company's financial condition and results of operations are sensitive to accounting measurements and estimates of matters that are inherently uncertain. When
applying accounting policies in areas that are subjective in nature, management must use its best judgment to arrive at the carrying value of certain assets. One of the most critical accounting
policies applied is related to the valuation of the loan portfolio.

A
variety of estimates impact carrying value of the loan portfolio including the calculation of the allowance for loan losses, valuation of underlying collateral and the timing of loan
charge-offs.

The
allowance for loan losses is one of the most difficult and subjective judgments. The allowance is established and maintained at a level that management believes is adequate to cover
losses resulting from the inability of borrowers to make required payments on loans. Estimates for loan losses are arrived at by analyzing risks associated with specific loans and the loan portfolio.
Current trends in delinquencies and charge-offs, the views of Bank regulators, changes in the size and composition of the loan portfolio and peer comparisons are also factors. The analysis
also requires consideration of the economic climate and direction and change in the interest rate environment, which may impact a borrower's ability to pay, legislation impacting the banking industry
and economic conditions specific to the Bank's service area. Because the calculation of the allowance for loan losses relies on estimates and judgments relating to inherently uncertain events, results
may differ from our estimates.

Another
critical accounting policy is related to securities. Securities are evaluated periodically to determine whether a decline in their value is other than temporary. The term "other
than temporary" is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of
evidence to support fair values equal to, or greater than, the carrying value of the investment. Management reviews criteria such as the magnitude and duration of the decline, as well as the reasons
for the decline, to predict whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a
corresponding charge to earnings is recognized.

SUPERVISION AND REGULATION

General. The Company and Bank are extensively regulated under
federal and state law. Generally, these laws and regulations are intended to protect depositors, not stockholders. The following is a summary description of certain provisions of certain laws, which
affect the regulation of banks and holding companies. The discussion is qualified in its entirety by reference to applicable laws and regulations. Changes in these laws and regulations may have a
material effect on the business and prospects of the Company and the Bank.

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 Company and any of its nonbank subsidiaries. The BCHA requires every bank 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 (5%) 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. 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.

Federal and State Bank Regulation. The Bank is a Maryland state-chartered bank, with all the powers of a commercial
bank, regulated and examined by the Office of the Maryland Commissioner of Financial Regulation (the "Commissioner') and the Federal Deposit Insurance Corporation ("FDIC"). The Commissioner and the
FDIC have extensive enforcement authority over the institutions they regulate to prohibit or correct activities which violate law,

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regulations
or written agreements with the regulator, or which are deemed to constitute unsafe or unsound practices. Enforcement actions may include the appointment of a conservator or receiver, the
issuance of a cease and desist order, the termination of deposit insurance, the imposition of civil money penalties on the institution, its directors, officers, employees and institution-affiliated
parties, and the enforcement of any such mechanisms through restraining orders or other court actions.

In
its lending activities, the maximum legal rate of interest, fees and charges which a financial institution may charge on a particular loan depends on a variety of factors such as the
type of borrower, the purpose of the loan, the amount of the loan and the date the loan is made. Other laws tie the maximum amount, which may be loaned to any one customer and its related interests to
capital levels. The Bank is also subject to certain restrictions on extensions of credit to executive officers, directors, principal stockholders or any related interest of such persons which
generally require that such credit extensions be made on substantially the same terms as are available to third persons dealing with the Bank and not involve more than the normal risk of repayment.

The
Community Reinvestment Act ("CRA") requires that in connection with the examination of financial institutions within their jurisdictions, the FDIC evaluate the record of the
financial institutions in meeting the credit needs of their local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of these banks. The factors
are also considered by all regulatory agencies in evaluating mergers, acquisitions and applications to open a branch or facility. As of the date of its most recent examination report, the Bank has a
CRA rating of "Satisfactory."

Under
the Federal Deposit Insurance Corporation Improvement Act of 1991("FDICIA"), each federal banking agency is required to prescribe, by regulation, non-capital safety and
soundness standards for institutions under its authority. The federal banking agencies, including the FDIC, have adopted standards covering internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. An institution that fails to meet those standards may be required by the
agency to develop a plan acceptable to the agency, which specifies the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the
institution to regulatory sanctions. The Bank believes that it meets substantially all standards which have been adopted. FDICIA also imposed new capital standards on insured depository institutions
described under the caption, "Capital Requirements."

Before
establishing new branch offices, the Bank must meet certain minimum capital stock and surplus requirements. Prior to establishment of the branch, the Bank must obtain Commissioner
and FDIC approval. If establishment of the branch involves the purchase of a bank building or furnishings, the total investment in bank buildings and furnishings cannot exceed, with certain
exceptions, 75% of the Bank's unimpaired capital and surplus.

Deposit Insurance.As an FDIC insured institution, deposits of the Bank are currently insured to a maximum of
$100,000 per depositor through the Bank Insurance Fund ("BIF"). The FDIC is required to establish the semi-annual assessments for BIF-insured depository institutions at a rate
determined to be appropriate to maintain or increase the reserve ratio of the respective deposit insurance funds at or above 1.25 percent of estimated insured deposits or at such higher
percentage that the FDIC determines to
be justified for that year by circumstances raising significant risk of substantial future losses to the fund. The Bank currently pays ade minimussemi-annual assessment.

Limits on Dividends and Other Payment.Both federal and state laws impose restrictions on the ability of the Bank to
pay dividends. The Federal Reserve Board ("FRB") has issued a policy statement, which provides that, as a general matter, insured banks may pay dividends only out of prior operating earnings. For a
Maryland state-chartered bank, dividends may be paid out of undivided profits or, with the prior approval of the Commissioner, from surplus in excess of 100% of required capital stock. If, however,
the surplus of a Maryland bank is less than 100% of its required capital stock, cash dividends may not be paid in excess of 90% of the net earnings. In addition to these specific restrictions, bank
regulatory agencies, in general, also have the ability to prohibit proposed dividends by a financial institution, which would otherwise be permitted under applicable regulations if the regulatory body
determines that such distribution would constitute an unsafe or unsound practice.

Capital Requirements.The FDIC adopted certain risk-based capital guidelines to assist in the assessment
of the capital adequacy of a banking organization's operations for both transactions reported as assets on the balance sheet and transactions, such as letters of credit and recourse arrangements,
which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk
adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans.

A
banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which include off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital.
"Tier 1," or core capital, includes common equity, perpetual preferred stock (excluding auction rate issues) and minority interest in equity accounts of consolidated subsidiaries, less goodwill and
other intangibles, subject to certain exceptions. "Tier 2," or supplementary capital, includes, among other things, limited-life preferred stock, hybrid capital instruments, mandatory
convertible securities, qualifying subordinated debt, and the allowance for loan losses, subject to certain

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limitations
and less required deductions. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. Banks subject to the
risk-based capital guidelines are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at least 4% and a ratio to total capital to
risk-weighted assets of at least 8%. The appropriate regulatory authority may set higher capital requirements when particular circumstances warrant.

In
August 1995 and May 1996, the federal banking agencies adopted final regulations specifying that the agencies will include, in their evaluations of a bank's capital
adequacy, an assessment of the bank's interest rate risk ("IRR") exposure. The standards for measuring the adequacy and effectiveness of a banking organization's interest rate risk management include
a measurement of board of director and senior management oversight, and a determination of whether a banking organization's procedures for comprehensive risk management are appropriate to the
circumstances of the specific banking organization. The Bank has internal IRR models that are used to measure and monitor IRR. Additionally, the regulatory agencies have been assessing IRR on an
informal basis for several years. For these reasons the addition of IRR evaluation to the agencies' capital guidelines does not result in significant changes in capital requirements for the Bank.

Failure
to meet applicable capital guidelines could subject a banking organization to a variety of enforcement actions, including limitations on its ability to pay dividends, the
issuance by the applicable regulatory authority of a capital directive to increase capital and, in the case of depository institutions, the termination of deposit
insurance by the FDIC, as well as to the measures described under the caption, "Federal Deposit Insurance Corporation Improvement Act of 1991" below, as applicable to undercapitalized institutions. In
addition, future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Bank to grow
and could restrict the amount of profits, if any, available for the payment of dividends to the stockholders.

Federal Deposit Insurance Corporation Improvement Act of 1991.In December 1991, Congress enacted FDICIA,
which substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made significant revisions to several other federal banking statutes. FDICIA provides
for, among other things, (i) publicly available annual financial condition and management reports for financial institutions, including audits by independent accountants, (ii) the
establishment of uniform accounting standards by federal banking agencies, (iii) the establishment of a "prompt corrective action" system of regulatory supervision and intervention, based on
capitalization levels, with more scrutiny and restrictions placed on depository institutions with lower levels of capital, (iv) additional grounds for the appointment of a conservator or
receiver, and (v) restrictions or prohibitions on accepting brokered deposits, except for institutions which significantly exceed minimum capital requirements. FDICIA also provides for
increased funding of the FDIC insurance funds and the implementation of risk-based premiums, described further under the caption "Deposit Insurance."

A
central feature of FDICIA is the requirement that the federal banking agencies take "prompt corrective action" with respect to depository institutions that do not meet minimum capital
requirements. Pursuant to FDICIA, the federal bank regulatory authorities have adopted regulations setting forth a five-tiered system for measuring the capital adequacy of the depository
institutions that they supervise. Under these regulations, a depository institution is classified in one of the following capital categories: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically undercapitalized." An institution may be deemed by the regulators to be in a capitalization category that is lower than is
indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating with respect to asset quality, management, earnings or liquidity. The Bank is
currently "well capitalized."

FDICIA
generally prohibits a depository institution from making any capital distribution (including payment of a cash dividend) if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. If a depository institution fails to submit an
acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of other requirements and restrictions,
including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and stop accepting deposits from correspondent banks. Critically undercapitalized
institutions are subject to the appointment of a receiver or conservator; generally within 90 days of the date such institution is determined to be critically undercapitalized.

FDICIA
provides the federal banking agencies with significantly expanded powers to take enforcement action against institutions, which fail to comply with capital or other standards.
Such action may include the termination of deposit insurance by the FDIC or the appointment of a receiver or conservator for the institution. FDICIA also limits the circumstances under which the FDIC
is permitted to provide financial assistance to an insured institution before appointment of a conservator or receiver.

Interstate Banking Legislation.The Riegle-Neal Banking and Branching Efficiency Act of 1994 was enacted
into law on September 29, 1994. The law eliminated, among other things, substantially all state law barriers to the acquisition of banks by out-of-state bank holding
companies, effective September 29, 1995. The law also permits

8

---



interstate
branching by banks effective as of June 1, 1999, subject to the ability of states to opt-out completely or to set an earlier effective date. Maryland generally
established an earlier effective date of September 29, 1995. A supervisory pact signed by Maryland and states that border Maryland establish uniform rules for the supervision of state-chartered
banks and trust companies that operate branches across state lines. Under the agreement, home-state regulators have primary responsibility for banks chartered in the home state, including
those that branch into other jurisdictions, although such branches may be subject to the other jurisdiction's regulatory authorities in certain circumstances. The effect of this new law and the
supervisory compact increases competition within the markets in which the Bank operates because it permits out-of-state banks to branch or operate in the Bank's market area.

Financial Modernization.In November 1999, the Gramm-Leach-Bliley Act ("GLBA") was signed into law. Effective
in pertinent part on March 11, 2000, GLBA revises the Bank Holding Company Act of 1956 and repeals the affiliation provisions for the Glass-Steagall Act of 1933, which, taken together, limited
the securities, insurance and other non-banking activities of any company that controls a FDIC insured institution. Under GLBA, bank holding companies can elect, subject to certain
qualifications, to become a "financial holding company." GLBA provides that a financial holding company may engage in a full range of financial activities, including, insurance and securities sales
and underwriting activities, and real estate development, with the expedited notice procedures.

Maryland
law generally permits Maryland state-chartered banks, including the Bank, to engage in the same activities, directly or through an affiliate, as national banks. GLBA permits
certain qualified national banks to form financial subsidiaries, which have broad authority to engage in all financial activities except insurance underwriting, insurance investments, real estate
investment or development, or merchant banking. Thus, GLBA has the effect of broadening the permitted activities of Maryland state-chartered banks.

GOVERNMENTAL MONETARY POLICIES AND ECONOMIC CONTROLS

The Company is affected by monetary policies of regulatory agencies, including the Federal Reserve Board, which regulates the national money supply in order to
mitigate recessionary and inflationary pressures. Among the techniques available to the Federal Reserve Board are: engaging in open market transactions in U.S. Government securities, changing the
discount rate on bank borrowings, changing reserve requirements against bank deposits, prohibiting the payment of interest on demand deposits, and imposing conditions on time and savings deposits.
These techniques are used in varying combinations to influence the overall growth of bank loans, investments and deposits. Their use may also affect interest rates charged on loans or paid on
deposits. The effect of governmental policies on the earnings of the Company cannot be predicted. However, the Company's earnings will be impacted by movement in interest rates, as discussed in
Part II Item 7a. "Quantitative and Qualitative Disclosure About Market Risk."

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 as for the new branch opened in 2005. The Bank leases space for the remaining six branches,
five of its CMSI locations, and for its operations center which primarily houses support functions. The land on which the new branch is located is also leased. As a result of the sale of one of the
Bank's branches in 2002, it remains responsible for a lease of the facility, currently subleased by the acquiring bank, which expires in 2005. Current lease terms expire in 2005 through 2024 and
contain renewal options ranging from 3 to 23 years.

The
Bank has purchased the furniture and fixtures required for its headquarters, operations center, branch network and subsidiary locations. The Bank has purchased the computer/teller
equipment in its branch network and the equipment used for administrative functions.

ITEM 3: LEGAL PROCEEDINGS

The Company is involved in various legal actions arising from normal business activities. In management's opinion, the outcome of these matters, individually or in
the aggregate, will not have a material adverse impact on the results of operation or financial position of the Company.

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

None.

9

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PART II

---

ITEM 5: MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

TRADING AND DIVIDENDS

As
of December 31, 2004, there were 428 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.

|Period      |  | Price per Share |       | Cash Dividends Paid
per Share
|----------- |  | --------------- | ----- | -----------------------------
|
|
|           
|1st Quarter |  | $               | 18.21 |                              
|2nd Quarter |  |                 | 18.13 |                              
|3rd Quarter |  |                 | 17.20 |                              
|4th Quarter |  |                 | 17.80 |                              

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 sufficient 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. The following table provides
information about the Company's outstanding options, warrants and rights under equity compensation plans:

|Plan Category                                              |  | Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a) |  | Weighted-average exercise
price of outstanding options,
warrants and rights
(b) |       | Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected
in column (a))
(c)
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------
|
|Equity compensation plans approved by security holders     |  | 193,470                                                                                         |  | $                                                                               | 14.28 |                                                                                                                                                
|Equity compensation plans not approved by security holders |  |                                                                                                |  |                                                                                 |      |                                                                                                                                                
|
|Total                                                      |  | 193,470                                                                                         |  | $                                                                               | 14.28 |                                                                                                                                                
|

10

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ITEM 6: SELECTED FINANCIAL DATA

|                                             |                                                                                        | 2004                                           |   | 2003        |         | 2002 |             | 2001    |   | 2000       
|-------------------------------------------- | -------------------------------------------------------------------------------------- | ---------------------------------------------- | - | ----------- | ------- | ---- | ----------- | ------- | - | -----------
|                                            
|CONSOLIDATED INCOME STATEMENT DATA:          |                                                                                        |                                                |   |             |         |      |             |         |   |            
|                                             | Interest income                                                                        |                                                | $ | 15,500,323  |         | $    | 15,935,691  |         | $ | 18,985,364 
|                                             | Interest expense                                                                       |                                                |   | 5,321,622   |         |      | 6,639,734   |         |   | 8,692,320  
|                                             |                                                                                        |                                                |   |             |         |      |             |         |   |            
|                                             | Net interest income                                                                    |                                                |   | 10,178,701  |         |      | 9,295,957   |         |   | 10,293,044 
|                                             | Provision for loan losses                                                              |                                                |   |            |         |      | 243,000     |         |   | 526,000    
|                                             |                                                                                        |                                                |   |             |         |      |             |         |   |            
|                                             | Net interest income after provision for loan losses                                    |                                                |   | 10,178,701  |         |      | 9,052,957   |         |   | 9,767,044  
|                                             | Noninterest income                                                                     |                                                |   | 8,781,151   |         |      | 8,268,612   |         |   | 7,534,802  
|                                             | Noninterest expense                                                                    |                                                |   | 17,751,000  |         |      | 16,058,355  |         |   | 14,536,958 
|                                             |                                                                                        |                                                |   |             |         |      |             |         |   |            
|                                             | Income before income taxes                                                             |                                                |   | 1,208,852   |         |      | 1,263,214   |         |   | 2,764,888  
|                                             | Income taxes                                                                           |                                                |   | 320,488     |         |      | 338,500     |         |   | 847,630    
|                                             |                                                                                        |                                                |   |             |         |      |             |         |   |            
|                                             | Net income                                                                             |                                                | $ | 888,364     |         | $    | 924,714     |         | $ | 1,917,258  
|                                             |                                                                                        |                                                |   |             |         |      |             |         |   |            
|CONSOLIDATED BALANCE SHEET DATA, AT YEAR END |                                                                                        |                                                |   |             |         |      |             |         |   |            
|                                             | Assets                                                                                 |                                                | $ | 319,123,132 |         | $    | 302,409,975 |         | $ | 324,221,615
|                                             | Gross loans                                                                            |                                                |   | 219,726,294 |         |      | 199,296,561 |         |   | 205,220,126
|                                             | Deposits                                                                               |                                                |   | 225,846,145 |         |      | 207,056,100 |         |   | 230,264,108
|                                             | Shareholders' equity                                                                   |                                                |   | 34,215,280  |         |      | 34,124,882  |         |   | 33,691,079 
|PER SHARE DATA:(a)                           |                                                                                        |                                                |   |             |         |      |             |         |   |            
|                                             | Number of shares of Common Stock outstanding, at year-end                              |                                                |   | 2,834,823   |         |      | 2,828,078   |         |   | 2,821,757  
|                                             | Net income:                                                                            |                                                |   |             |         |      |             |         |   |            
|                                             |                                                                                        | Basic                                          |   | $           | 0.31    |      | $           | 0.33    |   | $          
|                                             |                                                                                        | Diluted                                        |   |             | 0.31    |      |             | 0.32    |   |            
|                                             | Cash dividends declared                                                                |                                                |   | 0.38        |         |      | 0.36        |         |   | 0.34       
|                                             | Book value, at year end                                                                |                                                |   | 12.07       |         |      | 12.07       |         |   | 11.94      
|Performance and Capital Ratios:              |                                                                                        |                                                |   |             |         |      |             |         |   |            
|                                             | Return on average assets                                                               |                                                |   | 0.29%       |         |      | 0.29%       |         |   | 0.57%      
|                                             | Return on average shareholders' equity                                                 |                                                |   | 2.61%       |         |      | 2.71%       |         |   | 5.70%      
|                                             | Net yield on interest earning assets (b)                                               |                                                |   | 3.81%       |         |      | 3.36%       |         |   | 3.47%      
|                                             | Average shareholders' equity to average total assets                                   |                                                |   | 11.11%      |         |      | 10.83%      |         |   | 9.99%      
|                                             | Year-end capital to year-end risk-weighted assets:                                     |                                                |   |             |         |      |             |         |   |            
|                                             |                                                                                        | Tier 1                                         |   |             | 11.52%  |      |             | 13.75%  |   |            
|                                             |                                                                                        | Total                                          |   |             | 12.74%  |      |             | 15.51%  |   |            
|                                             | Year-end Tier 1 leverage ratio                                                         |                                                |   | 9.41%       |         |      | 10.35%      |         |   | 9.54%      
|                                             | Cash dividend declared to net income                                                   |                                                |   | 121.17%     |         |      | 109.96%     |         |   | 50.80%     
|ASSETS QUALITY RATIOS:                       |                                                                                        |                                                |   |             |         |      |             |         |   |            
|                                             | Allowance for loan losses, at year-end to:                                             |                                                |   |             |         |      |             |         |   |            
|                                             |                                                                                        | Gross loans                                    |   |             | 1.59%   |      |             | 1.83%   |   |            
|                                             |                                                                                        | Nonperforming, restructured and past-due loans |   |             | 132.05% |      |             | 151.37% |   |            
|                                             | Net charge-offs to average gross loans                                                 |                                                |   | 0.08%       |         |      | 0.09%       |         |   | 0.13%      
|                                             | Nonperforming assets as a percent of period-end gross loans and foreclosed real estate |                                                |   | 1.20%       |         |      | 1.26%       |         |   | 1.67%      

11

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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K and certain information incorporated herein by reference contain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements included or incorporated by reference in this
Annual Report on Form 10-K, other than statements that are purely historical, are forward-looking statements. Statements that include the use of terminology such as "anticipates,"
"expects," "intends," "plans," "believes," "estimates" and similar expressions also identify forward-looking statements. The forward-looking statements are based on the Company's current intent,
belief and expectations. Forward-looking statements in this Annual Report on Form 10-K include, but are not limited to statements of the Company's plans, strategies, objectives,
intentions, including, among other statements, statements involving the Company's projected loan and deposit growth, loan collateral values, collectability of loans, anticipated changes in other
operating income, payroll and branching expenses, branch, office and product expansion of the Company and its subsidiary, and liquidity and capital levels.

These
statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict. Actual results may differ materially from
these forward-looking statements because of interest rate fluctuations, a deterioration of economic conditions in the Baltimore-Washington metropolitan area, a downturn in the real estate market,
losses from impaired loans, an increase in nonperforming assets, potential exposure to environmental laws, changes in federal and state bank laws and regulations, the highly competitive nature of the
banking industry, a loss of key personnel, changes in accounting standards and other risks described in the Company's filings with the Securities and Exchange Commission. Existing and prospective
investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date. The Company undertakes no obligation to update or revise the information
contained in this Annual Report whether as a result of new information, future events or circumstances or otherwise. Past results of operations may not be indicative of future results. Readers should
carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including the Quarterly Reports on
Form 10-Q to be filed by the Company in 2005.

BUSINESS AND OVERVIEW

The Company is a bank holding company headquartered in Baltimore, Maryland with one wholly-owned subsidiary, Carrollton Bank. The Bank has three subsidiaries,
CMSI, and CFS, which are wholly owned, and CCDC, which is 96.4% owned.

The
Bank is engaged in general commercial and retail banking business with eleven branch locations. CMSI is in the business of originating residential mortgage loans and has four branch
locations. CFS provides brokerage services to customers and CCDC promotes, develops and improves the housing and economic conditions of people in Maryland.

The
Bank also operates a network of ATMs in Maryland, Virginia, and West Virginia and sponsors national retailers who accept ATM cards for purchases in various electronic
networks.

During
2004, the Company experienced growth in its balance sheet, primarily due to loan growth. The Company's strategy to increase its commercial loan portfolio was successful in 2004,
increasing its gross loan portfolio 10.2% over 2003. The Company's loans held for sale portfolio, which consists of residential mortgage loans originated by CMSI and held for sale, usually within
30 days of origination, increased over 350%.

Net
income decreased 4.0% from 2003 to 2004, but core earnings (earnings before the effect of investment security transactionsa non-GAAP financial measure)
increased 79.4%. The Company is asset sensitive and as a result, in the increasing interest rate environment of 2004, net interest income increased 9.5%. The Company recognized gains on sales of
securities during 2004 of $116,000 and increased its mortgage-banking revenues by over 100%. During 2004, the CMSI opened three mortgage-banking "net branches," which provide management fee income to
the Bank.

During
2004, the Company made preparations to open its newest retail branch in Bel Air, Maryland. The branch opened in January of 2005.

Based
upon 2004's stable earnings and encouraging prospects for future earnings, the Company paid dividends of $.38 per share to shareholders during 2004.

12

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RESULTS OF OPERATION

SUMMARY

The
Company reported net income for 2004 of $888,000 or $0.31 per share, representing a 4.0% decrease from 2003 net income of $925,000, or $0.33 per share. Core earnings (earnings before
the effect of investment security transactions) for the year were $1,123,000, a 79.4% increase over 2003 core earnings of $626,000.

The
loan portfolio increased 10.2% to $219,726,000, a result of the Company's continuing efforts to re-align the loan portfolio to be more in line with typical commercial
banks. Interest income decreased 2.7% due to the repricing of loans to a lower rate.

The
deposit portfolio increased 9.1% to $225,846,000, a result of the Company's efforts to increase the noninterest-bearing deposit portfolio. In addition, the Company began offering new
deposit products in 2004. Despite the increase in the deposit portfolio, interest expense decreased during 2004, due primarily to increased noninterest-bearing deposits.

Noninterest
income increased 6.2% in 2004 compared to 2003, due primarily to an increase in the revenue generated by the Company's mortgage-banking division. Included in the 2004 results
was a $116,000 gain on the sale of securities. Included in the 2003 results was a $486,000 gain on the sale of securities.

Noninterest
expense increased 10.5% in 2004 compared to 2003, primarily in the salaries and employee benefits areas. The Company increased its number of employees, during the year, most
significantly in the mortgage-banking area. In addition, included in noninterest expense in 2004 is the recognition of a $497,000 other-than-temporary impairment of the
Company's investment in FHLMC preferred stock.

The
Company reported net income for 2003 of $925,000, or $0.33 per share, representing a 51.7% decrease from 2002 net income of $1,917,000, or $0.68 per share. Included in the 2003
results was a $486,000 gain on the sale of securities. The loan portfolio decreased 2.9% to $199,297,000 as a result of loan payoffs and refinancing in 2003. The loan portfolio contraction, as well as
the lower interest rates, contributed to a decrease in interest income from 2002. Noninterest income from fees increased by 14.1% compared to 2002. Fees generated by the ATM network of 155 machines
and income from national point of sale sponsorships grew during 2003. Commissions from brokerage operations of $597,000 were an 11.0% decrease compared to $671,000 in 2002. In 2003, the Company
reactivated CMSI and as a result, generated mortgage banking revenue of $666,000.

NET INTEREST INCOME

Net
interest income, the amount by which interest income on interest-earning assets exceeds interest expense on interest-bearing liabilities, is the most significant component of the
Company's earnings. Net interest income is a function of several factors, including changes in the volume and mix of interest-earning assets and funding sources, and market interest rates. While
management policies influence these factors, external forces, including customer needs and demands, competition, the economic policies of the federal government and the monetary policies of the
Federal Reserve Board, are also important.

The
following table sets forth, for the periods indicated, information regarding the average balances of interest-earning assets and interest-bearing liabilities, the amount of interest
income and interest expense and the resulting yields on average interest-earning assets and rates paid on average interest -bearing liabilities. Average balances are also provided for
noninterest-earning assets and noninterest-bearing liabilities.

13

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AVERAGE BALANCES, INTEREST, AND YIELDS

|                                                       |                                      | 2004 |             | 2003       |   | 2002       |          
|------------------------------------------------------ | ------------------------------------ | ---- | ----------- | ---------- | - | ---------- | ---------
|
|                                                       |                                     
|ASSETS                                                 |                                      |      |             |            |   |            |          
|Federal funds sold and Federal Home Loan Bank deposit  |                                      | $    | 8,606,166   |            | $ | 116,899    |          
|Federal Home Loan Bank stock                           |                                      |      | 2,261,207   |            |   | 80,737     |          
|Investment securities:                                 |                                      |      |             |            |   |            |          
|                                                       | U. S. Treasury                       |      |             |           |   |            |         
|                                                       | U.S. government agency               |      |             | 28,566,496 |   |            | 674,774  
|                                                       | State and municipal                  |      |             | 4,549,377  |   |            | 287,890  
|                                                       | Mortgage-backed securities           |      |             | 8,747,456  |   |            | 479,546  
|                                                       | Corporate bonds                      |      |             | 4,592,680  |   |            | 274,845  
|                                                       | Other                                |      |             | 3,732,303  |   |            | 175,442  
|                                                       |                                      |      |             |            |   |            |          
|                                                       |                                      |      | 50,188,312  |            |   | 1,892,497  |          
|                                                       |                                      |      |             |            |   |            |          
|Loans:                                                 |                                      |      |             |            |   |            |          
|                                                       | Demand and time                      |      |             | 49,920,788 |   |            | 2,783,558
|                                                       | Residential mortgage                 |      |             | 68,431,096 |   |            | 4,090,660
|                                                       | Commercial mortgage and construction |      |             | 86,429,102 |   |            | 6,193,969
|                                                       | Installment                          |      |             | 2,414,072  |   |            | 209,275  
|                                                       | Lease financing                      |      |             | 4,024,469  |   |            | 320,885  
|                                                       |                                      |      |             |            |   |            |          
|                                                       |                                      |      | 211,219,527 |            |   | 13,598,347 |          
|                                                       |                                      |      |             |            |   |            |          
|Total interest-earning assets                          |                                      |      | 272,275,212 |            |   | 15,688,480 |          
|Noninterest-bearing cash                               |                                      |      | 21,682,244  |            |   |            |          
|Premises and equipment                                 |                                      |      | 4,959,453   |            |   |            |          
|Other assets                                           |                                      |      | 7,858,307   |            |   |            |          
|Allowance for loan losses                              |                                      |      | (3,616,474  | )          |   |            |          
|Unrealized gains on available for sale securities, net |                                      |      | 3,174,905   |            |   |            |          
|                                                       |                                      |      |             |            |   |            |          
|                                                       |                                      | $    | 306,333,647 |            | $ | 15,688,480 |          
|                                                       |                                      |      |             |            |   |            |          
|LIABILITIES AND SHAREHOLDERS' EQUITY                   |                                      |      |             |            |   |            |          
|Interest-bearing deposits:                             |                                      |      |             |            |   |            |          
|                                                       | Savings and NOW                      |      | $           | 71,404,510 |   | $          | 180,741  
|                                                       | Money market                         |      |             | 29,186,544 |   |            | 322,785  
|                                                       | Other time                           |      |             | 61,370,913 |   |            | 1,627,239
|                                                       |                                      |      |             |            |   |            |          
|                                                       |                                      |      | 161,961,967 |            |   | 2,130,765  |          
|Borrowed funds                                         |                                      |      | 56,153,768  |            |   | 3,190,857  |          
|                                                       |                                      |      |             |            |   |            |          
|Total interest-bearing liabilities                     |                                      |      | 218,115,735 |            |   | 5,321,622  |          
|Noninterest-bearing deposits                           |                                      |      | 51,501,352  |            |   |            |          
|Other liabilities                                      |                                      |      | 2,674,734   |            |   |            |          
|Shareholders' equity                                   |                                      |      | 34,041,826  |            |   |            |          
|                                                       |                                      |      |             |            |   |            |          
|Total liabilities and shareholders' equity             |                                      | $    | 306,333,647 |            | $ | 5,321,622  |          
|                                                       |                                      |      |             |            |   |            |          
|NET YIELD ON INTEREST- EARNING ASSETS                  |                                      | $    | 272,275,212 |            | $ | 10,366,858 |          
|                                                       |                                      |      |             |            |   |            |          

14

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Interest on investments and loans is presented on a fully taxable equivalent basis (a non-GAAP financial measure), using regular income
tax rates. Loans held for sale are included in residential mortgage loans.

In
2004, net interest income on a taxable basis increased by $794,000 to $10.4 million. On average, the loan portfolio increased 7.5% from 2003 while the investment portfolio
decreased by 26.1%. The yield on the loan portfolio decreased from 6.64% in 2003 to 6.44% in 2004. The yield on investment securities also decreased to 3.77% in 2004 from 4.23% in 2003. The decrease
in the investment portfolio and decreased yields caused total interest income on a tax equivalent basis to decrease from $16.2 million in 2003 to $15.7 million in 2004. The Company
intends to continue its expansion of its commercial loan portfolio as part of its long-term strategic plan.

Interest
expense decreased $1.3 million to $5.3 million in 2004 from $6.6 million in 2003. Interest expense decreased primarily due to a change in the deposit mix,
with an increase in the amount of noninterest-bearing deposits. In addition, the cost of interest-bearing deposits decreased from 1.94% in 2003 to 1.32% in 2004.

In
2003, net interest income on a taxable equivalent basis decreased by $1.2 million to $9.6 million as a result of decreases in both the volume and yields on earning
assets. On average, the loan portfolio decreased 8.9% from 2002 while the investment portfolio decreased by 15.5%. The yield on the loan portfolio decreased from 6.92% in 2002 to 6.64% in 2003.
Changes in loan portfolio mix, the prime rate changes, and a very competitive loan market caused the loan yield to decline. The yield on investment securities also declined to 4.23% in 2003 from 5.21%
in 2002. The reduction in the loan and investment portfolios and decreased yields, caused total interest income on a tax equivalent basis to fall from $19.5 million in 2002 to
$16.2 million in 2003.

Interest
expense decreased $2.1 million to $6.6 million in 2003 from $8.7 million in 2002. Interest expense decreased due to a decrease in both interest bearing
liabilities and rates. Interest expense on deposits decreased in 2003 from 2002 due to decreased cost of interest-bearing deposits, from 2.73% in 2002 to 1.94% in 2003.

The
following table and the related discussions of interest income and interest expense provide further analysis of the changes in net interest income during 2004 and 2003:

|                                                      |                                      | 2004 Compared to 2003 |          | 2003 Compared to 2002 |  
|----------------------------------------------------- | ------------------------------------ | --------------------- | -------- | --------------------- | -
|
|
|                                                      |                                     
|INTEREST INCOME                                       |                                      |                       |          |                       |  
|Federal funds sold and Federal Home Loan Bank deposit |                                      | $                     | 22,291   |                       | $
|Federal Home Loan Bank stock                          |                                      |                       | (5,859   | )                     |  
|INVESTMENT SECURITIES:                                |                                      |                       |          |                       |  
|                                                      | U.S. Treasury                        |                       |          |                      |  
|                                                      | U.S. government agency               |                       |          | (182,490              | )
|                                                      | State and municipal                  |                       |          | (2,778                | )
|                                                      | Mortgage-backed securities           |                       |          | 10,146                |  
|                                                      | Corporate bonds                      |                       |          | (2,740                | )
|                                                      | Other                                |                       |          | (71,019               | )
|                                                      |                                      |                       |          |                       |  
|                                                      |                                      |                       | (248,881 | )                     |  
|                                                      |                                      |                       |          |                       |  
|LOANS:                                                |                                      |                       |          |                       |  
|                                                      | Demand and time                      |                       |          | (409,724              | )
|                                                      | Residential mortgage                 |                       |          | (378,541              | )
|                                                      | Commercial mortgage and construction |                       |          | 454,556               |  
|                                                      | Installment                          |                       |          | (29,232               | )
|                                                      | Lease financing                      |                       |          | (20,721               | )
|                                                      |                                      |                       |          |                       |  
|                                                      |                                      |                       | (383,662 | )                     |  
|                                                      |                                      |                       |          |                       |  
|TOTAL INTEREST EARNED                                 |                                      |                       | (616,111 | )                     |  
|                                                      |                                      |                       |          |                       |  
|INTEREST EXPENSE                                      |                                      |                       |          |                       |  
|Savings and NOW                                       |                                      |                       | (46,379  | )                     |  
|Money market                                          |                                      |                       | 46,301   |                       |  
|Other time                                            |                                      |                       | (725,427 | )                     |  
|Borrowed funds                                        |                                      |                       | 133,359  |                       |  
|                                                      |                                      |                       |          |                       |  
|TOTAL INTEREST EXPENSE                                |                                      |                       | (592,146 | )                     |  
|                                                      |                                      |                       |          |                       |  
|NET INTEREST INCOME                                   |                                      | $                     | (23,965  | )                     | $
|                                                      |                                      |                       |          |                       |  

15

---



Interest on investments and loans is presented on a fully taxable equivalent basis (a non-GAAP financial measure), using regular income
tax rates. The change in interest income and expense due to variance in both rate and volume has been allocated to the change due to variance in rate.

PROVISION FOR LOAN LOSSES

On a monthly basis, management of the Company 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.

The
Company did not provide for any loan losses in 2004 as compared to a provision of $243,000 in 2003. Nonaccrual, restructured and delinquent loans over 90 days to total loans
remained relatively stable at 1.20% at the end of 2004 compared to 1.21% in 2003. The ratio of loan losses to average loans decreased in 2004 to 0.08% compared to 0.09% for 2003.

The
provision for loan losses was $243,000 for 2003 compared to $526,000 for 2002. Nonaccrual, restructured, and delinquent loans over 90 days to total loans decreased to 1.21% at
the end of 2003 compared to 1.56% in 2002. This decrease was due to the 2003 change in status of certain loans that were on nonaccrual in 2002, but had performed for a sufficient amount of time in
2003 to warrant their change in status to performing. The ratio of loan losses to average loans decreased in 2003 to 0.09% compared to 0.13% for 2002.

NONINTEREST INCOME

Noninterest income increased 6.0% to $8.8 million in 2004 compared to $8.3 million in 2003. Included in noninterest income were $116,000 in security
gains realized in 2004 compared to $486,000 in 2003. It is the Company's intention to realign it investment portfolio during 2005 so that the portfolio will better assist the Company's earnings and
liquidity as outlined in the Company's strategic plan.

Brokerage
commissions increased 4.5% to $624,000 in 2004 compared to $597,000 in 2003 due to improved market conditions. Management believes that brokerage commissions are a good source
of noninterest income for the Company and intends to continue focusing on increasing this source of income.

Electronic
banking fee income remained relatively stable at $4.7 million in 2004 and 2003. Electronic banking income is comprised of three sources: national point of sale, ("POS")
sponsorships, ATM fees and check card fees. The Company maintains ATMs in Wal-Mart stores in Maryland, Virginia and West Virginia, as well as at its branches. The fees from these
ATMs represent approximately 46% of total electronic banking revenue. The Company sponsors merchants who accept ATM cards for purchases within various networks (i.e. STAR, PULSE, NYCE). This
national POS sponsorship income represents approximately 31% of total electronic banking revenue. Fees from check cards comprise the remaining 23% of electronic banking revenue.

Mortgage-banking
revenue increased $676,000 to $1,342,000 in 2004 from $666,000 in 2003. During 2004, the Company opened three mortgage-banking "net branches." The employees of these net
branches earn as salaries all revenues earned on the sale of mortgage loans less operating expenses. In addition, each net branch pays management fees to CMSI for use of its processing and
underwriting staff. The net branch expenses are included in the Company's income statement, as they are divisions of CMSI, but the net effect of the operations of the net branches on the Company's net
income is limited to the management fees paid to CMSI. The inclusion of the expenses in the financial statements has the effect of showing significant expenses related to mortgage-banking and
increases the Company's efficiency ratio.

For
2003, noninterest income excluding securities gains, gains on branch divestitures, and gains or losses on loan sales increased by 7.2% compared to 2002. Brokerage commissions
decreased $74,000 or 11.0% in 2003 due to the economic slowdown and investor concerns over the stock market. Electronic Banking fee income increased $456,000 primarily due to the growth of national
point of sale sponsorships and increased ATM traffic. The Company reactivated its mortgage banking subsidiary in 2003. Noninterest income for 2003 includes $666,000 in mortgage banking revenue.

Net
securities gains in 2003 were $486,000 compared to $210,000 in 2002.

NONINTEREST EXPENSES

During 2004, noninterest expenses increased by $1.7 million, or 10.5% to $17.8 million compared to $16.1 million in 2003.

Salaries
and benefits increased by $1.2 million or 16.0% as the Company added staff for a total of 165 full time equivalent positions in 2004 from a total of 136 full time
equivalent positions in 2003. The increased staff was mostly in the mortgage-banking subsidiary of CMSI and in the commercial lending area. A portion of the salaries of mortgage division personnel
that consist of commissions are not included in salary expense, but are deferred and netted against mortgage-banking fees and gains.

16

---



Occupancy
expenses increased by $149,000 from $1.5 million in 2003 to $1.6 million in 2004. The additional expenses were due primarily to new facilities for
mortgage-banking operations. In addition, the Company incurred additional expenses related to its new branch facility in Harford County, Maryland, which opened in January of 2005.

Furniture
and equipment expense decreased by $194,000 from $1.8 million in 2003, to $1.6 million in 2004, mostly due to decreased depreciation expense. The Company's 158
ATMs all became fully depreciated during the fourth quarter of 2004.

Included
in 2004 noninterest expenses is the recognition of a $497,000 other-than-temporary impairment of the Company's investment in FMLMC preferred stock.
Management sold these securities during the first quarter of 2005 and realized a gain net of tax of approximately $45.000.

Other
operating expenses remained relatively stable at $5.3 million in 2004 and 2003.

In
2003, noninterest expenses increased by $1.5 million or 10.5%. Salaries and benefits increased by $1.2 million, or 19.7%. Full time equivalent staff increased from 116
positions at the end of 2002 to 136 positions at December 31, 2003 mostly due to increased personnel at the Company's mortgage banking subsidiary. Occupancy expenses increased $21,000 to
$1,453,000 in 2003, due to additional locations for the Company's mortgage-banking operations. This increase was slightly offset by reimbursement from the Company's insurance carrier in excess of
costs to repair flood damage at the Company's main headquarters. Furniture and equipment expense decreased by $275,000, mostly due to decreased depreciation in 2003. Other operating expenses increased
$539,000, or 11.3%. A significant portion of this increase is due to increased operations at the mortgage-banking subsidiary. In addition, the Bank incurred significant costs in the 2003 conversion of
its main processing systems.

INCOME TAX PROVISION

For 2004, the effective tax rate for the Company decreased to 26.5% compared to 26.8% for 2003.

For
2003, the effective tax rate for the Company decreased to 26.8% compared to 30.7% for 2002.

The
effective tax rates fluctuate from year to year due to changes in the mix of tax-exempt loans and investments as a percentage of total loans and investments.

FINANCIAL CONDITION

SUMMARY

Total assets of the Company increased by 5.5% to $319.1 million at December 31, 2004 from $302.4 million at December 31, 2003.
Investment securities decreased 32.0% to $42.5 million at December 31, 2004. Gross loans, excluding loans held for sale, increased by 10.2% to $219.7 million at
December 31, 2004 compared to $199.3 million at the end of 2003. Interest-earning assets increased $16.6 million to $285.4 million and were 89.4% of total assets at
December 31, 2004.

INVESTMENT SECURITIES

The investment portfolio consists of investment securities held to maturity and securities available for sale. Investment securities held to maturity are those
securities that the Company has the positive intent and ability to hold to maturity and are carried at amortized cost. Securities available for sale are those securities that the Company intends to
hold for an indefinite period of time but not necessarily until maturity. These securities are carried at fair value and may be sold as part of an asset/liability management strategy, liquidity
management, interest rate risk management, regulatory capital management or other similar factors.

The
components of the investment portfolio were as follows at December 31:

|                           |  | 2004 |            | 2003 |   | 2002       |  | 2001 |            | 2000
|-------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | ---- | ---------- | ----
|                          
|AVAILABLE FOR SALE         |  |      |            |      |   |            |  |      |            |     
|U.S. Treasury              |  | $    |           |      | $ |           |  | $    |           |     
|U.S. Government agency     |  |      | 19,913,790 |      |   | 34,566,285 |  |      | 44,866,333 |     
|Mortgage-backed securities |  |      | 8,447,886  |      |   | 9,628,267  |  |      | 17,008,728 |     
|State and municipal bonds  |  |      | 4,137,433  |      |   | 5,197,716  |  |      | 5,446,260  |     
|Corporate bonds            |  |      | 3,036,920  |      |   | 6,820,340  |  |      | 7,962,805  |     
|                           |  |      |            |      |   |            |  |      |            |     
|                           |  |      | 35,536,029 |      |   | 56,212,608 |  |      | 75,284,126 |     
|Equity securities          |  |      | 6,952,463  |      |   | 6,246,349  |  |      | 3,502,021  |     
|                           |  |      |            |      |   |            |  |      |            |     
|                           |  | $    | 42,488,492 |      | $ | 62,458,957 |  | $    | 78,786,147 |     
|                           |  |      |            |      |   |            |  |      |            |     
|HELD TO MATURITY           |  |      |            |      |   |            |  |      |            |     
|Foreign bonds              |  | $    |           |      | $ | 25,000     |  | $    | 25,000     |     
|                           |  |      |            |      |   |            |  |      |            |     

17

---



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

The
following table shows the maturity of the investment portfolio at December 31, 2004:

|                           |  | Available for Sale |           
|-------------------------- |  | ------------------ | ----------
|
|                           | 
|Within 1 year              |  | $                  | 18,466,830
|Over 1 to 5 years          |  |                    | 5,840,388 
|Over 5 to 10 years         |  |                    | 2,782,693 
|                           |  |                    |           
|                           |  |                    | 27,089,911
|Mortgage-backed securities |  |                    | 8,287,646 
|Equity securities          |  |                    | 3,255,196 
|                           |  |                    |           
|                           |  | $                  | 38,632,753
|                           |  |                    |           

The investment portfolio consists primarily of U. S. Government agency securities, mortgage-backed securities, corporate bonds, state and municipal
obligations, and equity securities. 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.

Investment
securities decreased $20.0 million to $42.5 million at December 31, 2004 compared to $62.5 million at December 31, 2003. The decrease was
due to maturities of securities as well as the sale of approximately $2.4 million of securities in 2004. In addition, in 2004, the Company recognized a $497,000
other-than-temporary impairment of the Company's investment in FMLMC preferred stock.

In
2005, the Company anticipates significant activity in its investment portfolio in order to realign the portfolio so that it will better assist the Company's earnings and liquidity as
outlined in the Company's strategic plan.

LOANS

The following table represents a breakdown of loan balances at December 31:

|                          |                                   | 2004 |             | 2003       |   | 2002        |            | 2001 |             | 2000      
|------------------------- | --------------------------------- | ---- | ----------- | ---------- | - | ----------- | ---------- | ---- | ----------- | ----------
|                         
|Real Estate:              |                                   |      |             |            |   |             |            |      |             |           
|                          | Residential                       |      | $           | 55,242,018 |   | $           | 57,586,028 |      | $           | 79,520,154
|                          | Commercial                        |      |             | 94,858,597 |   |             | 82,856,038 |      |             | 78,500,418
|                          | Construction and land development |      |             | 17,774,874 |   |             | 16,275,828 |      |             | 7,664,367 
|Demand and time           |                                   |      | 46,168,587  |            |   | 35,978,633  |            |      | 32,444,790  |           
|Lease financing           |                                   |      | 3,598,003   |            |   | 4,449,408   |            |      | 4,343,539   |           
|Installment               |                                   |      | 2,084,215   |            |   | 2,150,626   |            |      | 2,746,858   |           
|                          |                                   |      |             |            |   |             |            |      |             |           
|                          |                                   |      | 219,726,294 |            |   | 199,296,561 |            |      | 205,220,126 |           
|Allowance for loan losses |                                   |      | 3,485,076   |            |   | 3,648,245   |            |      | 3,578,762   |           
|                          |                                   |      |             |            |   |             |            |      |             |           
|Loans, net                |                                   | $    | 216,241,218 |            | $ | 195,648,316 |            | $    | 201,641,364 |           
|                          |                                   |      |             |            |   |             |            |      |             |           

Gross loans, excluding loans held for sale, increased $20.4 million or 10.2% from $199.3 million as of December 31, 2003 to
$219.7 million as of December 31, 2004. The increase was primarily in commercial real estate, which increased 14.5%. Commercial loans amounted to $162.4 million at
December 31, 2004 and were 74% of total loans. Consumer loans amounted to $57.3 million and were 26% of total loans.

The
following table shows the contractual maturities and interest rate sensitivities of the Company's loans at December 31, 2004. Some loans may include contractual installment
payments that are not reflected in the table until final maturity. In addition, the Company's experience indicates that a significant number of loans will be extended or repaid prior to contractual
maturity. Consequently, the table is not intended to be a forecast of future cash repayments.

18

---



|                |                                   | Maturing
|--------------- | --------------------------------- | --------
|
|
|               
|Real Estate:    |                                   |         
|                | Residential                       |         
|                | Commercial                        |         
|                | Construction and land development |         
|                |                                   |         
|                |                                   |         
|Demand and time |                                   |         
|Lease financing |                                   |         
|Installment     |                                   |         
|                |                                   |         
|                |                                   | $       
|                |                                   |         

The following table provides information concerning nonperforming assets and past due loans at December 31, 2004:

|                                        |  | 2004 |           | 2003 |   | 2002      |  | 2001 |           | 2000
|--------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | ---- | --------- | ----
|                                       
|Nonaccrual loans (a)                    |  | $    | 615,394   |      | $ | 712,116   |  | $    | 734,879   |     
|Restructured loans                      |  |      | 455,864   |      |   | 661,974   |  |      | 568,969   |     
|Foreclosed real estate                  |  |      |          |      |   | 100,000   |  |      | 218,654   |     
|                                        |  |      |           |      |   |           |  |      |           |     
|                                        |  | $    | 1,071,258 |      | $ | 1,474,090 |  | $    | 1,522,502 |     
|                                        |  |      |           |      |   |           |  |      |           |     
|Accruing loans past-due 90 days or more |  | $    | 1,567,919 |      | $ | 1,036,018 |  | $    | 1,900,663 |     
|                                        |  |      |           |      |   |           |  |      |           |     

a) Loans are placed in nonaccrual status when they are past-due 90 days as to either principal or
interest or when, in the opinion of management, the collection of all interest and/or principal is in doubt. A loan remains in nonaccrual status until the loan is current as to payment of both
principal and interest and the borrower demonstrated the ability to pay and remain current. Management may grant a waiver from nonaccrual status for a 90-day past-due loan that
is both well secured and in the process of collection.

ALLOWANCE FOR LOAN LOSSES

An allowance for loan losses is maintained to absorb losses in the existing loan portfolio. The allowance is a function of specific loan allowances, general loan
allowances based on historical loan loss experience and current trends, and allowances based on general economic conditions that affect the collectibility of the loan portfolio. These can include, but
are not limited to exposure to an industry experiencing problems, changes in the nature or volume of the portfolio and delinquency and nonaccrual trends. The portfolio review and calculation of the
allowance is performed by management on a continuing basis.

The
specific allowance is based on regular analysis of the loan portfolio and is determined by analysis of collateral value, cash flow and guarantor capacity, as applicable. The specific
allowance was $143,374, $134,190 and $1,312,020 as of December 31, 2004, 2003 and 2002, respectively.

The
general allowance is calculated using internal loan grading results and appropriate allowance factors on approximately ten classes of loans. This process is reviewed on a regular
basis. The allowance factors may be revised whenever necessary to address current credit quality trends or risks associated with particular loan types. Historic trend analysis is utilized to obtain
the factors to be applied. The general allowance was $2,796,664, $3,099,129 and $1,146,924 as of December 31, 2004, 2003 and 2002, respectively.

Allocation
of a portion of the allowance does not preclude its availability to absorb losses in other categories. An unallocated reserve is maintained to recognize the imprecision in
estimating and measuring loss when evaluating the allowance for individual loans or pools of loans.

During
the years ended December 31, 2000 through 2004, the unallocated portion of the allowance for loan losses has fluctuated with the specific and general allowances so that the
total allowance for loan losses would be at a level that management believes is the best estimate of probable future loan losses at the balance sheet date. The specific allowance may fluctuate from
period to period if the balance of what management considers problem loans changes. The general allowance will fluctuate with changes in the mix of the Company's loan portfolio, economic conditions,
or specific industry conditions. The requirements of the Company's federal regulators are a consideration in determining the required total allowance.

19

---



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.

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.

|                                                      |                 | Years ended December 31
|----------------------------------------------------- | --------------- | -----------------------
|
|                                                     
|Balance at beginning of year                          |                 | $                      
|Charge-offs:                                          |                 |                        
|                                                      | Commercial      |                        
|                                                      | Lease financing |                        
|                                                      | Real estate:    |                        
|                                                      |                 | Residential            
|                                                      |                 | Commercial             
|                                                      |                 | Construction           
|Installment                                           |                 |                        
|                                                      |                 |                        
|                                                      |                 |                        
|                                                      |                 |                        
|Recoveries:                                           |                 |                        
|                                                      | Commercial      |                        
|                                                      | Lease financing |                        
|                                                      | Real estate:    |                        
|                                                      |                 | Residential            
|                                                      |                 | Commercial             
|                                                      |                 | Construction           
|Installment                                           |                 |                        
|                                                      |                 |                        
|                                                      |                 |                        
|                                                      |                 |                        
|Net charge-offs                                       |                 |                        
|                                                      |                 |                        
|Provision charged to operations                       |                 |                        
|                                                      |                 |                        
|Balance at end of the year                            |                 | $                      
|                                                      |                 |                        
|Ratio of net charge-offs to average loans outstanding |                 |                        
|                                                      |                 |                        

A breakdown of the allowance for loan losses is provided in the table below; however, management does not believe that the allowance can be
segregated by category with precision. The breakdown of the allowance is based primarily on those factors discussed previously in evaluating the allowance as a whole. Since all of those factors are
subject to change, the breakdown is not necessarily indicative of the category of actual or realized credit losses.

20

---





The following table presents the allocation of the allowance for loan losses among the various loan categories at December 31:

|Portfolio                      |              | 2004 |           | 2003      |   | 2002      |           | 2001 |           | 2000   
|------------------------------ | ------------ | ---- | --------- | --------- | - | --------- | --------- | ---- | --------- | -------
|                              
|Commercial and lease financing |              | $    | 589,053   |           | $ | 1,226,447 |           | $    | 733,560   |        
|Real estate:                   |              |      |           |           |   |           |           |      |           |        
|                               | Residential  |      |           | 587,292   |   |           | 831,173   |      |           | 754,979
|                               | Commercial   |      |           | 1,034,546 |   |           | 1,041,834 |      |           | 876,243
|                               | Construction |      |           | 342,114   |   |           |          |      |           |       
|Installment                    |              |      | 149,271   |           |   | 133,865   |           |      | 94,162    |        
|Unallocated                    |              |      | 782,800   |           |   | 414,926   |           |      | 1,119,818 |        
|                               |              |      |           |           |   |           |           |      |           |        
|                               |              | $    | 3,485,076 |           | $ | 3,648,245 |           | $    | 3,578,762 |        
|                               |              |      |           |           |   |           |           |      |           |        

The table below provides a percentage breakdown of the loan portfolio by category to total loans at December 31:

|Portfolio                      |              | 2004  |      | 2003  |      | 2002  |      | 2001  |      | 2000  |     
|------------------------------ | ------------ | ----- | ---- | ----- | ---- | ----- | ---- | ----- | ---- | ----- | ----
|                               |             
|Commercial and lease financing |              | 22.7  | %    | 20.2  | %    | 17.9  | %    | 16.0  | %    | 10.5  | %   
|Real estate:                   |              |       |      |       |      |       |      |       |      |       |     
|                               | Residential  |       | 25.1 |       | 28.9 |       | 38.8 |       | 53.5 |       | 70.0
|                               | Commercial   |       | 43.2 |       | 41.6 |       | 38.2 |       | 23.9 |       | 17.0
|                               | Construction |       | 8.1  |       | 8.2  |       | 3.8  |       | 4.6  |       | 0.3 
|Installment                    |              | 0.9   |      | 1.1   |      | 1.3   |      | 2.0   |      | 2.2   |     
|                               |              |       |      |       |      |       |      |       |      |       |     
|                               |              | 100.0 | %    | 100.0 | %    | 100.0 | %    | 100.0 | %    | 100.0 | %   
|                               |              |       |      |       |      |       |      |       |      |       |     

All loan reserves are subject to regulatory examinations and determinations as to the appropriateness of the methodology and adequacy on an annual
basis.

At
December 31, 2004, the allowance for loan losses was $3.5 million, a 4.5% decrease from the end of 2003. The ratio of the allowance to total loans was 1.59% at
December 31, 2004 and 1.83% at December 31, 2003. The ratio of net loan losses to average loans outstanding for 2004 was 0.08% compared to 0.09% for 2003. The ratio of nonaccrual loans,
restructured loans and loans delinquent more than 90 days to total loans decreased to 1.20% at December 31, 2004 from 1.21% at the end of 2003. The ratio of real estate loans to total
loans decreased to 76.4% at the end of 2004 from 78.6% at the end of 2003.

FUNDING SOURCES

DEPOSITS

The following table sets forth the average deposit balances and average rates paid on deposits during the years ended December 31:

|                             |                         |   |             |            |      |      |   |             |            | 2002 |     
|---------------------------- | ----------------------- | - | ----------- | ---------- | ---- | ---- | - | ----------- | ---------- | ---- | ----
|
|
|
|                             |                        
|Noninterest-bearing deposits |                         | $ | 51,501,352  |            |     | %    | $ | 42,449,945  |            |     | %   
|Interest-bearing deposits:   |                         |   |             |            |      |      |   |             |            |      |     
|                             | NOW accounts            |   |             | 35,016,262 |      | 0.21 |   |             | 37,515,591 |      | 0.31
|                             | Savings accounts        |   |             | 36,388,248 |      | 0.29 |   |             | 35,109,007 |      | 0.33
|                             | Money market accounts   |   |             | 29,186,544 |      | 1.11 |   |             | 28,266,591 |      | 0.95
|                             | Certificates of deposit |   |             | 61,370,913 |      | 2.65 |   |             | 77,496,371 |      | 3.83
|                             |                         |   |             |            |      |      |   |             |            |      |     
|                             |                         | $ | 213,463,319 |            | 1.00 |      | $ | 220,837,505 |            | 1.57 |     
|                             |                         |   |             |            |      |      |   |             |            |      |     

21

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The following table provides the maturities of certificates of deposit of the Company in amounts of $100,000 or more at December 31, 2004:

|Maturing in: |                                 |   |          
|------------ | ------------------------------- | - | ---------
|             | 3 months or less                |   | $        
|             | Over 3 months through 6 months  |   |          
|             | Over 6 months through 12 months |   |          
|             | Over 12 months                  |   |          
|             |                                 |  
|             |                                 | $ | 9,321,990
|             |                                 |  

Total deposits at December 31, 2004 increased by $18.8 million to $225.8 million from the end of 2003. Interest bearing
accounts increased by $7.5 million and noninterest-bearing deposits increased by $11.3 million. During 2004, the Company made a concerted effort to continue the reduction of the level of
high-yield deposits. Additionally, the Company's efforts in attracting more noninterest-bearing deposits was successful.

The
Company began offering CDARS deposits to its customers during 2004. This program allows for customers that wish to invest more than the amounts that would normally be covered by FDIC
insurance with the Bank. The program is a nationwide one that allows participating banks to "swap" customer deposits so that no
customer has greater than the insurable maximum in one bank, but the customer only deals with his/her own bank. As on December 31, 2004, the Bank had approximately $11.4 million in CDARS
deposits.

BORROWINGS

Other short-term borrowings, consisting of Notes Payable-U.S. Treasury, are as follows:

|Other short-term borrowings:                  |  | 2004 |           | 2003 |   | 2002     
|--------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                             
|Total outstanding at period-end               |  | $    | 1,984,714 |      | $ | 2,025,339
|Average amount outstanding during period      |  |      | 1,051,267 |      |   | 910,061  
|Maximum amount outstanding at any period-end  |  |      | 2,008,989 |      |   | 2,032,502
|Weighted average interest rate at period-end  |  |      | 1.97%     |      |   | 0.73%    
|Weighted average interest rate for the period |  |      | 1.10%     |      |   | 1.04%    

Advances from the Federal Home Loan Bank remained at the same level of $45 million at the end of 2004, 2003, and 2002. Borrowings for
federal funds purchased, securities sold under agreements to repurchase and notes payable to the US Treasury decreased by $1.8 million from December 31, 2003 to 2004.

CAPITAL

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 shareholders' 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
and Bank at December 31, 2004 and 2003. 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.

22

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The
following table shows the Company's and the Bank's capital ratios as of December 31:

|                    |                |    |    | Carrollton Bancorp |        | Carrollton Bank
|------------------- | -------------- | -- | -- | ------------------ | ------ | ---------------
|
|                   
|Leverage ratio      |                | 4% |    | 9.41%              |        | 10.35%         
|Risk-based capital: |                |    |    |                    |        |                
|                    | Tier 1 (Core)  |    | 4% |                    | 11.52% |                
|                    | Tier 2 (Total) |    | 8% |                    | 12.74% |                

Total shareholders' equity increased 0.2% to $34.2 million at December 31, 2004. Earnings of the Company of $888,000 for the year
ended December 31, 2004 were offset by dividends of $1.1 million and an increase in capital of $180,000 from unrealized gains on securities available for sale.

LIQUIDITY AND CAPITAL EXPENDITURES

CAPITAL EXPENDITURES

Capital expenditures were approximately $1.9 million in 2004, $923,000 in 2003 and $367,000 in 2002. The capital expenditures in 2004 were principally due
to the expenditures required to open the Company's new branch in January 2005. The capital expenditures in 2003 were principally due to the opening of the Company's mortgage-banking branches
and to the system conversion that took place in 2004. The expenditures in 2002 were related to normal business activity.

Capital
expenditures are projected to be approximately $500,000 for fiscal year 2005 for renovations at five of the Company's branch locations.

LIQUIDITY

Liquidity describes the ability of the Company to meet financial obligations, including lending commitments and contingencies, that arise during the normal course
of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of the customers of the Company, as well as to meet current and planned expenditures.

The
Company's liquidity is derived primarily from its deposit base and equity capital. Liquidity is provided through the Company's portfolios of cash and interest-bearing deposits in
other banks, federal funds sold, loans held for sale, investment securities due within one year, and securities available for sale. Such assets totaled $86.9 million or 27.2% of total assets at
December 31, 2004.

The
borrowing requirements of customers include commitments to extend credit and the unused portion of lines of credit, which totaled $114.9 million at December 31, 2004.
Of this total, management places a high probability of required funding within one year on approximately $57.6 million. The amount remaining is unused home equity lines and other consumer lines
on which management places low probability of funding.

The
Company also has established lines of credit totaling $80.0 million with the Federal Home Loan Bank of Atlanta (the "FHLB") as an additional source of liquidity. At
December 31, 2004, the Company had $45.0 million outstanding with the FHLB and had sufficient collateral necessary to borrow the full amount available under the lines of credit.
Additionally, the Company has available unsecured federal funds lines of credit of $5 million with other institutions. There was no balance outstanding under these lines at December 31,
2004. The lines bear interest at the current federal funds rate of the correspondent bank.

MARKET RISK AND INTEREST RATE SENSITIVITY

The Company's interest rate risk represents the level of exposure it has to fluctuations in interest rates and is primarily measured as the change in earnings and
the theoretical market value of equity that results from changes in interest rates. The Asset/Liability Management Committee of the Board of Directors (the "ALCO") oversees the Company's management of
interest rate risk. The objective of the management of interest rate risk is to optimize net interest income during volatile as well as stable interest rate environments while maintaining a balance
between the maturity and repricing characteristics of assets and liabilities that is consistent with the Company's liquidity, asset and earnings growth, and capital adequacy goals.

Due
to changes in interest rates, the level of income for a financial institution can be affected by the repricing characteristics of its assets and liabilities. At December 31,
2004, the Company is in an asset sensitive position. Management continuously takes steps to reduce higher costing fixed rate funding instruments, while increasing assets that are more fluid in their
repricing. An asset sensitive position, theoretically, is favorable in a rising rate environment since more assets than liabilities will reprice in a given time frame as interest rates rise.
Management works to maintain a consistent spread between yields on assets and costs of deposits and borrowings, regardless of the direction of interest rates.

23

---



The
following chart shows the static gap position for interest sensitive assets and liabilities of the Company as of December 31, 2004. 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 allocated evenly over a five-year period. 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, 2004 in which assets and liabilities reprice:

|($'s in 000's)                                                 |                        | 0 to 90
days                      |        | 91 to 365
days |        | 1 to 2
years |        | 3 to 5
years |        | > 5
years |       
|-------------------------------------------------------------- | ---------------------- | --------------------------------- | ------ | -------------- | ------ | ------------ | ------ | ------------ | ------ | --------- | ------
|                                                               |                       
|ASSETS:                                                        |                        |                                   |        |                |        |              |        |              |        |           |       
|                                                               | Short term investments |                                   | $      | 14,851         |        | $            |       |              | $      |          |       
|                                                               | Securities             |                                   |        | 9,734          |        |              | 18,323 |              |        | 250       |       
|                                                               | Loans held for sale    |                                   |        | 10,220         |        |              |       |              |        |          |       
|                                                               | Loans:                 |                                   |        |                |        |              |        |              |        |           |       
|                                                               |                        | Residential real estate           |        |                | 2,833  |              |        | 1,956        |        |           | 2,138 
|                                                               |                        | Commercial real estate            |        |                | 7,371  |              |        | 22,473       |        |           | 25,245
|                                                               |                        | Construction and land development |        |                | 11,474 |              |        | 2,821        |        |           | 2,307 
|                                                               |                        | Demand and time                   |        |                | 18,545 |              |        | 10,158       |        |           | 4,581 
|                                                               |                        | Lease financing                   |        |                | 419    |              |        | 980          |        |           | 1,082 
|                                                               |                        | Installment                       |        |                | 282    |              |        | 432          |        |           | 340   
|                                                               |                        |                                   |        |                |        |              |        |              |        |           |       
|                                                               |                        |                                   | 40,924 |                |        | 38,820       |        |              | 35,693 |           |       
|                                                               |                        |                                   |        |                |        |              |        |              |        |           |       
|                                                               |                        | $                                 | 75,729 |                | $      | 57,143       |        | $            | 35,943 |           | $     
|                                                               |                        |                                   |        |                |        |              |        |              |        |           |       
|LIABILITIES:                                                   |                        |                                   |        |                |        |              |        |              |        |           |       
|                                                               | Deposits               |                                   | $      | 29,090         |        | $            | 53,663 |              | $      | 40,663    |       
|                                                               | Borrrowings            |                                   |        | 12,169         |        |              |       |              |        |          |       
|                                                               |                        |                                   |        |                |        |              |        |              |        |           |       
|                                                               |                        | $                                 | 41,259 |                | $      | 53,663       |        | $            | 40,663 |           | $     
|                                                               |                        |                                   |        |                |        |              |        |              |        |           |       
|Gap position                                                   |                        |                                   |        |                |        |              |        |              |        |           |       
|Period                                                         |                        | $                                 | 34,470 |                | $      | 3,480        |        | $            | (4,720 | )         | $     
|% of assets                                                    |                        |                                   | 10.8   | %              |        | 1.1          | %      |              | (1.5   | )%        |       
|Cumulative                                                     |                        | $                                 | 34,470 |                | $      | 37,950       |        | $            | 33,230 |           | $     
|% of assets                                                    |                        |                                   | 10.8   | %              |        | 11.9         | %      |              | 10.4   | %         |       
|Cumulative risk sensitive assets to risk sensitive liabilities |                        |                                   | 183.5  | %              |        | 140.0        | %      |              | 124.5  | %         |       

INFLATION

Inflation may be expected to have an impact on the Company's operating costs and thus on net income. A prolonged period of inflation could cause interest rates,
wages, and other costs to increase and could adversely affect the Company's results of operations unless the fees charged by the Company could be increased correspondingly. However, the Company
believes that the impact of inflation was not material for 2004, 2003 and 2002.

OFF-BALANCE SHEET ARRANGEMENTS

The Company enters into off-balance sheet arrangements in the normal course of business. These arrangements consist primarily of commitments to extend
credit, lines of credit and letters of credit. In addition, the Company has certain operating lease obligations.

Credit
commitments 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 of credit, 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 its commitments.

24

---



Outstanding
loan commitments, unused lines of credit and letters of credit were as follows at December 31, 2004:

|Loan commitments       |  | $ | 32,151,577
|---------------------- |  | - | ----------
|Unused lines of credit |  |   | 82,755,434
|Letters of credit      |  |   | 2,910,330 

The Company leases various branch and general office facilities to conduct its operations. The leases have remaining terms which range from a
period of one year to 20 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
following table shows information relating to the Company's off-balance sheet obligations at December 31, 2004 (dollars in thousands):

|Contractual Obligations     |  | Total |       | Less than
1 year |   | One to
three
years |  | Three to
five
years |       | More than
five
years
|--------------------------- |  | ----- | ----- | ---------------- | - | ------------------ |  | ------------------- | ----- | --------------------
|                           
|Operating lease obligations |  | $     | 6,804 |                  | $ | 690                |  | $                   | 1,034 |                     

NEW ACCOUNTING PRONOUNCEMENTS

On March 9, 2004, the SEC issued Staff Accounting Bulletin 105,Application of Accounting Principles to Loan
Commitments, to inform registrants of the Staff's view that the fair value of the recorded loan commitments should not consider the expected future cash flows related to the
associated servicing of the future loan. The provision of the Bulletin must be applied to loan commitments accounted for as derivatives for reporting periods beginning after March 31, 2004.

In
March 2004, the Emerging Issues Task Force reached a consensus on Issue 03-1,Meaning of Other Than Temporary
Impairment. The Task Force reached a consensus on an other-than-temporary impairment model for debt and equity securities accounted for under Statement
of Financial Accounting Standard No. 115,Accounting for Certain Investments in Debt and Equity Securities. The three-step model used
to determine other-than-temporary impairments shall be applied prospectively to all current and future investments in interim or annual reporting periods beginning after
June 15, 2004.

FASB
Statement No. 123,Accounting for Stock-Based Compensation(Revised 2004)Share Based
Payment, establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. The Statement eliminates the
alternative to use the Accounting Principles Board Opinion 25's intrinsic value method of accounting that was provided in Statement 123 as originally issued. Under Opinion 25, issuing stock options to
employees generally result in recognition of no compensation costs. This Statement requires entities to recognize the cost of employee services received in exchange for awards of equity instruments
based
on the grant-date fair value of those awards. In addition, this Statement amends FASB Statement No. 95, Statement of Cash Flows to require that excess tax benefits be reported as a
financing cash inflow rather than as a reduction of taxes paid. This Statement is effective as of the first interim or annual reporting period that begins after June 15, 2005.

AICPA
Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, prohibits the carrying over of valuation allowances in
loans and securities acquired in a transfer. At transfer, the assets are to be recorded at the total cash flows expected to be collected. The SOP is effective for loans acquired in fiscal years
beginning after December 15, 2004.

Also
during 2004, APB Opinion No. 29,Accounting for Nonmonetary Transactions, was amended to eliminate the exception for nonmonetary
exchanges of similar productive assets and replace it with a general exception for exchanges of nonmonetary assets that do not have commercial substance.

The
provisions of FASB Statement No. 123 will require the Company to expense the estimated fair value of options granted, beginning in the third quarter of 2005. Management does
not expect the other statements to have any material effect on the Company's financial position or results of operation.

7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For
information regarding the market risk of the Company's financial instruments, see "Market Risk and Interest Rate Sensitivity" in Management's Discussion and Analysis of Financial
Condition and Results of Operations in Item 7.

25

---





ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2004 and 2003, and the
related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years ended December 31, 2004. 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 standards of the Public Company Accounting Oversight Board in the United States of America. 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, 2004 and 2003, and the results of their operations and their cash flows for each of the three years ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.

Rowles & Company, LLP

SIGNATURE

Baltimore,
Maryland
February 10, 2005

26

---



CONSOLIDATED BALANCE SHEETS

|                                                                                                                                |                     | December 31,  
|------------------------------------------------------------------------------------------------------------------------------- | ------------------- | --------------
|
|                                                                                                                               
|ASSETS                                                                                                                          |                     |               
|Cash and due from banks                                                                                                         |                     | $             
|Federal funds sold and Federal Home Loan Bank deposit                                                                           |                     |               
|Federal Home Loan Bank stock, at cost                                                                                           |                     |               
|Investment securities                                                                                                           |                     |               
|                                                                                                                                | Available for sale  |               
|                                                                                                                                | Held to maturity    |               
|Loans held for sale                                                                                                             |                     |               
|Loans, less allowance for loan losses of $3,485,076 and $3,648,245                                                              |                     |               
|Premises and equipment                                                                                                          |                     |               
|Accrued interest receivable                                                                                                     |                     |               
|Foreclosed real estate                                                                                                          |                     |               
|Prepaid income taxes                                                                                                            |                     |               
|Bank owned life insurance                                                                                                       |                     |               
|Other assets                                                                                                                    |                     |               
|                                                                                                                                |                     |               
|                                                                                                                                |                     | $             
|                                                                                                                                |                     |               
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                            |                     |               
|Deposits                                                                                                                        |                     |               
|                                                                                                                                | Noninterest-bearing |               
|                                                                                                                                | Interest-bearing    |               
|                                                                                                                                |                     |               
|                                                                                                                                |                     | Total deposits
|Federal funds purchased and securities sold under agreement to repurchase                                                       |                     |               
|Notes payable  U.S. Treasury                                                                                                   |                     |               
|Advances from the Federal Home Loan Bank                                                                                        |                     |               
|Accrued interest payable                                                                                                        |                     |               
|Deferred income taxes                                                                                                           |                     |               
|Other liabilities                                                                                                               |                     |               
|                                                                                                                                |                     |               
|                                                                                                                                |                     |               
|                                                                                                                                |                     |               
|Shareholders' equity                                                                                                            |                     |               
|Common stock, par $1.00 per share; authorized 10,000,000 shares; issued and outstanding 2,834,823 in 2004 and 2,828,078 in 2003 |                     |               
|Surplus                                                                                                                         |                     |               
|Retained earnings                                                                                                               |                     |               
|Accumulated other comprehensive income                                                                                          |                     |               
|                                                                                                                                |                     |               
|                                                                                                                                |                     |               
|                                                                                                                                |                     |               
|                                                                                                                                |                     | $             
|                                                                                                                                |                     |               

The accompanying notes are an integral part of these financial statements.

27

---



CONSOLIDATED STATEMENTS OF INCOME

|                                                         |                            | Years Ended December 31,
|-------------------------------------------------------- | -------------------------- | ------------------------
|
|                                                        
|INTEREST INCOME                                          |                            |                         
|Interest and fees on loans                               |                            | $                       
|Interest and dividends on securities                     |                            |                         
|                                                         | Taxable interest income    |                         
|                                                         | Nontaxable interest income |                         
|                                                         | Dividends                  |                         
|Interest on federal funds sold and other interest income |                            |                         
|                                                         |                            |                         
|Total interest income                                    |                            |                         
|                                                         |                            |                         
|INTEREST EXPENSE                                         |                            |                         
|Deposits                                                 |                            |                         
|Borrowings                                               |                            |                         
|                                                         |                            |                         
|Total interest expense                                   |                            |                         
|                                                         |                            |                         
|Net interest income                                      |                            |                         
|PROVISION FOR LOAN LOSSES                                |                            |                         
|                                                         |                            |                         
|Net interest income after provision for loan losses      |                            |                         
|                                                         |                            |                         
|NONINTEREST INCOME                                       |                            |                         
|Service charges on deposit accounts                      |                            |                         
|Brokerage commissions                                    |                            |                         
|Mortgage banking fees and gains                          |                            |                         
|Other fees and commissions                               |                            |                         
|Gains on security sales                                  |                            |                         
|Gain on branch divestiture                               |                            |                         
|                                                         |                            |                         
|Total noninterest income                                 |                            |                         
|                                                         |                            |                         
|NONINTEREST EXPENSES                                     |                            |                         
|Salaries                                                 |                            |                         
|Employee benefits                                        |                            |                         
|Occupancy                                                |                            |                         
|Furniture and equipment                                  |                            |                         
|Write down of impaired securities                        |                            |                         
|Other noninterest expenses                               |                            |                         
|                                                         |                            |                         
|Total noninterest expenses                               |                            |                         
|                                                         |                            |                         
|Income before income taxes                               |                            |                         
|INCOME TAXES                                             |                            |                         
|                                                         |                            |                         
|NET INCOME                                               |                            | $                       
|                                                         |                            |                         
|NET INCOME PER SHAREBASIC                               |                            | $                       
|                                                         |                            |                         
|NET INCOME PER SHAREDILUTED                             |                            | $                       
|                                                         |                            |                         

The accompanying notes are an integral part of these financial statements.

28

---



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

|                                                                           |  | Common Stock |   |   |           |   |   | Accumulated
Other
Comprehensive
Income |   |  
|-------------------------------------------------------------------------- |  | ------------ | - | - | --------- | - | - | -------------------------------------- | - | -
|
|
|                                                                           |  |             
|BALANCE, DECEMBER 31, 2001                                                 |  | 2,701,254    |   | $ | 2,701,254 |   | $ | 17,017,446                             |   | $
|Net Income                                                                 |  |              |   |   |          |   |   |                                       |   |  
|Net unrealized gains (losses) on available for sale securities, net of tax |  |              |   |   |          |   |   |                                       |   |  
|                                                                           |  |              |   |   |           |   |   |                                        |   |  
|Comprehensive Income                                                       |  |              |   |   |           |   |   |                                        |   |  
|                                                                           |  |              |   |   |           |   |   |                                        |   |  
|Shares acquired and cancelled                                              |  | (14,044      | ) |   | (14,044   | ) |   | (185,277                               | ) |  
|Stock dividend, 5%                                                         |  | 134,547      |   |   | 134,547   |   |   | 1,785,439                              |   |  
|Cash dividends, $0.34 per share                                            |  |              |   |   |          |   |   |                                       |   |  
|                                                                           |  |              |   |   |           |   |   |                                        |   |  
|BALANCE, DECEMBER 31, 2002                                                 |  | 2,821,757    |   |   | 2,821,757 |   |   | 18,617,608                             |   |  
|Net Income                                                                 |  |              |   |   |          |   |   |                                       |   |  
|Net unrealized gains (losses) on available for sale securities, net of tax |  |              |   |   |          |   |   |                                       |   |  
|                                                                           |  |              |   |   |           |   |   |                                        |   |  
|Comprehensive Income                                                       |  |              |   |   |           |   |   |                                        |   |  
|                                                                           |  |              |   |   |           |   |   |                                        |   |  
|Stock options exercised                                                    |  | 6,715        |   |   | 6,715     |   |   | 70,007                                 |   |  
|Adjustment to 2002 stock dividend                                          |  | (394         | ) |   | (394      | ) |   | (5,228                                 | ) |  
|Cash dividends, $0.36 per share                                            |  |              |   |   |          |   |   |                                       |   |  
|                                                                           |  |              |   |   |           |   |   |                                        |   |  
|BALANCE, DECEMBER 31, 2003                                                 |  | 2,828,078    |   |   | 2,828,078 |   |   | 18,682,387                             |   |  
|Net Income                                                                 |  |              |   |   |          |   |   |                                       |   |  
|Net unrealized gains (losses) on available for sale securities, net of tax |  |              |   |   |          |   |   |                                       |   |  
|                                                                           |  |              |   |   |           |   |   |                                        |   |  
|Comprehensive Income                                                       |  |              |   |   |           |   |   |                                        |   |  
|                                                                           |  |              |   |   |           |   |   |                                        |   |  
|Stock options exercised, including tax benefit of $21,293                  |  | 8,845        |   |   | 8,845     |   |   | 122,616                                |   |  
|Shares acquired and cancelled                                              |  | (2,100       | ) |   | (2,100    | ) |   | (30,555                                | ) |  
|Cash dividends, $0.38 per share                                            |  |              |   |   |          |   |   |                                       |   |  
|                                                                           |  |              |   |   |           |   |   |                                        |   |  
|BALANCE, DECEMBER 31, 2004                                                 |  | 2,834,823    |   | $ | 2,834,823 |   | $ | 18,774,448                             |   | $
|                                                                           |  |              |   |   |           |   |   |                                        |   |  

The accompanying notes are an integral part of these financial statements.

29

---



CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                           |                             | Years Ended December 31,                            |            
|------------------------------------------------------------------------------------------ | --------------------------- | --------------------------------------------------- | -----------
|
|                                                                                           |                            
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                      |                             |                                                     |            
|Net income                                                                                 |                             | $                                                   | 888,364    
|ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITES: |                             |                                                     |            
|Provision for loan losses                                                                  |                             |                                                     |           
|Deprecation and amortization                                                               |                             |                                                     | 1,255,340  
|Deferred income taxes                                                                      |                             |                                                     | (198,755   
|Amortization of premiums and discounts                                                     |                             |                                                     | 230,676    
|Gains on disposal of securities                                                            |                             |                                                     | (115,810   
|Write down of impaired securities                                                          |                             |                                                     | 497,313    
|Loans held for sale made, net of principal sold                                            |                             |                                                     | (6,635,747 
|Mortgage-banking fees and gains                                                            |                             |                                                     | (1,342,399 
|Gain on branch divestiture                                                                 |                             |                                                     |           
|Gains on sale and write-down of premises and equipment                                     |                             |                                                     | (18,941    
|(Gains) losses on sale of foreclosed real estate                                           |                             |                                                     | 11,548     
|Write-down of foreclosed real estate                                                       |                             |                                                     | 8,077      
|(Increase) decrease in:                                                                    |                             |                                                     |            
|                                                                                           | Accrued interest receivable |                                                     |            
|                                                                                           | Prepaid income taxes        |                                                     |            
|                                                                                           | Other assets                |                                                     |            
|Increase (decrease) in:                                                                    |                             |                                                     |            
|                                                                                           | Accrued interest payable    |                                                     |            
|                                                                                           | Income taxes payable        |                                                     |            
|                                                                                           | Other liabilities           |                                                     |            
|                                                                                           |                             |                                                     |            
|                                                                                           |                             | Net cash provided by (used in) operating activities |            
|                                                                                           |                             |                                                     |            
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                      |                             |                                                     |            
|Proceeds from sales of securities available for sale                                       |                             |                                                     | 2,518,491  
|Proceeds from maturities of securities available for sale                                  |                             |                                                     | 30,685,807 
|Proceeds from redemption (purchase) of Federal Home Loan Bank stock                        |                             |                                                     | (372,900   
|Purchase of securities available for sale                                                  |                             |                                                     | (13,528,310
|Loans made, net of principal collected                                                     |                             |                                                     | (20,677,402
|Purchase of loans, net of principal collected                                              |                             |                                                     |           
|Purchase of premises and equipment                                                         |                             |                                                     | (1,935,364 
|Proceeds from sale of premises and equipment                                               |                             |                                                     | 361,582    
|Purchase of foreclosed real estate                                                         |                             |                                                     |           
|Net proceeds from branch divestiture                                                       |                             |                                                     |           
|Proceeds from sale of foreclosed real estate                                               |                             |                                                     | 164,876    
|                                                                                           |                             |                                                     |            
|                                                                                           |                             | Net cash provided by (used in) investing activities |            
|                                                                                           |                             |                                                     |            
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                      |                             |                                                     |            
|Net increase (decrease) in time deposits                                                   |                             |                                                     | 7,124,050  
|Net increase (decrease) in other deposits                                                  |                             |                                                     | 11,665,996 
|Net increase (decrease) in other borrowed funds                                            |                             |                                                     | (1,808,269 
|Common stock repurchase and retirement                                                     |                             |                                                     | (32,655    
|Stock options exercised                                                                    |                             |                                                     | 131,461    
|Dividends paid                                                                             |                             |                                                     | (1,076,433 
|                                                                                           |                             |                                                     |            
|                                                                                           |                             | Net cash provided by (used in) financing activities |            
|                                                                                           |                             |                                                     |            
|Net increase (decrease) in cash and cash equivalents                                       |                             |                                                     | 6,891,618  
|Cash and cash equivalents at beginning of year                                             |                             |                                                     | 27,300,926 
|                                                                                           |                             |                                                     |            
|Cash and cash equivalents at end of year                                                   |                             | $                                                   | 34,192,544 
|                                                                                           |                             |                                                     |            
|SUPPLEMENTAL INFORMATION:                                                                  |                             |                                                     |            
|Interest paid on deposits and borrowings                                                   |                             | $                                                   | 5,279,498  
|                                                                                           |                             |                                                     |            
|Income taxes paid                                                                          |                             | $                                                   | 545,609    
|                                                                                           |                             |                                                     |            
|NONCASH ACTIVITY:                                                                          |                             |                                                     |            
|Transfer of loans to foreclosed real estate                                                |                             | $                                                   | 84,500     
|                                                                                           |                             |                                                     |            

The accompanying notes are an integral part of these financial statements.

30

---



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, 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 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 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. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of securities.

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.

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. Management may grant a waiver from
nonaccrual status for a 90 day past due loan that is well secured or in the process of collection. 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
Company measures impaired loans (1) at the observable market price; (2) at the present value of expected cash flows discounted at the loan's effective interest rate; or
(3) at the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, an impairment is recognized
through the allowance for loan losses.

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 historical loss experience, 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.

Premises and Equipment 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.

Foreclosed Real Estate Real estate acquired through foreclosure is recorded at the lower
of cost or fair market value on the date acquired. Losses incurred at the time of acquisition of the property are charged to the allowance for

31

---



loan
losses. Subsequent reductions in the estimated carrying value of the property and other expenses of owning the property are included in noninterest expense.

Intangible Assets A deposit intangible asset of $1,847,700, relating to a branch
acquisition, is being amortized using the straight-line method over 15 years. The remaining unamortized balance at December 31, 2004 and 2003 was $677,453 and $800,633,
respectively. Amortization expense was $123,180 for 2004, 2003, and 2002, respectively.

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.

Intangible
assets are included in other assets on the Consolidated Balance Sheets. Management evaluates intangible assets for impairment quarterly.

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 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.

Per Share Data Basic net income per common share is determined by dividing net income by
the weighted average shares of common stock outstanding giving retroactive effect to any stock dividends and splits 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 using the treasury stock method.

Comprehensive Income Comprehensive income includes net income and the unrealized gain
(loss) on investment securities available for sale, net of income taxes.

Stock options 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 years ended December 31, 2004, 2003, and 2002.

|                            |                                                   | 2004 |   | 2003    |   | 2002 |        
|--------------------------- | ------------------------------------------------- | ---- | - | ------- | - | ---- | -------
|                            |                                                  
|Net Income:                 |                                                   |      |   |         |   |      |        
|                            | As Reported                                       |      | $ | 888,364 |   | $    | 924,714
|                            | Additional compensation net of related income tax |      |   | (81,812 | ) |      | (22,727
|                            |                                                   |      |   |         |   |      |        
|                            | Pro forma                                         |      | $ | 806,552 |   | $    | 901,987
|                            |                                                   |      |   |         |   |      |        
|Basic Earnings Per Share:   |                                                   |      |   |         |   |      |        
|                            | As Reported                                       |      | $ | 0.31    |   | $    | 0.33   
|                            | Pro forma                                         |      |   | 0.28    |   |      | 0.32   
|Diluted Earnings Per Share: |                                                   |      |   |         |   |      |        
|                            | As reported                                       |      |   | 0.31    |   |      | 0.32   
|                            | Pro forma                                         |      |   | 0.28    |   |      | 0.32   

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 years ended December 31, 2004, 2003, and 2002.

|                    |  | 2004     |  | 2003           |  | 2002          
|------------------- |  | -------- |  | -------------- |  | --------------
|                   
|Dividend yield      |  | 2.25%    |  | 2.48% to 2.84% |  | 2.84% to 2.97%
|Expected volatility |  | 18.15%   |  | 20.88%         |  | 19.55%        
|Risk free rate      |  | 4.43%    |  | 4.25% to 4.67% |  | 4.70% to 5.56%
|Estimated life      |  | 10 years |  | 10 years       |  | 10 years      

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 $22 million and $20 million during 2004 and 2003, respectively, is sufficient to satisfy the reserve requirements.

32

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In
order to cover the costs of services provided by correspondent banks, the Company maintains compensating balances at these correspondent banks, or pays fees in the event the credit
earned on balances is not sufficient
to cover activity charges. During 2004 and 2003, the Company maintained an average compensating balance of approximately $1,000,000 which was maintained at the Federal Reserve Bank.

3. INVESTMENT SECURITIES

Investment securities are summarized as follows:

|                           |  | Amortized
cost |            | Unrealized
gains |   | Unrealized
losses |  | Fair
value
|-------------------------- |  | -------------- | ---------- | ---------------- | - | ----------------- |  | ----------
|                          
|December 31, 2004          |  |                |            |                  |   |                   |  |           
|AVAILABLE FOR SALE         |  |                |            |                  |   |                   |  |           
|U.S. government agency     |  | $              | 20,061,205 |                  | $ | 2,797             |  | $         
|Mortgage-backed securities |  |                | 8,287,646  |                  |   | 174,560           |  |           
|State and municipal        |  |                | 4,017,338  |                  |   | 120,657           |  |           
|Corporate bonds            |  |                | 3,011,368  |                  |   | 25,552            |  |           
|                           |  |                |            |                  |   |                   |  |           
|                           |  |                | 35,377,557 |                  |   | 323,566           |  |           
|Equity securities          |  |                | 3,255,196  |                  |   | 3,701,667         |  |           
|                           |  |                |            |                  |   |                   |  |           
|                           |  | $              | 38,632,753 |                  | $ | 4,025,233         |  | $         
|                           |  |                |            |                  |   |                   |  |           

|                           |  | Amortized
cost |            | Unrealized
gains |   | Unrealized
losses |  | Fair
value
|-------------------------- |  | -------------- | ---------- | ---------------- | - | ----------------- |  | ----------
|                          
|December 31, 2003          |  |                |            |                  |   |                   |  |           
|AVAILABLE FOR SALE         |  |                |            |                  |   |                   |  |           
|U.S. government agency     |  | $              | 34,536,818 |                  | $ | 70,616            |  | $         
|Mortgage-backed securities |  |                | 9,086,362  |                  |   | 541,905           |  |           
|State and municipal        |  |                | 5,041,536  |                  |   | 159,588           |  |           
|Corporate bonds            |  |                | 6,578,815  |                  |   | 241,525           |  |           
|                           |  |                |            |                  |   |                   |  |           
|                           |  |                | 55,243,531 |                  |   | 1,013,634         |  |           
|Equity securities          |  |                | 3,652,390  |                  |   | 2,996,026         |  |           
|                           |  |                |            |                  |   |                   |  |           
|                           |  | $              | 58,895,921 |                  | $ | 4,009,660         |  | $         
|                           |  |                |            |                  |   |                   |  |           
|HELD TO MATURITY           |  |                |            |                  |   |                   |  |           
|Foreign Bond               |  | $              | 25,000     |                  | $ |                  |  | $         
|                           |  |                |            |                  |   |                   |  |           

Information related to unrealized losses in the portfolio as of December 31, 2004 follows:

|                           |  | December 31, 2004
|-------------------------- |  | -----------------
|
|
|                          
|U.S. government agency     |  | $                
|Mortgage-backed securities |  |                  
|State and municipal        |  |                  
|Equity securities          |  |                  
|                           |  |                  
|                           |  | $                
|                           |  |                  

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when
economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value.

During
2004, the Company wrote down its FHLMC preferred stock securities by $497,313 to fair value to reflect what the Company considers to be an
other-than-temporary impairment of those securities. At December 31, 2004, one marketable equity security had an unrealized loss with aggregate depreciation of 40% from
the Company's cost

33

---



basis.
No credit issues have been identified that cause management to believe the declines in market value are other than temporary. In analyzing the issuer's financial condition, management considers
industry analysis reports, financial performance and projected target prices of investment analysts within a one-year time frame. Unrealized losses on marketable equity securities that are
in excess of 50% of cost, and that have been sustained for more than 24 months, are generally recognized by management as being other than temporary and charged to earnings, unless evidence
exists to support a realizable value equal to or greater than the Company's carrying value of the investment.

All
unrealized losses on U.S. government agency and state and municipal securities as of December 31, 2004 are considered to be temporary losses, because each security will be
redeemed at face value at, or prior to maturity. In most cases, the temporary impairment in value is caused by market interest rate fluctuations.

Contractual
maturities of debt securities at December 31, 2004 and 2003 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.

|                           |  | December 31, 2004
|-------------------------- |  | -----------------
|
|
|                          
|Within one year            |  | $                
|Over one to five years     |  |                  
|Over five to ten years     |  |                  
|Mortgage-backed securities |  |                  
|                           |  |                  
|                           |  | $                
|                           |  |                  

|                           |  | December 31, 2003
|-------------------------- |  | -----------------
|
|
|                          
|Within one year            |  | $                
|Over one to five years     |  |                  
|Over five to ten years     |  |                  
|Mortgage-backed securities |  |                  
|                           |  |                  
|                           |  | $                
|                           |  |                  

At December 31, 2004 and 2003, securities with an amortized cost of $26,930,449 (fair value of $26,941,696) and $30,077,878 (fair value of
$30,610,239), respectively, were pledged as collateral for government deposits, securities sold under repurchase agreements, and advances from the Federal Home Loan Bank.

In
2004, 2003, and 2002, the Company realized gross gains on sales of securities of $115,810, $486,109, and $209,880, respectively, and losses or write downs of $497,313, $0, and $0,
respectively. Income taxes on net security gains were $(147,336), $187,735, and $81,056 in 2004, 2003, and 2002, respectively.

34

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4. LOANS

Major classifications of loans at December 31 are as follows:

|                          |                                   | 2004 |             | 2003      
|------------------------- | --------------------------------- | ---- | ----------- | ----------
|                         
|Real estate:              |                                   |      |             |           
|                          | Residential                       |      | $           | 55,242,018
|                          | Commercial                        |      |             | 94,858,597
|                          | Construction and land development |      |             | 17,774,874
|Demand and time           |                                   |      | 46,168,587  |           
|Lease financing           |                                   |      | 3,598,003   |           
|Installment               |                                   |      | 2,084,215   |           
|                          |                                   |      |             |           
|                          |                                   |      | 219,726,294 |           
|Allowance for loan losses |                                   |      | 3,485,076   |           
|                          |                                   |      |             |           
|Loans, net                |                                   | $    | 216,241,218 |           
|                          |                                   |      |             |           

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 at December 31 is as follows:

|                                      |  | 2004 |             | 2003
|------------------------------------- |  | ---- | ----------- | ----
|                                     
|Repricing or maturing within one year |  | $    | 93,722,336  |     
|Maturing over one to five years       |  |      | 87,538,764  |     
|Maturing over five years              |  |      | 38,465,194  |     
|                                      |  |      |             |     
|                                      |  | $    | 219,726,294 |     
|                                      |  |      |             |     

Loan balances have been adjusted by the following deferred amounts as of December 31:

|                                                 |  | 2004 |          | 2003 |  
|------------------------------------------------ |  | ---- | -------- | ---- | -
|                                                 | 
|Deferred origination costs and premiums          |  | $    | 458,177  |      | $
|Deferred origination fees and unearned discounts |  |      | (662,831 | )    |  
|                                                 |  |      |          |      |  
|Net deferred fees                                |  | $    | (204,654 | )    | $
|                                                 |  |      |          |      |  

Transactions in the allowance for loan losses for the years ended December 31 were as follows:

|                                |  | 2004 |           | 2003 |   | 2002     
|------------------------------- |  | ---- | --------- | ---- | - | ---------
|                               
|Beginning balance               |  | $    | 3,648,245 |      | $ | 3,578,762
|Provision charged to operations |  |      |          |      |   | 243,000  
|Recoveries                      |  |      | 113,953   |      |   | 91,511   
|                                |  |      |           |      |   |          
|                                |  |      | 3,762,198 |      |   | 3,913,273
|Loans charged off               |  |      | 277,122   |      |   | 265,028  
|                                |  |      |           |      |   |          
|Ending balance                  |  | $    | 3,485,076 |      | $ | 3,648,245
|                                |  |      |           |      |   |          

Nonperforming assets and loans past-due 90 days or more but not in nonaccrual status were as follows at December 31:

|                        |                            | 2004 |         | 2003      |   | 2002   
|----------------------- | -------------------------- | ---- | ------- | --------- | - | -------
|                       
|Nonaccrual loans        |                            | $    | 615,394 |           | $ | 712,116
|Restructured loans      |                            |      | 455,864 |           |   | 661,974
|Foreclosed real estate  |                            |      |        |           |   | 100,000
|                        |                            |      |         |           |   |        
|                        | Total nonperforming assets |      | $       | 1,071,258 |   | $      
|                        |                            |      |         |           |   |        
|Accruing loans past-due |                            |      |         |           |   |        
|                        | 90 days or more            |      | $       | 1,567,919 |   | $      
|                        |                            |      |         |           |   |        

35

---



The amount of interest income that would have been recorded in 2004, 2003, and 2002 on nonaccrual loans if those loans had been handled in
accordance with their contractual terms totaled $64,037, $54,857, and 30,938, respectively. The amount of interest income actually recorded on nonaccrual loans totaled $32,318, $30,660, and $22,878
for 2004, 2003, and 2002, respectively.

At
December 31, 2004, 2003, and 2002, the Company had one impaired loan to the same borrower amounting to $455,864, $661,974, and $568,969, respectively, which 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 $530,680, $615,021, and $576,577 in 2004, 2003, and
2002, respectively. During 2004, 2003, and 2002, the Company received total payments on impaired loans of $341,857, $34,650, and $85,189, respectively. Of these amounts, $75,938, $34,650, and $54,614
were recorded as interest income for 2004, 2003, and 2002, respectively. The remainder was applied to reduce principal. There is no specific allowance for this loan since the fair value of the
collateral securing the loan is considered adequate to cover all principal and interest due. The Company also continues to accrue interest on this loan due to the adequacy of the collateral value.

Loans
with a balance of $48,231,884 and $49,827,528 were pledged as collateral to the Federal Home Loan Bank of Atlanta as of December 31, 2004 and 2003, respectively. At
December 31, 2004 and 2003, the Company serviced loans for others totaling $2,383,332 and $3,423,249, respectively.

5. CREDIT COMMITMENTS

Outstanding loan commitments, unused lines of credit, and letters of credit were as follows as of December 31:

|                       |                                   | 2004 |            | 2003       |   | 2002      
|---------------------- | --------------------------------- | ---- | ---------- | ---------- | - | ----------
|                      
|LOAN COMMITMENTS       |                                   |      |            |            |   |           
|                       | Mortgage loans                    |      | $          | 8,899,836  |   | $         
|                       | Construction and land development |      |            | 9,438,961  |   |           
|                       | Commercial loans                  |      |            | 13,812,780 |   |           
|                       |                                   |      |            |            |   |           
|                       |                                   | $    | 32,151,577 |            | $ | 33,624,154
|                       |                                   |      |            |            |   |           
|UNUSED LINES OF CREDIT |                                   |      |            |            |   |           
|                       | Home equity lines                 |      | $          | 55,883,051 |   | $         
|                       | Commercial lines                  |      |            | 25,467,308 |   |           
|                       | Unsecured consumer lines          |      |            | 1,405,075  |   |           
|                       |                                   |      |            |            |   |           
|                       |                                   | $    | 82,755,434 |            | $ | 74,600,420
|                       |                                   |      |            |            |   |           
|LETTERS OF CREDIT      |                                   | $    | 2,910,330  |            | $ | 2,795,649 
|                       |                                   |      |            |            |   |           

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 of credit, 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

36

---



collectibility.
During the years ended December 31, 2004, 2003 and 2002, transactions in related party loans were as follows:

|                  |  | 2004 |            | 2003 |   | 2002       |  
|----------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                  | 
|Beginning balance |  | $    | 3,209,200  |      | $ | 4,421,030  |  
|Additions         |  |      | 1,040,580  |      |   | 648,991    |  
|Repayments        |  |      | (2,429,063 | )    |   | (1,860,821 | )
|                  |  |      |            |      |   |            |  
|Ending balance    |  | $    | 1,820,717  |      | $ | 3,209,200  |  
|                  |  |      |            |      |   |            |  

A director of the Company is a partner in a law firm that provides legal services to the Company and the Bank. During the years ended
December 31, 2004, 2003, and 2002, amounts paid to the law firm in connection with those services were $249,341, $259,502, and $224,138, respectively.

A
director of the Company is President of an insurance brokerage through which the Company and the Bank place various insurance policies. During the years ended December 31, 2004,
2003, and 2002, amounts paid to the insurance brokerage for insurance premiums were $192,234, $244,721, and $153,656, respectively. Related commissions amounted to $28,660, $32,528, and $17,724 during
the years ended December 31, 2004, 2003, and 2002, respectively.

A
director of the Company is President of an electrical company through which the Company and the Bank contracted for electrical services amounting to $0 in 2004, $3,341 in 2003, and
$4,623 in 2002.

A
director of the Company is the Executive Vice President for a commercial real estate services company, through which the Company and the Bank contracted for appraisal and management
services amounting to $739,712 in 2004, $100,949 in 2003, and $3,744 in 2002.

7. PREMISES AND EQUIPMENT

A summary of premises and equipment is as follows as of December 31:

|                                          |  | 2004 |            | 2003 |  
|----------------------------------------- |  | ---- | ---------- | ---- | -
|                                          | 
|Land and improvements                     |  | $    | 909,544    |      | $
|Buildings                                 |  |      | 2,850,977  |      |  
|Leasehold improvements                    |  |      | 2,773,689  |      |  
|Equipment and fixtures                    |  |      | 7,930,744  |      |  
|                                          |  |      |            |      |  
|                                          |  |      | 14,464,954 |      |  
|Accumulated depreciation and amortization |  |      | (9,048,020 | )    |  
|                                          |  |      |            |      |  
|                                          |  | $    | 5,416,934  |      | $
|                                          |  |      |            |      |  

Buildings have useful lives of 7 to 40 years. Leasehold improvements have useful lives of 1 to 40 years. Equipment and fixtures have
useful lives of 3 to 40 years.

Depreciation
and amortization of premises and equipment was $1,059,198, $1,275,612, and $1,481,612 for 2004, 2003, and 2002, respectively. Amortization of intangible assets, excluding
amortization of deposit premiums, was $72,962, $41,811, and $45,756 for 2004, 2003, and 2002, respectively.

During
the year ended December 31, 2002, the Company sold its Baltimore Street property for $200,000. The Bank also sold deposits, along with all assets located within its Liberty
Road branch.

8. DEPOSITS

Major classifications of interest-bearing deposits are as follows as of December 31:

|                                            |  | 2004 |             | 2003
|------------------------------------------- |  | ---- | ----------- | ----
|                                           
|NOW and Super NOW                           |  | $    | 35,662,256  |     
|Money market                                |  |      | 31,041,530  |     
|Savings                                     |  |      | 35,934,645  |     
|Certificates of deposit of $100,000 or more |  |      | 9,321,990   |     
|Other time deposits (a)                     |  |      | 60,145,953  |     
|                                            |  |      |             |     
|                                            |  | $    | 172,106,374 |     
|                                            |  |      |             |     

37

---



8. DEPOSITS(Continued)

Interest expense associated with certificates of deposit of $100,000 or more was approximately $145,000, $868,000, and $1,198,000 for the years
ended December 31, 2004, 2003, and 2002, respectively.

Time
deposits mature as follows:

|                                  |  | December 31,
|--------------------------------- |  | ------------
|
|                                 
|Maturing within one year          |  | $           
|Maturing over one to two years    |  |             
|Maturing over two to three years  |  |             
|Maturing over three to four years |  |             
|Maturing over four to five years  |  |             
|                                  |  |             
|                                  |  | $           
|                                  |  |             

9. BORROWED FUNDS

Federal funds purchased and securities sold under agreements to repurchase represent 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:

|                                            |  | 2004 |            | 2003 |   | 2002      
|------------------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                           
|Total outstanding at year end               |  | $    | 10,183,951 |      | $ | 11,951,594
|Average amount outstanding during year      |  |      | 9,983,370  |      |   | 12,324,539
|Maximum amount outstanding at any month end |  |      | 13,540,231 |      |   | 14,733,180
|Weighted average interest rate at year end  |  |      | 1.91%      |      |   | 1.22%     
|Weighted average interest rate for the year |  |      | 0.96%      |      |   | 0.71%     

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 rate. The average balances of the notes were $1,051,267
and $910,061 during 2004 and 2003, respectively.

Advances
from the Federal Home Loan Bank (FHLB) of Atlanta amounted to $45,000,000 at December 31, 2004 and 2003. Advances averaged $45,000,000 for both 2004 and 2003, with a
weighted average cost of 6.74% for both 2004 and 2003. At both December 31, 2004 and 2003, the advances carried a weighted average interest rate of 6.74%, and mature at dates ranging from
March 26, 2008 to May 24, 2010. The Bank has a total secured line of $80 million with the FHLB for which the Bank granted the FHLB a security interest in certain residential first
mortgage loans and commercial mortgage loans, as well as pledged investment securities (see notes 3 and 4).

The
Company borrows under available unsecured federal funds lines of credit of $5 million with other institutions. There was no balance outstanding under these lines at
December 31, 2004 and 2003. These lines bear interest at the current federal funds rate of the correspondent bank.

38

---



10. OTHER NONINTEREST EXPENSES

Other noninterest expenses include the following for the years ended December 31:

|                                   |  | 2004 |           | 2003 |   | 2002     
|---------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                  
|ATM services                       |  | $    | 1,134,848 |      | $ | 1,458,647
|Data processing services           |  |      | 719,445   |      |   | 1,025,536
|Carrier service                    |  |      | 479,131   |      |   | 367,186  
|Employee-related expenses          |  |      | 306,678   |      |   | 294,645  
|Marketing                          |  |      | 287,343   |      |   | 187,172  
|Printing, stationery, and supplies |  |      | 282,914   |      |   | 193,616  
|Postage and freight                |  |      | 228,030   |      |   | 208,914  
|Liability insurance                |  |      | 216,890   |      |   | 181,657  
|Loan expenses                      |  |      | 215,570   |      |   | 123,910  
|Telephone                          |  |      | 195,867   |      |   | 221,363  
|Professional services              |  |      | 187,784   |      |   | 573,684  
|Directors' fees                    |  |      | 165,950   |      |   | 139,950  
|Deposit premium amortization       |  |      | 123,180   |      |   | 123,180  
|Shareholder expense                |  |      | 91,283    |      |   | 36,000   
|Bank account charges               |  |      | 88,134    |      |   | 73,490   
|Software amortization              |  |      | 72,962    |      |   | 41,811   
|Other                              |  |      | 552,638   |      |   | 74,685   
|                                   |  |      |           |      |   |          
|                                   |  | $    | 5,348,647 |      | $ | 5,325,446
|                                   |  |      |           |      |   |          

11. 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.
In 2004, the shareholders approved increasing the number of shares available for grant under the Plan from 210,000 shares to 300,000 shares. 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 or upon employee termination if not exercised.

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

|                                 |  | 2004    |   | 2003             |  | 2002   
|-------------------------------- |  | ------- | - | ---------------- |  | -------
|
|                                
|Outstanding at beginning of year |  | 174,785 |   |                  |  | 179,025
|Granted                          |  | 32,430  |   | $16.02 to $16.22 |  | 9,930  
|Exercised                        |  | (8,845  | ) | $9.71 to $15.42  |  | (6,085 
|Expired/Canceled                 |  | (4,900  | ) | $10.94 to $18.10 |  | (8,085 
|                                 |  |         |   |                  |  |        
|Outstanding at end of year       |  | 193,470 |   | $9.71 to $18.10  |  | 174,785
|                                 |  |         |   |                  |  |        
|Exercisable at December 31       |  | 143,919 |   |                  |  | 137,580
|                                 |  |         |   |                  |  |        

39

---



A Summary of information about stock options outstanding is as follows at December 31, 2004:

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Remaining
Life
(Years)

Shares
Underlying
Options
Currently
Exercisable$
9.71

3,150

6.33

3,15010.54

840

6.16

84010.94

32,975

6.42

32,97512.11

5,460

7.33

3,64012.14

630

7.16

42012.67

26,250

7.58

17,50013.45

19,425

5.58

19,42513.45

3,580

5.33

3,58014.50

6,510

8.33

2,17015.36

3,150

4.33

3,15015.42

26,670

4.35

26,67015.48

1,050

4.83

1,05016.02

25,500

9.58

16.22

6,930

9.33

16.70

3,150

3.16

3,15017.75

3,000

8.92

99917.79

22,050

3.35

22,05018.10

3,150

3.33

3,150193,470



143,919


12. NET INCOME PER SHARE

The calculation of net income per common share as restated giving retroactive effect to any stock dividends and splits is as follows for the years
ended December 31:

|         |                                           | 2004 |   | 2003      |  | 2002
|-------- | ----------------------------------------- | ---- | - | --------- |  | ----
|        
|BASIC:   |                                           |      |   |           |  |     
|         | Net income (applicable to common stock)   |      | $ | 888,364   |  | $   
|         | Average common shares outstanding         |      |   | 2,831,880 |  |     
|         | Basic net income per share                |      | $ | 0.31      |  | $   
|DILUTED: |                                           |      |   |           |  |     
|         | Net income (applicable to common stock)   |      | $ | 888,364   |  | $   
|         | Average common shares outstanding         |      |   | 2,831,880 |  |     
|         | Stock option adjustment                   |      |   | 28,366    |  |     
|         |                                           |      |   |           |  |     
|         | Average common shares outstanding-diluted |      |   | 2,860,246 |  |     
|         |                                           |      |   |           |  |     
|         | Diluted net income per share              |      | $ | 0.31      |  | $   
|         |                                           |      |   |           |  |     

40

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13. 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 available for sale 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:

|                                                    |  | 2004 |           | 2003 |   | 2002      |  
|--------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | -
|                                                    | 
|Net Income                                          |  | $    | 888,364   |      | $ | 924,714   |  
|                                                    |  |      |           |      |   |           |  
|Other comprehensive income:                         |  |      |           |      |   |           |  
|Unrealized holding gains (losses) during the period |  |      | (88,800   | )    |   | 1,217,864 |  
|Add: Security impairment write down                 |  |      | 497,313   |      |   |          |  
|Less: Adjustment for security gains                 |  |      | (115,810  | )    |   | (486,109  | )
|                                                    |  |      |           |      |   |           |  
|Other comprehensive income before tax               |  |      | 292,703   |      |   | 731,755   |  
|Income taxes on comprehensive income                |  |      | (113,042  | )    |   | (282,603  | )
|                                                    |  |      |           |      |   |           |  
|Other comprehensive income after tax                |  |      | 179,661   |      |   | 449,152   |  
|                                                    |  |      |           |      |   |           |  
|Comprehensive income                                |  | $    | 1,068,025 |      | $ | 1,373,866 |  
|                                                    |  |      |           |      |   |           |  

14. CAPITAL STANDARDS

The Federal Reserve Board and the 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, 2004 and 2003, the capital ratios
and minimum capital requirements are as follows:

|                                         |                 | Actual |   | Minimum Capital Adequacy |  | To be Well Capitalized
|---------------------------------------- | --------------- | ------ | - | ------------------------ |  | ----------------------
|
|                                        
|DECEMBER 31, 2004                        |                 |        |   |                          |  |                       
|Total Capital (to risk-weighted assets)  |                 |        |   |                          |  |                       
|                                         | Consolidated    |        | $ | 32,832,000               |  | 12.74%                
|                                         | Carrollton Bank |        |   | 32,680,000               |  | 12.96%                
|Tier 1 Capital (to risk-weighted assets) |                 |        |   |                          |  |                       
|                                         | Consolidated    |        |   | 29,677,000               |  | 11.52%                
|                                         | Carrollton Bank |        |   | 29,525,000               |  | 11.71%                
|Tier 1 Capital (to average assets)       |                 |        |   |                          |  |                       
|                                         | Consolidated    |        |   | 29,677,000               |  | 9.41%                 
|                                         | Carrollton Bank |        |   | 29,525,000               |  | 9.49%                 
|DECEMBER 31, 2003                        |                 |        |   |                          |  |                       
|Total Capital (to risk-weighted assets)  |                 |        |   |                          |  |                       
|                                         | Consolidated    |        | $ | 34,998,000               |  | 15.51%                
|                                         | Carrollton Bank |        |   | 31,581,000               |  | 14.12%                
|Tier 1 Capital (to risk-weighted assets) |                 |        |   |                          |  |                       
|                                         | Consolidated    |        |   | 31,014,000               |  | 13.75%                
|                                         | Carrollton Bank |        |   | 28,774,000               |  | 12.86%                
|Tier 1 Capital (to average assets)       |                 |        |   |                          |  |                       
|                                         | Consolidated    |        |   | 31,014,000               |  | 10.35%                
|                                         | Carrollton Bank |        |   | 28,774,000               |  | 9.75%                 

Tier 1 capital consists of common stock, surplus, and retained earnings. Total capital includes a limited amount of the allowance for loan 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, 2004, the most recent notification from the Federal Reserve and the FDIC categorized the Company and the Bank as well capitalized under the regulatory framework
for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Company's or Bank's category.

41

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15. RETIREMENT 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. Assets of the plan are held in a trust fund managed by an insurance
company. During 2004, the Company froze the Plan and incurred a curtailment charge of $23,644.

The
following table sets forth the financial status of the plan as of and for the year ended December 31:

|                                                                                                                |                                                | 2004 |           | 2003       |   | 2002      |           
|--------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ---- | --------- | ---------- | - | --------- | ----------
|                                                                                                                |                                               
|CHANGE IN BENEFIT OBLIGATION:                                                                                   |                                                |      |           |            |   |           |           
|                                                                                                                | Benefit obligation at beginning of year        |      | $         | 8,820,583  |   | $         | 8,201,071 
|                                                                                                                | Service cost                                   |      |           | 528,407    |   |           | 434,987   
|                                                                                                                | Interest cost                                  |      |           | 545,710    |   |           | 544,400   
|                                                                                                                | Actuarial gain                                 |      |           | 69,083     |   |           | 21,234    
|                                                                                                                | Benefits paid                                  |      |           | (331,542   | ) |           | (381,109  
|                                                                                                                | Adjustment for special event  curtailment     |      |           | (1,893,235 | ) |           |          
|                                                                                                                |                                                |      |           |            |   |           |           
|                                                                                                                | Benefit obligation at end of year              |      |           | 7,739,006  |   |           | 8,820,583 
|                                                                                                                |                                                |      |           |            |   |           |           
|CHANGE IN PLAN ASSETS:                                                                                          |                                                |      |           |            |   |           |           
|                                                                                                                | Fair value of plan assets at beginning of year |      |           | 7,399,746  |   |           | 6,161,247 
|                                                                                                                | Actual return on plan assets                   |      |           | 271,153    |   |           | 1,152,983 
|                                                                                                                | Employer contribution                          |      |           | 450,000    |   |           | 466,625   
|                                                                                                                | Benefits paid                                  |      |           | (390,181   | ) |           | (381,109  
|                                                                                                                |                                                |      |           |            |   |           |           
|                                                                                                                | Fair value of plan assets at end of year       |      |           | 7,730,718  |   |           | 7,399,746 
|                                                                                                                |                                                |      |           |            |   |           |           
|                                                                                                                | Funded status                                  |      |           | (8,288     | ) |           | (1,420,837
|                                                                                                                | Unrecognized net actuarial (gain) loss         |      |           | (15,901    | ) |           | 1,537,550 
|                                                                                                                | Unrecognized prior service cost                |      |           |           |   |           | 73,501    
|                                                                                                                |                                                |      |           |            |   |           |           
|                                                                                                                | Prepaid (accrued) benefit cost                 |      | $         | (24,189    | ) | $         | 190,214   
|                                                                                                                |                                                |      |           |            |   |           |           
|ASSUMPTIONS USED IN MEASURING THE PROJECTED BENEFIT OBLIGATION WERE AS FOLLOWS FOR THE YEARS ENDED DECEMBER 31: |                                                |      |           |            |   |           |           
|                                                                                                                | Discount rates                                 |      |           | 6.75%      |   |           | 6.25%     
|                                                                                                                | Rates of increase in compensation levels       |      |           | 5.50%      |   |           | 4.25%     
|                                                                                                                | Long-term rate of return on assets             |      |           | 9.00%      |   |           | 8.00%     
|NET PENSION EXPENSE INCLUDES THE FOLLOWING COMPONENTS:                                                          |                                                |      |           |            |   |           |           
|                                                                                                                | Service cost                                   |      | $         | 528,407    |   | $         | 434,987   
|                                                                                                                | Interest cost                                  |      |           | 545,710    |   |           | 544,400   
|                                                                                                                | Estimated return on assets                     |      |           | (558,384   | ) |           | (538,297  
|                                                                                                                | Net amortization and deferral                  |      |           | 148,670    |   |           | 166,460   
|                                                                                                                |                                                |      |           |            |   |           |           
|                                                                                                                | Net pension expense                            |      | $         | 664,403    |   | $         | 607,550   
|                                                                                                                |                                                |      |           |            |   |           |           
|ACCUMULATED BENEFIT OBLIGATION AT YEAR END                                                                      |                                                | $    | 7,739,006 |            | $ | 7,089,425 |           
|                                                                                                                |                                                |      |           |            |   |           |           
|ALLOCATION OF ASSETS                                                                                            |                                                |      |           |            |   |           |           
|                                                                                                                | Equity securities                              |      | $         | 3,715,646  |   | $         | 3,361,235 
|                                                                                                                | Fixed income-guaranteed fund                   |      |           | 4,015,072  |   |           | 4,038,511 
|                                                                                                                |                                                |      |           |            |   |           |           
|                                                                                                                |                                                | $    | 7,730,718 |            | $ | 7,399,746 |           
|                                                                                                                |                                                |      |           |            |   |           |           

The Plan's investment strategy is predicated on its investment objectives and the risk and return expectations of asset classes appropriate for the
Plan. Investment objectives have been established by considering the Plan's
liquidity needs and time horizon and the fiduciary standards under ERISA. The asset allocation strategy is developed to meet the Plan's long term needs in a manner designed to control volatility and
to reflect the Company's risk tolerance.

In
determining the long-term rate of return on pension plan assets assumption, the target asset allocation is first reviewed. An expected long-term rate of return
is assumed for each asset class, and an underlying inflation rate assumption is also made. The effects of asset diversification and periodic fund rebalancing are also considered.

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. In conjunction with the curtailment of the pension plan, the Company expanded the thrift plan to make it a Safe Harbor Plan. Once an employee has been

42

---



at
the Company for one year, the Company then contributes 3% of the employee's salary quarterly to the plan for the employee's benefit. The Company's contributions to this plan, included in employee
benefit expenses, were $92,485, $70,678, and $88,866 for 2004, 2003, and 2002, respectively.

16. 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.

17. INCOME TAXES

The components of income tax expense are as follows for the years ended December 31:

|         |  | 2004 |          | 2003 |   | 2002     |  
|-------- |  | ---- | -------- | ---- | - | -------- | -
|         | 
|CURRENT  |  |      |          |      |   |          |  
|Federal  |  | $    | 428,205  |      | $ | 577,840  |  
|State    |  |      | 91,038   |      |   | 14,468   |  
|         |  |      |          |      |   |          |  
|         |  |      | 519,243  |      |   | 592,308  |  
|DEFERRED |  |      | (198,755 | )    |   | (253,808 | )
|         |  |      |          |      |   |          |  
|         |  | $    | 320,488  |      | $ | 338,500  |  
|         |  |      |          |      |   |          |  

The components of the deferred tax benefits were as follows for the years ended December 31:

|                                |  | 2004 |          | 2003 |   | 2002     |  
|------------------------------- |  | ---- | -------- | ---- | - | -------- | -
|                                | 
|Provision for loan losses       |  | $    | 62,425   |      | $ | (26,244  | )
|Deferred loan origination costs |  |      | 6,794    |      |   | (39,382  | )
|Deferred compensation plan      |  |      | 3,128    |      |   | 4,099    |  
|Depreciation                    |  |      | 7,004    |      |   | (136,195 | )
|Discount accretion              |  |      | (2,140   | )    |   | (1,661   | )
|Retirement benefits             |  |      | (83,904  | )    |   | (54,425  | )
|Impairment loss provisions      |  |      | (192,062 | )    |   |         |  
|                                |  |      |          |      |   |          |  
|                                |  | $    | (198,755 | )    | $ | (253,808 | )
|                                |  |      |          |      |   |          |  

The components of the net deferred tax liability were as follows for the years ended December 31:

|                                                             |  | 2004 |           | 2003 |   | 2002      |  
|------------------------------------------------------------ |  | ---- | --------- | ---- | - | --------- | -
|                                                             | 
|DEFERRED TAX ASSETS                                          |  |      |           |      |   |           |  
|Allowance for loan losses                                    |  | $    | 1,110,802 |      | $ | 1,173,227 |  
|Deferred compensation plan                                   |  |      | 206,665   |      |   | 209,793   |  
|Prepaid retirement benefits                                  |  |      | 9,342     |      |   |          |  
|                                                             |  |      |           |      |   |           |  
|                                                             |  |      | 1,326,809 |      |   | 1,383,020 |  
|                                                             |  |      |           |      |   |           |  
|DEFERRED TAX LIABILITIES                                     |  |      |           |      |   |           |  
|Accrued retirement benefits                                  |  |      |          |      |   | 74,562    |  
|Deferred loan origination costs                              |  |      | 131,884   |      |   | 125,090   |  
|Unrealized gains on available for sale investment securities |  |      | 1,297,024 |      |   | 1,376,044 |  
|Depreciation                                                 |  |      | 92,812    |      |   | 85,808    |  
|Discount accretion                                           |  |      | 3,832     |      |   | 5,972     |  
|FHLB Stock dividends                                         |  |      | 2,019     |      |   | 2,019     |  
|                                                             |  |      |           |      |   |           |  
|                                                             |  |      | 1,527,571 |      |   | 1,669,495 |  
|                                                             |  |      |           |      |   |           |  
|NET DEFERRED TAX LIABILITY                                   |  | $    | (200,762  | )    | $ | (286,475  | )
|                                                             |  |      |           |      |   |           |  

43

---



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

|                                    |                                                       | 2004 |       | 2003 |      | 2002 |     
|----------------------------------- | ----------------------------------------------------- | ---- | ----- | ---- | ---- | ---- | ----
|                                    |                                                      
|Statutory federal income tax rate   |                                                       | 34.0 | %     | 34.0 | %    | 34.0 | %   
|Increase (Decrease) resulting from: |                                                       |      |       |      |      |      |     
|                                    | Tax-exempt income                                     |      | (10.2 | )    | (9.3 | )    | (4.8
|                                    | State income taxes, net of federal income tax benefit |      | 1.9   |      | 1.5  |      | 1.2 
|                                    | Nondeductible expense                                 |      | 0.8   |      | 0.6  |      | 0.3 
|                                    |                                                       |      |       |      |      |      |     
|                                    |                                                       | 26.5 | %     | 26.8 | %    | 30.7 | %   
|                                    |                                                       |      |       |      |      |      |     

18. 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 1 year to 20 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 $779,709,
$615,032, and $569,703 for 2004, 2003, and 2002, respectively.

Lease
obligations will require minimum rent payments as follows:

|Period          |  | Minimum rentals
|--------------- |  | ---------------
|               
|2005            |  | $              
|2006            |  |                
|2007            |  |                
|2008            |  |                
|2009            |  |                
|Remaining years |  |                
|                |  |                
|                |  | $              
|                |  |                

44

---



19. PARENT COMPANY FINANCIAL INFORMATION

The balance sheets as of December 31, 2004 and 2003 and statements of income and cash flows for Carrollton Bancorp (Parent Only) for 2004,
2003, and 2002, are presented below:

BALANCE SHEETS

|                                         |  | December 31,
|---------------------------------------- |  | ------------
|
|                                        
|ASSETS                                   |  |             
|Cash                                     |  | $           
|Interest-bearing deposits in subsidiary  |  |             
|Investment in subsidiary                 |  |             
|Investment securities available for sale |  |             
|Other assets                             |  |             
|                                         |  |             
|                                         |  | $           
|                                         |  |             
|LIABILITIES AND SHAREHOLDERS' EQUITY     |  |             
|Liabilities                              |  | $           
|                                         |  |             
|Shareholders' Equity                     |  |             
|Common Stock                             |  |             
|Surplus                                  |  |             
|Retained earnings                        |  |             
|Accumulated other comprehensive income   |  |             
|                                         |  |             
|                                         |  |             
|                                         |  |             
|                                         |  | $           
|                                         |  |             

STATEMENTS OF INCOME

|                                                                                |  | Years ended December 31,
|------------------------------------------------------------------------------- |  | ------------------------
|
|                                                                               
|INCOME                                                                          |  |                         
|Dividends from subsidiary                                                       |  | $                       
|Interest and dividends                                                          |  |                         
|Security gains                                                                  |  |                         
|                                                                                |  |                         
|                                                                                |  |                         
|EXPENSES                                                                        |  |                         
|                                                                                |  |                         
|Income before income taxes and equity in undistributed net income of subsidiary |  |                         
|Income tax expense (benefit)                                                    |  |                         
|                                                                                |  |                         
|                                                                                |  |                         
|Equity in undistributed net income of subsidiary                                |  |                         
|                                                                                |  |                         
|Net Income                                                                      |  | $                       
|                                                                                |  |                         

45

---



STATEMENTS OF CASH FLOWS

|                                                                                  |                                                     | Years ended December 31, |           
|--------------------------------------------------------------------------------- | --------------------------------------------------- | ------------------------ | ----------
|
|                                                                                  |                                                    
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |                                                     |                          |           
|Net income                                                                        |                                                     | $                        | 888,364   
|ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES: |                                                     |                          |           
|Equity in undistributed income of subsidiary                                      |                                                     |                          | (251,313  
|Security gains                                                                    |                                                     |                          |          
|Decrease (increase) in other assets                                               |                                                     |                          | 662       
|Increase (decrease) in other liabilities                                          |                                                     |                          | 920,110   
|                                                                                  |                                                     |                          |           
|                                                                                  | Net cash provided by operating activities           |                          |           
|                                                                                  |                                                     |                          |           
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |                                                     |                          |           
|Net (increase) decrease in interest-bearing deposits                              |                                                     |                          | (509,782  
|Purchase of securities available for sale                                         |                                                     |                          | (100,000  
|Proceeds from sales of securities available for sale                              |                                                     |                          |          
|                                                                                  |                                                     |                          |           
|                                                                                  | Net cash provided by (used in) investing activities |                          |           
|                                                                                  |                                                     |                          |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |                                                     |                          |           
|Dividends paid                                                                    |                                                     |                          | (1,076,433
|Common stock repurchase and retirement                                            |                                                     |                          | (32,655   
|Stock options exercised                                                           |                                                     |                          | 131,461   
|                                                                                  |                                                     |                          |           
|                                                                                  | Net cash used in financing activities               |                          |           
|                                                                                  |                                                     |                          |           
|Net (decrease) increase in cash                                                   |                                                     |                          | (29,586   
|Cash at beginning of year                                                         |                                                     |                          | 52,999    
|                                                                                  |                                                     |                          |           
|Cash at end of year                                                               |                                                     | $                        | 23,413    
|                                                                                  |                                                     |                          |           
|NONCASH ACTIVITIES:                                                               |                                                     |                          |           
|Income taxes paid, net of cash received from subsidiaries                         |                                                     | $                        | 53,475    
|                                                                                  |                                                     |                          |           

46

---



20. 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, 2004 |             | December 31, 2003
|---------------------------------------------- |  | ----------------- | ----------- | -----------------
|
|                                              
|FINANCIAL ASSETS                               |  |                   |             |                  
|Cash and cash equivalents                      |  | $                 | 34,192,544  |                  
|Investment securities (total)                  |  |                   | 42,488,492  |                  
|Federal Home Loan Bank stock                   |  |                   | 2,622,900   |                  
|Loans held for sale                            |  |                   | 10,219,729  |                  
|Loans, net                                     |  |                   | 216,241,218 |                  
|Accrued interest receivable                    |  |                   | 1,295,719   |                  
|FINANCIAL LIABILITIES                          |  |                   |             |                  
|Noninterest-bearing deposits                   |  | $                 | 53,739,771  |                  
|Interest-bearing deposits                      |  |                   | 172,106,374 |                  
|Federal funds purchased                        |  |                   | 687,883     |                  
|Securities sold under agreements to repurchase |  |                   | 9,496,068   |                  
|Notes payable-U.S. Treasury                    |  |                   | 1,984,714   |                  
|Advances from the Federal Home Loan Bank       |  |                   | 45,000,000  |                  
|Accrued interest payable                       |  |                   | 493,179     |                  

The fair values of U.S. Treasury and government agency securities, corporate bonds, mortgage-backed 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.

Generally,
the Company charges fees for commitments to extend credit. Interest rates on commitments to extend credit are normally committed for periods of less than one month. Fees
charged on standby letters of credit are deemed to be immaterial and these guarantees are expected to be settled at face amount or expire unused. It is impractical to assign any fair value to these
commitments.

21. 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.

The
Commercial/Retail Bank segment provides full service retail and business banking services, including lending and deposit services, investment activities and other customary services
associated with a bank.

The
Electronic Banking segment provides off-site ATM services, national point of sale transaction originations, home banking, and debit card transaction processing.

The
Brokerage segment provides full service brokerage services for stocks, bonds, mutual funds and annuities.

The
Mortgage Unit segment provides residential mortgage lending products and services.

47

---



Segment
information for the Company for 2004 is as follows:

|                                                                       |  | Commercial/
Retail Bank |             | Electronic
Banking |   | Brokerage  |   | Mortgage
Unit |          | Segment
Totals |   | Eliminations |   | Consolidated |            
|---------------------------------------------------------------------- |  | ----------------------- | ----------- | ------------------ | - | ---------- | - | ------------- | -------- | -------------- | - | ------------ | - | ------------ | -----------
|                                                                       | 
|Interest income                                                        |  | $                       | 12,967,518  |                    | $ |           |   | $             |         |                | $ | 1,871,921    |   | $            | 14,839,439 
|Interest expense                                                       |  |                         | (4,546,465  | )                  |   | (114,273   | ) |               |         |                |   |             |   |              | (4,660,738 
|                                                                       |  |                         |             |                    |   |            |   |               |          |                |   |              |   |              |            
|Net interest income                                                    |  |                         | 8,421,053   |                    |   | (114,273   | ) |               |         |                |   | 1,871,921    |   |              | 10,178,701 
|Noninterest income                                                     |  |                         | 996,456     |                    |   | 4,714,411  |   |               | 644,802  |                |   | 2,425,482    |   |              | 8,781,151  
|Intersegment income                                                    |  |                         | 665,091     |                    |   |           |   |               | 2,615    |                |   | (651,657     | ) |              | 16,049     
|Noninterest expenses                                                   |  |                         | (10,588,278 | )                  |   | (3,504,470 | ) |               | (482,356 | )              |   | (3,191,945   | ) |              | (17,767,049
|                                                                       |  |                         |             |                    |   |            |   |               |          |                |   |              |   |              |            
|Income before income taxes                                             |  |                         | (505,678    | )                  |   | 1,095,668  |   |               | 165,061  |                |   | 453,801      |   |              | 1,208,852  
|Income taxes                                                           |  |                         | 348,411     |                    |   | (423,147   | ) |               | (70,495  | )              |   | (175,257     | ) |              | (320,488   
|                                                                       |  |                         |             |                    |   |            |   |               |          |                |   |              |   |              |            
|Net income                                                             |  | $                       | (157,267    | )                  | $ | 672,521    |   | $             | 94,566   |                | $ | 278,544      |   | $            | 888,364    
|                                                                       |  |                         |             |                    |   |            |   |               |          |                |   |              |   |              |            
|Segment assets                                                         |  | $                       | 316,116,470 |                    | $ | 4,999,471  |   | $             | 168,524  |                | $ | 20,374,769   |   | $            | 341,659,234
|Expenditures for segment purchases of premises, equipment and software |  | $                       | 1,466,051   |                    | $ | 349,932    |   | $             | 37,297   |                | $ | 82,084       |   | $            | 1,935,364  

A reconciliation of total segment assets to consolidated total assets follows as of December 31, 2004:

|Total segment assets                         |  | $ | 341,659,234 |  
|-------------------------------------------- |  | - | ----------- | -
|Elimination of intersegment loans            |  |   | (21,988,401 | )
|Elimination of intersegment deposit accounts |  |   | (547,701    | )
|                                             |  |   |            
|                                             |  | $ | 319,123,132 |  
|                                             |  |   |            

Segment information for the Company for 2003 is as follows:

|                                                                       |  | Commercial/
Retail Bank |             | Electronic
Banking |   | Brokerage  |   | Mortgage
Unit |          | Segment
Totals |   | Eliminations |   | Consolidated |            
|---------------------------------------------------------------------- |  | ----------------------- | ----------- | ------------------ | - | ---------- | - | ------------- | -------- | -------------- | - | ------------ | - | ------------ | -----------
|                                                                       | 
|Interest income                                                        |  | $                       | 15,065,256  |                    | $ |           |   | $             | 3,962    |                | $ | 579,609      |   | $            | 15,648,827 
|Interest expense                                                       |  |                         | (5,901,928  | )                  |   | (177,442   | ) |               |         |                |   | (273,500     | ) |              | (6,352,870 
|                                                                       |  |                         |             |                    |   |            |   |               |          |                |   |              |   |              |            
|Net interest income                                                    |  |                         | 9,163,328   |                    |   | (177,442   | ) |               | 3,962    |                |   | 306,109      |   |              | 9,295,957  
|Provision for loan losses                                              |  |                         | (231,000    | )                  |   |           |   |               |         |                |   | (12,000      | ) |              | (243,000   
|Noninterest income                                                     |  |                         | 2,076,622   |                    |   | 4,734,112  |   |               | 793,572  |                |   | 664,306      |   |              | 8,268,612  
|Intersegment income                                                    |  |                         | 100,724     |                    |   |           |   |               |         |                |   |             |   |              | 100,724    
|Noninterest expenses                                                   |  |                         | (10,944,649 | )                  |   | (3,821,983 | ) |               | (509,665 | )              |   | (882,782     | ) |              | (16,159,079
|                                                                       |  |                         |             |                    |   |            |   |               |          |                |   |              |   |              |            
|Income before income taxes                                             |  |                         | 165,025     |                    |   | 734,687    |   |               | 287,869  |                |   | 75,633       |   |              | 1,263,214  
|Income taxes                                                           |  |                         | 85,622      |                    |   | (283,736   | ) |               | (111,175 | )              |   | (29,211      | ) |              | (338,500   
|                                                                       |  |                         |             |                    |   |            |   |               |          |                |   |              |   |              |            
|Net income                                                             |  | $                       | 250,647     |                    | $ | 450,951    |   | $             | 176,694  |                | $ | 46,422       |   | $            | 924,714    
|                                                                       |  |                         |             |                    |   |            |   |               |          |                |   |              |   |              |            
|Segment assets                                                         |  | $                       | 296,158,289 |                    | $ | 6,571,225  |   | $             | 340,094  |                | $ | 5,383,870    |   | $            | 308,453,478
|Expenditures for segment purchases of premises, equipment and software |  | $                       | 787,225     |                    | $ | 74,423     |   | $             |         |                | $ | 61,992       |   | $            | 923,640    

A reconciliation of total segment assets to consolidated total assets follows as of December 31, 2003:

|Total segment assets                         |  | $ | 308,453,478 |  
|-------------------------------------------- |  | - | ----------- | -
|Elimination of intersegment loans            |  |   | (4,518,191  | )
|Elimination of intersegment deposit accounts |  |   | (1,525,312  | )
|                                             |  |   |            
|                                             |  | $ | 302,409,975 |  
|                                             |  |   |            

48

---



Segment information for the Company for 2002 is as follows:

|                                                                       |  | Commercial/
Retail Bank |             | Electronic
Banking |   | Brokerage  |   | Mortgage
Unit |          | Segment
Totals |   | Eliminations |   | Consolidated |            
|---------------------------------------------------------------------- |  | ----------------------- | ----------- | ------------------ | - | ---------- | - | ------------- | -------- | -------------- | - | ------------ | - | ------------ | -----------
|                                                                       | 
|Interest income                                                        |  | $                       | 16,880,426  |                    | $ |           |   | $             | 3,826    |                | $ | 1,285,642    |   | $            | 18,169,894 
|Interest expense                                                       |  |                         | (6,797,663  | )                  |   | (278,423   | ) |               |         |                |   | (800,764     | ) |              | (7,876,850 
|                                                                       |  |                         |             |                    |   |            |   |               |          |                |   |              |   |              |            
|Net interest income                                                    |  |                         | 10,082,763  |                    |   | (278,423   | ) |               | 3,826    |                |   | 484,878      |   |              | 10,293,044 
|Provision for loan losses                                              |  |                         | (502,000    | )                  |   |           |   |               |         |                |   | (24,000      | ) |              | (526,000   
|Noninterest income                                                     |  |                         | 2,640,874   |                    |   | 4,222,976  |   |               | 670,952  |                |   |             |   |              | 7,534,802  
|Intersegment income                                                    |  |                         | 65,119      |                    |   |           |   |               |         |                |   |             |   |              | 65,119     
|Noninterest expenses                                                   |  |                         | (10,372,136 | )                  |   | (3,621,027 | ) |               | (535,204 | )              |   | (73,710      | ) |              | (14,602,077
|                                                                       |  |                         |             |                    |   |            |   |               |          |                |   |              |   |              |            
|Income before income taxes                                             |  |                         | 1,914,620   |                    |   | 323,526    |   |               | 139,574  |                |   | 387,168      |   |              | 2,764,888  
|Income taxes                                                           |  |                         | (519,487    | )                  |   | (124,946   | ) |               | (53,673  | )              |   | (149,524     | ) |              | (847,630   
|                                                                       |  |                         |             |                    |   |            |   |               |          |                |   |              |   |              |            
|Net income                                                             |  | $                       | 1,395,133   |                    | $ | 198,580    |   | $             | 85,901   |                | $ | 237,644      |   | $            | 1,917,258  
|                                                                       |  |                         |             |                    |   |            |   |               |          |                |   |              |   |              |            
|Segment assets                                                         |  | $                       | 311,072,820 |                    | $ | 12,714,617 |   | $             | 237,172  |                | $ | 12,279,240   |   | $            | 336,303,849
|Expenditures for segment purchases of premises, equipment and software |  | $                       | 305,036     |                    | $ | 62,124     |   | $             |         |                | $ |             |   | $            | 367,160    

A reconciliation of total segment assets to consolidated total assets follows as of December 31, 2002:

|Total segment assets                         |  | $ | 336,303,849 |  
|-------------------------------------------- |  | - | ----------- | -
|Elimination of intersegment loans            |  |   | (11,072,112 | )
|Elimination of intersegment deposit accounts |  |   | (1,010,122  | )
|                                             |  |   |            
|                                             |  | $ | 324,221,615 |  
|                                             |  |   |            

22. CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

|                             |  | Year Ended December 31, 2004 |           
|---------------------------- |  | ---------------------------- | ----------
|
|                             | 
|Interest income              |  | $                            | 3,790,140 
|Interest expense             |  |                              | (1,276,800
|                             |  |                              |           
|Net interest income          |  |                              | 2,513,340 
|Security gains               |  |                              | 115,810   
|Other income                 |  |                              | 1,954,704 
|Operating expenses           |  |                              | (4,171,692
|                             |  |                              |           
|Income before taxes          |  |                              | 412,162   
|Income taxes                 |  |                              | (105,190  
|                             |  |                              |           
|Net income                   |  | $                            | 306,972   
|                             |  |                              |           
|Net income per share  basic |  | $                            | 0.11      
|                             |  |                              |           
|Cash dividends per share     |  | $                            | 0.09      
|                             |  |                              |           
|Market prices: high          |  | $                            | 18.21     
|                             |  |                              |           
|low                          |  | $                            | 17.80     
|                             |  |                              |           

49

---



|                             |  | Year Ended December 31, 2003 |           
|---------------------------- |  | ---------------------------- | ----------
|
|                             | 
|Interest income              |  | $                            | 4,241,869 
|Interest expense             |  |                              | (1,943,872
|                             |  |                              |           
|Net interest income          |  |                              | 2,297,997 
|Provision for loan losses    |  |                              | (121,500  
|Security gains               |  |                              | 154,118   
|Other income                 |  |                              | 1,759,179 
|Operating expenses           |  |                              | (3,532,988
|                             |  |                              |           
|Income before taxes          |  |                              | 556,806   
|Income taxes                 |  |                              | (207,561  
|                             |  |                              |           
|Net income                   |  | $                            | 349,245   
|                             |  |                              |           
|Net income per share  basic |  | $                            | 0.12      
|                             |  |                              |           
|Cash dividends per share     |  | $                            | 0.09      
|                             |  |                              |           
|Market prices: high          |  | $                            | 15.55     
|                             |  |                              |           
|low                          |  | $                            | 12.82     
|                             |  |                              |           

|                             |  | Year Ended December 31, 2002 |           
|---------------------------- |  | ---------------------------- | ----------
|
|                             | 
|Interest income              |  | $                            | 4,913,172 
|Interest expense             |  |                              | (2,345,141
|                             |  |                              |           
|Net interest income          |  |                              | 2,568,031 
|Provision for loan losses    |  |                              | (131,500  
|Gain on branch divestiture   |  |                              |          
|Security gains               |  |                              | 103,005   
|Other income                 |  |                              | 1,524,190 
|Operating expenses           |  |                              | (3,605,742
|                             |  |                              |           
|Income before taxes          |  |                              | 457,984   
|Income taxes                 |  |                              | (132,462  
|                             |  |                              |           
|Net income                   |  | $                            | 325,522   
|                             |  |                              |           
|Net income per share  basic |  | $                            | 0.11      
|                             |  |                              |           
|Cash dividends per share     |  | $                            | 0.085     
|                             |  |                              |           
|Market prices: high          |  | $                            | 12.02     
|                             |  |                              |           
|low                          |  | $                            | 11.20     
|                             |  |                              |           

50

---





ITEM 9: 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.

ITEM 9A: CONTROLS AND PROCEDURES

Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our principal executive
officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and
principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. The
design of any system of controls is based in part upon certain assumption about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions, regardless of how remote.

In
addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or other factors that could significantly affect those controls
subsequent to the date of their last evaluation.

ITEM 9B: OTHER INFORMATION

Not applicable.

PART III

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ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

There is hereby incorporated by reference into this Item 10 the information appearing under the captions "Election of Directors," "Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement relating to its Annual Meeting of Shareholders to be held on April 19, 2005.

ITEM 11: EXECUTIVE COMPENSATION

There is hereby incorporated by reference into this Item 11 the information appearing under the captions "Executive Compensation," "Long-Term Incentive
Plan," and "Retirement Plans" in the Company's definitive Proxy Statement relating to its Annual Meeting of Shareholders to be held on April 19, 2005.

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

There is hereby incorporated by reference into this Item 12 the information appearing under the caption "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive Proxy Statement relating to its Annual Meeting of Shareholders to be held on April 19, 2005.

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

There is hereby incorporated by reference into this Item 13 the information appearing under the caption "Certain Relationships and Related Transactions" in the
Company's definitive Proxy Statement relating to its Annual meeting of Shareholders to be held on April 19, 2005.

ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES

There is hereby incorporated by reference into this Item 14 the information appearing under the caption "Audit Fees and Services" in the Company's definitive Proxy
Statement relating to its Annual meeting of Shareholders to be held on April 19, 2005.

51

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PART IV

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ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



|Exhibit
Number |  | Description                                                                                                         
|-------------- |  | --------------------------------------------------------------------------------------------------------------------
|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 May 20, 1971 by and between Home Mutual Life Insurance Company and The Carrollton Bank of Baltimore.*   
|10.6           |  | Lease dated April 17, 1974 by and between Liberty Plaza Enterprises, Inc. and The Carrollton Bank of Baltimore.*    
|10.7           |  | Lease dated July 19, 1988 by and between Northway Limited Partnership and The Carrollton Bank of Baltimore.*        
|10.8           |  | Lease dated August 11, 1994 by and between Kensington Associates Limited Partnership and Carrollton Bank.**         
|10.9           |  | Lease dated October 11, 1994 by and between Ridgeview Associates Limited Partnership and Carrollton Bank.**         
|10.10          |  | Employment agreement with Robert A. Altieri***                                                                      
|10.11          |  | Employment agreement with Gary M. Jewell***                                                                         
|21.1           |  | Subsidiaries of Carrollton Bancorp                                                                                  
|23.0           |  | Consent of Accountant                                                                                               
|31.1           |  | Certification of Robert A. Altieri, President and Chief Executive Officer                                           
|31.2           |  | Certification of Barbara M. Broczkowski, Senior Vice President and Chief Financial Officer                          
|32.1           |  | Certification of Robert A. Altieri, President and Chief Executive Officer                                           
|32.2           |  | Certification of Barbara M. Broczkowski, Senior Vice President and Chief Financial Officer                          

Notice
of press release related to earnings for the quarter ended March 31, 2004 filed on April 16, 2004.

Notice
of press release related to earnings for the quarter ended June 30, 2004 filed on July 23, 2004.

Notice
of change of Chief Financial Officer filed on August 13, 2004.

Notice
of press release related to earnings for the quarter ended September 30, 2004 and to the restatement of prior quarter earnings filed on November 4, 2004.

Notice
of press release related to dividend declaration filed on November 16, 2004.

52

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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 18, 2005 |  | By: /s/ Robert A. AltieriRobert A. Altieri
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 18, 2005 |  | By: /s/ Robert A. AltieriRobert A. Altieri
President and Chief Executive Officer
|-------------- |  | --------------------------------------------------------------------------------

PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER

|March 18, 2005 |  | By: /s/ Barbara M. BroczkowskiBarbara M. Broczkowski
Senior Vice President and Chief Financial Officer
|-------------- |  | ------------------------------------------------------------------------------------------------------
|               |  | Board of Directors                                                                                    
|March 18, 2005 |  | /s/ Robert J. AumillerRobert J. Aumiller
Director                                                     
|March 18, 2005 |  | /s/ Steven K. BreedenSteven K. Breeden
Director                                                       
|March 18, 2005 |  | /s/ Albert R. CounselmanAlbert R. Counselman
Director                                                 
|March 18, 2005 |  | /s/ Harold I. HackermanHarold I. Hackerman
Director                                                   
|March 18, 2005 |  | /s/ John P. HauswaldJohn P. Hauswald
Director                                                         
|               |  |                                                                                                       

53

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|March 18, 2005 |  | /s/ David P. HesslerDavid P. Hessler
Director            
|-------------- |  | ---------------------------------------------------------
|March 18, 2005 |  | /s/ Howard S. KleinHoward S. Klein
Director              
|March 18, 2005 |  | /s/ Ben F. MasonBen F. Mason
Director                    
|March 18, 2005 |  | /s/ Charles E. Moore, Jr.Charles E. Moore, Jr.
Director  
|March 18, 2005 |  | /s/ John Paul RogersJohn Paul Rogers
Director            
|March 18, 2005 |  | /s/ William C. Rogers, Jr.William C. Rogers, Jr.
Director

54

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EXHIBIT INDEX

|Exhibit
Number |  | Description                                                                                                         |  | Sequentially
Numbered Page
|-------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | --------------------------
|              
|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 May 20, 1971 by and between Home Mutual Life Insurance Company and The Carrollton Bank of Baltimore.    |  | *                         
|10.6           |  | Lease dated April 17, 1974 by and between Liberty Plaza Enterprises, Inc. and The Carrollton Bank of Baltimore.     |  | *                         
|10.7           |  | Lease dated July 19, 1988 by and between Northway Limited Partnership and The Carrollton Bank of Baltimore.         |  | *                         
|10.8           |  | Lease dated August 11, 1994 by and between Kensington Associates Limited Partnership and Carrollton Bank.           |  | **                        
|10.9           |  | Lease dated October 11, 1994 by and between Ridgeview Associates Limited Partnership and Carrollton Bank.           |  | **                        
|10.10          |  | Employment agreement with Robert A. Altieri                                                                         |  | ***                       
|10.11          |  | Employment agreement with Gary M. Jewell                                                                            |  | ***                       
|21.1           |  | Subsidiaries of Carrollton Bancorp                                                                                  |  |                           
|23.0           |  | Consent of Accountant                                                                                               |  |                           
|31.1           |  | Certification of Robert A. Altieri, President and Chief Executive Officer                                           |  |                           
|31.2           |  | Certification of Barbara M. Broczkowski, Senior Vice President and Chief Financial Officer                          |  |                           
|32.1           |  | Certification of Robert A. Altieri, President and Chief Executive Officer                                           |  |                           
|32.2           |  | Certification of Barbara M. Broczkowski, Senior Vice President and Chief Financial Officer                          |  |                           

55

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