U.S. SECURITIES AND EXCHANGE COMMISSION

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WASHINGTON, D.C. 20549

FORM 10-K

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Annual Report pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934 (Fee required)

For
the fiscal year ended December 31, 2005

Commission
file number: 0-23090

Carrollton
Bancorp

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(Exact
Name of Registrant as Specified in its Charter)

|Maryland(State or Other Jurisdiction of Incorporation or Organization)   |  | 52-1660951(I.R.S. Employer Identification No.)
|------------------------------------------------------------------------ |  | ----------------------------------------------
|344 N. Charles St.
Baltimore, MD(Address of principal executive offices) |  | 21201(Zip Code)                               
|(410) 536-4600(Registrant's telephone number,
including area code)       |  |                                               

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

None

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

Common
Stock,
par value $1.00 per share

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(Title
of class)

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large
accelerated filer o        Accelerated
filer o        Non-accelerated filer ý

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

The aggregate market value of the Common Stock, all of which has voting rights, held by non-affiliates of the registrant on December 31, 2005
was $42,145,470. This calculation is based upon the last price known to the registrant at which its Common Stock was sold as of the last business day of the registrant's most recently completed fourth
fiscal quarter. As of December 31, 2005, the last known sale price was $15.00 per share.

On
March 1, 2006, 2,813,268 shares of the registrant's common stock were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The Company's Proxy Statement for Annual Meeting of Shareholders to be held on April 18, 2006, is incorporated by reference in this Form 10-K in Part III, Item 10,
Item 11, Item 12, Item 13, and Item 14.

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TABLE OF CONTENTS

|PART I     |  |                                                                                                               |  | 
|---------- |  | ------------------------------------------------------------------------------------------------------------- |  | 
|Item 1    |  | Business                                                                                                      |  | 
|Item 1A   |  | Risk Factors                                                                                                  |  | 
|Item 2    |  | Properties                                                                                                    |  | 
|Item 3    |  | Legal Proceedings                                                                                             |  | 
|Item 4    |  | Submission of Matters to a Vote of Security Holders                                                           |  | 
|PART II    |  |                                                                                                               |  | 
|Item 5    |  | Market for Registrant's Common Equity, Related Shareholders Matters and
Issuer Purchases of Equity Securities |  | 
|Item 6    |  | Selected Financial Data                                                                                       |  | 
|Item 7    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                         |  | 
|Item 7A   |  | Quantitative and Qualitative Disclosures About Market Risk                                                    |  | 
|Item 8    |  | Financial Statements and Supplementary Data                                                                   |  | 
|Item 9    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                          |  | 
|Item 9A   |  | Controls and Procedures                                                                                       |  | 
|Item 9B   |  | Other Information                                                                                             |  | 
|PART III   |  |                                                                                                               |  | 
|Item 10   |  | Directors and Executive Officers of the Registrant                                                            |  | 
|Item 11   |  | Executive Compensation                                                                                        |  | 
|Item 12   |  | Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters                |  | 
|Item 13   |  | Certain Relationships and Related Transactions                                                                |  | 
|Item 14   |  | Principal Accounting Fees and Services                                                                        |  | 
|PART IV    |  |                                                                                                               |  | 
|Item 15   |  | Exhibits and Financial Statement Schedules                                                                    |  | 
|Signatures |  |                                                                                                               |  | 

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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," "plans", "believes," "estimates" and similar expressions also identify forward-looking statements. The forward-looking statements are based on Carrollton Bancorp's current intent, belief
and
expectations. Forward-looking statements in this Annual Report on Form 10-K include, but are not limited to:

Part I.
Item 3. Legal Proceedings:



Part II.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations:



Part III.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk:



Part IV.
Item 8. Note 3. Investments:



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 the date of this Report. Carrollton Bancorp 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.

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PART I

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ITEM 1: 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, 2005, had a total of eleven 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 operated a network of ATMs in Maryland, Virginia, and West Virginia and sponsors national retailers who accept ATM cards for purchases in various electronic
networks. On September 22, 2005,
Wal-Mart notified the Bank of its intention to terminate the agreement for the Bank to provide ATM's at Wal-Mart, Sam's Club, and Wal-Mart Supercenters in Maryland,
Virginia, and West Virginia. The effective date of the termination was January 22, 2006.

The
Bank is an independent, community bank that seeks to provide personal attention and professional financial services to its customers while offering virtually all of the banking
services of larger competitors. Our customers are primarily individuals and small and medium-sized businesses. The Bank's business philosophy includes offering informed and courteous service, local
and timely decision-making, flexible and reasonable operating procedures and consistently applied credit policies.

The
executive offices of the Company and the principal office of the Bank are located at 344 North Charles Street, Baltimore, Maryland 21201, telephone number
(410) 536-4600. The Company files quarterly and annual reports with the Securities and Exchange Commission ("SEC") on forms 10-Q and 10-K, respectively,
proxy materials on Schedule 14A and current reports on Form 8-K. The Company makes available, free of charge, all of these reports, as well as any amendments, through the
Company's Internet site as soon as is reasonably practicable after they are filed electronically with the SEC. The address of that site is http://www.carrolltonbank.com. To access the SEC reports, click
on"Insider TransactionsSEC Filings""SEC
Filings". The SEC also maintains an internet site that contains reports, proxy materials and information statements at http://sec.gov. In addition, the Company will provide paper
copies of filings free of charge upon written request.

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:



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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 mortgage loans, 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 commercial mortgage loans, time and demand loans, lines and letters of credit, and acquisition, development and construction 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.

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 ratio 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 no losses on residential mortgage loans and recoveries of $14,874 in 2005. The Bank experienced losses of $746 and recoveries of $8,087 in 2004. The Bank experienced losses of $8,709
and recoveries of $0 in 2003. There were no residential mortgage loans delinquent more than 90 days at December 31, 2005. 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. 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 $0 and recoveries of $7,700 during 2005. The Bank experienced losses on home equity loans during 2004 of
$7,000 and recoveries of $0. The Bank experienced losses on home equity loans during 2003 of $8,189 and recoveries of $0. There were $242,000 of home equity loans delinquent more than 90 days
at December 31, 2005. 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 115% coverage of the business debt service, and for 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 no losses on commercial mortgage loans during 2005, 2004,
and 2003, respectively. There were $1.1 million of commercial mortgage loans past due more than 90 days at December 31, 2005. 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 80% 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

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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 2005, 2004, or 2003. There were no construction and land development loans past due more than 90 days at
December 31, 2005. There are no discernible delinquency or loss trends relating to construction and land development loans known to management.

Demand
and time 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. 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. If guaranteed by the principal, the net worth and assets of the principal may be dissipated by demands of the business, or due to other factors. The Bank had losses of
$123,578 and recoveries of $130,904 on time demand and loans in 2005. The Bank had losses of $192,440 and recoveries of $67,111 on demand and time loans in 2004. The Bank had losses of $200,173 and
recoveries of $58,034 on demand and time loans in 2003. There were no demand and time and line of credit loans delinquent more than 90 days at December 31, 2005. There are no discernible
delinquency or loss trends relating to demand and time 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. 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
debt-to-income ratio requirement helps determine the borrower's current ability to repay the loan. The Bank had charge-offs of home improvement loans of $0,
$10,020, and $3,170, in 2005, 2004 and 2003, respectively. There were recoveries of $0, $14,898, and $21,922, in 2005, 2004, and 2003, respectively. There were no home improvement loans delinquent
more than 90 days at December 31, 2005. 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 up to 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 up to 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 2005, 2004, or 2003, and recoveries of
$0, $0, and $369,
in 2005, 2004 and 2003, respectively. There were no automobile or other vehicle loans past due more than 90 days at December 31, 2005. 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 2005, 2004, and 2003 were $1,927, $43,470, and $34,000, respectively. There were $25,000
of overdraft loans and other personal loans past due more than 90 days at December 31, 2005. 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 2005, 2004, or 2003. Recoveries on loans secured by stocks and bonds were $0,
$411, and $0 in 2005, 2004, and 2003, respectively. There were no loans secured by savings accounts or stock and bond certificates past due more than

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90 days
at December 31, 2005. 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 did 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 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 2006 to 2031, 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 customers to deposit more than would normally be covered by
FDIC insurance. CDARS is a nationwide program 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 2005, commission income totaled $668,000 and net income was $158,000.

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.

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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.

Employees. As of December 31, 2005, the Bank and its subsidiaries had 157 full
time equivalent employees, 31 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 believes that it has a favorable relationship with its employees.

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.

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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, 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 a de 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

9

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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 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

10

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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.

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.

THE PATRIOT ACT

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "PATRIOT Act") requires
financial institutions to develop a customer identification plan that includes procedures to:



Under the provisions of the PATRIOT Act, the Bank is also required from time to time to search its customer data base for the names of known or suspected
terrorists as provided by the government.

Due to the extensive regulation of the commercial banking business in the United States, the Company is particularly susceptible to changes in
federal and state legislation and regulations.

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 1A: RISK FACTORS

The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties that we are unaware of, or that we currently
deem immaterial, also may become important factors that affect us and our business. If any of these risks were to occur, our business, financial condition or results of operations could be materially
and adversely affected.

We
face significant competition for banking services in our primary market in which we operate. Competition in the local banking industries may limit our ability to attract and retain
customers. We may face competition now and in the

11

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future
from the following: other local and regional banking institutions, including larger commercial banking organizations; savings banks; credit unions; other financial institutions; and
non-bank financial services companies serving the area.

In
particular, our competitors may possess greater resources that may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive
promotional and advertising campaigns. Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have
larger lending limits, which enable them to serve the credit needs of larger customers. We also face competition from out-of-state financial intermediaries that have opened
low-end production offices or that solicit deposits in their respective market areas. If we are unable to attract and retain banking customers we may be unable to continue our loan growth
and level of deposits and our results of operations and financial condition may otherwise be negatively affected.

In
the past, we have expanded our operations into non-banking activities such as insurance-related products and brokerage services. We may have difficulty competing with more
established providers of these products and services due to the intense competition in many of these industries. In addition, we may be unable to attract and retain non-banking customers
due to a lack of market and product knowledge or other industry specific matters or an inability to attract and retain qualified, experienced employees. Our failure to attract and retain customers
with respect to these non-banking activities could negatively impact our future earnings.

Our
main source of income from operations is net interest income, which is equal to the difference between the interest income received on loans, investment securities and other
interest-earning assets and the interest expense incurred in connection with deposits, borrowings and other interest-bearing liabilities. As a result, our net interest income can be affected by
changes in market interest rates. These rates are highly sensitive to many
factors beyond our control, including general economic conditions, both domestic and foreign, and the monetary and fiscal policies of various governmental and regulatory authorities. We have adopted
asset and liability management policies to try to minimize the potential adverse effects of changes in interest rates on our net interest income, primarily by altering the mix and maturity of loans,
investments and funding sources. However, even with these policies in place, we cannot provide assurance that changes in interest rates will not negatively impact our operating results.

An
increase in interest rates also could have a negative impact on our business by reducing the ability of borrowers to repay their current loan obligations, which could not only result
in increased loan defaults, foreclosures and write-offs, but also necessitate further increases to our allowance for loan losses. Increases in interest rates also may reduce the demand for
loans and, as a result, the amount of loan and commitment fees. In addition, fluctuations in interest rates may result in disintermediation, which is the flow of funds away from depository
institutions into direct investments that pay higher rates of return, and may affect the value of our investment securities and other interest-earning assets.

If
our customers default on the repayment of their loans, our profitability could be adversely affected. A borrower's default on its obligations under one or more of our loans may result
in lost principal and interest income and increased operating expenses as a result of the allocation of management time and resources to the collection and work-out of the loans. If
collection efforts are unsuccessful or acceptable workout arrangements cannot be reached, we may have to write-off the loans in whole or in part. Although we may acquire any real estate or
other assets that secure the defaulted loans through foreclosure or other similar remedies, the amount owed under the defaulted loans may exceed the value of the assets acquired.

Our
management periodically makes a determination of our allowance for loan losses based on available information, including the quality of our loan portfolio, economic conditions, and
the value of the underlying collateral and the level of our non-accruing loans. If our assumptions prove to be incorrect, our allowance may not be sufficient. Increases in this allowance
will result in an expense for the period. If, as a result of general economic conditions or an increase in nonperforming loans, management determines that an increase in our allowance for loan losses
is necessary, we may incur additional expenses.

In
addition, as an integral part of their examination process, bank regulatory agencies periodically review our allowance for loan losses and the value we attribute to real estate
acquired through foreclosure or other similar remedies. These regulatory agencies may require us to adjust our determination of the value for these items. These adjustments could negatively impact our
results of operations or financial condition.

Because
we serve primarily individuals and smaller businesses, the ability of our customers to repay their loans is impacted by the economic conditions in these areas. As of
December 31, 2005, approximately 78% of our loan portfolio consisted of commercial loans, defined as commercial and industrial, municipal, multi-family, commercial real estate and construction
loans. Thus, our results of operations, both in terms of the origination of new loans and the potential default of existing loans, is heavily dependent upon the strength of local businesses.

We
have traditionally obtained funds principally through deposits and borrowings. As a general matter, deposits are a cheaper source of funds than borrowings, because interest rates paid
for deposits are typically less than interest rates charged for borrowings. If, as a result of competitive pressures, market interest rates, general economic conditions or other events, the balance of
our deposits decrease relative to our overall banking operations, we may

12

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have
to rely more heavily on borrowings as a source of funds in the future. Such an increased reliance on borrowings could have a negative impact on our results of operations or financial condition.

In
the course of our business, we may acquire, through foreclosure, properties securing loans that are in default. Particularly in commercial real estate lending, there is a risk that
hazardous substances could be discovered on these properties. In this event, we might be required to remove these substances from the affected properties at our sole cost and expense. The cost of this
removal could substantially exceed the value of the affected properties. We may not have adequate remedies against the prior owners or other responsible parties and could find it difficult or
impossible to sell the affected properties. The occurrence of one or more of these events could adversely affect our financial condition or operating results.

We
originate and sell mortgage loans. Changes in interest rates affect demand for our loan products and the revenue realized on the sale of loans. A decrease in the volume of loans sold
and lower gains on sales of mortgages can decrease our revenues and net income.

Bank
holding companies and state and federally chartered banks operate in a highly regulated environment and are subject to supervision and examination by federal and state regulatory
agencies. We are subject to the Bank Holding Company Act of 1956, as amended, and to regulation and supervision by the Federal Deposit Insurance Corporation, or FDIC, and the Office of the Maryland
Commissioner of Financial Regulation.. The cost of compliance with regulatory requirements may adversely affect our results of operations or financial condition. Federal and state laws and regulations
govern numerous matters including: changes in the ownership or control of banks and bank holding companies; maintenance of adequate capital and the financial condition of a financial institution;
permissible types, amounts and terms of extensions of credit and investments; permissible non-banking activities; the level of reserves against deposits; and restrictions on dividend
payments.

The
FDIC, and state banking authorities possess cease and desist powers to prevent or remedy unsafe or unsound practices or violations of law by banks subject to their regulation, and
the Federal Reserve Board possesses similar powers with respect to bank holding companies. These and other restrictions limit the manner in which we may conduct our business and obtain financing.

Furthermore,
our banking business is affected not only by general economic conditions, but also by the monetary policies of the FRB. Changes in monetary or legislative policies may
affect the interest rates we must offer to attract deposits and the interest rates we can charge on our loans, as well as the manner in which we offer deposits and make loans. These monetary policies
have had, and are expected to continue to have, significant effects on the operating results of depository institutions, including our Bank.

We
rely heavily on communications and information systems to conduct our business. Any failure or interruptions or breach in security of these systems could result in failures or
disruptions in our customer relationship management, general ledger, deposits, servicing or loan origination systems. The occurrence of any failures or interruptions could result in a loss of customer
business and have a material adverse effect on our results of operations and financial condition.

Under
regulatory capital adequacy guidelines and other regulatory requirements, we must meet guidelines that include quantitative measures of assets, liabilities, and certain
off-balance sheet items, subject to qualitative judgments by regulators about components, risk weightings and other factors. If we fail to meet these minimum capital guidelines and other
regulatory requirements, our financial condition would be materially and adversely affected. Our failure to maintain the status of "well capitalized" under our regulatory framework could affect the
confidence of our customers in us, thus compromising our competitive position. In addition, failure to maintain the status of "well capitalized" under our regulatory framework or "well managed" under
regulatory examination procedures could compromise our status as a bank holding company and related eligibility for a streamlined review process for acquisition proposals.

13

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ITEM 2: PROPERTIES

The Company owned the following properties, which had a book value of $3.9 million at December 31, 2005:

|Location                                                          |  | Description                                                                                                                                                             
|----------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                 
|1740 East Joppa Road
Towson, MD 21234                             |  | Full service branch with drive thru, Electronic Banking offices and leased office space                                                                                 
|427 Crain Highway
Glen Burnie, MD 21061                           |  | Full service branch with drive-thru                                                                                                                                     
|531 South Conkling Street.
Baltimore, MD 21224                    |  | Full service branch with drive-thru                                                                                                                                     
|344 N. Charles Street
Baltimore, MD 21201                         |  | Full service branch with Executive offices, Lending offices and Finance offices                                                                                         
|Northway Shopping Center
684 Old Mill Road
Millersville, MD 21108 |  | Full service branch with drive-thru; subject to a ground lease that expires August 31, 2014, assuming the Company exercises all extension options                       
|602 Hoagie Drive
Bel Air, MD 21014                                |  | Full service branch with drive-thru and Lending offices; subject to a ground lease expiring November 30, 2044 assuming that the Company exercises all extension options.

The Company leased the following facilities at an aggregate annual rental of $947,957 as of December 31, 2005:

|Location                                                              |  | Description                                                                    |  | Lease Expiration Date*
|--------------------------------------------------------------------- |  | ------------------------------------------------------------------------------ |  | ----------------------
|                                                                     
|1066-70 Maiden Choice Lane
Arbutus, MD 21229                          |  | Full service branch                                                            |  | April 30, 2006 (1)    
|4738 Shelbourne Road
Baltimore, MD 21229                              |  | Detached drive-thru                                                            |  | April 30, 2006 (1)    
|Suites 101-103 & 120-122
1589 Sulphur Spring Road
Baltimore, MD 21227 |  | Administrative and operational offices                                         |  | February 28, 2019     
|2637-A Old Annapolis Road
Hanover, MD 21076                           |  | Full service branch                                                            |  | October 1, 2014       
|Wilkens Beltway Plaza
4658 Wilkens Avenue
Baltimore, MD 21229         |  | Limited-service branch                                                         |  | October 21, 2024      
|555 Fairmount Avenue
Baltimore, MD 21286                              |  | Full service branch to be closed at the termination of the lease in April 2006 |  | April 20, 2006        
|8157A Honeygo Boulevard
White Marsh, MD 21236                         |  | Full service branch                                                            |  | December 31, 2017     
|2300 York Road
Timonium, MD 21093                                     |  | Mortgage subsidiary offices                                                    |  | January 14, 2010      
|208 Hickory Avenue
Bel Air, MD 21014                                  |  | Mortgage subsidiary offices                                                    |  | March 31, 2010        
|8905 Harford Road
Baltimore, MD 21234                                 |  | Mortgage subsidiary offices                                                    |  | June 30, 2006         
|1 Center Square, Suite 201
Hanover, PA 17331                          |  | Mortgage subsidiary offices                                                    |  | June 29, 2007         

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

There were no matters submitted to a vote of the stockholders during the quarter ended December 31, 2005.

14

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PART II

---

ITEM 5: MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

TRADING AND DIVIDENDS

As
of December 31, 2005, there were 421 shareholders of record of the Company. The Company's Common Stock has traded on the National Association of Security Dealers' Automated
Quotation System ("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.

As
a depository institution whose deposits are insured by the FDIC, the Bank may not pay dividends or distribute any of its capital assets while it remains in default on any assessment
due to the FDIC. The Bank
currently is not in default under any of its obligations to the FDIC. As a commercial bank under the Maryland Financial Institution Law, the Bank may declare cash dividends from undivided profits or,
with the prior approval of the Commissioner of Financial Regulation, out of surplus in excess of 100% of its required capital stock, and after providing for due or accrued expenses, losses, interest
and taxes.

The
Company and the Bank, in declaring and paying dividends, are also limited insofar as minimum capital requirements of regulatory authorities must be maintained. The Company and the
Bank currently comply with such capital requirements.

Dividends
declared per share on the Company's common stock were $0.40 in 2005, $0.38 in 2004, and $0.36 in 2003, representing a payout ratio of 45.97% in 2005, 121.17% in 2004, and
109.96% in 2003. The dividend payout ratio is the result of dividing the amount of dividends paid by net income.

The
Company implemented a Dividend Reinvestment Plan that provides automatic reinvestment of dividends in additional shares of Carrollton Bancorp common stock.

During
2005, the Company repurchased and retired 42,500 shares of common stock at a price of $14.10 per share.

The
following table sets forth the high and low sales price and dividends per share of the Company's Common Stock for the periods indicated.

|Period      |  | Price Per Share |       | Cash Dividends Paid
Per Share
|----------- |  | --------------- | ----- | -----------------------------
|
|
|           
|4th Quarter |  | $               | 14.00 |                              
|3rd Quarter |  |                 | 13.95 |                              
|2nd Quarter |  |                 | 14.25 |                              
|1st Quarter |  |                 | 14.12 |                              

As of December 31, 2005, there were 421 common shareholders of record holding an aggregate of 2,809,698 shares. The Company believes there
to be in excess of 514 beneficial owners of the Company's Common Stock.

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

15

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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     |  | 227,130                                                                                         |  | $                                                                               | 14.52 |                                                                                                                                                
|Equity compensation plans not approved by security holders |  |                                                                                                |  |                                                                                 |      |                                                                                                                                                
|
|Total                                                      |  | 227,130                                                                                         |  | $                                                                               | 14.52 |                                                                                                                                                
|

16

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ITEM 6: SELECTED FINANCIAL DATA

|                                             |                                                                                        | 2005                                           |   | 2004        |         | 2003 |             | 2002    |   | 2001       
|-------------------------------------------- | -------------------------------------------------------------------------------------- | ---------------------------------------------- | - | ----------- | ------- | ---- | ----------- | ------- | - | -----------
|                                            
|CONSOLIDATED INCOME STATEMENT DATA:          |                                                                                        |                                                |   |             |         |      |             |         |   |            
|                                             | Interest income                                                                        |                                                | $ | 19,071,379  |         | $    | 15,500,323  |         | $ | 15,935,691 
|                                             | Interest expense                                                                       |                                                |   | 7,375,083   |         |      | 5,321,622   |         |   | 6,639,734  
|                                             |                                                                                        |                                                |   |             |         |      |             |         |   |            
|                                             | Net interest income                                                                    |                                                |   | 11,696,296  |         |      | 10,178,701  |         |   | 9,295,957  
|                                             | Provision for loan losses                                                              |                                                |   |            |         |      |            |         |   | 243,000    
|                                             |                                                                                        |                                                |   |             |         |      |             |         |   |            
|                                             | Net interest income after provision for loan losses                                    |                                                |   | 11,696,296  |         |      | 10,178,701  |         |   | 9,052,957  
|                                             | Noninterest income                                                                     |                                                |   | 10,718,636  |         |      | 8,781,151   |         |   | 8,268,612  
|                                             | Noninterest expenses                                                                   |                                                |   | 18,634,124  |         |      | 17,751,000  |         |   | 16,058,355 
|                                             |                                                                                        |                                                |   |             |         |      |             |         |   |            
|                                             | Income before income taxes                                                             |                                                |   | 3,780,808   |         |      | 1,208,852   |         |   | 1,263,214  
|                                             | Income taxes                                                                           |                                                |   | 1,322,371   |         |      | 320,488     |         |   | 338,500    
|                                             |                                                                                        |                                                |   |             |         |      |             |         |   |            
|                                             | Net income                                                                             |                                                | $ | 2,458,437   |         | $    | 888,364     |         | $ | 924,714    
|                                             |                                                                                        |                                                |   |             |         |      |             |         |   |            
|CONSOLIDATED BALANCE SHEET DATA, AT YEAR END |                                                                                        |                                                |   |             |         |      |             |         |   |            
|                                             | Assets                                                                                 |                                                | $ | 360,467,146 |         | $    | 319,123,132 |         | $ | 302,409,975
|                                             | Gross loans                                                                            |                                                |   | 247,943,073 |         |      | 219,726,294 |         |   | 199,296,561
|                                             | Deposits                                                                               |                                                |   | 271,626,503 |         |      | 225,846,145 |         |   | 207,056,100
|                                             | Shareholders' equity                                                                   |                                                |   | 34,640,165  |         |      | 34,215,280  |         |   | 34,124,882 
|PER SHARE DATA:(a)                           |                                                                                        |                                                |   |             |         |      |             |         |   |            
|                                             | Number of shares of Common Stock outstanding, at year-end                              |                                                |   | 2,809,698   |         |      | 2,834,823   |         |   | 2,828,078  
|                                             | Net income:                                                                            |                                                |   |             |         |      |             |         |   |            
|                                             |                                                                                        | Basic                                          |   | $           | 0.87    |      | $           | 0.31    |   | $          
|                                             |                                                                                        | Diluted                                        |   |             | 0.87    |      |             | 0.31    |   |            
|                                             | Cash dividends declared                                                                |                                                |   | 0.40        |         |      | 0.38        |         |   | 0.36       
|                                             | Book value, at year end                                                                |                                                |   | 12.33       |         |      | 12.07       |         |   | 12.07      
|Performance and capital ratios:              |                                                                                        |                                                |   |             |         |      |             |         |   |            
|                                             | Return on average assets                                                               |                                                |   | 0.72%       |         |      | 0.29%       |         |   | 0.29%      
|                                             | Return on average shareholders' equity                                                 |                                                |   | 7.12%       |         |      | 2.61%       |         |   | 2.71%      
|                                             | Net interest margin (b)                                                                |                                                |   | 3.89%       |         |      | 3.81%       |         |   | 3.36%      
|                                             | Average shareholders' equity to average total assets                                   |                                                |   | 10.13%      |         |      | 11.11%      |         |   | 10.83%     
|                                             | Year-end capital to year-end risk -weighted assets:                                    |                                                |   |             |         |      |             |         |   |            
|                                             |                                                                                        | Tier 1                                         |   |             | 11.63%  |      |             | 11.52%  |   |            
|                                             |                                                                                        | Total                                          |   |             | 13.51%  |      |             | 12.74%  |   |            
|                                             | Year-end Tier 1 leverage ratio                                                         |                                                |   | 8.96%       |         |      | 9.41%       |         |   | 10.35%     
|                                             | Cash dividends declared to net income                                                  |                                                |   | 45.97%      |         |      | 121.17%     |         |   | 109.96%    
|ASSETS QUALITY RATIOS:                       |                                                                                        |                                                |   |             |         |      |             |         |   |            
|                                             | Allowance for loan losses, at year-end to:                                             |                                                |   |             |         |      |             |         |   |            
|                                             |                                                                                        | Gross loans                                    |   |             | 1.35%   |      |             | 1.59%   |   |            
|                                             |                                                                                        | Nonperforming, restructured and past-due loans |   |             | 209.50% |      |             | 132.05% |   |            
|                                             | Net charge-offs to average gross loans                                                 |                                                |   | 0.06%       |         |      | 0.08%       |         |   | 0.09%      
|                                             | Nonperforming assets as a percent of period-end gross loans and foreclosed real estate |                                                |   | 0.64%       |         |      | 1.20%       |         |   | 1.26%      

17

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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 2006.

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 a 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 operated a network of ATMs in Maryland, Virginia, and West Virginia and sponsors national retailers who accept ATM cards for purchases in various electronic
networks. On September 22, 2005, Wal-Mart notified the Bank of its intention to terminate the agreement for the Bank to provide ATMs at Wal-Mart, Sam's Club, and
Wal-Mart Supercenters in Maryland, Virginia and West Virginia. The effective date of the termination was January 22, 2006.

During
2005, 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 2005,
increasing its gross loan portfolio 12.8% over 2004. 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 34.7%.

Net
income increased 177% from 2004 to 2005. The earnings for the year ended December 31, 2005 include security gains of $840,000 from the sale of equity securities, a $506,000
charge representing a penalty for the prepayment of a $5 million Federal Home Loan Bank of Atlanta (FHLBA) advance at 7.26% maturing May 24, 2010, and the write down and cost of disposal
of ATMs totaling $564,000 related to the termination of the Wal-Mart agreement. Wal-Mart terminated the agreement for Carrollton Bank to provide automated teller
machines (ATMs) at Wal-Mart, Sam's Club and Wal-Mart Supercenters in Maryland, Virginia and West Virginia. To illustrate the impact on earnings from these three items (using a
non-GAAP financial measure), net income for 2005 excluding the gains on the sales of securities, FHLBA prepayment penalty, and the write down and cost of disposal of the ATMs, as described
above, would have been $2.6 million or $0.92 per diluted share, an increase of 123%, compared to net income of $1.2 million excluding the gains on the sale of securities and the $497,000
write-down on the Federal Home Loan Mortgage Corporation stock (FHLMC) for 2004.    The Company is asset sensitive and as a result of the increasing interest rate environment
of 2005 and the increase in interest earning assets of $33.7 million from 2004 to 2005, net interest income increased 15% for 2005 compared to 2004. Noninterest income excluding the gains on
the sales of securities of $840,000 in 2005 and $116,000 in 2004 increased 14% compared to 2004.

The
Company opened its newest retail branch in Bel Air, Maryland in January 2005. As of December 31, 2005, that branch had attracted $8.5 million in deposits.

Based
upon current earnings and encouraging prospects for future earnings, the Company paid dividends of $.40 per share to shareholders during 2005.

18

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RESULTS OF OPERATION

SUMMARY

The
Company reported net income for 2005 of $2.5 million or $0.87 per share, representing a 177% increase from 2004 net income of $888,000, or $0.31 per share. Core earnings
(earnings before the effect of investment security transactions) for the year were $1.9 million, a 138% increase over 2004 core earnings of $1.2 million.

The
loan portfolio, including loans held for sale, increased 14.1% to $258.3 million, a result of the Company's continuing efforts to align the loan portfolio to be in line with
typical commercial banks. Interest income on loans increased 23.9% due to loans increasing $31.9 million and loans repricing to higher rates.

The
deposit portfolio increased 20.3% to $271.6 million, with the majority of the growth derived from noninterest bearing deposits, money market accounts and certificates of
deposit. Interest expense increased during 2005, due primarily to a $32.5 million increase in interest-bearing deposits and the yield on interest-bearing deposits increasing 80 basis points.

Noninterest
income increased 22.1% in 2005 compared to 2004, due primarily to a 625% or $724,000 increase in gains on sales of securities, an increase of 41% or $788,000 in fees and
commissions earned by CMSI, a 3% or $133,000 increase in the Electronic Banking Division's revenue, and a 14% or $134,000 increase in service charges.

Noninterest
expense increased 5.0% in 2005 compared to 2004, due to the opening of a new branch in the North Bel Air area of Harford County as well as increased expenses relating to the
$506,000 prepayment penalty assessed by the FHLBA for the payoff of $5.0 million in borrowings plus the write-down of the Company's ATM network of $563,000. Some of the increases in
noninterest expenses were offset by a
decrease in employee benefits due to freezing the defined benefit pension plan effective December 31, 2004 and by a decrease in furniture and equipment expense due to the original cost of the
ATM network being fully depreciated in 2004. In 2004, the Company recognized a $497,000 impairment on FHLMC stock it owned.

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 $1.2 million, a 79.4% increase over 2003 core earnings of $626,000.

The
loan portfolio increased 10.2% during 2004 to $219.7 million, 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 $225.8 million, 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.

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.

19

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AVERAGE BALANCES, INTEREST, AND YIELDS

|                                                       |                                      | 2005 |             | 2004       |   | 2003       |          
|------------------------------------------------------ | ------------------------------------ | ---- | ----------- | ---------- | - | ---------- | ---------
|
|                                                       |                                     
|ASSETS                                                 |                                      |      |             |            |   |            |          
|Federal funds sold and Federal Home Loan Bank deposit  |                                      | $    | 19,067,206  |            | $ | 623,910    |          
|Federal Home Loan Bank stock                           |                                      |      | 2,643,019   |            |   | 109,616    |          
|Investment securities: (a)                             |                                      |      |             |            |   |            |          
|                                                       | U.S. government agency               |      |             | 20,306,719 |   |            | 560,887  
|                                                       | State and municipal                  |      |             | 4,027,933  |   |            | 264,620  
|                                                       | Mortgage-backed securities           |      |             | 11,089,402 |   |            | 611,055  
|                                                       | Corporate bonds                      |      |             | 1,277,192  |   |            | 70,749   
|                                                       | Other                                |      |             | 1,877,280  |   |            | 135,232  
|                                                       |                                      |      |             |            |   |            |          
|                                                       |                                      |      | 38,578,526  |            |   | 1,642,543  |          
|                                                       |                                      |      |             |            |   |            |          
|Loans:                                                 |                                      |      |             |            |   |            |          
|                                                       | Demand and time                      |      |             | 67,134,231 |   |            | 3,554,951
|                                                       | Residential mortgage (b)             |      |             | 74,654,896 |   |            | 4,613,621
|                                                       | Commercial mortgage
and construction |      |             | 97,985,886 |   |            | 8,298,411
|                                                       | Installment                          |      |             | 1,813,896  |   |            | 154,258  
|                                                       | Lease financing                      |      |             | 2,782,231  |   |            | 214,524  
|                                                       |                                      |      |             |            |   |            |          
|                                                       |                                      |      | 244,371,140 |            |   | 16,835,765 |          
|                                                       |                                      |      |             |            |   |            |          
|Total interest-earning assets                          |                                      |      | 304,659,891 |            |   | 19,211,834 |          
|Noninterest-bearing cash                               |                                      |      | 26,624,448  |            |   |            |          
|Premises and equipment                                 |                                      |      | 5,694,687   |            |   |            |          
|Other assets                                           |                                      |      | 4,034,529   |            |   |            |          
|Allowance for loan losses                              |                                      |      | (3,472,722  | )          |   |            |          
|Unrealized gains on available for sale securities, net |                                      |      | 3,412,785   |            |   |            |          
|                                                       |                                      |      |             |            |   |            |          
|                                                       |                                      | $    | 340,953,618 |            |   |            |          
|                                                       |                                      |      |             |            |   |            |          
|LIABILITIES AND SHAREHOLDERS' EQUITY                   |                                      |      |             |            |   |            |          
|Interest-bearing deposits:                             |                                      |      |             |            |   |            |          
|                                                       | Savings and NOW                      |      | $           | 67,931,566 |   |            | 162,865  
|                                                       | Money market                         |      |             | 40,658,604 |   |            | 998,161  
|                                                       | Certificates of deposit              |      |             | 81,412,306 |   |            | 2,861,697
|                                                       |                                      |      |             |            |   |            |          
|                                                       |                                      |      | 190,002,476 |            |   | 4,022,723  |          
|Borrowed funds                                         |                                      |      | 54,879,637  |            |   | 3,352,360  |          
|                                                       |                                      |      |             |            |   |            |          
|Total interest-bearing liabilities                     |                                      |      | 244,882,113 |            |   | 7,375,083  |          
|Noninterest-bearing deposits                           |                                      |      | 59,645,770  |            |   |            |          
|Other liabilities                                      |                                      |      | 1,885,164   |            |   |            |          
|Shareholders' equity                                   |                                      |      | 34,540,571  |            |   |            |          
|                                                       |                                      |      |             |            |   |            |          
|Total liabilities and shareholders' equity             |                                      | $    | 340,953,618 |            |   |            |          
|                                                       |                                      |      |             |            |   |            |          
|NET INTEREST MARGIN (C)                                |                                      | $    | 304,659,891 |            | $ | 11,836,751 |          
|                                                       |                                      |      |             |            |   |            |          

20

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Net interest income on a tax-equivalent basis increased to $11.8 million for the year ended December 31, 2005 compared to
$10.4 million for 2004. The increase in tax-equivalent net interest income during 2005 was almost entirely due to a $32.4 million increase in average earning assets during
2005 compared to 2004. An increase in average loans outstanding of $33.2 million, or 15.7% and average federal funds sold of $10.5 million or 121.6% was partially offset by a decline in
average investment securities outstanding for the year of $11.6 million.

The
increase in average loans outstanding is attributed to the Company's active business development efforts in its commercial loan portfolio and general economic conditions of the
Company's primary service market. Targeted short-term interest rates, as established by the Federal Reserve Bank, increased during 2005 resulting in the Company's yield on earning assets
increasing 55 basis points to 6.31% for the year ended December 31, 2005 compared to 5.76% for the same period in 2004. The yield on loans increased to 6.89% in 2005 compared to 6.44% for 2004
as lower yielding loans repriced during the year to higher rates. The yield on investment securities also increased to 4.26% in 2005 from 3.77% in 2004. The net impact was a $3.5 million or
22.4% increase in tax-equivalent interest income for the year ended December 31, 2005 compared to 2004.

In
2004, net interest income on a taxable-equivalent 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.

Interest
expense increased $2.1 million to $7.4 million in 2005 from $5.3 million in 2004. Interest expense increased primarily due to a change in the deposit mix,
with an increase in the amount of interest-bearing deposits. In addition, the cost of interest-bearing deposits increased from 1.32% in 2004 to 2.12% in 2005.

Interest
expense on total interest-bearing liabilities increased $2.1 million, or 38.6%, for the year ended December 31, 2005. The increase in interest expense was due to a
$27.3 million increase in average interest-bearing liabilities and the cost of interest-bearing liabilities increasing to 3.01% for the year ended December 31, 2005 compared to 2.44% for
the same period in 2004.

The
following table and the related discussions of interest income and interest expense provide further analysis of the changes in net interest income during 2005 and 2004:

|                       |                                                                   | 2005 Compared to 2004 |           | 2004 Compared to 2003 |  
|---------------------- | ----------------------------------------------------------------- | --------------------- | --------- | --------------------- | -
|
|
|                       |                                                                  
|INTEREST INCOME        |                                                                   |                       |           |                       |  
|                       | Federal funds sold and interest-bearing deposits with other banks |                       | $         | 364,757               |  
|                       | Investment securities and FHLB stock                              |                       |           | (55,017               | )
|                       | Loans (a)                                                         |                       |           | 1,099,671             |  
|                       |                                                                   |                       |           |                       |  
|TOTAL INTEREST EARNED  |                                                                   |                       | 1,409,411 |                       |  
|                       |                                                                   |                       |           |                       |  
|INTEREST EXPENSE       |                                                                   |                       |           |                       |  
|                       | Deposits                                                          |                       |           | 1,501,020             |  
|                       | Borrowings                                                        |                       |           | 216,307               |  
|                       |                                                                   |                       |           |                       |  
|TOTAL INTEREST EXPENSE |                                                                   |                       | 1,717,327 |                       |  
|                       |                                                                   |                       |           |                       |  
|NET INTEREST INCOME    |                                                                   | $                     | (307,916  | )                     | $
|                       |                                                                   |                       |           |                       |  

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.

21

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The
Company continues to experience strong asset quality in its loan portfolio with a low delinquency rate and a low charge off rate. The Company did not provide for any loan losses for
the years ended December 31, 2005 and 2004. Nonaccrual, restructured and delinquent loans over 90 days to total loans improved further to 0.64% at the end of 2005 compared to 1.20% in
2004. The ratio of net loan losses to average loans decreased in 2005 to 0.06% compared to 0.08% for 2004.

The
Company did not provide for any loan losses for the year ended December 31, 2004 compared to a net provision for loan losses of $243,000 for 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 net loan losses to average loans decreased in
2004 to 0.08% compared to 0.09% for 2003.

NONINTEREST INCOME

Noninterest income increased from $8.8 million during 2004 to $10.7 million in 2005 due, in large part, to increases in gains and fees recognized on
the sale of mortgage loans, net of costs, gains on security sales, increases in Electronic Banking division's revenues and increases in fees charged for deposit services. Specifically, net gains and
fees on sales of mortgage loans increased $788,000 or 41.1% from 2004 to 2005, gains on sales of securities increased $724,000 or 625.2%, the Electronic Banking Division's revenue increased $133,000
or 2.7% and deposit service charges increased by $134,000 or 14.2%. Brokerage commissions also increased $44,000 or 7.0%. The increase in net gains and fees on sales of mortgage loans corresponded to
an increase in the volume of mortgage loans sold during the year, from $129.7 million in 2004 to $183.1 million in 2005. The Company believes that this increase in mortgage loan volume
was primarily attributable to the market, in general, and expanding the operations of the mortgage company in 2004. The gain on sale of securities increased $724,000 due to the Company taking some
profits on equity investments in 2005.

Electronic
banking income is comprised of three sources: national point of sale ("POS") sponsorships, ATM fees, and check card fees. Through December 31, 2005, the Company
maintained ATMs in Wal-Mart stores in Maryland, Virginia and West Virginia, as well as at its branches. The fees from these ATMs represent approximately 39% of total
electronic banking revenue in 2005. The Company sponsors merchants who accept ATM cards for purchases within various networks (i.e. STAR, PULSE, and NYCE). This national POS sponsorship income
represents approximately 41% of total electronic banking revenue. Fees from check cards comprise the remaining 20% of electronic banking revenue. On September 22, 2005, Wal-Mart
notified the Bank of its intention to terminate the agreement for the Company to provide ATM services at its locations in Maryland, Virginia and West Virginia. The effective date of the termination
was January 22, 2006.

The
Company offers a variety of financial planning and investment options to customers, through its subsidiary, CFS, and recognizes commission income as these services are provided.

Noninterest
income increased 6.0% to $8.8 million in 2004 compared to $8.3 million in 2003. Included in noninterest income was $116,000 in security gains realized in 2004
compared to $486,000 in 2003. 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 decreased from $5.2 million in 2003 to $4.9 million in 2004. Electronic banking income is comprised of three sources: national point of sale,
("POS") sponsorships, ATM fees and check card fees. The Company maintained ATMs in Wal-Mart stores in Maryland, Virginia and West Virginia, as well as at its branches. The fees from
these ATMs represented approximately 46% of total electronic banking
revenue in 2004. The Company sponsors merchants who accept ATM cards for purchases within various networks (i.e. STAR, PULSE, NYCE). This national POS sponsorship income represented approximately 31%
of total electronic banking revenue. Fees from check cards comprise the remaining 23% of electronic banking revenue.

Mortgage-banking
revenue increased $1.3 million to $1.9 million 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.

NONINTEREST EXPENSES

Noninterest expense consists primarily of costs associated with personnel, occupancy and equipment, data processing, marketing and professional fees. The Company's
noninterest expense for the year ended December 31, 2005 totaled $18.6 million, representing an increase of $883,000, or 5.0%, as compared to 2004. Salaries, the largest component of
noninterest expense increased $607,000 or 8.9% from 2004 to 2005 due to merit increases and the opening of a new branch in the North Bel Air area of Harford County and were partially offset by a
decrease in the

22

---



average
number of fulltime equivalent employees from 165 in 2004 to 157 in 2005. Employee benefits decreased by $532,000 due to freezing the defined benefit pension plan effective December 31,
2004.

Occupancy
costs increased $247,000 or 15.4%, due to the opening of the new branch in Harford County and normal lease payment escalations and costs to maintain business properties.
Furniture and equipment expense decreased $379,000 or 23.8% due to the original cost of the ATM network being fully depreciated in 2004.

In
2005, the Company had non-recurring charges of $564,000 related to the termination of the Wal-Mart agreement, and $506,000 representing a penalty for the prepayment of a
$5.0 million FHLBA advance at 7.26% maturing May 24, 2010. In 2004, there was a non-recurring charge of $497,000 related to the write down of FHLMC stock.

Other
noninterest expense increased $368,000 or 6.9% due to increases in marketing expenses related to opening the new branch in Harford County, amortization of software acquired,
increased data processing services due to growth in loans and deposits, increased loan expenses related to CMSI, and professional fees partially offset by decreases in various other 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.

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.

INCOME TAX PROVISION

Income tax expense was $1.3 million in 2005, compared to $320,000 in 2004 and $339,000 in 2003. The effective tax rate was 35.0% in 2005, 26.5% in 2004 and
26.8% in 2003. 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. During
2005, a lower percentage of the Company's pre-tax income was exempt from taxes compared to 2004 and 2003.

FINANCIAL CONDITION

SUMMARY

Total assets of the Company increased by 13.0% to $360.5 million at December 31, 2005 from $319.1 million at December 31, 2004.
Investment securities increased 12.0% to $47.6 million at December 31, 2005. Gross loans, excluding loans held for sale, increased by 12.8% to $247.9 million at
December 31, 2005 compared to
$219.7 million at the end of 2004. Interest-earning assets increased $33.7 million to $326.6 million and were 89.9% of total assets at December 31, 2005.

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.

23

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

|                            |                          | 2005 |            | 2004       |   | 2003       |            | 2002 |            | 2001      
|--------------------------- | ------------------------ | ---- | ---------- | ---------- | - | ---------- | ---------- | ---- | ---------- | ----------
|                           
|AVAILABLE FOR SALE          |                          |      |            |            |   |            |            |      |            |           
|U.S. Government agency      |                          | $    | 10,740,335 |            | $ | 19,913,790 |            | $    | 34,566,285 |           
|Mortgage-backed securities  |                          |      | 8,490,125  |            |   | 8,447,886  |            |      | 9,628,267  |           
|State and municipal bonds   |                          |      | 3,689,859  |            |   | 4,137,433  |            |      | 5,197,716  |           
|Corporate bonds             |                          |      | 1,514,471  |            |   | 3,036,920  |            |      | 6,820,340  |           
|                            |                          |      |            |            |   |            |            |      |            |           
|                            |                          |      | 24,434,790 |            |   | 35,536,029 |            |      | 56,212,608 |           
|Equity securities           |                          |      | 4,660,213  |            |   | 6,952,463  |            |      | 6,246,349  |           
|                            |                          |      |            |            |   |            |            |      |            |           
|                            | Total available for sale |      |            | 29,095,003 |   |            | 42,488,492 |      |            | 62,458,957
|                            |                          |      |            |            |   |            |            |      |            |           
|HELD TO MATURITY            |                          |      |            |            |   |            |            |      |            |           
|U.S. Government agency      |                          |      | 5,000,000  |            |   |           |            |      |           |           
|Mortgage-backed securities  |                          |      | 9,575,713  |            |   |           |            |      |           |           
|State and municipal bonds   |                          |      | 3,912,692  |            |   |           |            |      |           |           
|Foreign bonds               |                          |      |           |            |   |           |            |      | 25,000     |           
|                            |                          |      |            |            |   |            |            |      |            |           
|                            | Total held to maturity   |      |            | 18,488,405 |   |            |           |      |            | 25,000    
|                            |                          |      |            |            |   |            |            |      |            |           
|Total investment securities |                          | $    | 47,583,408 |            | $ | 42,488,492 |            | $    | 62,483,957 |           
|                            |                          |      |            |            |   |            |            |      |            |           

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, 2005:

|                           |  | Available for Sale |            | Held to Maturity |  
|-------------------------- |  | ------------------ | ---------- | ---------------- | -
|
|                           | 
|Within one year            |  | $                  | 250,000    |                  | $
|Over one to five years     |  |                    | 9,767,684  |                  |  
|Over five to ten years     |  |                    | 5,899,059  |                  |  
|                           |  |                    |            |                  |  
|                           |  |                    | 15,916,743 |                  |  
|                           |  |                    |            |                  |  
|Mortgage-backed securities |  |                    | 8,551,466  |                  |  
|Equity securities          |  |                    | 1,633,298  |                  |  
|                           |  |                    |            |                  |  
|                           |  | $                  | 26,101,507 |                  | $
|                           |  |                    |            |                  |  

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 increased $5.1 million to $47.6 million at December 31, 2005 compared to $42.5 million at December 31, 2004. The increase was due
to purchases of mortgage backed securities and state and municipal bonds. In 2004, the Company recognized a $497,000 other-than-temporary impairment of the Company's investment
in FMLMC preferred stock.

24

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LOANS

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

|                          |                                   | 2005 |             | 2004       |   | 2003        |            | 2002 |             | 2001      
|------------------------- | --------------------------------- | ---- | ----------- | ---------- | - | ----------- | ---------- | ---- | ----------- | ----------
|                         
|Real Estate:              |                                   |      |             |            |   |             |            |      |             |           
|                          | Residential                       |      | $           | 53,148,211 |   | $           | 55,242,018 |      | $           | 57,586,028
|                          | Commercial                        |      |             | 97,909,115 |   |             | 94,858,597 |      |             | 82,856,038
|                          | Construction and land development |      |             | 37,415,478 |   |             | 17,774,874 |      |             | 16,275,828
|Demand and time           |                                   |      | 56,118,527  |            |   | 46,168,587  |            |      | 35,978,633  |           
|Lease financing           |                                   |      | 1,936,482   |            |   | 3,598,003   |            |      | 4,449,408   |           
|Installment               |                                   |      | 1,415,260   |            |   | 2,084,215   |            |      | 2,150,626   |           
|                          |                                   |      |             |            |   |             |            |      |             |           
|                          |                                   |      | 247,943,073 |            |   | 219,726,294 |            |      | 199,296,561 |           
|Allowance for loan losses |                                   |      | 3,337,163   |            |   | 3,485,076   |            |      | 3,648,245   |           
|                          |                                   |      |             |            |   |             |            |      |             |           
|Loans, net                |                                   | $    | 244,605,910 |            | $ | 216,241,218 |            | $    | 195,648,316 |           
|                          |                                   |      |             |            |   |             |            |      |             |           

Gross loans, excluding loans held for sale, increased $28.2 million or 12.8% from $219.7 million as of December 31, 2004 to
$247.9 million as of December 31, 2005. The increase was primarily in commercial lending including commercial construction and land development. Commercial loans amounted to
$193.3 million at December 31, 2005 and were 78% of total loans. Consumer loans amounted to $54.6 million and were 22% of total loans.

The
following table shows the contractual maturities and interest rate sensitivities of the Company's loans at December 31, 2005. 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.

|                |                                   | 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:

|                                        |  | 2005 |           | 2004 |   | 2003      |  | 2002 |           | 2001
|--------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | ---- | --------- | ----
|                                       
|Nonaccrual loans (a)                    |  | $    | 1,413,925 |      | $ | 615,394   |  | $    | 712,116   |     
|Restructured loans                      |  |      |          |      |   | 455,864   |  |      | 661,974   |     
|Foreclosed real estate                  |  |      |          |      |   |          |  |      | 100,000   |     
|                                        |  |      |           |      |   |           |  |      |           |     
|                                        |  | $    | 1,413,925 |      | $ | 1,071,258 |  | $    | 1,474,090 |     
|                                        |  |      |           |      |   |           |  |      |           |     
|Accruing loans past-due 90 days or more |  | $    | 179,012   |      | $ | 1,567,919 |  | $    | 1,036,018 |     
|                                        |  |      |           |      |   |           |  |      |           |     

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.

25

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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 $77,744, $143,374, and $134,190 as of December 31, 2005, 2004 and 2003, 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 $2,319,000, $2,559,000, and $3,099,000 as of December 31, 2005, 2004 and 2003, 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, 2001 through 2005, 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. Due to the level of the unallocated allowance,
management did not make any provision for loan losses in 2005 and 2004.

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.

26

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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:                                          |                 |                        
|                                                      | Demand and time |                        
|                                                      | Lease financing |                        
|                                                      | Real estate:    |                        
|                                                      |                 | Residential            
|                                                      |                 | Commercial             
|                                                      |                 | Construction           
|Installment                                           |                 |                        
|                                                      |                 |                        
|                                                      |                 |                        
|                                                      |                 |                        
|Recoveries:                                           |                 |                        
|                                                      | Demand and time |                        
|                                                      | 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.

27

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

|Portfolio                           |                                   | 2005 |           | 2004    |   | 2003      |           | 2002 |           | 2001     
|----------------------------------- | --------------------------------- | ---- | --------- | ------- | - | --------- | --------- | ---- | --------- | ---------
|                                   
|Demand and time and lease financing |                                   | $    | 474,059   |         | $ | 589,053   |           | $    | 1,226,447 |          
|Real estate:                        |                                   |      |           |         |   |           |           |      |           |          
|                                    | Residential                       |      |           | 718,028 |   |           | 587,292   |      |           | 831,173  
|                                    | Commercial                        |      |           | 679,002 |   |           | 1,034,546 |      |           | 1,041,834
|                                    | Construction and land development |      |           | 382,204 |   |           | 342,114   |      |           |         
|Installment                         |                                   |      | 143,318   |         |   | 149,271   |           |      | 133,865   |          
|Unallocated                         |                                   |      | 940,552   |         |   | 782,800   |           |      | 414,926   |          
|                                    |                                   |      |           |         |   |           |           |      |           |          
|                                    |                                   | $    | 3,337,163 |         | $ | 3,485,076 |           | $    | 3,648,245 |          
|                                    |                                   |      |           |         |   |           |           |      |           |          

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

|Portfolio                           |                                   | 2005  |      | 2004  |      | 2003  |      | 2002  |      | 2001  |     
|----------------------------------- | --------------------------------- | ----- | ---- | ----- | ---- | ----- | ---- | ----- | ---- | ----- | ----
|                                    |                                  
|Demand and time and lease financing |                                   | 23.4  | %    | 22.7  | %    | 20.2  | %    | 17.9  | %    | 16.0  | %   
|Real estate:                        |                                   |       |      |       |      |       |      |       |      |       |     
|                                    | Residential                       |       | 21.4 |       | 25.1 |       | 28.9 |       | 38.8 |       | 53.5
|                                    | Commercial                        |       | 39.6 |       | 43.2 |       | 41.6 |       | 38.2 |       | 23.9
|                                    | Construction and land development |       | 15.1 |       | 8.1  |       | 8.2  |       | 3.8  |       | 4.6 
|Installment                         |                                   | 0.5   |      | 0.9   |      | 1.1   |      | 1.3   |      | 2.0   |     
|                                    |                                   |       |      |       |      |       |      |       |      |       |     
|                                    |                                   | 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, 2005, the allowance for loan losses was $3.3 million, a 4.2% decrease from the end of 2004. The ratio of the allowance to total loans was 1.35% at
December 31, 2005 and 1.59% at December 31, 2004. The ratio of net loan losses to average loans outstanding for 2005 was 0.06% compared to 0.08% for 2004. The ratio of nonaccrual loans,
restructured loans and loans delinquent more than 90 days to total loans decreased to 0.64% at December 31, 2005 from 1.20% at the end of 2004. The ratio of real estate loans to total
loans decreased to 76.1% at the end of 2005 from 76.4% at the end of 2004.

FUNDING SOURCES

DEPOSITS

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

|                             |                         | 2005 |             | 2004       |      | 2003 |  
|---------------------------- | ----------------------- | ---- | ----------- | ---------- | ---- | ---- | -
|
|                             |                        
|Noninterest-bearing deposits |                         | $    | 59,645,770  |            |     | %    | $
|Interest-bearing deposits:   |                         |      |             |            |      |      |  
|                             | NOW accounts            |      |             | 34,384,963 |      | 0.21 |  
|                             | Savings accounts        |      |             | 33,546,603 |      | 0.27 |  
|                             | Money market accounts   |      |             | 40,658,604 |      | 2.45 |  
|                             | Certificates of deposit |      |             | 81,412,306 |      | 3.52 |  
|                             |                         |      |             |            |      |      |  
|                             |                         | $    | 249,648,246 |            | 1.61 |      | $
|                             |                         |      |             |            |      |      |  

28

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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, 2005:

|Maturing in: |                                 |   |           
|------------ | ------------------------------- | - | ----------
|             | 3 months or less                |   | $         
|             | Over 3 months through 6 months  |   |           
|             | Over 6 months through 12 months |   |           
|             | Over 12 months                  |   |           
|             |                                 |  
|             |                                 | $ | 14,990,576
|             |                                 |  

Total deposits at December 31, 2005 increased by $45.8 million to $271.6 million from the end of 2004. Interest bearing
accounts increased by $32.5 million and noninterest-bearing deposits increased by $13.3 million. During 2005, 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 of December 31, 2005, the Bank had approximately $21.4 million in CDARS
deposits.

BORROWED FUNDS

Borrowed funds consist of securities sold under repurchase agreements, federal funds purchased and borrowings from the FHLB and notes payable-U.S.
Tresury. Securities sold under repurchase agreements are securities sold to the Bank's customers under a continuing "roll-over" contract and mature in one business day. The underlying
securities sold are federal agency securities that are segregated from the Company's other investment securities. Federal funds purchased are unsecured, overnight borrowings from other financial
institutions. Notes payable-U.S. Treasury are U.S. Treasury and Federal Treasury Tax and Loan deposits accepted by the Bank from its customers to be remitted to the Federal Reserve on a
periodic basis.

29

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Information
with respect to borrowings is as follows at and for the years ended December 31:

|                                                |                                                                         | Maturity Date |                  | 2005 |            | 2004       |   | 2003      
|----------------------------------------------- | ----------------------------------------------------------------------- | ------------- | ---------------- | ---- | ---------- | ---------- | - | ----------
|                                               
|Amount outstanding at year-end:                 |                                                                         |               |                  |      |            |            |   |           
|                                                | Federal Home Loan Bank                                                  |               | March 26, 2008   |      | $          | 5,000,000  |   | $         
|                                                | Federal Home Loan Bank                                                  |               | February 2, 2010 |      |            | 35,000,000 |   |           
|                                                | Federal Home Loan Bank                                                  |               | May 24, 2010     |      |            |           |   |           
|                                                |                                                                         |               |                  |      |            |            |   |           
|                                                |                                                                         |               |                  | $    | 40,000,000 |            | $ | 45,000,000
|                                                |                                                                         |               |                  |      |            |            |   |           
|                                                | Federal funds purchased and securities sold under repurchase agreements |               |                  |      | $          | 9,280,348  |   | $         
|                                                | Notes-payable  U.S. Treasury                                           |               |                  |      | $          | 1,932,124  |   | $         
|Weighted average interest rate at year-end:     |                                                                         |               |                  |      |            |            |   |           
|                                                | Advances from the FHLB                                                  |               |                  |      |            | 6.67%      |   |           
|                                                | Federal funds purchased and securities sold under repurchase agreements |               |                  |      |            | 3.59%      |   |           
|                                                | Notes payable  U.S. Treasury                                           |               |                  |      |            | 4.17%      |   |           
|Maximum outstanding at any month-end:           |                                                                         |               |                  |      |            |            |   |           
|                                                | Advances from the FHLB                                                  |               |                  |      | $          | 45,000,000 |   | $         
|                                                | Federal funds purchased and securities sold under repurchase agreements |               |                  |      |            | 11,742,108 |   |           
|                                                | Notes payable  U.S. Treasury                                           |               |                  |      |            | 1,958,750  |   |           
|Average balance outstanding during the year:    |                                                                         |               |                  |      |            |            |   |           
|                                                | Advances from the FHLB                                                  |               |                  |      | $          | 44,876,712 |   | $         
|                                                | Federal funds purchased and securities sold under repurchase agreements |               |                  |      |            | 8,986,714  |   |           
|                                                | Notes payable  U.S. Treasury                                           |               |                  |      |            | 1,016,211  |   |           
|Weighted average interest rate during the year: |                                                                         |               |                  |      |            |            |   |           
|                                                | Advances from the FHLB                                                  |               |                  |      |            | 6.84%      |   |           
|                                                | Federal funds purchased and securities sold under repurchase agreements |               |                  |      |            | 2.66%      |   |           
|                                                | Notes payable  U.S. Treasury                                           |               |                  |      |            | 3.06%      |   |           

Debt retirement expense of $505,839 was incurred in 2005 due to the prepayment of a $5.0 million FHLB advance that had a maturity date of
May 24, 2010 and an interest rate of 7.26%.

The
Company may borrow under available unsecured federal funds lines of credit of $10 million and a secured federal funds line of credit of $10 million with other
institutions. There was no balance outstanding under these lines at December 31, 2005 and 2004. These lines bear interest at the current federal funds rate of the correspondent bank.

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, 2005 and 2004. 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.

30

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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% |    | 8.96%              |        | 8.72%          
|Risk-based capital: |               |    |    |                    |        |                
|                    | Tier 1 (Core) |    | 4% |                    | 11.63% |                
|                    | Total         |    | 8% |                    | 13.51% |                

Total shareholders' equity increased 1.2% to $34.6 million at December 31, 2005. Earnings of the Company of $2.5 million for
the year ended December 31, 2005 and the proceeds and the tax benefit from the exercise of stock options of $225,000 were offset by dividends of $1.1 million and a repurchase of shares
totaling $599,000.

LIQUIDITY AND CAPITAL EXPENDITURES

CAPITAL EXPENDITURES

Capital expenditures were approximately $902,000 in 2005, $1.9 million in 2004, and $923,000 in 2003. Capital expenditures in 2005 were due to renovations
at several branches and normal business activity. 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 a system conversion.

Capital
expenditures are projected to be approximately $700,000 for fiscal year 2006 for renovations at five of the Company's branch locations and the operations center.

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, unpledged investment securities held to maturity due within one year, and unpledged securities available for sale. Such assets totaled
$68.2 million or 18.9% of total assets at December 31, 2005.

The
borrowing requirements of customers include commitments to extend credit and the unused portion of lines of credit, which totaled $105.7 million at December 31, 2005.
Of this total, management places a high probability of required funding within one year on approximately $58.1 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, 2005, the Company had $40.0 million outstanding with the FHLB and had $65.0 million collateral available to borrow under the line of credit. Additionally, the Company
has available unsecured federal funds lines of credit of $10.0 million and a secured federal funds line of credit of $10.0 million with other institutions. There was no balance
outstanding under these lines at December 31, 2005. 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,
2005, 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.

31

---



In
order to partially offset a reduction in interest income in a declining interest rate environment, on December 14, 2005, the Bank purchased a $10.0 million notional
amount interest rate Floor with a minimum interest rate (strike rate) of 7.0% based on the US prime rate. The term of the Floor is five years. The Floor will reduce the variability of cash flow from a
pool of variable rate loans should the rate index of the loans fall below the predetermined strike rate of the hedge (7%).

The
following chart shows the static gap position for interest sensitive assets and liabilities of the Company as of December 31, 2005. 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, 2005 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 |                                   | $       | 11,855         |        | $            |       |              | $      |          |       
|                                                               | Investment securities  |                                   |         | 5,668          |        |              | 2,179  |              |        | 5,435     |       
|                                                               | Loans held for sale    |                                   |         | 13,767         |        |              |       |              |        |          |       
|                                                               | Loans:                 |                                   |         |                |        |              |        |              |        |           |       
|                                                               |                        | Residential real estate           |         |                | 45,294 |              |        | 1,260        |        |           | 959   
|                                                               |                        | Commercial real estate            |         |                | 23,690 |              |        | 5,221        |        |           | 20,826
|                                                               |                        | Construction and land development |         |                | 22,118 |              |        | 10,066       |        |           | 725   
|                                                               |                        | Demand and time                   |         |                | 38,511 |              |        | 537          |        |           | 1,063 
|                                                               |                        | Lease financing                   |         |                | 113    |              |        | 93           |        |           | 614   
|                                                               |                        | Installment                       |         |                | 906    |              |        | 23           |        |           | 65    
|                                                               |                        |                                   |         |                |        |              |        |              |        |           |       
|                                                               |                        | $                                 | 161,922 |                | $      | 19,379       |        | $            | 29,687 |           | $     
|                                                               |                        |                                   |         |                |        |              |        |              |        |           |       
|LIABILITIES:                                                   |                        |                                   |         |                |        |              |        |              |        |           |       
|                                                               | Deposits               |                                   | $       | 75,743         |        | $            | 44,877 |              | $      | 10,915    |       
|                                                               | Borrowings             |                                   |         | 11,212         |        |              |       |              |        |          |       
|                                                               |                        |                                   |         |                |        |              |        |              |        |           |       
|                                                               |                        | $                                 | 86,955  |                | $      | 44,877       |        | $            | 10,915 |           | $     
|                                                               |                        |                                   |         |                |        |              |        |              |        |           |       
|Gap position                                                   |                        |                                   |         |                |        |              |        |              |        |           |       
|Period                                                         |                        | $                                 | 74,967  |                | $      | (25,498      | )      | $            | 18,772 |           | $     
|% of assets                                                    |                        |                                   | 20.80   | %              |        | (7.07        | )%     |              | 5.21   | %         |       
|Cumulative                                                     |                        | $                                 | 74,967  |                | $      | 49,469       |        | $            | 68,241 |           | $     
|% of assets                                                    |                        |                                   | 20.80   | %              |        | 13.72        | %      |              | 18.93  | %         |       
|Cumulative risk sensitive assets to risk sensitive liabilities |                        |                                   | 186.21  | %              |        | 43.18        | %      |              | 271.98 | %         |       

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 2005, 2004 and 2003.

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

32

---



collateral,
as outstanding loans. The Company is not aware of any accounting loss it would incur by funding its commitments.

Outstanding
loan commitments, unused lines of credit and letters of credit were as follows at December 31, 2005:

|Loan commitments       |  | $ | 26,037,567
|---------------------- |  | - | ----------
|Unused lines of credit |  |   | 79,700,600
|Letters of credit      |  |   | 2,606,061 

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, 2005 (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 |  | $     | 8,080 |                  | $ | 724                |  | $                   | 1,299 |                     

NEW ACCOUNTING PRONOUNCEMENTS

FASB Statement No. 154,Accounting Changes and Error Correctionsreplaces APB Opinion No. 20 Accounting Changesand FASB Statement No. 3Reporting Accounting Changes in Interim Financial Statements-An
Amendment of APB Opinion No. 28. FASB Statement No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. It
applies to all voluntary changes in accounting principle. It establishes retrospective application as the required method for reporting a change in accounting principle and the reporting of a
correction of an error. The Statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

FASB
Statement No. 153,Exchanges of Nonmonetary Assets an Amendment of APB Opinion No. 29, eliminates the exception to fair
value for exchanges of similar productive assets that was provided in APB Opinion No. 29.

FASB
Statement No. 152,Accounting for Real Estate Time-Sharing Transactions, amends FASB Statement No. 66 Accounting for Sales of Real Estateto
reference the financial accounting and reporting guidance for real estate time-sharing transitions that
is provided in AICPA Statement of Position
04-2,Accounting for Real Estate Time Sharing Transactions. This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real
Estate Projects, to state that the guidance for (a) incidental operations and
(b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions.

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.

FASB
Statement No. 123R,Share Based Payment, revises FASB Statement No. 123,Accounting for
Stock-Based Compensationand supersedes Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to
Employees, and its related implementation guidance. Statement 123R establishes standards to the accounting for transactions in which an entity exchanges its equity instruments
for goods or services. Statement 123R 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. As such, it eliminated the alternative provided by Statement 123 that such costs could be measured either by using fair value or by using Opinion 25's intrinsic value method of
accounting which generally did not result in the recognition of compensation costs as a result of the grant of stock options to employees. In addition, Statement 123R 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. Statement 123R becomes effective as of the first interim or annual reporting period that begins after December 15, 2005.

The
provisions of FASB Statement No. 123R will require the Company to expense the estimated fair value of options granted, beginning in the first quarter of 2006. 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.

33

---





ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
Carrollton Bancorp
Baltimore, Maryland

We have audited the accompanying consolidated balance sheets of Carrollton Bancorp and Subsidiary as of December 31, 2005 and 2004, and the
related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years ended December 31, 2005. 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. We were not engaged to perform an audit of the Company's internal control over
financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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, 2005 and 2004, and the results of their operations and their cash flows for each of the three years ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America.

Rowles & Company, LLP, Certified Public Accountants

SIGNATURE

Baltimore,
Maryland
February 10, 2006

34

---



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 $3,337,163 and $3,485,076                                                              |                     |               
|Premises and equipment                                                                                                          |                     |               
|Accrued interest receivable                                                                                                     |                     |               
|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 agreements 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 2,809,698 in 2005 and 2,834,823 in 2004 |                     |               
|Additional paid-in capital                                                                                                      |                     |               
|Retained earnings                                                                                                               |                     |               
|Accumulated other comprehensive income                                                                                          |                     |               
|                                                                                                                                |                     |               
|                                                                                                                                |                     |               
|                                                                                                                                |                     |               
|                                                                                                                                |                     | $             
|                                                                                                                                |                     |               

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

35

---



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                                    |                            |                         
|Electronic Banking fees                                  |                            |                         
|Mortgage banking fees and gains                          |                            |                         
|Other fees and commissions                               |                            |                         
|Gains on security sales                                  |                            |                         
|                                                         |                            |                         
|Total noninterest income                                 |                            |                         
|                                                         |                            |                         
|NONINTEREST EXPENSES                                     |                            |                         
|Salaries                                                 |                            |                         
|Employee benefits                                        |                            |                         
|Occupancy                                                |                            |                         
|Furniture and equipment                                  |                            |                         
|Impairment of ATM network                                |                            |                         
|Prepayment penalty                                       |                            |                         
|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 consolidated financial statements.

36

---



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
        YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

|                                                                           |  | Common Stock |           | Additional
Paid-In
Capital |   | Retained
Earnings |   | Accumulated
Other
Comprehensive
Income |            | Comprehensive
Income |  
|-------------------------------------------------------------------------- |  | ------------ | --------- | -------------------------- | - | ----------------- | - | -------------------------------------- | ---------- | -------------------- | -
|                                                                           |  |              |           |                            |   |                   |   |                                        |            |                      |  
|BALANCE, DECEMBER 31, 2002                                                 |  | $            | 2,821,757 |                            | $ | 18,617,608        |   | $                                      | 10,513,874 |                      | $
|Net Income                                                                 |  |              |          |                            |   |                  |   |                                        | 924,714    |                      |  
|Net unrealized gains (losses) on available for sale securities, net of tax |  |              |          |                            |   |                  |   |                                        |           |                      |  
|                                                                           |  |              |           |                            |   |                   |   |                                        |            |                      |  
|Comprehensive income                                                       |  |              |           |                            |   |                   |   |                                        |            |                      |  
|                                                                           |  |              |           |                            |   |                   |   |                                        |            |                      |  
|Stock options exercised                                                    |  |              | 6,715     |                            |   | 70,007            |   |                                        |           |                      |  
|Adjustments to 2002 stock dividend                                         |  |              | (394      | )                          |   | (5,228            | ) |                                        | 5,622      |                      |  
|Cash dividends, $0.36 per share                                            |  |              |          |                            |   |                  |   |                                        | (1,016,785 | )                    |  
|                                                                           |  |              |           |                            |   |                   |   |                                        |            |                      |  
|BALANCE, DECEMBER 31, 2003                                                 |  |              | 2,828,078 |                            |   | 18,682,387        |   |                                        | 10,427,425 |                      |  
|Net Income                                                                 |  |              |          |                            |   |                  |   |                                        | 888,364    |                      |  
|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     |                            |   | 122,616           |   |                                        |           |                      |  
|Shares acquired and cancelled                                              |  |              | (2,100    | )                          |   | (30,555           | ) |                                        |           |                      |  
|Cash dividends, $0.38 per share                                            |  |              |          |                            |   |                  |   |                                        | (1,076,433 | )                    |  
|                                                                           |  |              |           |                            |   |                   |   |                                        |            |                      |  
|BALANCE, DECEMBER 31, 2004                                                 |  |              | 2,834,823 |                            |   | 18,774,448        |   |                                        | 10,239,356 |                      |  
|Net Income                                                                 |  |              |          |                            |   |                  |   |                                        | 2,458,437  |                      |  
|Net unrealized gains (losses) on available for sale securities, net of tax |  |              |          |                            |   |                  |   |                                        |           |                      |  
|                                                                           |  |              |           |                            |   |                   |   |                                        |            |                      |  
|Comprehensive income                                                       |  |              |           |                            |   |                   |   |                                        |            |                      |  
|                                                                           |  |              |           |                            |   |                   |   |                                        |            |                      |  
|Shares acquired and cancelled                                              |  |              | (42,500   | )                          |   | (556,750          | ) |                                        |           |                      |  
|Stock options exercised including tax benefit of $18,166                   |  |              | 17,375    |                            |   | 207,830           |   |                                        |           |                      |  
|Cash dividends, $0.40 per share                                            |  |              |          |                            |   |                  |   |                                        | (1,130,262 | )                    |  
|                                                                           |  |              |           |                            |   |                   |   |                                        |            |                      |  
|BALANCE, DECEMBER 31, 2005                                                 |  | $            | 2,809,698 |                            | $ | 18,425,528        |   | $                                      | 11,567,531 |                      | $
|                                                                           |  |              |           |                            |   |                   |   |                                        |            |                      |  

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

37

---



CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                           |                                                   | Years Ended December 31,                            |            
|------------------------------------------------------------------------------------------ | ------------------------------------------------- | --------------------------------------------------- | -----------
|
|                                                                                           |                                                  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                      |                                                   |                                                     |            
|Net income                                                                                 |                                                   | $                                                   | 2,458,437  
|ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITES: |                                                   |                                                     |            
|Provision for loan losses                                                                  |                                                   |                                                     |           
|Deprecation and amortization                                                               |                                                   |                                                     | 937,570    
|Deferred income taxes                                                                      |                                                   |                                                     | 153,209    
|Amortization of premiums and discounts                                                     |                                                   |                                                     | 80,719     
|Gains on disposal of securities                                                            |                                                   |                                                     | (839,859   
|Impairment of ATM network                                                                  |                                                   |                                                     | 563,400    
|Write down of impaired securities                                                          |                                                   |                                                     |           
|Loans held for sale made, net of principal sold                                            |                                                   |                                                     | (3,547,380 
|Gains on sale and write-down of premises and equipment                                     |                                                   |                                                     | (6,246     
|(Gains) losses on sale of foreclosed real estate                                           |                                                   |                                                     |           
|Write-down of foreclosed real estate                                                       |                                                   |                                                     |           
|Income tax benefit from exercise of stock options                                          |                                                   |                                                     | 18,166     
|(Increase) decrease in:                                                                    |                                                   |                                                     |            
|                                                                                           | Accrued interest receivable                       |                                                     |            
|                                                                                           | Prepaid income taxes                              |                                                     |            
|                                                                                           | Cash surrender value of bank owned life insurance |                                                     |            
|                                                                                           | Other assets                                      |                                                     |            
|Increase (decrease) in:                                                                    |                                                   |                                                     |            
|                                                                                           | Accrued interest payable                          |                                                     |            
|                                                                                           | Deferred loan origination fees                    |                                                     |            
|                                                                                           | Other liabilities                                 |                                                     |            
|                                                                                           |                                                   |                                                     |            
|                                                                                           |                                                   | Net cash provided by (used in) operating activities |            
|                                                                                           |                                                   |                                                     |            
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                      |                                                   |                                                     |            
|Proceeds from sales of securities available for sale                                       |                                                   |                                                     | 2,461,757  
|Proceeds from maturities of securities available for sale                                  |                                                   |                                                     | 19,716,329 
|Redemption (purchase) of Federal Home Loan Bank stock, net                                 |                                                   |                                                     | 191,300    
|Purchase of securities available for sale                                                  |                                                   |                                                     | (8,354,638 
|Purchase of securities held to maturity                                                    |                                                   |                                                     | (19,021,466
|Loans made, net of principal collected                                                     |                                                   |                                                     | (28,509,599
|Purchase of premises and equipment                                                         |                                                   |                                                     | (902,943   
|Proceeds from sale of premises and equipment                                               |                                                   |                                                     | 15,189     
|Proceeds from sale of foreclosed real estate                                               |                                                   |                                                     |           
|                                                                                           |                                                   |                                                     |            
|                                                                                           |                                                   | Net cash provided by (used in) investing activities |            
|                                                                                           |                                                   |                                                     |            
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                      |                                                   |                                                     |            
|Net increase (decrease) in time deposits                                                   |                                                   |                                                     | 20,085,651 
|Net increase (decrease) in other deposits                                                  |                                                   |                                                     | 25,694,707 
|Payment of Federal Home Loan Bank advance                                                  |                                                   |                                                     | (5,000,000 
|Net increase (decrease) in other borrowed funds                                            |                                                   |                                                     | (956,193   
|Common stock repurchase and retirement                                                     |                                                   |                                                     | (599,250   
|Stock options exercised                                                                    |                                                   |                                                     | 207,039    
|Dividends paid                                                                             |                                                   |                                                     | (1,130,262 
|                                                                                           |                                                   |                                                     |            
|                                                                                           |                                                   | Net cash provided by (used in) financing activities |            
|                                                                                           |                                                   |                                                     |            
|Net increase (decrease) in cash and cash equivalents                                       |                                                   |                                                     | 4,898,021  
|Cash and cash equivalents at beginning of year                                             |                                                   |                                                     | 34,192,544 
|                                                                                           |                                                   |                                                     |            
|Cash and cash equivalents at end of year                                                   |                                                   | $                                                   | 39,090,565 
|                                                                                           |                                                   |                                                     |            
|SUPPLEMENTAL INFORMATION:                                                                  |                                                   |                                                     |            
|Interest paid on deposits and borrowings                                                   |                                                   | $                                                   | 7,286,399  
|                                                                                           |                                                   |                                                     |            
|Income taxes paid                                                                          |                                                   | $                                                   | 1,525,204  
|                                                                                           |                                                   |                                                     |            
|NONCASH ACTIVITY:                                                                          |                                                   |                                                     |            
|Transfer of loans to foreclosed real estate                                                |                                                   | $                                                   |           
|                                                                                           |                                                   |                                                     |            

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

38

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of Carrollton Bancorp and subsidiary (the "Company") conform to U.S. generally accepted accounting
principles. The following is a description of the more significant of these policies.

Organization

The Company was formed January 11, 1990 and is a Maryland corporation chartered as a bank holding company. The Company holds all the issued and outstanding
shares of common stock of Carrollton Bank (the "Bank"). The Bank is a Maryland company that engages in general commercial banking operations. Deposits in the Bank are insured, subject to regulatory
limitations, by the Federal Deposit Insurance Corporation (the "FDIC").

The
Bank provides commercial and brokerage services to individuals and small and medium-sized businesses. Services offered by the Bank include a variety of loans and a broad spectrum of
commercial and consumer financial services.

Basis of Presentation

The consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles and include all accounts of the Company and its
wholly-owned subsidiary, Carrollton Bank. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Certain amounts for prior years have
been reclassified to conform to the presentation for 2005. These reclassifications have no effect on stockholders' equity or net income as previously reported.

Use of Estimates

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and judgments
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Material
estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses (the "Allowance"),
and other than temporary impairment of investment securities. In connection with the determination of the Allowance, management prepares fair value analyses and obtains independent appraisals as
necessary. Management believes that the Allowance is sufficient to address the losses inherent in the current loan portfolio. While management uses available information to recognize losses on loans,
future additions to the Allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination processes, periodically
review the Bank's Allowance. Such agencies may require the Bank to recognize additions to the Allowance based on their judgments about information available to them at the time of their examinations.

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.

Cash and Cash Equivalents

For purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents include cash and due from banks, federal funds sold and interest-bearing
deposits with banks.

Federal
funds sold are carried at cost, which approximates fair value, and are generally sold for one-day periods.

Federal Home Loan Bank Stock

Federal Home Loan Bank stock is carried at cost, which approximates fair value.

Investment Securities Available for Sale

Securities available for sale are acquired as part of the Company's asset/liability management strategy and may be sold in response to changes in interest rates,
loan demand, changes in prepayment risk and other factors. Securities available for sale are recorded at their fair value. Unrealized holding gains or losses, net of the related tax effect, are
excluded from earnings and reported as an item of other comprehensive income until realized. The carrying values of securities available for sale are adjusted for premium amortization to the earlier
of the maturity or expected call date and discount accretion to the maturity date. Realized gains and losses, using the specific identification method, are included as a separate component of
noninterest income. Related interest and dividends are included in interest

39

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income.
Declines in the fair value of individual available for sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value.
Factors affecting the determination of whether an other-than-temporary impairment has occurred include a downgrading of the security by a rating agency, a significant
deterioration in the financial condition of the issuer, or that management would not have the intent and ability to hold a security for a period of time sufficient to allow for any anticipated
recovery in fair value.

Equity
securities represent the stock of various financial institutions.

Investment Securities Held to Maturity

Investment securities held to maturity are those securities which the Company has the ability and positive intent to hold until maturity. Securities so classified
at the time of purchase are recorded at cost. Carrying values of securities held to maturity are adjusted for premium amortization to the earlier of the maturity or expected call date and discount
accretion to the maturity date. Declines in the fair value of individual held to maturity securities below their cost, that are other than temporary, result in write-downs of the individual securities
to their fair value. Factors affecting the determination of whether an other-than-temporary impairment has occurred include a downgrading of the security by the rating agency,
a significant deterioration in the financial condition of the issuer, or that management would not have the ability to hold a security for a period of time sufficient to allow for any anticipated
recovery in fair value.

Loans Held for Sale

Residential mortgage loans originated for sale are carried at the lower of cost or market, which may be indicated by the committed sale price, determined on an
individual basis.

Loans Receivable

Loans are stated at the amount of unpaid principal adjusted for deferred origination fees and costs and the allowance for loan losses. Deferred origination fees
and costs are recognized as an adjustment of the related loan yield using the interest method. The Company determines the delinquency status of loans based on contractual loan terms. Loans are
generally 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 demonstrates 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.

A
loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. A loan is not considered impaired during a period of delay in payment if the Company expects to collect all amounts due, including interest past-due. The
Company generally considers a period of delay in payment to include delinquency up to 90 days.

In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 114,Accounting by Creditors for Impairment of a Loan("SFAS No. 114"), the Company measures impaired loans: (i) at the present value of expected cash flows discounted at the loan's effective interest rate; (ii) at the observable
market price; or (iii) 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 a valuation allowance and corresponding provision for loan losses.

SFAS
No. 114 does not apply to larger groups of smaller-balance homogeneous loans such as consumer installment loans. These loans are collectively evaluated for impairment. The
Company's impaired loans are, therefore, comprised primarily of commercial loans, including commercial mortgage loans, and real estate development and construction loans. In addition, impaired loans
are generally loans which management has placed in nonaccrual status. The Company recognizes interest income for impaired loans consistent with its method for nonaccrual loans. Specifically, interest
payments received are normally applied to principal. An impaired loan is charged off when the loan, or a portion thereof, is considered uncollectible.

The
Company provides for loan losses through the establishment of the Allowance by provisions charged against earnings. The Company's objective is to ensure that the Allowance is
adequate to cover probable loan losses inherent in the loan portfolio at the date of each balance sheet. Management considers a number of factors in estimating the required level of the Allowance.
These factors include: historical loss experience in the loan portfolios; the levels and trends in past-due and nonaccrual loans; the status of nonaccrual loans and other loans identified
as having the potential for further deterioration; credit risk and industry concentrations; trends in loan volume; the effects of any changes in lending policies and procedures or underwriting
standards; and, a continuing evaluation of the economic environment. The Company's estimate of the required Allowance is subject to revision as these factors change and is sensitive to the effects of
economic and market conditions on borrowers. Loan losses are charged against the

40

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allowance
when management believes the uncollectibility of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the Allowance.

Real Estate Properties Acquired in Satisfaction of Loans

Real estate properties acquired in satisfaction of loans are reported in foreclosed real estate and are recorded at the lower of cost or estimated fair value less
selling costs. Losses incurred at the time of acquisition of the property are charged to the allowance for loan losses. Subsequent write-downs are included in noninterest expense along with operating
income and expenses of such properties and gains or losses realized upon disposition.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are charged to noninterest expenses.
Depreciation generally is computed on the straight-line basis over the estimated useful lives of the assets, which generally range from three to ten years for furniture and equipment,
three to five years for computer software and hardware, and ten to forty years for buildings and leasehold improvements. Leasehold improvements are generally amortized over the terms of the related
leases or the lives of the assets, whichever is shorter. The costs of significant purchases, renewals and betterments are capitalized, while the costs of ordinary maintenance and repairs are expensed
as incurred and included in noninterest expense.

Any
gain or loss on the sale of an asset is treated as an adjustment to the basis of its replacement, if traded in, or as an income or expense item, if sold. Leases are accounted for as
operating leases since none meet the criteria for capitalization.

Bank Owned Life Insurance

The Company purchased insurance on the lives of certain groups of employees. The policies accumulate asset values to meet future liabilities. Increases in the cash
surrender value are recorded in noninterest income in the Consolidated Statements of Income.

Income Taxes

The Company and its subsidiary file a consolidated federal income tax return. Deferred income taxes are recognized for the tax consequences of temporary
differences between financial statement carrying amounts and the tax basis of assets and liabilities based on enacted tax rates expected to be in effect when such amounts are realized or settled.

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, 2005 and 2004 was $554,284 and $677,453, respectively. Amortization expense was $123,180 for 2005, 2004, and 2003, 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.

Derivative Instruments and Hedging Activities

The Company accounts for derivative instruments and hedging activities utilizing guidelines established in FASB Statement No. 133 ("FASB No. 133"), Accounting for Derivative
Instruments and Hedging Activities, as amended. The Company recognizes all derivatives as either assets or liabilities on the
balance sheet and measures those instruments at fair value. Changes in fair value of derivatives designated and accounted for as cash flow hedges, to the extent they are effective as hedges, are
recorded in "Other Comprehensive Income," net of deferred taxes. Any hedge ineffectiveness would be recognized in the income statement line item pertaining to the hedged item.

Management
periodically reviews contracts from various functional areas of the Company to identify potential derivatives embedded within selected contracts. Management has identified
potential embedded derivatives in certain loan commitments for residential mortgages where the Company has intent to sell to an outside investor. Due to the short-term nature of these loan
commitments and the minimal historical dollar amount of commitments outstanding, the corresponding impact on the Company's financial condition and results of operation has not been material.

The
Company entered into an interest rate Floor transaction on December 14, 2005. The Floor has a notional amount of $10.0 million with a minimum interest rate of 7.00%
based on US prime rate and was initiated to hedge exposure to the variability in the future cash flows derived from adjustable rate home equity loans. The Floor has a term of five years. This interest
rate Floor is designated a cash flow hedge, as it is designed to reduce variation in

41

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overall
changes in cash flow below the above designated strike level associated with the first Prime based interest payments received each period on its then existing loans. The interest rate of these
loans will change whenever the repricing index changes, plus or minus a credit spread (based on each loan's underlying credit characteristics), until the maturity of the interest rate Floor. Should
the Prime rate index fall below the strike level of the Floor prior to maturity, the Floor's counterparty will pay the Bank the difference between the strike rate and the rate index multiplied by the
notional value of the Floor multiplied by the number of days in the period divided by 360 days. The fair value of the Floor will be recorded as "Other assets" and changes in the fair value will
be recorded as "Other Comprehensive Income" a component of shareholders' equity.

Per Share Data

Basic net income per share is determined by dividing net income by the weighted average number of common shares 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 all changes in shareholders' equity during a period, except those relating to investments by and distributions to shareholders. The
Company's comprehensive income consists of net earnings and unrealized gains and losses on securities available for sale and is presented in the statements of shareholders' equity. Accumulated other
comprehensive income is displayed as a separate component of shareholders' equity.

Stock-based Compensation

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, 2005, 2004,
and 2003:

|                            |                                                   | 2005 |   | 2004      |   | 2003 |        
|--------------------------- | ------------------------------------------------- | ---- | - | --------- | - | ---- | -------
|                            |                                                  
|Net Income:                 |                                                   |      |   |           |   |      |        
|                            | As reported                                       |      | $ | 2,458,437 |   | $    | 888,364
|                            | Additional compensation net of related income tax |      |   | (99,572   | ) |      | (81,812
|                            |                                                   |      |   |           |   |      |        
|                            | Pro forma                                         |      | $ | 2,358,865 |   | $    | 806,552
|                            |                                                   |      |   |           |   |      |        
|Basic Earnings Per Share:   |                                                   |      |   |           |   |      |        
|                            | As reported                                       |      | $ | 0.87      |   | $    | 0.31   
|                            | Pro forma                                         |      |   | 0.83      |   |      | 0.28   
|Diluted Earnings Per Share: |                                                   |      |   |           |   |      |        
|                            | As reported                                       |      |   | 0.87      |   |      | 0.31   
|                            | Pro forma                                         |      |   | 0.83      |   |      | 0.28   

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, 2005, 2004, and 2003:

|                    |  | 2005           |  | 2004     |  | 2003          
|------------------- |  | -------------- |  | -------- |  | --------------
|                   
|Dividend yield      |  | 2.67%          |  | 2.25%    |  | 2.48% to 2.84%
|Expected volatility |  | 26.94%         |  | 18.15%   |  | 20.88%        
|Risk free rate      |  | 3.96% to 4.47% |  | 4.43%    |  | 4.25% to 4.67%
|Estimated life      |  | 10 years       |  | 10 years |  | 10 years      

2. CASH AND DUE FROM BANKS

The Bank is required by the Federal Reserve System to maintain certain reserve balances based principally on deposit liabilities. At
December 31, 2005 and 2004, the required reserve balances were $323,000 and $530,000, respectively. The Company sells federal funds on an unsecured basis to its correspondent banks. Average
balances sold were $12.9 million in 2005 and $3.2 million in 2004.

42

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3. INVESTMENT SECURITIES

Investment securities are summarized as follows:

|                   |                            | Amortized
cost |            | Unrealized
gains |   | Unrealized
losses |           | Fair
value
|------------------ | -------------------------- | -------------- | ---------- | ---------------- | - | ----------------- | --------- | ----------
|                  
|December 31, 2005  |                            |                |            |                  |   |                   |           |           
|AVAILABLE FOR SALE |                            |                |            |                  |   |                   |           |           
|                   | U.S. government agency     |                | $          | 10,786,412       |   | $                 | 3,225     |           
|                   | Mortgage-backed securities |                |            | 8,551,994        |   |                   | 34,005    |           
|                   | State and municipal        |                |            | 3,613,458        |   |                   | 76,401    |           
|                   | Corporate bonds            |                |            | 1,516,345        |   |                   |          |           
|                   |                            |                |            |                  |   |                   |           |           
|                   |                            |                | 24,468,209 |                  |   | 113,631           |           |           
|                   | Equity securities          |                |            | 1,633,298        |   |                   | 3,030,815 |           
|                   |                            |                |            |                  |   |                   |           |           
|                   |                            | $              | 26,101,507 |                  | $ | 3,144,446         |           | $         
|                   |                            |                |            |                  |   |                   |           |           
|HELD TO MATURITY   |                            |                |            |                  |   |                   |           |           
|                   | U.S. government agency     |                | $          | 5,000,000        |   | $                 |          |           
|                   | Mortgage-backed securities |                |            | 9,575,713        |   |                   | 29,016    |           
|                   | State and municipal        |                |            | 3,912,692        |   |                   |          |           
|                   |                            |                |            |                  |   |                   |           |           
|                   |                            | $              | 18,488,405 |                  | $ | 29,016            |           | $         
|                   |                            |                |            |                  |   |                   |           |           

|                   |                            | 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         |           | $         
|                   |                            |                |            |                  |   |                   |           |           

Information related to unrealized losses in the portfolio as of December 31, 2005 follows:

|                           |  | December 31, 2005 |           
|-------------------------- |  | ----------------- | ----------
|
|
|                           | 
|U.S. government agency     |  | $                 | 4,935,950 
|Mortgage-backed securities |  |                   | 7,489,065 
|State and municipal        |  |                   | 3,862,860 
|Corporate bonds            |  |                   |          
|Equity securities          |  |                   |          
|                           |  |                   |           
|                           |  | $                 | 16,287,875
|                           |  |                   |           

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 considered to be an
other-than-temporary impairment of those securities. At December 31, 2005,

43

---



one
marketable equity security had an unrealized loss with aggregate depreciation of approximately $3,900 from the Company's cost basis. No credit issues have been identified that cause management to
believe the decline in market value is 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, mortgage-backed securities, state and municipal securities and corporate bonds as of December 31, 2005 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, 2005 and 2004 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, 2005
|-------------------------- |  | -----------------
|
|
|                          
|Within one year            |  | $                
|Over one to five years     |  |                  
|Over five to ten years     |  |                  
|Mortgage-backed securities |  |                  
|                           |  |                  
|                           |  | $                
|                           |  |                  

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

At December 31, 2005 and 2004, securities with an amortized cost of $32.8 million (fair value of $32.6 million) and
$26.9 million (fair value of $30.1million), respectively, were pledged as collateral for government deposits, securities sold under repurchase agreements, and advances from the Federal Home
Loan Bank.

In
2005, 2004, and 2003, the Company realized gross gains on sales of securities of $839,859, $115,810, and $486,109, respectively. During 2004, the Company recognized an other than
temporary impairment of $497,313. There were no realized losses in 2005 or 2003. Income taxes (benefit) on net security gains (losses) were $293,783, $(147,336), and $187,735, in 2005, 2004 and 2003,
respectively.

44

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4. LOANS

Major classifications of loans at December 31 are as follows:

|                          |                                   | 2005 |             | 2004      
|------------------------- | --------------------------------- | ---- | ----------- | ----------
|                         
|Real estate:              |                                   |      |             |           
|                          | Residential                       |      | $           | 53,148,211
|                          | Commercial                        |      |             | 97,909,115
|                          | Construction and land development |      |             | 37,415,478
|Demand and time           |                                   |      | 56,118,527  |           
|Lease financing           |                                   |      | 1,936,482   |           
|Installment               |                                   |      | 1,415,260   |           
|                          |                                   |      |             |           
|                          |                                   |      | 247,943,073 |           
|Allowance for loan losses |                                   |      | 3,337,163   |           
|                          |                                   |      |             |           
|Loans, net                |                                   | $    | 244,605,910 |           
|                          |                                   |      |             |           

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:

|                                      |  | 2005 |             | 2004
|------------------------------------- |  | ---- | ----------- | ----
|                                     
|Repricing or maturing within one year |  | $    | 139,326,825 |     
|Maturing over one to five years       |  |      | 91,219,788  |     
|Maturing over five years              |  |      | 17,396,460  |     
|                                      |  |      |             |     
|                                      |  | $    | 247,943,073 |     
|                                      |  |      |             |     

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

|                                                 |  | 2005 |          | 2004 |  
|------------------------------------------------ |  | ---- | -------- | ---- | -
|                                                 | 
|Deferred origination costs and premiums          |  | $    | 392,075  |      | $
|Deferred origination fees and unearned discounts |  |      | (741,636 | )    |  
|                                                 |  |      |          |      |  
|Net deferred fees                                |  | $    | (349,561 | )    | $
|                                                 |  |      |          |      |  

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

|                                |  | 2005 |           | 2004 |   | 2003     
|------------------------------- |  | ---- | --------- | ---- | - | ---------
|                               
|Beginning balance               |  | $    | 3,485,076 |      | $ | 3,648,245
|Provision charged to operations |  |      |          |      |   |         
|Recoveries                      |  |      | 167,128   |      |   | 113,953  
|                                |  |      |           |      |   |          
|                                |  |      | 3,652,204 |      |   | 3,762,198
|Loans charged off               |  |      | 315,041   |      |   | 277,122  
|                                |  |      |           |      |   |          
|Ending balance                  |  | $    | 3,337,163 |      | $ | 3,485,076
|                                |  |      |           |      |   |          

45

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Nonperforming assets and loans past-due 90 days or more but accruing interest were as follows at December 31:

|                                               |                            | 2005 |           | 2004      |   | 2003     
|---------------------------------------------- | -------------------------- | ---- | --------- | --------- | - | ---------
|                                              
|Nonaccrual loans                               |                            | $    | 1,413,925 |           | $ | 615,394  
|Restructured loans                             |                            |      |          |           |   | 455,864  
|Foreclosed real estate                         |                            |      |          |           |   |         
|                                               |                            |      |           |           |   |          
|                                               | Total nonperforming assets |      | $         | 1,413,925 |   | $        
|                                               |                            |      |           |           |   |          
|Accruing loans past-due 90 days or more        |                            | $    | 179,012   |           | $ | 1,567,919
|                                               |                            |      |           |           |   |          
|Unrecorded interest on nonaccrual loans        |                            | $    | 111,413   |           | $ | 64,037   
|                                               |                            |      |           |           |   |          
|Interest income recognized on nonaccrual loans |                            | $    | 58,718    |           | $ | 32,318   
|                                               |                            |      |           |           |   |          

At December 31, 2005, there were no impaired loans.

At
December 31, 2004, and 2003, the Company had one impaired loan to the same borrower amounting to $455,864, and $661,974, 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 $298,406, $530,680, and $615,021, in 2005, 2004, and 2003,
respectively. During 2005, 2004, and 2003, the Company received total payments on impaired loans of $601,323, $341,857, and $34,650, respectively. Of these amounts, $24,583, $75,938, and $34,650, were
recorded as interest income for 2005, 2004, and 2003, respectively. The remainder was applied to reduce principal and recovery of professional fees. There was no specific allowance for this loan since
the fair value of the collateral securing the loan was considered adequate to cover all principal and interest due. The Company also continued to accrue interest on this loan due to the adequacy of
the collateral value.

Loans
with a balance of approximately $86.2 million and $48.2 million were pledged as collateral to the Federal Home Loan Bank of Atlanta as of December 31, 2005 and
2004, respectively. At December 31, 2005 and 2004, the Company serviced loans for others totaling $1.6 million and $2.4 million, respectively.

5. CREDIT COMMITMENTS

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

|                       |                                   | 2005 |            | 2004       |   | 2003      
|---------------------- | --------------------------------- | ---- | ---------- | ---------- | - | ----------
|                      
|LOAN COMMITMENTS       |                                   |      |            |            |   |           
|                       | Mortgage loans                    |      | $          | 4,066,223  |   | $         
|                       | Construction and land development |      |            | 14,913,344 |   |           
|                       | Commercial loans                  |      |            | 7,058,000  |   |           
|                       |                                   |      |            |            |   |           
|                       |                                   | $    | 26,037,567 |            | $ | 32,151,577
|                       |                                   |      |            |            |   |           
|UNUSED LINES OF CREDIT |                                   |      |            |            |   |           
|                       | Home equity lines                 |      | $          | 52,194,528 |   | $         
|                       | Commercial lines                  |      |            | 26,095,802 |   |           
|                       | Unsecured consumer lines          |      |            | 1,410,270  |   |           
|                       |                                   |      |            |            |   |           
|                       |                                   | $    | 79,700,600 |            | $ | 82,755,434
|                       |                                   |      |            |            |   |           
|LETTERS OF CREDIT      |                                   | $    | 2,606,061  |            | $ | 2,910,330 
|                       |                                   |      |            |            |   |           

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.

46

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6. RELATED PARTY TRANSACTIONS

The Company's executive officers and directors, or other entities, to which they are related, enter into loan transactions with the Bank in the
ordinary course of business. The terms of these transactions are similar to the terms provided to other borrowers entering into similar loan transactions and do not involve more than normal risk of
collectibility. During the years ended December 31, 2005, 2004 and 2003, transactions in related party loans were as follows:

|                  |  | 2005 |           | 2004 |   | 2003       |  
|----------------- |  | ---- | --------- | ---- | - | ---------- | -
|                  | 
|Beginning balance |  | $    | 1,820,717 |      | $ | 3,209,200  |  
|Additions         |  |      | 179,452   |      |   | 1,040,580  |  
|Repayments        |  |      | (105,385  | )    |   | (2,429,063 | )
|                  |  |      |           |      |   |            |  
|Ending balance    |  | $    | 1,894,784 |      | $ | 1,820,717  |  
|                  |  |      |           |      |   |            |  

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, 2005, 2004, and 2003, amounts paid to the law firm in connection with those services were $220,000, $249,000, and $260,000, 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, 2005,
2004, and 2003, amounts paid to the insurance brokerage for insurance premiums were $215,000, $192,000, and $245,000, 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 $3,341 in 2003. No such services
were performed in 2005 or 2004.

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 $169,000 in 2005, $739,000 in 2004, and $101,000 in 2003.

7. PREMISES AND EQUIPMENT

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

|                                          |  | 2005 |            | 2004 |  
|----------------------------------------- |  | ---- | ---------- | ---- | -
|                                          | 
|Land and improvements                     |  | $    | 909,544    |      | $
|Buildings                                 |  |      | 2,885,994  |      |  
|Leasehold improvements                    |  |      | 3,137,550  |      |  
|Equipment and fixtures                    |  |      | 5,341,396  |      |  
|                                          |  |      |            |      |  
|                                          |  |      | 12,274,484 |      |  
|Accumulated depreciation and amortization |  |      | (6,840,856 | )    |  
|                                          |  |      |            |      |  
|                                          |  | $    | 5,433,628  |      | $
|                                          |  |      |            |      |  

Depreciation and amortization of premises and equipment was $673,022, $1,059,198, and $1,275,612, for 2005, 2004, and 2003, respectively.
Amortization of software was $141,368, $72,962, and $41,811 for 2005, 2004, and 2003, respectively.

On
September 22, 2005, Wal-Mart notified the Bank of its intention to terminate the agreement for the Bank to provide ATMs at Wal-Mart, Sam's Club, and Wal-Mart supercenters in
Maryland, Virginia and West Virginia. An impairment of $563,400 was recorded for the write down and cost of disposal of the ATM network. The ATMs were assets of the Electronic Banking division.

8. DEPOSITS

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

|                                            |  | 2005 |             | 2004
|------------------------------------------- |  | ---- | ----------- | ----
|                                           
|NOW and Super NOW                           |  | $    | 33,396,380  |     
|Money market                                |  |      | 50,482,662  |     
|Savings                                     |  |      | 31,182,882  |     
|Certificates of deposit of $100,000 or more |  |      | 14,990,576  |     
|Other time deposits                         |  |      | 74,563,018  |     
|                                            |  |      |             |     
|                                            |  | $    | 204,615,518 |     
|                                            |  |      |             |     

47

---



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

Borrowed funds consist of securities sold under repurchase agreements, federal funds purchased, borrowings from the FHLB and notes
payable-U.S. Treasury. Notes payable-U.S. Treasury are U.S. Treasury and Federal Treasury Tax and Loan deposits accepted by the Bank from its customers to be remitted to the
Federal Reserve on a periodic basis. Securities sold under repurchase agreements are securities sold to the Bank's customers under a continuing "roll-over" contract and mature in one
business day. The underlying securities sold are federal agency securities that are segregated from the Company's other investment securities. Federal funds purchased are unsecured, overnight
borrowings from other financial institutions.

Information
with respect to borrowings is as follows at and for the years ended December 31:

|                                                |                                                                         | Maturity Date |                  | 2005 |            | 2004       |   | 2003       |           
|----------------------------------------------- | ----------------------------------------------------------------------- | ------------- | ---------------- | ---- | ---------- | ---------- | - | ---------- | ----------
|                                                |                                                                         |               |                  |      |            |            |  
|Amount outstanding at year-end:                 |                                                                         |               |                  |      |            |            |   |            |           
|                                                | Federal Home Loan Bank                                                  |               | March 26, 2008   |      | $          | 5,000,000  |   | $          | 5,000,000 
|                                                | Federal Home Loan Bank                                                  |               | February 2, 2010 |      |            | 35,000,000 |   |            | 35,000,000
|                                                | Federal Home Loan Bank                                                  |               | May 24, 2010     |      |            |           |   |            | 5,000,000 
|                                                |                                                                         |               |                  |      |            |            |   |            |           
|                                                |                                                                         |               |                  | $    | 40,000,000 |            | $ | 45,000,000 |           
|                                                |                                                                         |               |                  |      |            |            |   |            |           
|                                                | Federal funds purchased and securities sold under repurchase agreements |               |                  |      | $          | 9,280,348  |   | $          | 10,183,951
|                                                | Notes-payable  U.S. Treasury                                           |               |                  |      | $          | 1,932,124  |   | $          | 1,984,714 
|Weighted average interest rate at year-end:     |                                                                         |               |                  |      |            |            |   |            |           
|                                                | Advances from the FHLB                                                  |               |                  |      |            | 6.67       | % |            | 6.84      
|                                                | Federal funds purchased and securities sold under repurchase agreements |               |                  |      |            | 3.59       | % |            | 1.91      
|                                                | Notes payable  U.S. Treasury                                           |               |                  |      |            | 4.17       | % |            | 1.97      
|Maximum outstanding at any month-end:           |                                                                         |               |                  |      |            |            |   |            |           
|                                                | Advances from the FHLB                                                  |               |                  |      | $          | 45,000,000 |   | $          | 45,000,000
|                                                | Federal funds purchased and securities sold under repurchase agreements |               |                  |      |            | 11,742,108 |   |            | 13,540,231
|                                                | Notes payable  U.S. Treasury                                           |               |                  |      |            | 1,958,750  |   |            | 2,008,989 
|Average balance outstanding during the year:    |                                                                         |               |                  |      |            |            |   |            |           
|                                                | Advances from the FHLB                                                  |               |                  |      | $          | 44,876,712 |   | $          | 45,000,000
|                                                | Federal funds purchased and securities sold under repurchase agreements |               |                  |      |            | 8,986,714  |   |            | 10,102,501
|                                                | Notes payable  U.S. Treasury                                           |               |                  |      |            | 1,016,211  |   |            | 1,051,267 
|Weighted average interest rate during the year: |                                                                         |               |                  |      |            |            |   |            |           
|                                                | Advances from the FHLB                                                  |               |                  |      |            | 6.84       | % |            | 6.84      
|                                                | Federal funds purchased and securities sold under repurchase agreements |               |                  |      |            | 2.66       | % |            | 0.96      
|                                                | Notes payable  U.S. Treasury                                           |               |                  |      |            | 3.06       | % |            | 1.10      

Debt retirement expense of $505,839 was incurred in 2005 due to the prepayment of a $5.0 million FHLB advance that had a maturity date of
May 24, 2010 and an interest rate of 7.26%.

48

---



The
Company has available unsecured federal funds lines of credit of $10 million and a secured federal funds line of credit of $10 million with other institutions. There
was no balance outstanding under these lines at December 31, 2005 and 2004. These lines bear interest at the current federal funds rate of the correspondent bank.

10. OTHER NONINTEREST EXPENSES

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

|                                   |  | 2005 |           | 2004 |   | 2003     
|---------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                  
|ATM services                       |  | $    | 1,057,794 |      | $ | 1,134,848
|Data processing services           |  |      | 807,314   |      |   | 719,445  
|Carrier service                    |  |      | 496,714   |      |   | 479,131  
|Marketing                          |  |      | 355,921   |      |   | 287,343  
|Loan expenses                      |  |      | 354,864   |      |   | 215,570  
|Employee-related expenses          |  |      | 345,203   |      |   | 306,678  
|Printing, stationary, and supplies |  |      | 257,865   |      |   | 282,914  
|Professional services              |  |      | 226,965   |      |   | 187,784  
|Liability insurance                |  |      | 214,579   |      |   | 216,890  
|Telephone                          |  |      | 189,990   |      |   | 195,867  
|Directors' fees                    |  |      | 173,050   |      |   | 165,950  
|Postage and freight                |  |      | 167,681   |      |   | 228,030  
|Software amortization              |  |      | 141,368   |      |   | 72,962   
|Deposit premium amortization       |  |      | 123,180   |      |   | 123,180  
|Shareholder expense                |  |      | 111,273   |      |   | 91,283   
|Bank account charges               |  |      | 80,592    |      |   | 88,134   
|Other                              |  |      | 612,460   |      |   | 552,638  
|                                   |  |      |           |      |   |          
|                                   |  | $    | 5,716,813 |      | $ | 5,348,647
|                                   |  |      |           |      |   |          

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:

|                                 |  | 2005    |   | 2004             |  | 2003   
|-------------------------------- |  | ------- | - | ---------------- |  | -------
|
|                                
|Outstanding at beginning of year |  | 193,470 |   |                  |  | 174,785
|Granted                          |  | 53,930  |   | $14.45 to $14.85 |  | 32,430 
|Exercised                        |  | (17,375 | ) | $9.71 to $14.50  |  | (8,845 
|Expired/Canceled                 |  | (2,895  | ) | $12.67 to $15.48 |  | (4,900 
|                                 |  |         |   |                  |  |        
|Outstanding at end of year       |  | 227,130 |   | $9.71 to $18.10  |  | 193,470
|                                 |  |         |   |                  |  |        
|Exercisable at December 31       |  | 213,550 |   |                  |  | 143,919
|                                 |  |         |   |                  |  |        

On December 15, 2005, the Board of Directors authorized the grant of 42,000 options to officers and the immediate vesting of such options.
All outstanding options to officers where the exercise price of the option exceeded the fair market value of the Company's stock were also approved for accelerated vesting. This resulted in 75,500
options becoming vested in 2005 that would have otherwise vested in future years.

49

---



A
summary of information about stock options outstanding is as follows at December 31, 2005:

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Remaining
Life
(Years)

Shares
Underlying
Options
Currently
Exercisable9.71$
DOT_LEADERS]_]

2,940

5.33

2,94010.54

630

5.16

63010.94

24,150

5.42

24,15012.11

4,830

6.33

4,83012.14

630

6.16

63012.67

21,000

6.58

21,00013.45

15,750

4.58

15,75013.45

3,580

4.33

3,58014.45

6,930

9.29

14.50

6,090

7.33

4,06014.50

42,000

9.96

42,00014.85

5,000

9.43

5,00015.36

3,150

3.33

3,15015.42

26,670

3.35

26,67016.02

25,500

8.58

25,50016.22

6,930

8.33

2,31016.70

3,150

2.16

3,15017.75

3,000

7.92

3,00017.79

22,050

2.35

22,05018.10

3,150

2.33

3,15014.52

227,130

6.30

213,550


As of December 31, 2005, the weighted average exercise price of shares underlying options currently exercisable is $14.49 per share.

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:

|                                                   |  | 2005 |           | 2004 |   | 2003     
|-------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                                  
|Weighted average common shares outstanding         |  |      | 2,827,747 |      |   | 2,831,880
|Stock option adjustment                            |  |      | 14,140    |      |   | 28,366   
|                                                   |  |      |           |      |   |          
|Weighted average common shares outstanding-diluted |  |      | 2,841,887 |      |   | 2,860,246
|                                                   |  |      |           |      |   |          
|Net income (applicable to common stock)            |  | $    | 2,458,437 |      | $ | 888,364  
|                                                   |  |      |           |      |   |          
|Basic net income per share                         |  | $    | 0.87      |      | $ | 0.31     
|                                                   |  |      |           |      |   |          
|Diluted net income per share                       |  | $    | 0.87      |      | $ | 0.31     
|                                                   |  |      |           |      |   |          

50

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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:

|                                                    |  | 2005 |           | 2004 |   | 2003      |  
|--------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | -
|                                                    | 
|Net Income                                          |  | $    | 2,458,437 |      | $ | 888,364   |  
|                                                    |  |      |           |      |   |           |  
|Other comprehensive income:                         |  |      |           |      |   |           |  
|Unrealized holding gains (losses) during the period |  |      | (22,384   | )    |   | (88,800   | )
|Add: Security impairment write down                 |  |      |          |      |   | 497,313   |  
|Less: Adjustment for security gains                 |  |      | (839,859  | )    |   | (115,810  | )
|                                                    |  |      |           |      |   |           |  
|Other comprehensive income before tax               |  |      | (862,243  | )    |   | 292,703   |  
|Income taxes on comprehensive income                |  |      | 332,998   |      |   | (113,042  | )
|                                                    |  |      |           |      |   |           |  
|Other comprehensive income after tax                |  |      | (529,245  | )    |   | 179,661   |  
|                                                    |  |      |           |      |   |           |  
|Comprehensive income                                |  | $    | 1,929,192 |      | $ | 1,068,025 |  
|                                                    |  |      |           |      |   |           |  

14. CAPITAL STANDARDS

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly additional discretionary action taken by regulators that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting procedures. The Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.

Quantitative
measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1
capital (as defined) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes, as of December 31, 2005, that the Bank meets
all capital adequacy requirements to which it is subject. As of December 31, 2005, the most recent notification from the Federal Reserve Bank and the FDIC categorized the Company and the Bank
as "well

51

---



capitalized"
under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes would change the Company's or the Bank's
category.

|                                         |                 | Actual |   | Minimum Capital Adequacy |  | To be Well Capitalized
|---------------------------------------- | --------------- | ------ | - | ------------------------ |  | ----------------------
|
|                                        
|DECEMBER 31, 2005                        |                 |        |   |                          |  |                       
|Total Capital (to risk-weighted assets)  |                 |        |   |                          |  |                       
|                                         | Consolidated    |        | $ | 37,447,000               |  | 13.51%                
|                                         | Carrollton Bank |        |   | 34,338,000               |  | 12.52%                
|Tier 1 Capital (to risk-weighted assets) |                 |        |   |                          |  |                       
|                                         | Consolidated    |        |   | 32,250,000               |  | 11.63%                
|                                         | Carrollton Bank |        |   | 31,001,000               |  | 11.30%                
|Tier 1 Capital (to average assets)       |                 |        |   |                          |  |                       
|                                         | Consolidated    |        |   | 32,250,000               |  | 8.96%                 
|                                         | Carrollton Bank |        |   | 31,001,000               |  | 8.72%                 
|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%                 

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. Effective December 31, 2004, the Company froze the Plan. Participant benefits stopped accruing as of the date of the freeze.

52

---



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

|                                                                                                                |                                                | 2005 |           | 2004      |   | 2003      |           
|--------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ---- | --------- | --------- | - | --------- | ----------
|                                                                                                                |                                               
|CHANGE IN BENEFIT OBLIGATION:                                                                                   |                                                |      |           |           |   |           |           
|                                                                                                                | Benefit obligation at beginning of year        |      | $         | 7,739,006 |   | $         | 8,820,583 
|                                                                                                                | Service cost                                   |      |           |          |   |           | 528,407   
|                                                                                                                | Interest cost                                  |      |           | 477,203   |   |           | 545,710   
|                                                                                                                | Actuarial gain                                 |      |           | 61,831    |   |           | 69,083    
|                                                                                                                | Benefits paid                                  |      |           | (333,255  | ) |           | (331,542  
|                                                                                                                | Adjustment for special event  curtailment     |      |           |          |   |           | (1,893,235
|                                                                                                                |                                                |      |           |           |   |           |           
|                                                                                                                | Benefit obligation at end of year              |      |           | 7,944,785 |   |           | 7,739,006 
|                                                                                                                |                                                |      |           |           |   |           |           
|CHANGE IN PLAN ASSETS:                                                                                          |                                                |      |           |           |   |           |           
|                                                                                                                | Fair value of plan assets at beginning of year |      |           | 7,730,718 |   |           | 7,399,746 
|                                                                                                                | Actual return on plan assets                   |      |           | 591,608   |   |           | 271,153   
|                                                                                                                | Employer contribution                          |      |           |          |   |           | 450,000   
|                                                                                                                | Benefits paid and administrative expenses      |      |           | (369,339  | ) |           | (390,181  
|                                                                                                                |                                                |      |           |           |   |           |           
|                                                                                                                | Fair value of plan assets at end of year       |      |           | 7,952,987 |   |           | 7,730,718 
|                                                                                                                |                                                |      |           |           |   |           |           
|                                                                                                                | Funded status                                  |      |           | 8,202     |   |           | (8,288    
|                                                                                                                | Unrecognized net actuarial (gain) loss         |      |           | 45,450    |   |           | (15,901   
|                                                                                                                | Unrecognized prior service cost                |      |           |          |   |           |          
|                                                                                                                |                                                |      |           |           |   |           |           
|                                                                                                                | Prepaid (accrued) benefit cost                 |      | $         | 53,652    |   | $         | (24,189   
|                                                                                                                |                                                |      |           |           |   |           |           
|ASSUMPTIONS USED IN MEASURING THE PROJECTED BENEFIT OBLIGATION WERE AS FOLLOWS FOR THE YEARS ENDED DECEMBER 31: |                                                |      |           |           |   |           |           
|                                                                                                                | Discount rates                                 |      |           | 6.25%     |   |           | 6.25%     
|                                                                                                                | Rates of increase in compensation levels       |      |           | N/A       |   |           | 4.25%     
|                                                                                                                | Long-term rate of return on assets             |      |           | 8.00%     |   |           | 8.00%     
|NET PENSION EXPENSE INCLUDES THE FOLLOWING COMPONENTS:                                                          |                                                |      |           |           |   |           |           
|                                                                                                                | Service cost                                   |      | $         |          |   | $         | 528,407   
|                                                                                                                | Interest cost                                  |      |           | 477,203   |   |           | 545,710   
|                                                                                                                | Estimated return on assets                     |      |           | (555,044  | ) |           | (558,384  
|                                                                                                                | Net amortization and deferral                  |      |           |          |   |           | 148,670   
|                                                                                                                |                                                |      |           |           |   |           |           
|                                                                                                                | Net pension expense (benefit)                  |      | $         | (77,841   | ) | $         | 664,403   
|                                                                                                                |                                                |      |           |           |   |           |           
|ACCUMULATED BENEFIT OBLIGATION AT YEAR END                                                                      |                                                | $    | 7,944,785 |           | $ | 7,739,006 |           
|                                                                                                                |                                                |      |           |           |   |           |           
|ALLOCATION OF ASSETS                                                                                            |                                                |      |           |           |   |           |           
|                                                                                                                | Equity securities                              |      | $         | 4,102,673 |   | $         | 3,715,646 
|                                                                                                                | Fixed income-guaranteed fund                   |      |           | 3,850,314 |   |           | 4,015,072 
|                                                                                                                |                                                |      |           |           |   |           |           
|                                                                                                                |                                                | $    | 7,952,987 |           | $ | 7,730,718 |           
|                                                                                                                |                                                |      |           |           |   |           |           

Benefits expected to be paid from the Plan are as follows:

|Year      |  | Amount
|--------- |  | ------
|         
|2006      |  | $     
|2007      |  |       
|2008      |  |       
|2009      |  |       
|2010      |  |       
|2011-2015 |  |       

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.

53

---



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 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 also matches 50% of the employee 401(K) contribution up to 6% of employee compensation.
Contributions to this Plan, included in employee benefit expenses, were $292,080, $92,485, and $70,678, for 2005, 2004, and 2003, 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 or results of operations..

17. INCOME TAXES

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

|         |  | 2005 |           | 2004 |   | 2003     |  
|-------- |  | ---- | --------- | ---- | - | -------- | -
|         | 
|CURRENT  |  |      |           |      |   |          |  
|Federal  |  | $    | 989,907   |      | $ | 428,205  |  
|State    |  |      | 179,255   |      |   | 91,038   |  
|         |  |      |           |      |   |          |  
|         |  |      | 1,169,162 |      |   | 519,243  |  
|DEFERRED |  |      | 153,209   |      |   | (198,755 | )
|         |  |      |           |      |   |          |  
|         |  | $    | 1,322,371 |      | $ | 320,488  |  
|         |  |      |           |      |   |          |  

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

|                                |  | 2005 |          | 2004 |   | 2003     |  
|------------------------------- |  | ---- | -------- | ---- | - | -------- | -
|                                | 
|Provision for loan losses       |  | $    | 57,124   |      | $ | 62,425   |  
|Deferred loan origination costs |  |      | (4,812   | )    |   | 6,794    |  
|Deferred compensation plan      |  |      | (227     | )    |   | 3,128    |  
|Depreciation                    |  |      | (120,334 | )    |   | 7,004    |  
|Discount accretion              |  |      | (666     | )    |   | (2,140   | )
|Retirement benefits             |  |      | 30,062   |      |   | (83,904  | )
|Impairment loss provisions      |  |      | 192,062  |      |   | (192,062 | )
|                                |  |      |          |      |   |          |  
|                                |  | $    | 153,209  |      | $ | (198,755 | )
|                                |  |      |          |      |   |          |  

54

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

|                                                             |  | 2005 |           | 2004 |   | 2003      |  
|------------------------------------------------------------ |  | ---- | --------- | ---- | - | --------- | -
|                                                             | 
|DEFERRED TAX ASSETS                                          |  |      |           |      |   |           |  
|Allowance for loan losses                                    |  | $    | 1,053,678 |      | $ | 1,110,802 |  
|Deferred compensation plan                                   |  |      | 206,892   |      |   | 206,665   |  
|Depreciation                                                 |  |      | 27,522    |      |   |          |  
|Accrued retirement benefits                                  |  |      |          |      |   | 9,342     |  
|                                                             |  |      |           |      |   |           |  
|                                                             |  |      | 1,288,092 |      |   | 1,326,809 |  
|                                                             |  |      |           |      |   |           |  
|DEFERRED TAX LIABILITIES                                     |  |      |           |      |   |           |  
|Prepaid retirement benefits                                  |  |      | 20,720    |      |   |          |  
|Deferred loan origination costs                              |  |      | 127,072   |      |   | 131,884   |  
|Unrealized gains on available for sale investment securities |  |      | 1,156,088 |      |   | 1,297,024 |  
|Depreciation                                                 |  |      |          |      |   | 92,812    |  
|Discount accretion                                           |  |      | 3,166     |      |   | 3,832     |  
|FHLB Stock dividends                                         |  |      | 2,019     |      |   | 2,019     |  
|                                                             |  |      |           |      |   |           |  
|                                                             |  |      | 1,309,065 |      |   | 1,527,571 |  
|                                                             |  |      |           |      |   |           |  
|NET DEFERRED TAX LIABILITY                                   |  | $    | (20,973   | )    | $ | (200,762  | )
|                                                             |  |      |           |      |   |           |  

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

|                                    |                                                       | 2005 |      | 2004 |       | 2003 |     
|----------------------------------- | ----------------------------------------------------- | ---- | ---- | ---- | ----- | ---- | ----
|                                    |                                                      
|Statutory federal income tax rate   |                                                       | 34.0 | %    | 34.0 | %     | 34.0 | %   
|Increase (Decrease) resulting from: |                                                       |      |      |      |       |      |     
|                                    | Tax-exempt income                                     |      | (3.4 | )    | (10.2 | )    | (9.3
|                                    | State income taxes, net of federal income tax benefit |      | 4.0  |      | 1.9   |      | 1.5 
|                                    | Nondeductible expense                                 |      | 0.4  |      | 0.8   |      | 0.6 
|                                    |                                                       |      |      |      |       |      |     
|                                    |                                                       | 35.0 | %    | 26.5 | %     | 26.8 | %   
|                                    |                                                       |      |      |      |       |      |     

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 $947,957,
$779,709, and $615,032, for 2005, 2004, and 2003, respectively.

Lease
obligations will require minimum rent payments as follows:

|Period          |  | Minimum rentals
|--------------- |  | ---------------
|               
|2006            |  | $              
|2007            |  |                
|2008            |  |                
|2009            |  |                
|2010            |  |                
|Remaining years |  |                
|                |  |                
|                |  | $              
|                |  |                

55

---



19. PARENT COMPANY FINANCIAL INFORMATION

The balance sheets as of December 31, 2005 and 2004 and statements of income and cash flows for Carrollton Bancorp (Parent Only) for 2005,
2004, and 2003, 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                           |             
|                                         | Additional Paid-in Capital             |             
|                                         | 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                                                                      |  | $                       
|                                                                                |  |                         

56

---



STATEMENTS OF CASH FLOWS

|                                                                                  |                                                     | Years ended December 31, |           
|--------------------------------------------------------------------------------- | --------------------------------------------------- | ------------------------ | ----------
|
|                                                                                  |                                                    
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |                                                     |                          |           
|Net income                                                                        |                                                     | $                        | 2,458,437 
|ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES: |                                                     |                          |           
|Equity in undistributed net income of subsidiary                                  |                                                     |                          | (1,357,780
|Security gains                                                                    |                                                     |                          | (766,772  
|Income tax benefit from exercise of stock options                                 |                                                     |                          | 18,166    
|Decrease (increase) in other assets                                               |                                                     |                          | (74       
|Increase (decrease) in other liabilities                                          |                                                     |                          | 309,958   
|                                                                                  |                                                     |                          |           
|                                                                                  | Net cash provided by operating activities           |                          |           
|                                                                                  |                                                     |                          |           
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |                                                     |                          |           
|Purchase of securities available for sale                                         |                                                     |                          |          
|Proceeds from sales of securities available for sale                              |                                                     |                          | 1,016,133 
|                                                                                  |                                                     |                          |           
|                                                                                  | Net cash provided by (used in) investing activities |                          |           
|                                                                                  |                                                     |                          |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |                                                     |                          |           
|Dividends paid                                                                    |                                                     |                          | (1,130,262
|Common stock repurchase and retirement                                            |                                                     |                          | (599,250  
|Stock options exercised                                                           |                                                     |                          | 207,039   
|                                                                                  |                                                     |                          |           
|                                                                                  | Net cash used in financing activities               |                          |           
|                                                                                  |                                                     |                          |           
|Net increase (decrease) in cash                                                   |                                                     |                          | 155,595   
|Cash at beginning of year                                                         |                                                     |                          | 84,178    
|                                                                                  |                                                     |                          |           
|Cash at end of year                                                               |                                                     | $                        | 239,773   
|                                                                                  |                                                     |                          |           
|NONCASH ACTIVITIES:                                                               |                                                     |                          |           
|Income taxes paid, net of cash received from subsidiaries                         |                                                     | $                        | 36,615    
|                                                                                  |                                                     |                          |           

20. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of each class of financial instrument.

Cash and cash equivalents

The carrying amount of cash and due from banks is a reasonable estimate of fair value.

Federal funds sold and Federal Home Loan Bank deposit

The carrying amount of federal funds sold and Federal Home Loan Bank deposit is a reasonable estimate of fair value.

Investment Securities

The fair values of securities held to maturity and securities available for sale are based upon quoted market prices or dealer quotes.

Loans held for sale

The fair value of residential mortgage loans originated for sale is estimated by discounting future cash flows using current rates for which similar loans would be
made to borrowers with similar credit histories.

Loans, net

The fair value of loans receivable is estimated by discounting future cash flows using current rates for which similar loans would be made to borrowers with
similar credit histories.

57

---



20. FAIR VALUE OF FINANCIAL INSTRUMENTS(Continued)

Deposit liabilities

The fair value of demand deposits and savings accounts is the amount payable on demand. The fair value of fixed maturity certificates of deposit is estimated using
the rates currently offered for deposits of similar remaining maturities.

Federal funds purchased and securities sold under agreements to repurchase

The carrying amount of federal funds purchased and securities sold under agreements to repurchase is a reasonable estimate of fair value.

Advances from the FHLB

The fair value of long-term FHLB advances is estimated by discounting the value of contractual cash flows using rates currently offered for advances
with similar terms and remaining maturities.

Commitments to extend credit, standby letters of credit and financial guarantees written

The Company charges fees for commitments to extend credit. Interest rates on loans for which these commitments are extended are normally committed for periods of
less than one month. Fees charged on standby letters of credit and other financial guarantees 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.

|                      |                                                                            | December 31, 2005 |   | December 31, 2004
|--------------------- | -------------------------------------------------------------------------- | ----------------- | - | -----------------
|
|                     
|FINANCIAL ASSETS      |                                                                            |                   |   |                  
|                      | Cash and cash equivalents                                                  |                   | $ | 39,090,565       
|                      | Investment securities (total)                                              |                   |   | 47,583,408       
|                      | Federal Home Loan Bank stock                                               |                   |   | 2,431,600        
|                      | Loans held for sale                                                        |                   |   | 13,767,109       
|                      | Loans, net                                                                 |                   |   | 244,605,910      
|FINANCIAL LIABILITIES |                                                                            |                   |   |                  
|                      | Noninterest-bearing deposits                                               |                   |   | 67,010,985       
|                      | Interest-bearing deposits                                                  |                   |   | 204,615,518      
|                      | Federal funds purchased and securities sold under agreements to repurchase |                   |   | 9,280,348        
|                      | Notes payable-U.S. Treasury                                                |                   |   | 1,932,124        
|                      | Advances from the Federal Home Loan Bank                                   |                   |   | 40,000,000       

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.

58

---



Segment
information for the Company for 2005 is as follows:

|                                                                       |  | Commercial/
Retail Bank |             | Electronic
Banking |   | Brokerage  |   | Mortgage
Unit |          | Segment
Totals |   | Eliminations |   | Consolidated |            
|---------------------------------------------------------------------- |  | ----------------------- | ----------- | ------------------ | - | ---------- | - | ------------- | -------- | -------------- | - | ------------ | - | ------------ | -----------
|                                                                       | 
|Interest income                                                        |  | $                       | 17,177,300  |                    | $ |           |   | $             |         |                | $ | 1,366,403    |   | $            | 18,543,703 
|Interest expense                                                       |  |                         | (6,741,963  | )                  |   | (105,444   | ) |               |         |                |   |             |   |              | (6,847,407 
|                                                                       |  |                         |             |                    |   |            |   |               |          |                |   |              |   |              |            
|Net interest income                                                    |  |                         | 10,435,337  |                    |   | (105,444   | ) |               |         |                |   | 1,366,403    |   |              | 11,696,296 
|Provision for loan losses                                              |  |                         |            |                    |   |           |   |               |         |                |   |             |   |              |           
|Noninterest income                                                     |  |                         | 2,466,304   |                    |   | 4,871,076  |   |               | 667,510  |                |   | 2,713,746    |   |              | 10,718,636 
|Intersegment income                                                    |  |                         | 598,180     |                    |   |           |   |               | 2,906    |                |   | (512,785     | ) |              | 88,301     
|Noninterest expenses                                                   |  |                         | (11,919,891 | )                  |   | (3,727,831 | ) |               | (412,222 | )              |   | (2,662,481   | ) |              | (18,722,425
|                                                                       |  |                         |             |                    |   |            |   |               |          |                |   |              |   |              |            
|Income before income taxes                                             |  |                         | 1,579,930   |                    |   | 1,037,801  |   |               | 258,194  |                |   | 904,883      |   |              | 3,780,808  
|Income taxes                                                           |  |                         | (472,393    | )                  |   | (400,798   | ) |               | (99,714  | )              |   | (349,466     | ) |              | (1,322,371 
|                                                                       |  |                         |             |                    |   |            |   |               |          |                |   |              |   |              |            
|Net income                                                             |  | $                       | 1,107,537   |                    | $ | 637,003    |   | $             | 158,480  |                | $ | 555,417      |   | $            | 2,458,437  
|                                                                       |  |                         |             |                    |   |            |   |               |          |                |   |              |   |              |            
|Segment assets                                                         |  | $                       | 358,760,082 |                    | $ | 3,691,629  |   | $             | 82,512   |                | $ | 23,749,243   |   | $            | 386,283,466
|Expenditures for segment purchases of premises, equipment and software |  | $                       | 655,832     |                    | $ | 211,910    |   | $             |         |                | $ | 35,201       |   | $            | 902,943    

A reconciliation of total segment assets to consolidated total assets follows as of December 31, 2005:

|Total segment assets                         |  | $ | 386,283,466 |  
|-------------------------------------------- |  | - | ----------- | -
|Elimination of intersegment loans            |  |   | (25,065,528 | )
|Elimination of intersegment deposit accounts |  |   | (750,792    | )
|                                             |  |   |            
|                                             |  | $ | 360,467,146 |  
|                                             |  |   |            

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 
|Provision for loan losses                                              |  |                         |            |                    |   |           |   |               |         |                |   |             |   |              |           
|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 |  
|                                             |  |   |            

59

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22. CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

|                             |  | Year Ended December 31, 2005 |           
|---------------------------- |  | ---------------------------- | ----------
|
|                             | 
|Interest income              |  | $                            | 4,275,029 
|Interest expense             |  |                              | (1,555,268
|                             |  |                              |           
|Net interest income          |  |                              | 2,719,761 
|Gains on security sales      |  |                              | 73,087    
|Other noninterest income     |  |                              | 2,255,502 
|Noninterest expenses         |  |                              | (4,367,243
|                             |  |                              |           
|Income before income taxes   |  |                              | 681,107   
|Income taxes                 |  |                              | (268,511  
|                             |  |                              |           
|Net income                   |  | $                            | 412,596   
|                             |  |                              |           
|Net income per share  basic |  | $                            | 0.15      
|                             |  |                              |           
|Cash dividends per share     |  | $                            | 0.10      
|                             |  |                              |           
|Market prices: high          |  | $                            | 17.00     
|                             |  |                              |           
|low                          |  | $                            | 14.12     
|                             |  |                              |           

|                             |  | Year Ended December 31, 2004 |           
|---------------------------- |  | ---------------------------- | ----------
|
|                             | 
|Interest income              |  | $                            | 3,790,140 
|Interest expense             |  |                              | (1,276,800
|                             |  |                              |           
|Net interest income          |  |                              | 2,513,340 
|Gains on security sales      |  |                              | 115,810   
|Other noninterest income     |  |                              | 1,954,704 
|Noninterest expenses         |  |                              | (4,171,692
|                             |  |                              |           
|Income before income 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     
|                             |  |                              |           

60

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ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There have been no changes in or disagreements with accountants, on accounting and financial disclosure during 2005.

ITEM 9A: CONTROLS AND PROCEDURES

The Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934) are effective based on the evaluation of these controls and procedures by the Company's management, including our principal
executive and principal financial officers, as of December 31, 2005. There were no changes in the Company's internal controls over financial reporting that occurred during the fourth fiscal
quarter of 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

ITEM 9B: OTHER INFORMATION

None.

PART III

---

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS OF THE REGISTRANT

The information required by this Item is 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 for the Annual Meeting of Shareholders to be held on
April 18, 2006.

ITEM 11: EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to the information appearing under the captions "Executive Compensation," "Long-Term
Incentive Plan," and "Retirement Plans" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 18, 2006.

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item is incorporated by reference to the information appearing under the caption "Security Ownership of Certain Beneficial Owners
and Management" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 18, 2006.

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is hereby incorporated by reference to the information appearing under the caption "Certain Relationships and Related
Transactions" in the Company's definitive Proxy Statement for the Annual meeting of Shareholders to be held on April 18, 2006.

ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is hereby incorporated by reference to the information appearing under the caption "Audit Fees and Services" in the Company's
definitive Proxy Statement for the Annual meeting of Shareholders to be held on April 18, 2006.

61

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PART IV

---

ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



|Exhibit
Number |  | Description
|-------------- |  | -----------
|              

$_$_DATA_CELL,3,1,1$_$_DATA_CELL,4,1,1
  3(i)
$_$_DATA_CELL,4,2,1
Articles of Incorporation of Carrollton Bancorp*
$_$_DATA_CELL,5,1,1
  3(ii)
$_$_DATA_CELL,5,2,1
By-Laws of Carrollton Bancorp*
$_$_DATA_CELL,6,1,1
10.1
$_$_DATA_CELL,6,2,1
Lease dated January 24, 1989 by and between Hill Management Services, Inc. and The
Carrollton Bank of Baltimore.*
$_$_DATA_CELL,7,1,1
10.2
$_$_DATA_CELL,7,2,1
Lease dated July 21, 1989 by and between Hill Management Services, Inc. and The
Carrollton Bank of Baltimore.*
$_$_DATA_CELL,8,1,1
10.3
$_$_DATA_CELL,8,2,1
Lease dated October 30, 1959 between Amcap, Inc. and The Carrollton Bank of
Baltimore, as amended.*
$_$_DATA_CELL,9,1,1
10.4
$_$_DATA_CELL,9,2,1
Lease dated August 3, 1976 between Amcap, Inc. and The Carrollton Bank of
Baltimore.*
$_$_DATA_CELL,10,1,1
10.7
$_$_DATA_CELL,10,2,1
Lease dated July 19, 1988 by and between Northway Limited Partnership and The
Carrollton Bank of Baltimore.*
$_$_DATA_CELL,11,1,1
10.8
$_$_DATA_CELL,11,2,1
Lease dated August 11, 1994 by and between KIMCO and Carrollton Bank.**
$_$_DATA_CELL,12,1,1
10.9
$_$_DATA_CELL,12,2,1
Lease dated October 11, 1994 by and between Ridgeview Associates Limited Partnership
and Carrollton Bank.**
$_$_DATA_CELL,13,1,1
10.10
$_$_DATA_CELL,13,2,1
Employment agreement with Robert A. Altieri***
$_$_DATA_CELL,14,1,1
10.11
$_$_DATA_CELL,14,2,1
Employment agreement with Gary M. Jewell***
$_$_DATA_CELL,15,1,1
10.12
$_$_DATA_CELL,15,2,1
Lease dated January 15, 2004 by and between Turf Village Offices and Carrollton Bank
(2300 York Road, Suite 114, 115, 116)
$_$_DATA_CELL,16,1,1
10.13
$_$_DATA_CELL,16,2,1
Lease dated June 17, 2004 by and between Turf Village Offices and Carrollton Bank
(2300 York Road, Suite 211)
$_$_DATA_CELL,17,1,1
10.14
$_$_DATA_CELL,17,2,1
Lease dated February 15, 2005 by and between Turf Village Offices and Carrollton
Bank (2300 York Road, Suites 213,214,215,216)
$_$_DATA_CELL,18,1,1
10.15
$_$_DATA_CELL,18,2,1
Lease dated February 18, 2005 by and between Broadway 205 Associates, LLP and
Carrollton Mortgage Services, Inc.
$_$_DATA_CELL,19,1,1
10.16
$_$_DATA_CELL,19,2,1
Lease dated October 26, 2005 by and between Arthur Lea Stabler and Helen H. Stabler
and Carrollton Bank
$_$_DATA_CELL,20,1,1
10.17
$_$_DATA_CELL,20,2,1
Lease dated June 11, 2004 by and between Mario J. Orlando and Matthew J. Salafia and
Carrollton Mortgage Services, Inc.
$_$_DATA_CELL,21,1,1
10.18
$_$_DATA_CELL,21,2,1
Lease dated November 4, 2003 by and between Hickory Crossing, LLC and Carrollton
Bank
$_$_DATA_CELL,22,1,1
10.19
$_$_DATA_CELL,22,2,1
Lease dated October 31, 1997 between The Avenue at White Marsh, LLC and Carrollton
Bank
$_$_DATA_CELL,23,1,1
21.1
$_$_DATA_CELL,23,2,1
Subsidiaries of Carrollton Bancorp
$_$_DATA_CELL,24,1,1
23.1
$_$_DATA_CELL,24,2,1
Consent of Independent Registered Public Accounting Firm by Exchange Act Rule
13-a-14(a)
$_$_DATA_CELL,25,1,1
31.1
$_$_DATA_CELL,25,2,1
Certification by the Principal Executive Officer required by Exchange Act Rule
13-a-14(a)
$_$_DATA_CELL,26,1,1
31.2
$_$_DATA_CELL,26,2,1
Certification by Principal Financial Officer required by Exchange Act Rule
13-a-14(a)
$_$_DATA_CELL,27,1,1
32.1
$_$_DATA_CELL,27,2,1
Certification by the Principal Executive Officer
$_$_DATA_CELL,28,1,1
32.2
$_$_DATA_CELL,28,2,1
Certification by the Principal Financial Officer
$_$_DATA_CELL,29,1,1

62

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SIGNATURES

Pursuant
to the requirement of 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
(Registrant)

|March 1, 2006 |  | By: /s/ Robert A. AltieriRobert A. Altieri
President and Chief Executive Officer
|------------- |  | --------------------------------------------------------------------------------

Pursuant to the requirements of Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

|March 1, 2006 |  | By: /s/ Robert A. AltieriRobert A. Altieri
President and Chief Executive Officer
|------------- |  | --------------------------------------------------------------------------------

PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER

|March 1, 2006 |  | By: /s/ James M. UvegesJames M. Uveges
(Principal financial and accounting officer)
Senior Vice President and Chief Financial Officer
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------
|              |  | Board of Directors                                                                                                                   
|March 1, 2006 |  | By: /s/ Robert J. AumillerRobert J. Aumiller
Director                                                                                
|March 1, 2006 |  | By: /s/ Steven K. BreedenSteven K. Breeden
Director                                                                                  
|March 1, 2006 |  | By: /s/ Albert R. CounselmanAlbert R. Counselman
Chairman of the Board                                                               
|March 1, 2006 |  | By: /s/ Harold I. HackermanHarold I. Hackerman
Director                                                                              
|March 1, 2006 |  | By: /s/ John P. HauswaldJohn P. Hauswald
Director                                                                                    
|              |  |                                                                                                                                      

63

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|March 1, 2006 |  | By: /s/ David P. HesslerDavid P. Hessler
Director            
|------------- |  | -------------------------------------------------------------
|March 1, 2006 |  | By: /s/ Howard S. KleinHoward S. Klein
Director              
|March 1, 2006 |  | By: /s/ Ben F. MasonBen F. Mason
Director                    
|March 1, 2006 |  | By: /s/ Charles E. Moore, Jr.Charles E. Moore, Jr.
Director  
|March 1, 2006 |  | By: /s/ John Paul RogersJohn Paul Rogers
Director            
|March 1, 2006 |  | By: /s/ William C. Rogers, Jr.William C. Rogers, Jr.
Director

64

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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 Amcap, Inc. and The Carrollton Bank of Baltimore, as amended.                             |  | *                         
|10.4           |  | Lease dated August 3, 1976 between Amcap, 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 KIMCO 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                                                                                       |  | ***                       
|10.12          |  | Lease dated January 15, 2004 by and between Turf Village Offices and Carrollton Bank (2300 York Road, Suite 114, 115, 116)     |  |                           
|10.13          |  | Lease dated June 17, 2004 by and between Turf Village Offices and Carrollton Bank (2300 York Road, Suite 211)                  |  |                           
|10.14          |  | Lease dated February 15, 2005 by and between Turf Village Offices and Carrollton Bank (2300 York Road, Suites 213,214,215,216) |  |                           
|10.15          |  | Lease dated February 18, 2005 by and between Broadway 205 Associates, LLP and Carrollton Mortgage Services, Inc.               |  |                           
|10.16          |  | Lease dated October 26, 2005 by and between Arthur Lea Stabler and Helen H. Stabler and Carrollton Bank                        |  |                           
|10.17          |  | Lease dated June 11, 2004 by and between Mario J. Orlando and Matthew J. Salafia and Carrollton Mortgage Services, Inc.        |  |                           
|10.18          |  | Lease dated November 4, 2003 by and between Hickory Crossing, LLC and Carrollton Bank                                          |  |                           
|10.19          |  | Lease dated October 31, 1997 between The Avenue at White Marsh, LLC and Carrollton Bank                                        |  |                           
|21.1           |  | Subsidiaries of Carrollton Bancorp                                                                                             |  |                           
|23.1           |  | Consent of Independent Registered Public Accounting Firm required by Exchange Act Rule 13-a-14(a)                              |  |                           
|31.1           |  | Certification by the Principal Executive Officer required by Exchange Act Rule 13a-14(a)                                       |  |                           
|31.2           |  | Certification by the Principal Financial Officer required by Exchange Act Rule 13a-14(a)                                       |  |                           
|32.1           |  | Certification by the Principal Executive Officer                                                                               |  |                           
|32.2           |  | Certification by Principal Financial Officer                                                                                   |  |                           

65

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