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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2004

Commission file number: 0-23090

Carrollton Bancorp

(Name of Issuer in Its Charter)

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

Common Stock

(Title of Class)

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

Yes ý    No o

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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PART I

ITEM 1: DESCRIPTION OF BUSINESS

   General. – Carrollton Bancorp (the "Company"), a bank holding company registered under the Bank Holding Company Act of 1956, as amended, was organized on January 11, 1990, and is headquartered in Baltimore, Maryland. Carrollton Bank (the "Bank") is a commercial bank and the principal subsidiary of the Company. The Bank was chartered by an act of the General Assembly of Maryland (Chapter 727) approved April 10, 1900. The Bank is engaged in a general commercial and retail banking business and, as of December 31, 2004, had a total of ten branch locations in Maryland with two branch locations in Baltimore City; three branch locations in Anne Arundel County; and five branches in Baltimore County. The Company's eleventh branch opened in Harford County in January 2005. The Bank's wholly owned subsidiaries are Carrollton Mortgage Services, Inc. ("CMSI"), which is used primarily to originate and sell residential mortgage loans and Carrollton Financial Services, Inc. ("CFS"), which provides brokerage services. Carrollton Community Development Corporation ("CCDC") is a 96.4% owned subsidiary of the Bank which promotes, develops and improves the housing and economic conditions of people in Maryland, particularly the Metropolitan Baltimore area.

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

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

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

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



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



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Consumer loans including automobile loans, home equity loans and lines of credit.



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Loans guaranteed by the United States Small Business Administration.



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



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Letters of credit and remittance services.



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Credit and debit card services.



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Merchant credit card deposit servicing.



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



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A 24-hour ATM network.



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After-hours depository services.



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Safe deposit boxes.



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Point of Sale (POS) services.



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Other services, such as direct deposit, traveler's checks and IRAs.

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

   Lending Activities. – The Bank makes various types of loans to borrowers based on, among other things, an evaluation of the borrowers' net asset value, cash flow, security and ability to repay. Loans to consumers include home equity lines of credit, home improvement loans, overdraft lines of credit, and installment loans for automobiles, boats and recreational vehicles. The Bank also makes loans secured by deposit accounts and common stocks. The Bank's commercial loan product line includes first mortgage loans, time and demand loans, lines and letters of credit, and asset based financing. The Notes to the Consolidated Financial Statements contained in Part II, Item 8 report the classification by type of loan for the whole portfolio.

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   First and second residential mortgage loans, made principally through the Bank's subsidiary, CMSI, enable customers to purchase or refinance residential properties. These loans are secured by liens on the residential property. All first mortgage loans with a loan to value greater then 80% have private mortgage insurance coverage equal to or greater than the amount required under the Federal National Mortgage Association guidelines. Residential loans are considered low risk based on the type of collateral (residential property) and the underwriting standards used. The Bank experienced $746 in losses in 2004 and $8,087 in recoveries on residential mortgage loans in 2004. The Bank experienced losses of $8,709 and recoveries of $0 in 2003. The Bank experienced no losses or recoveries in 2002. There were $312,563 of residential mortgage loans delinquent more than 90 days at December 31, 2004. There are no discernible delinquency or loss trends relating to residential mortgage loans known to management.

   Home equity lines of credit are typically second mortgage loans (sometimes first mortgages) secured by the borrower's primary residence structured as a revolving borrowing line with a maximum loan amount. Customers write checks to access the line. Generally, the Bank has a second lien on the property behind the first mortgage lien holder. The Bank has a number of different equity loan products that it offers. Borrowers can choose between fixed rate loans or loans tied to the prime rate with margins ranging from 0% to 1.5%. The Bank will finance up to 90% of the value of the home in combination with the first mortgage loan balance, depending on the rate and program. The Bank maintains in its portfolio loans financed under a program that financed up to 125% of the value of the home, subject to stricter income and debt ratios, with a maximum loan amount of $25,000. Home equity loans carry a higher level of risk than first mortgage residential loans because of the second lien position on the property, and because a higher loan to value ratio is used in the underwriting of the loan. However, the overall risk of loss on home equity loans is also considered low due to the underlying values of the collateral. The Bank experienced losses on home equity loans of $7,000 and recoveries of $0 during 2004. The Bank experienced losses on home equity loans during 2003 of $8,189 and recoveries of $0. The Bank experienced losses on home equity loans during 2002 of $160,591 and recoveries of $67,705. There were $323,955 of home equity loans delinquent more than 90 days at December 31, 2004. There are no discernible delinquency or loss trends relating to home equity loans known to management.

   Commercial and investment mortgage loans are first mortgage loans made to individuals or to businesses to finance acquisitions of plant or earning assets, such as rental property. These loans are secured by a first mortgage lien on the commercial property, and may be further secured by other property or other assets depending on the value of the mortgaged property. In most instances, these loans are guaranteed personally by the principals. The Bank typically looks for cash flow from the business at least equal to 100% coverage of the business debt service, and to income-producing property to be self-supporting, generally, with a minimum debt service coverage ratio of 120% to 125%. Commercial mortgage loans carry more risk than residential real estate loans. Commercial mortgage loans tend to be larger in size, and the properties tend to exhibit more fluctuation in value. The repayment of the loan is primarily dependent on the success of the business itself, or the tenants in the case of income producing property. Economic cycles can affect the success of a business. The Bank experienced net losses of $0, $0, and $112,718 on commercial mortgage loans during 2004, 2003, and 2002, respectively. There were $325,094 of commercial mortgage loans past due more than 90 days at December 31, 2004. There are no known discernible delinquency or loss trends relating to commercial mortgage loans.

   Construction and land development loans are loans to finance the acquisition and development of parcels of land and to construct residential housing or commercial property. The Bank typically will finance 70% to 75% of the discounted future value of these projects, or 80% of value or 90% of cost, whichever is less, on a single-family detached home. The loan is collateralized by the project or real estate itself, and other assets or guarantees of the principals in most cases. Repayment to the Bank is anticipated from the proceeds of sale of the final units, or permanent mortgage financing on a residential construction loan for a single borrower. These types of loans carry a higher degree of risk than a commercial mortgage loan. Interest rates, buyer preferences, and desired locations are all subject to change during the period from the time of the loan commitment to final delivery of the final unit, all of which can change the economics of the project. In addition, real estate developers to whom these loans are typically made are subject to the business risk of operating a business in a competitive environment. The Bank did not experience any losses or recoveries on construction and land development loans during 2004, 2003, or 2002. There were no construction and land development loans past due more than 90 days at December 31, 2004. There are no discernible delinquency or loss trends relating to construction and land development loans known to management.

   Time and demand loans and lines of credit are loans to businesses for relatively short periods of time, usually not more than one year. These loans are made for any valid business purpose. These loans may be secured by assets of the borrower or guarantor, but may be unsecured based on the personal guarantee of the principal. If secured, loans may be made for up to 100% of the value of the collateral. Time and demand loans and lines of credit are more risky than commercial real estate lending transactions. The businesses to which these loans are made are subject to normal business risk, and cash flows of the business may be subject to economic cycles. In addition, the value of the collateral may fluctuate, or the collateral may be used for other purposes if not subject to Uniform Commercial Code filings. If guaranteed by the principal, the net worth and assets of the principal may be dissipated by demands of the business,

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or due to other factors. The Bank had losses of $192,440 and recoveries of $67,111 on time and demand loans in 2004. The Bank had losses of $200,173 and recoveries of $58,034 on time and demand loans in 2003. The Bank had losses of $21,904 and recoveries of $2,475 on time and demand loans in 2002. There were $1,038,830 of time and demand and line of credit loans delinquent more than 90 days at December 31, 2004. There are no discernible delinquency or loss trends relating to time and demand loans or lines of credit known to management.

   Home improvement loans are loans made to borrowers to complete improvements to their homes including such projects as room additions, swimming pool installations or new roofs. Home improvement loans include those made directly to customers and those made indirectly or originated through an approved home improvement dealer. The Bank makes unsecured home improvement loans to a maximum amount of $15,000. Any loan above that limit is secured by a deed of trust. Borrowers are required to own their home, and to meet certain income and debt ratio requirements. The Bank also reviews the credit history of all applicants. Because they are unsecured or secured by a deed of trust, these loans are more risky than first mortgage residential lending. This risk is mitigated somewhat based on the fact that the loans are used to improve the borrower's home, typically a borrower's most significant asset. In addition, the income-to-debt-ratio requirement helps determine the borrower's current ability to repay the loan. The Bank had charge-offs of home improvement loans of $10,020, $3,170, and $24,472 in 2004, 2003 and 2002, respectively. There were recoveries of $14,898, $21,922, and $10,912 in 2004, 2003, and 2002, respectively. There were no home improvement loans delinquent more than 90 days at December 31, 2004. There are no discernible loss or delinquency trends relating to home improvement loans known to management.

   The remainder of the consumer loan portfolio is comprised of installment loans for automobiles, boats and recreational vehicles ("RV"), overdraft protection lines, and loans secured by deposit accounts or stocks. The largest portion of this group is installment loans for automobiles and other vehicles. The Bank will finance 90% of the cost of a new car purchase, or the maximum loan amount as determined by the National Automobile Dealers Association (NADA) publication for used cars. The Bank will finance 85% of the cost of a new boat or RV, or the maximum loan amount determined by the NADA Boat/RV Guide for used Boats and RVs. These loans are secured by the vehicle purchased. Borrowers must meet certain income and debt ratio requirements, and a credit review is performed on each applicant. These types of loans are subject to the risk that the value of the vehicle will decline faster than the amount due on the loan. However, the income-to-debt ratio requirement helps determine the borrower's current ability to repay. The Bank had no losses on automobile loans in 2004, 2003, or 2002, and recoveries of $0, $369, and $1,400 in 2004, 2003 and 2002, respectively. There were no automobile or other vehicle loans past due more than 90 days at December 31, 2004. There are no discernible delinquency or loss trends relating to automobile or other vehicle loans known to management.

   Overdraft lines and other personal loans are unsecured lending arrangements. These loans or lines of credit are made to allow customers to easily make purchases of consumer goods. If the lines are handled as agreed, they will typically be automatically renewed each year. Because they are unsecured, these loans carry a higher level of risk than secured lending transactions. The Bank attempts to mitigate significant risk by establishing fairly low credit limits. Net charge-offs in 2004, 2003, and 2002 were $43,470, $34,000, and $59,000, respectively. There were $801 of overdraft loans and other personal loans past due more than 90 days at December 31, 2004. There are no discernible delinquency or loss trends relating to overdraft lines and other personal loans known to management.

   Loans secured by savings accounts and stock and bond certificates are secured lending arrangements. The Bank will advance funds for up to 95% of balances in savings or certificate of deposit accounts. The Bank will advance funds up to 60% of the market value of actively traded stock certificates and bonds or 50% of the market value of listed but not actively traded stocks and bonds. Loans secured by stocks and bonds are subject to margin calls to maintain the loan to value ratio. Collateral is not released until the loan is repaid, and the borrower is generally required to pay interest monthly. There were no losses on loans secured by savings accounts or stock and bond certificates during 2004, 2003, or 2002. Recoveries on loans secured by stocks and bonds were $411, $0, and $0 in 2004, 2003, and 2002, respectively. There were no loans secured by savings accounts or stock and bond certificates past due more than 90 days at December 31, 2004. There are no discernible delinquency or loss trends relating to loans secured by savings accounts or stock and bond certificates known to management.

   The Bank is the principal originator of the loans it makes, at this time. In prior periods, residential mortgage loans and home equity loans and lines of credit were predominantly purchased from a network of brokers or other types of originators with whom the Bank does business. The Bank has sold some loans in the secondary market and therefore derives a small amount of noninterest income from serviced loans. These income amounts are not significant to the amounts of noninterest income derived from other sources.

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

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

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

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

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

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

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

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

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

   Competition. – The Bank faces strong competition in all areas of its operations. This competition comes from entities operating in Baltimore City, Baltimore County, Anne Arundel County, Harford County, and Carroll County, and includes branches of some of the largest banks in Maryland. Its most direct competition for deposits historically has come from other commercial banks, savings banks, savings and loan associations and credit unions. The Bank also competes for deposits with money market funds, mutual funds and corporate and government securities. The Bank competes with the same banking entities for loans, as well as mortgage banking companies and other institutional lenders. The competition for loans varies from time to time depending on certain factors, including, among others, the general availability of lendable funds and credit, general and local economic conditions, current interest rate levels, conditions in the mortgage market and other factors which are not readily predictable. Some of the Bank's competitors have greater assets and operating capacity than the Bank.

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

   Asset Management. – The Bank makes available several types of loan services to its customers as described above, depending on customer needs. Recent emphasis has been made on originating short-term (one year or less), variable rate commercial loans and variable rate home equity lines of credit, with the balance of its funds invested in consumer/installment loans and real estate loans, both commercial and residential. In addition, a portion of the Bank's assets is invested in high-grade securities and other investments in order to provide income, liquidity and safety. Such investments include U.S. government agency securities, corporate bonds, mortgage-backed securities and collateralized mortgage obligations, as well as advances of federal funds to other member banks of the Federal Reserve System. Subject to the effects of taxes, the Bank also invests in tax-exempt state and municipal securities with a minimum rating of "A" by a recognized ratings agency. The Bank's primary source of funds is customer deposits. The risk of non-repayment (or deferred payment) of loans is inherent in the business of commercial banking, regardless of the type of loan or borrower. The Bank's efforts to expand its loan portfolio to small and medium-sized businesses may result in the Bank undertaking certain lending risks which are somewhat different from those involved in loans made to larger businesses. The Bank's management evaluates all loan applications and seeks to minimize the exposure to credit risks through the use of thorough loan application, approval and monitoring procedures. However, there can be no assurance that such procedures significantly reduce all risks.

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   Employees. – As of December 31, 2004, the Bank and its subsidiaries had 165 full time equivalent employees, 48 of whom were officers. Each officer generally has responsibility for one or more loan, banking, customer contact, operations, or subsidiary functions. Non-officer employees are employed in a variety of administrative capacities. Management does not anticipate any inordinate difficulty in recruiting and training such additional officers and employees as it may need in the future. Management believes that relations with its employees are good.

CRITICAL ACCOUNTING POLICIES

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

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

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

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

SUPERVISION AND REGULATION

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

   As a bank holding company, the Company is subject to the Bank Holding Company Act of 1956, as amended (the "BHCA"). The BHCA is administered by the Board of Governors of the Federal Reserve System (the "Board of Governors"), and the Company is required to file with the Board of Governors such reports and information as may be required pursuant to the BHCA. The Board of Governors also may examine the Company and any of its nonbank subsidiaries. The BCHA requires every bank holding company to obtain the prior approval of the Board of Governors before: (i) it or any of its subsidiaries (other than a bank) acquires substantially all of the assets of any bank; (ii) it acquires ownership or control of any voting shares of any bank if after such acquisition it would own or control, directly or indirectly, more than five percent of the voting shares of such bank; or (iii) it merges or consolidates with any other bank holding company.

   Under the BHCA, a bank holding company is generally prohibited from engaging in, or acquiring direct or indirect control of more than five percent (5%) of the voting shares of any company engaged in non-banking activities. A major exception to this prohibition is for activities the Board of Governors finds, by order or regulation, to be so closely related to banking or managing or controlling banks. Some of the activities that the Board of Governors has determined by regulation to be properly incident to the business of a bank holding company are: making or servicing loans and certain types of leases; engaging in certain investment advisory and discount brokerage activities; performing certain data processing services; acting in certain circumstances as a fiduciary or as an investment or financial advisor; ownership of certain types of savings associations; engaging in certain insurance activities; and making investments in certain corporations or projects designed primarily to promote community welfare.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

8

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

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

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

GOVERNMENTAL MONETARY POLICIES AND ECONOMIC CONTROLS

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

ITEM 2: DESCRIPTION OF PROPERTY

   Both the Bank's main branch and certain of the Company's executive and administrative offices are located in the Bank's headquarters building which it owns in downtown Baltimore, Maryland. The Bank owns buildings for three of its other branch office locations as well as for the new branch opened in 2005. The Bank leases space for the remaining six branches, five of its CMSI locations, and for its operations center which primarily houses support functions. The land on which the new branch is located is also leased. As a result of the sale of one of the Bank's branches in 2002, it remains responsible for a lease of the facility, currently subleased by the acquiring bank, which expires in 2005. Current lease terms expire in 2005 through 2024 and contain renewal options ranging from 3 to 23 years.

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

ITEM 3: LEGAL PROCEEDINGS

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

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

   None.

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PART II

ITEM 5: MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

TRADING AND DIVIDENDS

   As of December 31, 2004, there were 428 shareholders of record of the Company. Since May 1994, the Company's Common Stock has traded on the NASDAQ National Market Tier of The NASDAQ Stock Market under the symbol "CRRB." Currently, there are two broker-dealers who make a market in the Common Stock.

   The table below sets forth the high and low sales price for each quarter in the last two years, and cash dividends paid per share.

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

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ITEM 6: SELECTED FINANCIAL DATA

(a)

Per share amounts and common shares outstanding have been adjusted to retroactively reflect the effect of a 5% stock dividend declared by the Board of Directors on October 24, 2002.

(b)

This ratio is presented on a fully taxable equivalent basis (a non-GAAP financial measure), using regular income tax rates.

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

FORWARD-LOOKING STATEMENTS

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

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

BUSINESS AND OVERVIEW

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

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

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

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

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

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

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

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RESULTS OF OPERATION

SUMMARY

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

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

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

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

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

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

NET INTEREST INCOME

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

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

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AVERAGE BALANCES, INTEREST, AND YIELDS

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

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

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

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

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

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

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

PROVISION FOR LOAN LOSSES

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

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

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

NONINTEREST INCOME

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

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

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

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

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

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

NONINTEREST EXPENSES

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

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

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

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

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

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

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

INCOME TAX PROVISION

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

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

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

FINANCIAL CONDITION

SUMMARY

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

INVESTMENT SECURITIES

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

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

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

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

   The investment portfolio consists primarily of U. S. Government agency securities, mortgage-backed securities, corporate bonds, state and municipal obligations, and equity securities. The income from state and municipal obligations is exempt from federal income tax. Certain agency securities are exempt from state income taxes. The Company uses its investment portfolio as a source of both liquidity and earnings.

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

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

LOANS

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

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

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

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