10-K

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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, 2006

Commission file number: 0-23090

	Carrollton Bancorp
(Exact Name of Registrant as Specified in its Charter)

	Maryland	52 1660951
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
	344 N. Charles St.
	Baltimore, MD	21201
	(Address of principal executive offices)	(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

(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 x   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 x

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 x   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 x

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

The aggregate market value of the Common Stock, all of which has voting rights, held by non-affiliates of the registrant on December 31, 2006 was approximately $39.4 million. 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, 2006, the last known sale price was $17.16 per share. For the purpose of this calculation, the term “affiliate” referes to all directors and executive officers of the registrant.

On March 9, 2007, 2,819,035 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 May 15, 2007, is incorporated by reference in this Form 10-K in Part III, Item 10, Item 11, Item 12, Item 13, and Item 14.

CARROLLTON BANCORP

TABLE OF CONTENTS

PART I
Item 1 —	Business	4
Item 1A —	Risk Factors	11
Item 2 —	Properties	14
Item 3 —	Legal Proceedings	15
Item 4 —	Submission of Matters to a Vote of Security Holders	15
PART II
Item 5 —	Market for Registrant’s Common Equity and Related Shareholders Matters	16
Item 6 —	Selected Financial Data	18
Item 7 —	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 7A —	Quantitative and Qualitative Disclosures About Market Risk	33
Item 8 —	Financial Statements and Supplementary Data	34
Item 9 —	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	60
Item 9A —	Controls and Procedures	60
Item 9B —	Other Information	60
PART III
Item 10 —	Directors, Executive Officers, and Corporate Governance	60
Item 11 —	Executive Compensation	60
Item 12 —	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	60
Item 13 —	Certain Relationships and Related Transactions and Director Independence	60
Item 14 —	Principal Accountant Fees and Services	60
PART IV
Item 15 —	Exhibits and Financial Statement Schedules	61
Signatures		62

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2006 ANNUAL REPORT

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:

Statement regarding the impact on the Company of routine legal proceeding.

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

Statements regarding loan growth in real estate development and construction and commercial loan portfolios in 2007.

Statement regarding 2007 certificate of deposit pricing strategy.

Statement regarding challenges facing management in terms of interest rates, growth in net interest income and overall management of the net interest margin.

Statements regarding volatility in mortgage refinancing activity.

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

Statements regarding the Company’s ability to limit exposure to interest rate risk.

Statements regarding factors that influence demand for real estate loans.

Statements regarding future revenue improvements.

Statements regarding the sufficiency of the Company’s allowance for loan losses.

Part IV. Item 8. Note 3. Investments:

Statement regarding anticipated changes in the fair value of securities in relation to market rates.

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

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, 2006, had a total of ten branch locations in Maryland with two branch locations in Baltimore City; three branch locations in Anne Arundel County; four branches in Baltimore County and one branch  in Harford County. The Company expects its fifth branch to open in Baltimore County in June 2007. The Bank’s wholly owned subsidiaries are Carrollton Mortgage Services, Inc. (“CMSI”), which is used primarily to originate and sell residential mortgage loans, Carrollton Financial Services, Inc. (“CFS”), which provides brokerage services, and Mulberry Street LLC (“MSLLC”) which is used to dispose of other real estate owned. 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:

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

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

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

·Loans guaranteed by the United States Small Business Administration.

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

·Internet banking, including electronic bill payment

·Letters of credit and remittance services.

·Credit and debit card services.

·Merchant credit card deposit servicing.

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

·A 24-hour ATM network.

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2006 ANNUAL REPORT

·After-hours depository services.

·Safe deposit boxes.

·Point of Sale (POS) services.

·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 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 and no recoveries on residential mortgage loans in 2006. The Bank experienced no losses and recoveries of $14,874 in 2005. The Bank experienced losses of $746 and recoveries of $8,087 in 2004. There were no residential mortgage loans delinquent more than 90 days at December 31, 2006. 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 no losses or recoveries on home equity loans during 2006. The Bank experienced losses on home equity loans during 2005 of $0 and recoveries of $7,700. The Bank experienced losses on home equity loans during 2004 of $7,000 and recoveries of $0. There were $0 of home equity loans delinquent more than 90 days at December 31, 2006. 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 losses on commercial mortgage loans of $59,120 during 2006 and $0 during 2005 and 2004, respectively. There were $252,295 of commercial mortgage loans past due more than 90 days at December 31, 2006. 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 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

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CARROLLTON BANCORP

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 2006, 2005, or 2004. There were no construction and land development loans past due more than 90 days at December 31, 2006. 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 no losses or recoveries on demand and time loans in 2006.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. 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 $11,515, $0 and $10,020, in 2006, 2005 and 2004, respectively. There were recoveries of $608, $0, and $14,898, in 2006, 2005, and 2004, 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 losses on automobile loans of $6,849 in 2006 and no losses in 2005, or 2004, and recoveries of $1,251, $0, and $0, in 2006, 2005 and 2004, 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 2006, 2005, and 2004 were $11,662, $1,927, and  $43,470,  respectively. There were no overdraft loans and other personal loans past due more than 90 days at December 31, 2006. 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 2006, 2005, or 2004. Recoveries on loans secured by stocks and bonds were $0, $0, and $411 in 2006, 2005, and 2004 respectively. There were no loans secured by savings accounts or stock and bond certificates past due more than 90 days at December 31, 2006. There are no discernible delinquency or loss trends relating to loans secured by savings accounts or stock and bond certificates known to management.

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2006 ANNUAL REPORT

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.

Mulberry Street LLC was established in 2004 for the purpose of disposing of real estate owned.

Investment Activities. – The Company maintains a portfolio of investment securities to provide liquidity and income. The current portfolio amounts to about 16% 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 2006, commission income totaled $647,000 and net income was $152,000.

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, 2006, the Bank and its subsidiaries had 138 full time equivalent employees, 33 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 the 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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2006 ANNUAL REPORT

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.

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”).  For traditional and ROTH IRA’s, the federal deposit insurance limit increased from $100,000 to $250,000. 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.

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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 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,

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2006 ANNUAL REPORT

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 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:

·Collect identifying information about customers opening a deposit or loan account

·Verify customer identity

·Maintain records of the information used to verify the customer’s identity

·Determine whether the customer appears on any list of suspected terrorists or terrorist organizations

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. Also, consider the other information in this Annual Report on Form 10-K, as well as the documents incorporated by reference.

Competition may decrease our growth or profits.

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 future from the following: other local and regional banking institutions, including larger commercial

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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.

Changes in interest rates and other factors beyond our control may adversely affect our earnings and financial condition.

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.

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.

Our allowance for loan losses may not be adequate to cover our actual loan losses, which could adversely affect our earnings.

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 and future additions to the allowance may be necessary which 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 based on their judgement. These adjustments could negatively impact 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

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2006 ANNUAL REPORT

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.

Changes in local economic conditions could adversely affect our business.

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, 2006, 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 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.

Government regulation significantly affects our business.

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. Regulations affecting banks and financial services companies undergo continuous change, and we cannot predict the ultimate effect of these changes, which could have a material adverse effect on our profitability or financial condition. Federal economic and monetary policy may also affect our ablitity to attract deposits and other funding sources, make loans and investements, and achieve satisfactory interest spreads.

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.

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.

Technology failure could adversely affect our operations and profits.

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.

Our ability to pay dividends is limited by law and contract.

Our ability to pay dividends to our shareholders largely depends on Carrollton Bancorp’s receipt of dividends from Carrollton Bank. The amount of dividends that Carrollton Bank may pay to Carrollton Bancorp is limited by

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federal laws and regulations. We also may decide to limit the payment of dividends even when we have the legal ability to pay them in order to maintain earnings for use in our business.

The market price for our common stock may be volatile.

The market price for our common stock has fluctuated, ranging between $14.40 and $19.45 per share during the last 12 months ended December 31, 2006. The overall market and the price of our common stock may continue to be volatile. There may be a significant impact on the market share of our common stock due to, among other things:

Variations in our anticipated or actual operating results or the results of our competitors;

Changes in investors’ or analysts’ perceptions of the risks and conditions of business;

The size of the public float of our common stock;

Regulatory developments;

The announcement of acquisitions or new branch locations by us or our competitors;

Market conditions; and

General economic conditions.

Additionally, the average daily trading volume for our common stock is low and on various days throughout  the year, there is no activity on the stock. There can be no assurance that a more active or consistent trading market will develop. As a result, relatively small trades could have a significant impact on the price of our stock.

ITEM 2: PROPERTIES

The Company owned the following properties, which had a book value of $2.7 million at December 31, 2006:

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

The Company leased the following facilities at an aggregate annual rental of $937,160 as of December 31, 2006:

Location	Description	Lease Expiration Date*
1066-70 Maiden Choice Lane Arbutus, MD 21229	Full service branch	April 30, 2031
4738 Shelbourne Road Baltimore, MD 21229	Detached drive-thru	April 30, 2031
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
8157A Honeygo Boulevard White Marsh, MD 21236	Full service branch	December 31, 2017
Northway Shopping Center 684 Old Mill Road Millersville, MD 21108	Full service branch	August 31, 2014
602 Hoagie Drive Bel Air, MD 21014	Full service branch	November 30, 2044

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2006 ANNUAL REPORT

10301 York Road Cockeysville, MD 21030	Full service branch expected to open in the second quarter of 2007	December 1, 2047
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, 2007
1 Center Square, Suite 201 Hanover, PA 17331	Mortgage subsidiary offices	June 29, 2007

*Expiration date, assuming the Company exercises all extension options.

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, 2006.

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PART II

ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

TRADING AND DIVIDENDS

As of December 31, 2006, there were 391 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 $0.45 in 2006, $0.40 in 2005, and $0.38 in 2004, representing a payout ratio of 48.98% in 2006, 45.97% in 2005, and 121.17% in 2004. 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 2006, the Company repurchased and retired 7,518 shares of common stock at an average price of $17.14. In 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
	2006				2005				2006		2005
	Low		High		Low		High
4th Quarter	$	16.99	$	19.45	$	14.00	$	15.00	$	0.12	$	0.10
3rd Quarter	16.11		18.00		13.95		16.29		0.11		0.10
2nd Quarter	15.64		18.80		14.25		17.00		0.11		0.10
1st Quarter	14.40		15.95		14.12		17.00		0.11		0.10
									$	0.45	$	0.40

As of December 31, 2006, there were approximately 391 common shareholders of record holding an aggregate of 2,806,705 shares. The Company believes there to be in excess of 558 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.

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2006 ANNUAL REPORT

STOCK PERFORMANCE TABLE

The Company is required by the SEC to provide a five-year comparison of the cumulative total Shareholder return on our Common Stock compared with that of a broad equity market index, and either a published industry index or a constructed peer group index of the Company.

The following chart compares the cumulative Shareholder return on the Company’s Common Stock from December 31, 2001 to December 31, 2006 with the cumulative total of the NASDAQ Composite (U.S.), the NASDAQ Bank and SNL Mid-Atlantic Indices. The comparison assumes $100 was invested on December 31, 2001 in the Company’s Common Stock and in each of the foregoing indices. It also assumes reinvestment of any dividends.

The Company does not make, nor does it endorse, any predictions as to future stock performance.

Total Return Performance

	Period Ending
Index	12/31/01		12/31/02		12/31/03		12/31/04		12/31/05		12/31/06
Carrollton Bancorp		100.00		112.33		148.16		151.37		131.18		154.18
NASDAQ Composite		100.00		68.76		103.67		113.16		115.57		127.58
SNL Mid-Atlantic Bank Index		100.00		76.91		109.35		115.82		117.87		141.46

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

EQUITY COMPENSATION PLAN

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		229,030		$	14.70		34,140
Equity compensation plans not approved by security holders		—		—			—
Total		229,030		$	14.70		34,140

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ITEM 6:SELECTED FINANCIAL DATA

	2006		2005		2004		2003		2002
CONSOLIDATED INCOME STATEMENT DATA:
Interest income	$	23,127,504	$	19,071,379	$	15,500,323	$	15,935,691	$	18,985,364
Interest expense	8,737,450		7,375,083		5,321,622		6,639,734		8,692,320
Net interest income	14,390,054		11,696,296		10,178,701		9,295,957		10,293,044
Provision for loan losses	—		—		—		243,000		526,000
Net interest income after provision for loan losses	14,390,054		11,696,296		10,178,701		9,052,957		9,767,044
Noninterest income	8,898,996		10,718,636		8,781,151		8,268,612		7,534,802
Noninterest expenses	19,381,003		18,634,124		17,751,000		16,058,355		14,536,958
Income before income taxes	3,908,047		3,780,808		1,208,852		1,263,214		2,764,888
Income taxes	1,323,268		1,322,371		320,488		338,500		847,630
Net income	$	2,584,779	$	2,458,437	$	888,364	$	924,714	$	1,917,258
CONSOLIDATED BALANCE SHEET DATA, AT YEAR END
Assets	$	349,824,752	$	360,467,146	$	319,123,132	$	302,409,975	$	324,221,615
Gross loans	260,001,314		247,943,073		219,726,294		199,296,561		205,220,126
Deposits	277,903,801		271,626,503		225,846,145		207,056,100		230,264,108
Shareholders’ equity	34,711,378		34,640,165		34,215,280		34,124,882		33,691,079
PER SHARE DATA:
Number of shares of Common Stock outstanding, at year-end	2,806,705		2,809,698		2,834,823		2,828,078		2,821,757
Net income:
Basic	$	0.92	$	0.87	$	0.31	$	0.33	$	0.68
Diluted	0.90		0.87		0.31		0.32		0.68
Cash dividends declared	0.45		0.40		0.38		0.36		0.34
Book value, at year end	12.37		12.33		12.07		12.07		11.94
Performance and capital ratios:
Return on average assets	0.75%		0.72%		0.29%		0.29%		0.57%
Return on average shareholders’ equity	7.55%		7.12%		2.61%		2.71%		5.70%
Net interest margin (a)	4.57%		3.89%		3.81%		3.36%		3.47%
Average shareholders’ equity to average total assets	9.91%		10.13%		11.11%		10.83%		9.99%
Year-end capital to year-end risk- weighted assets:
Tier 1	11.92%		11.63%		11.52%		13.75%		13.57%
Total	13.20%		13.51%		12.74%		15.51%		15.07%
Year-end Tier 1 leverage ratio	9.74%		8.96%		9.41%		10.35%		9.54%
Cash dividends declared to net income	48.98%		45.97%		121.17%		109.96%		50.80%
ASSET QUALITY RATIOS:
Allowance for loan losses, at year-end to:
Gross loans	1.20%		1.35%		1.59%		1.83%		1.74%
Nonperforming, restructured and past-due loans	54.93%		209.50%		132.05%		151.37%		111.68%
Net charge-offs to average gross loans	0.08%		0.06%		0.08%		0.09%		0.13%
Nonperforming assets as a percent of period-end gross loans and foreclosed real estate	2.19%		0.64%		1.20%		1.26%		1.67%

(a)Net interest margin is the ratio of net interest income, determined on a fully taxable equivalent basis (a non-GAAP financial measure), to total average interest earning assets.

18

2006 ANNUAL REPORT

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 2007.

BUSINESS AND OVERVIEW

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

The Bank is engaged in a general commercial and retail banking business with ten branch locations. CMSI is in the business of originating residential mortgage loans and has two branch locations. CFS provides brokerage services to customers and MSLLC manages and disposes of real estate acquired through foreclosures. CCDC promotes, develops and improves the housing and economic conditions of people in Maryland.

The Bank sponsors national retailers who accept ATM cards for purchases in various electronic networks. Effective January 22, 2006, the agreement with Wal-Mart for the Bank to provide ATMs at Wal-Mart, Sam’s Club, and Wal-Mart Supercenters in Maryland, Virginia and West Virginia was terminated.

During 2006, total assets decreased $10.6 million to $349.8 million due mainly to the a reduction in cash and cash equivalents that was used to pay off $18.0 million of Federal Home Loan Bank of Atlanta (FHLBA) advances. Partially offsetting this decrease was an $8.4 million or 5% increase in commercial loans that were funded primarily by the increase in deposits. 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, decreased 45.6% due to the slow down in the residential housing market.

Net income for the year ended December 31, 2006 totaled $2.6 million compared to $2.5 million for the prior year, a 5% increase. The earnings were significantly affected by recording a before tax charge of approximately $1.8 million ($1.2 million after tax) representing the loss from a check kiting scheme by one of the Bank’s commercial customers. The earnings also included a charge of approximately $2.3 million representing a prepayment penalty for restructuring a $35 million FHLBA advance at a fixed rate of 6.84% maturing February 2, 2010. This charge was substantially offet by a gain of approximately $2.2 million from the sale of equity securities. The earnings for the year ended December 31, 2005 included 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 FHLBA advance at 7.26% maturing May 24, 2010, and the write down and cost of disposal of ATMS totaling $563,000 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. The Company is asset sensitive and as a result of the increasing interest rate environment of 2006 and the increase in average interest earning assets of $15.1 million from 2005 to 2006, net interest income increased 23% for 2006 compared to 2005. Noninterest income excluding the gains on the sales of securities of $2.2 million in 2006 and $840,000 in 2005 decreased 32% compared to 2005. The decrease was due primarily  to the $3.0 million decrease in ATM and Point of Sale revenue relating to the termination of the Wal-Mart ATM agreement.

The Company expects to open its newest retail branch in Cockeysville, Maryland in the second quarter of 2007.

Based upon current earnings and encouraging prospects for future earnings, the Company paid dividends of $0.45 per share to shareholders during 2006.

19

CARROLLTON BANCORP

RESULTS OF OPERATIONS

SUMMARY

The Company reported net income for 2006 of $2.6 million or $0.90 per diluted share, representing a 5% increase from 2005 net income of $2.5 million  or $0.87 per share.

The loan portfolio net of the Allowance for Loan Losses and including loans held for sale, increased 2.3%  to $264.4 million, as a result of the Company’s continuing efforts to align the loan portfolio to be in line with typical commercial banks. Loans held for sale decreased 45.6% to $7.5 million due to the slow down in the residential housing market. Interest income on loans, including loans held for sale, increased 19.1% due to average loans, including loans held for sale, increasing $14.9 million and loans repricing to higher rates.

The deposit portfolio increased 2.3% to $277.9 million, with the majority of the growth derived from money market accounts and certificates of deposit.  Partially affecting these increases were decreases in noninterest bearing deposits and savings accounts. Interest expense increased during 2006, due primarily to a $24.7 million increase in average interest-bearing deposits and the yield on interest-bearing deposits increasing 96 basis points.

Noninterest income decreased 17.0% in 2006 compared to 2005, due primarily to a $3.0 million decrease in ATM and Point of Sale revenue relating to the termination of the Wal-Mart ATM agreement and partially offset by the $1.3 million increase in the gain on the sale of securities.

Noninterest expense increased 4.0% in 2006 compared to 2005. The increase was due to the $1.8 million charge from the check kiting scheme by one of the Bank’s commercial customers and the $1.7 million increase in the prepayment penalty for restructuring a FHLBA advance partially offset by the elimination of personnel, transaction fees, and other operating expenses as well as a write down of $563,000 in 2005 related to the termination of the Wal-Mart ATM agreement.

The Company reported net income for 2005 of $2.5 million or $0.87 per diluted share, representing a 177% increase from 2004 net income of $888,000, or $0.31 per diluted share.

The loan portfolio, including loans held for sale, increased 14.1% during 2005 to $258.3 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 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.

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.

20

2006 ANNUAL REPORT

AVERAGE BALANCES, INTEREST, AND YIELDS

	2006								2005								2004
	Average Balance			Interest		Yield			Average Balance			Interest		Yield			Average Balance			Interest		Yield
ASSETS
Federal funds sold and Federal Home Loan Bank deposit	$	7,839,525		$	382,625		4.88	%	$	19,067,206		$	623,910		3.27	%	$	8,606,166		$	116,899		1.36	%
Federal Home Loan Bank stock	1,742,153			99,046			5.69		2,643,019			109,616			4.15		2,261,207			80,737			3.57
Investment securities: (a)
U.S. government agency	15,316,293			788,538			5.15		20,306,719			560,887			2.76		28,566,496			674,774			2.36
State and municipal	8,734,211			544,815			6.24		4,027,933			264,620			6.57		4,549,377			287,890			6.33
Mortgage-backed securities	21,554,754			1,170,089			5.43		11,089,402			611,055			5.51		8,747,456			479,546			5.48
Corporate bonds	4,089,963			270,840			6.62		1,277,192			70,749			5.54		4,592,680			274,845			5.98
Other	1,154,060			49,212			4.26		1,877,280			135,232			7.20		3,732,303			175,442			4.70
	50,849,281			2,823,494			5.55		38,578,526			1,642,543			4.26		50,188,312			1,892,497			3.77
Loans:
Demand and time	73,339,911			5,862,743			7.99		67,134,231			3,554,951			5.30		49,920,788			2,783,558			5.58
Residential mortgage (b)	72,131,409			3,926,413			5.44		74,654,896			4,613,621			6.18		68,431,096			4,090,660			5.98
Commercial mortgage and construction	110,899,759			8,544,541			7.70		97,985,886			8,298,411			8.47		86,429,102			6,193,969			7.17
Installment	1,504,253			80,978			5.38		1,813,896			154,258			8.50		2,414,072			209,275			8.67
Lease financing	1,429,551			80,889			5.66		2,782,231			214,524			7.71		4,024,469			320,885			7.97
	259,304,883			20,044,135			7.73		244,371,140			16,835,765			6.89		211,219,527			13,598,347			6.44
Total interest-earning assets	319,735,842			23,349,301			7.30		304,659,891			19,211,834			6.31		272,275,212			15,688,480			5.76
Noninterest-bearing cash	14,651,700								26,624,448								21,682,244
Premises and equipment	5,432,452								5,694,687								4,959,453
Other assets	7,993,335								4,034,529								7,858,307
Allowance for loan losses	(3,287,376		)						(3,472,722		)						(3,616,474		)
Unrealized gains on available for sale securities, net	1,065,683								3,412,785								3,174,905
	$	345,591,636							$	340,953,618							$	306,333,647
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits:
Savings and NOW	$	62,309,713		147,770			0.24	%	$	67,931,566		162,865			0.24	%	$	71,404,510		180,741			0.25	%
Money market	51,303,354			1,936,266			3.77		40,658,604			998,161			2.45		29,186,544			322,785			1.11
Certificates of deposit	101,071,899			4,521,369			4.47		81,412,306			2,861,697			3.52		61,370,913			1,627,239			2.65
	214,684,966			6,605,404			3.08		190,002,476			4,022,723			2.12		161,961,967			2,130,765			1.32
Borrowed funds	38,900,240			2,132,046			5.48		54,879,637			3,352,360			6.11		56,153,768			3,190,857			5.68
Total interest-bearing liabilities	253,585,206			8,737,451			3.45		244,882,113			7,375,083			3.01		218,115,735			5,321,622			2.44
Noninterest-bearing deposits	56,441,180								59,645,770								51,501,352
Other liabilities	1,312,259								1,885,164								2,674,734
Shareholders’ equity	34,252,991								34,540,571								34,041,826
Total liabilities and shareholders’ equity	$	345,591,636							$	340,953,618							$	306,333,647
Net interest margin (c)	$	319,735,842		$	14,611,850		4.57	%	$	304,659,891		$	11,836,751		3.89	%	$	272,275,212		$	10,366,858		3.81	%

(a)Interest on investments and loans is presented on a fully taxable equivalent basis (a non-GAAP financial measure), using the federal income tax rates of 34% and, where applicable, the state rate of 7% (or a combined federal and state rate of 38.62%) to increase tax exempt interest income to a taxable equivalent basis. This is a non-GAAP measure that management believes is useful when comparing annual results.

(b)Loans held for sale are included in residential mortgage loans.

(c)Net interest margin is the ratio of net interest income, determined on a fully taxable-equivalent basis, to total average interest earning assets.

21

CARROLLTON BANCORP

Net interest income on a tax-equivalent basis increased to $14.6 million for the year ended December 31, 2006 compared to $11.8 million for 2005. The increase in tax-equivalent net interest income during 2006 was due to a $15.1 million increase in average interest-earning assets during 2006 compared to 2005 and an increase in the yield on interest-earning assets of 99 basis points.

The $14.9 million or 6.1% 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. The yield on loans increased to 7.73% in 2006 compared to 6.89% for 2005 as lower yielding loans repriced during the year to higher rates. The yield on investment securities also increased to 5.55% in 2006 from 4.26% in 2005. The net impact was a $4.1 million or 21.5% increase in tax-equivalent interest income for the year ended December 31, 2006 compared to 2005.

In 2005, 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.

Interest expense increased $1.4 million to $8.7 million in 2006 from $7.4 million in 2005. Interest expense increased primarily due to a change in the deposit mix, with an increase in the amount of interest-bearing deposits partially offet by a decrease in borrowings. In addition, the cost of interest-bearing deposits increased from 2.12% in 2005 to 3.08% in 2006.

Interest expense on total interest-bearing liabilities increased $1.4 million, or 18.5%, for the year ended December 31, 2006. The increase in interest expense was due to an $8.7 million increase in average interest-bearing liabilities and the cost of interest-bearing liabilities increasing to 3.45% for the year ended December 31, 2006 compared to 3.01% for the same period in 2005.

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:

	2006 Compared to 2005									2005 Compared to 2004
	Change Due to Variance In									Change Due to Variance In
	Rate(b)			Volume(b)			Total			Rates(b)			Volume(b)			Total
INTEREST INCOME
Federal funds sold and interest-bearing deposits with other banks	$	126,216		$	(367,145	)	$	(240,929	)	$	364,757		$	142,254		$	507,011
Investment securities and FHLB stock	682,785			485,348			1,168,133			(55,017		)	(166,058		)	(221,075		)
Loans (a)	2,181,328			1,028,935			3,210,263			1,099,671			2,137,747			3,237,418
TOTAL INTEREST EARNED	2,990,329			1,147,138			4,137,467			1,409,411			2,113,943			3,523,354
INTEREST EXPENSE
Deposits	2,060,511			523,269			2,583,779			1,501,020			390,938			1,891,958
Borrowings	(245,072		)	(976,341		)	(1,221,413		)	216,307			(54,804		)	161,503
TOTAL INTEREST EXPENSE	1,815,439			(453,072		)	1,362,367			1,717,327			336,134			2,053,461
NET INTEREST INCOME	$	1,174,890		$	1,600,210		$	2,775,100		$	(307,916	)	$	1,777,809		$	1,469,893

(a)Interest on investments and loans is presented on a fully taxable equivalent basis (a non-GAAP financial measure), using regular income tax rates.

(b)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.

22

2006 ANNUAL REPORT

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 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, 2006 and 2005. Nonaccrual, restructured and delinquent loans over 90 days to total loans increased to 2.19% at the end of 2006 compared to 0.64% in 2005. The ratio of net loan losses to average loans increased in 2006 to 0.08 % compared to 0.06% for 2005.

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 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.

NONINTEREST INCOME

Noninterest income decreased from $10.7 million during 2005 to $8.9  million in 2006 due primarily to the $3.0 million decrease in ATM and Point of Sale revenue relating to the termination of the Wal-Mart ATM agreement and partially offset by the $1.3 million increase in the gain on the sale of securities. The decrease in net gains and fees on sales of mortgage loans corresponded to a decrease in the volume of mortgage loans sold during the year due to a slow down in the residential housing market. In 2006, sales of available-for-sale securities generated $2.2 million in gains compared to $840,000 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. Effective January 22, 2006, the agreement with Wal-Mart for the Bank to provide ATM services at its locations in Maryland, Virginia and West Virginia was terminated. The fees from the ATMs represent approximately 8% of total electronic banking revenue in 2006. 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 78% of total electronic banking revenue. Fees from check cards comprise the remaining 14% of electronic banking revenue.

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 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.

During 2004, the Company opened a mortgage subsidiary CMSI,  Our mortgage-banking business is structured to provide a source of fee income largely from the process of originating residential mortgage loans for sale on the secondary market, as well as the origination of loans to be held in our loan portfolio. Mortgage-banking products include Federal Housing Adminstration (“FHA”) and the federal Veterans Administration (“VA”) loans,  conventional and nonconforming first and second mortgages, and construction and permanent financing.

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CARROLLTON BANCORP

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, 2006 totaled $19.4 million, representing an increase of $747,000, or 4.0%, as compared to 2005. The increase was due to the $1.8 million charge from the check kiting scheme by one of the Bank’s commercial customers and the $1.7 million increase in the prepayment penalty for restructuring a FHLBA advance partially offset by the elimination of personnel, transaction fees, other operating expenses as well as a write down of $563,000 in 2005 related to the termination of the Wal-Mart agreement.

During 2005 noninterest expenses increased by $883,000, or  5.0% to $18.6 million compared to $17.8 million in 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 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% from 2004 to 2005 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 $563,000 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% from 2003 to 2004 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.

INCOME TAX PROVISION

Income tax expense was $1.3 million in 2006 and 2005 and $320,000 in 2004. The effective tax rate was 33.9% in 2006, 35.0% in 2005 and 26.5% in 2004. 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. During 2006, the Company purchased additional tax exempt securities, which reduced the effective tax rates.

FINANCIAL CONDITION

SUMMARY

Total assets of the Company decreased by 3.0% to $349.8 million at December 31, 2006 from $360.5 million at December 31, 2005. Investment securities increased 15.7% to $55.1 million at December 31, 2006. Gross loans, excluding loans held for sale, increased by 4.9% to $260.0 million at December 31, 2006 compared to $247.9 million at the end of 2005. Interest-earning assets increased $2.4 million to $327.1 million and were 93.5% of total assets at December 31, 2006.

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.

24

2006 ANNUAL REPORT

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

	2006		2005		2004		2003		2002
AVAILABLE FOR SALE
U.S. Government agency	$	9,363,760	$	10,740,335	$	19,913,790	$	34,566,285	$	44,866,333
Mortgage-backed securities	12,725,553		8,490,125		8,447,886		9,628,267		17,008,728
State and municipal bonds	5,724,959		3,689,859		4,137,433		5,197,716		5,446,260
Corporate bonds	5,621,529		1,514,471		3,036,920		6,820,340		7,962,805
Subtotal	33,709,801		24,434,790		35,536,029		56,212,608		75,284,126
Equity securities	2,224,846		4,660,213		6,952,463		6,246,349		3,502,021
Total available for sale	35,934,647		29,095,003		42,488,492		62,458,957		78,786,147
HELD TO MATURITY
U.S. Government agency	6,456,069		5,000,000		—		—		—
Mortgage-backed securities	8,761,200		9,575,713		—		—		—
State and municipal bonds	3,912,704		3,912,692		—		—		—
Equity securities	—		—		—		25,000		25,000
Total held to maturity	19,129,973		18,488,405		—		25,000		25,000
Total investment securities	$	55,064,620	$	47,583,408	$	42,488,492	$	62,483,957	$	78,811,147

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, 2006:

	Available for Sale							Held to Maturity
Maturing	Amortized Cost		Fair Value		Yield			Amortized Cost		Fair Value		Yield
Within one year	$	2,000,000	$	1,985,620		3.05	%	$	—	$	—		—	%
Over one to five years	4,923,172		4,924,303			4.96		—		—			—
Over five to ten years	3,928,823		3,958,428			4.91		8,414,510		8,324,424			4.93
Over ten years	10,120,600		10,115,897			5.83		1,954,263		1,941,379			5.73
	20,972,595		20,984,248					10,368,773		10,265,803
Mortgage-backed securities	12,712,231		12,725,553			5.82		8,761,200		8,624,465			4.96
Equity securities	1,140,856		2,224,846			2.40		—		—			—
	$	34,825,682	$	35,934,647				$	19,129,973	$	18,890,268

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 $7.5 million to $55.1 million at December 31, 2006 compared to $47.6 million at December 31, 2005. 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.

LOANS

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

	2006		2005		2004		2003		2002
Real Estate:
Residential	$	55,057,625	$	53,148,211	$	55,242,018	$	57,586,028	$	79,520,154
Commercial	120,397,988		97,909,115		94,858,597		82,856,038		78,500,418
Construction and land development	29,996,306		37,415,478		17,774,874		16,275,828		7,664,367
Demand and time	51,549,802		56,118,527		46,168,587		35,978,633		32,444,790
Lease financing	969,113		1,936,482		3,598,003		4,449,408		4,343,539
Installment	2,030,480		1,415,260		2,084,215		2,150,626		2,746,858
	260,001,314		247,943,073		219,726,294		199,296,561		205,220,126
Allowance for loan losses	3,131,021		3,337,163		3,485,076		3,648,245		3,578,762
Loans, net	$	256,870,293	$	244,605,910	$	216,241,218	$	195,648,316	$	201,641,364

25

CARROLLTON BANCORP

Gross loans, excluding loans held for sale, increased $12.1 million or 4.9% from $247.9 million as of December 31, 2005 to $260.0 million as of December 31, 2006. The increase was primarily in commercial lending including commercial construction and land development. Commercial loans amounted to $202.9 million at December 31, 2006 and were 78% of total loans. Consumer loans amounted to $57.1 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, 2006. 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
	In one year or less				After 1 through 5 years					After 5 years
	Fixed		Variable		Fixed		_	Variable		Fixed		Variable		Total
Real Estate:
Residential	$	185,032	$	741,011	$	1,417,229		$	—	$	16,074,707	$	36,639,646	$	55,057,625
Commercial	13,387,834		11,053,853		73,766,392			841,931		18,693,031		2,654,947		120,397,988
Construction and land development	10,882,428		7,408,186		380,673			4,235,920		6,944,049		145,050		29,996,306
Demand and time	1,335,962		31,720,178		10,735,337			6,036,889		1,142,042		579,394		51,549,802
Lease financing	216,151		—		752,962			—		—		—		969,113
Installment	935,382		15,717		258,766			281,791		301,761		237,063		2,030,480
	$	26,942,789	$	50,938,945	$	87,311,359		$	11,396,531	$	43,155,590	$	40,256,100	$	260,001,314

The following table provides information concerning nonperforming assets and past due loans at December 31, 2006:

	2006		2005		2004		2003		2002
Nonaccrual loans (a)	$	3,699,397	$	1,413,925	$	615,394	$	712,116	$	734,879
Restructured loans	180,686		—		455,864		661,974		568,969
Foreclosed real estate	1,383,163		—		—		100,000		218,654
	$	5,263,246	$	1,413,925	$	1,071,258	$	1,474,090	$	1,522,502
Accruing loans past-due 90 days or more	$	436,599	$	179,012	$	1,567,919	$	1,036,018	$	1,900,663

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

ALLOWANCE FOR LOAN LOSSES

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

The specific allowance is based on regular analysis of the loan portfolio and is determined by analysis of collateral value, cash flow and guarantor capacity, as applicable. The specific allowance was $534,639, $77,744, and $143,374 as of December 31, 2006, 2005 and 2004, 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 $2,001,000, $2,319,000, and $2,559,000 as of December 31, 2006, 2005 and 2004, 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.

26

2006 ANNUAL REPORT

During the years ended December 31, 2002 through 2006, 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 2006 and 2005.

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

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

	Years ended December 31
Description	2006		2005		2004		2003		2002
Balance at beginning of year	$	3,337,163	$	3,485,076	$	3,648,245	$	3,578,762	$	3,338,807
Charge-offs:
Demand and time	—		123,578		192,440		200,173		21,904
Lease financing	154,747		168,823		—		—		—
Real estate:
Residential	—		—		7,746		16,898		160,591
Commercial	59,120		—		—		—		112,718
Construction	—		—		—		—		—
Installment	41,967		22,640		76,936		47,957		85,393
	255,834		315,041		277,122		265,028		380,606
Recoveries:
Demand and time	—		130,904		67,111		58,034		2,475
Lease financing	16,530		3,980		—		—		—
Real estate:
Residential	—		14,874		8,087		—		67,705
Commercial	6,290		—		—		—		—
Construction	—		—		—		—		—
Installment	26,872		17,370		38,755		33,477		24,381
	49,692		167,128		113,953		91,511		94,561
Net charge-offs	206,142		147,913		163,169		173,517		286,045
Provision charged to operations	—		—		—		243,000		526,000
Balance at end of the year	$	3,131,021	$	3,337,163	$	3,485,076	$	3,648,245	$	3,578,762
Ratio of net charge-offs to average loans outstanding	0.08%		0.06%		0.08%		0.09%		0.13%

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

CARROLLTON BANCORP

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

Portfolio	2006		2005		2004		2003		2002
Demand and time and lease financing	$	922,612	$	474,059	$	589,053	$	1,226,447	$	733,560
Real estate:
Residential	409,684		718,028		587,292		831,173		754,979
Commercial	923,453		679,002		1,034,546		1,041,834		876,243
Construction and land development	230,072		382,204		342,114		—		—
Installment	49,399		143,318		149,271		133,865		94,162
Unallocated	595,801		940,552		782,800		414,926		1,119,818
	$	3,131,021	$	3,337,163	$	3,485,076	$	3,648,245	$	3,578,762

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

Portfolio	2006		2005		2004	_	2003		2002
Demand and time and lease financing	20.2	%	23.4	%	22.7	%	20.2	%	17.9	%
Real estate:
Residential	21.2		21.4		25.1		28.9		38.8
Commercial	46.3		39.6		43.2		41.6		38.2
Construction and land development	11.5		15.1		8.1		8.2		3.8
Installment	0.8		0.5		0.9		1.1		1.3
	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, 2006, the allowance for loan losses was $3.1 million, a 6.2% decrease from the end of 2005. The ratio of the allowance to total loans was 1.20% at December 31, 2006 and 1.35% at December 31, 2005. The ratio of net loan losses to average loans outstanding for 2006 was 0.08% compared to 0.06% for 2005. The ratio of nonaccrual loans, restructured loans and loans delinquent more than 90 days to total loans increased to 2.19% at December 31, 2006 from 0.64% at the end of 2005. The ratio of real estate loans to total loans increased to 79.0% at the end of 2006 from 76.1% at the end of 2005.

FUNDING SOURCES

DEPOSITS

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

	2006					2005					2004
	Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate
Noninterest-bearing deposits	$	56,441,180		—	%	$	59,645,770		—	%	$	51,501,352		—	%
Interest-bearing deposits:
NOW accounts	32,038,917			0.21		34,384,963			0.21		35,016,262			0.21
Savings accounts	30,270,796			0.27		33,546,603			0.27		36,388,248			0.29
Money market accounts	51,303,354			3.77		40,658,604			2.45		29,186,544			1.11
Certificates of deposit	101,071,899			4.47		81,412,306			3.52		61,370,913			2.65
	$	271,126,146		2.44		$	249,648,246		1.61		$	213,463,319		1.00

The following table provides the maturities of certificates of deposit of the Company in amounts of $100,000 or more at December 31, 2006:

Maturing in:
3 months or less	$	12,945,360
Over 3 months through 6 months	4,514,815
Over 6 months through 12 months	7,588,860
Over 12 months	4,518,886
	$	29,567,921

28

2006 ANNUAL REPORT

Total deposits at December 31, 2006 increased by $6.3 million to $277.9 million from the end of 2005. Interest bearing accounts increased by $23.2 million and noninterest-bearing deposits decreased by $16.9 million.

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, 2006, the Bank had approximately $9.2 million in CDARS deposits, a decrease of $12.2 million from December 31, 2005.

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.

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

	Maturity Date	2006		2005		2004
Amount outstanding at year-end:
Federal Home Loan Bank	March 26, 2008	$	5,000,000	$	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
Federal Home Loan Bank	Daily Rate Credit	17,000,000		—		—
		$	22,000,000	$	40,000,000	$	45,000,000
Federal funds purchased and securities sold under repurchase agreements		$	13,405,463	$	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		5.43%		6.67%		6.84%
Federal funds purchased and securities sold under repurchase agreements		4.86%		3.59%		1.91%
Notes payable — U.S. Treasury		—		4.17%		1.97%
Maximum outstanding at any month-end:
Advances from the FHLB		$	40,000,000	$	45,000,000	$	45,000,000
Federal funds purchased and securities sold under repurchase agreements		13,405,463		11,742,108		13,540,231
Notes payable — U.S. Treasury		1,432,463		1,958,750		2,008,989
Average balance outstanding during the year:
Advances from the FHLB		$	24,603,287	$	44,876,712	$	45,000,000
Federal funds purchased and securities sold under repurchase agreements		9,040,071		8,986,714		10,102,501
Notes payable — U.S. Treasury		185,067		1,016,211		1,051,267
Weighted average interest rate during the year:
Advances from the FHLB		5.38%		6.84%		6.84%
Federal funds purchased and securities sold under repurchase agreements		4.66%		2.66%		0.96%
Notes payable — U.S. Treasury		4.18%		3.06%		1.10%

Debt retirement expense of $2.3 million was incurred in 2006 due to the restructuring of a $35.0 million FHLBA advance that had a maturity date of February 2, 2010 and an interest rate of 6.84%. 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 $5 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, 2006 and 2005. These lines bear interest at the current federal funds rate of the correspondent bank.

29

CARROLLTON BANCORP

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, 2006 and 2005. 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.

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

					Carrollton Bancorp			Carrollton Bank
	Minimum			_	2006			2006
Leverage ratio		4	%			9.74	%		9.30	%
Risk-based capital:
Tier 1 (Core)		4	%			11.92	%		11.48	%
Total		8	%			13.20	%		12.60	%

Total shareholders’ equity increased 0.2% to $34.7 million at December 31, 2006. Earnings of the Company of $2.6 million for the year ended December 31, 2006 and the proceeds and the tax benefit from the exercise of stock options of $52,000 were offset by dividends of $1.3 million, repurchase of shares totaling $129,000, and the reduction in unrealized gains on available for sale securities of $1.2 million due to the realization of the $2.2 million gain on the sale of equity securities.

LIQUIDITY AND CAPITAL EXPENDITURES

CAPITAL EXPENDITURES

Capital expenditures were approximately $901,000 in 2006, $902,000 in 2005, and $1.9 million in 2004. Capital expenditures in 2006 were due to renovataions at a couple of branches and partial construction of a new branch in Cockeysville expected to open in the second quarter of 2007. 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.

Capital expenditures are projected to be approximately $1.2 million for fiscal year 2007 for renovations at five of the Company’s branch locations and the costs to complete construction of a new branch.

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 $43.8 million or 12.5% of total assets at December 31, 2006.

The borrowing requirements of customers include commitments to extend credit and the unused portion of lines of credit, which totaled $132.0 million at December 31, 2006. Of this total, management places a high probability of required funding within one year on approximately $72.6 million. The amount remaining is unused home equity lines and other consumer lines on which management places low probability of funding.

The Company also has established lines of credit totaling $80.0 million with the Federal Home Loan Bank of Atlanta (the “FHLB”) as an additional source of liquidity. At December 31, 2006, the Company had $22.0 million outstanding with the FHLB and had $50.1 million collateral available to borrow under the line of credit. Additionally, the Company has available unsecured federal funds lines of credit of $5.0 million and a secured

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2006 ANNUAL REPORT

federal funds line of credit of $5.0 million with other institutions. There was no balance outstanding under these lines at December 31, 2006. 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, 2006, 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.

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, 2006 in which assets and liabilities reprice:

(Dollars in thousands)	_	0 to 90 days			91 to 365 days				1 to 2 years			3 to 5 years			> 5 years
ASSETS:
Short term investments		$	3,990			$	—		$	—		$	—		$	—
Investment securities		9,329				5,374			5,082			15,403			19,876
Loans held for sale		7,489				—			—			—			—
Loans:
Residential real estate		30,682				1,915			3,088			6,105			13,268
Commercial real estate		20,570				13,436			22,983			50,357			13,052
Construction and land development		16,545				6,178			301			79			6,893
Demand and time		35,606				840			738			9,998			4,368
Lease financing		19				197			325			428			—
Installment		487				38			72			212			1,221
		$	124,717			$	27,978		$	32,589		$	82,582		$	58,678
LIABILITIES:
Deposits		$	93,786			$	53,327		$	13,866		$	7,665		$	109,259
Borrowings		30,405				—			5,000			—			—
		$	124,191			$	53,327		$	18,866		$	7,665		$	109,259
Gap position
Period		$	(526	)		$	(25,349	)	$	13,723		$	74,917		$	(50,581	)
% of assets		(0.15		)%		(7.25		)%	3.92		%	21.42		%	(14.46		)%
Cumulative		$	(526	)		$	(24,823	)	$	(11,100	)	$	63,817		$	13,236
% of assets		(0.15		)%		(7.10		)%	(3.17		)%	18.24		%	3.78		%
Cumulative risk sensitive assets to risk sensitive liabilities		100.42		%		52.46		%	172.74		%	1,077.39		%	53.71		%

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CARROLLTON BANCORP

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 2006, 2005, and 2004.

OFF-BALANCE SHEET ARRANGEMENTS

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

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

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

Outstanding loan commitments, unused lines of credit and letters of credit were as follows at December 31, 2006:

Loan commitments	$	40,463,996
Unused lines of credit	91,563,387
Letters of credit	2,223,755

CONTRACTURAL OBLIGATIONS

The Company enters into contractural obligations in the normal course of business. Among these obligations are short and long-term FHLB advances, operating leases related to branch and administrative facilities, a long term contract with a data processing provider and purchase contracts related to construction of a new branch office. Payments required under these obligations are set forth in the table below as of December 31, 2006.

Contractual Obligations (Dollars in thousands)	_	Total		_	Less than 1 year			One to three years		Three to five years			More than five years
Federal Home Loan Bank		$	22,000			$	17,000	$	5,000		$	—		$	—
Federal fund purchased and securities sold under agreement to repurchase		13,405				13,405		—			—			—
Operating lease obligations		8,451				959		1,534			1,258			4,700
Purchase obligations(1)		1,971				987		595			389			—
Total		$	45,827			$	32,351	$	7,129		$	1,647		$	4,700

(1)Represents payments required under contract, based on average monthly charges for 2006 and assuming a growth rate of 3%, with the Company’s current data processing service provider that expires in March 2011. Also includes estimated cost to complete construction of a new branch.

NEW ACCOUNTING PRONOUNCEMENTS

In February 2006, FASB issued SFAS 155, “Accounting for Certain Hybrid Financial Instruments”, which permits, but does not require, fair value accounting for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation in accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”. The statement also subjects beneficial interests in securitized financial assets to the requirements of SFAS 133. This statement is effective for all financial instruments acquired, issued, or subject to remeasurement for fiscal years beginning after September 15, 2006. The Company does not expect that the adoption of this Statement will have a material impact on its financial position, results of operations or cash flows.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, and an amendment of FASB Statement No. 140.” The statement amends SFAS No. 140 by (1) requiring the separate accounting for servicing assets and servicing liabilities, which arise from the sale of financial assets; (2) requiring all separately recognized serving assets and servicing liabilities to be initially measured at fair value, if practicable; and (3) permitting an entity to choose between an amortization method or a fair value method for subsequent

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2006 ANNUAL REPORT

measurement for each class of separately recognized servicing assets and servicing liabilities. This statement is effective for fiscal years beginning after September 15, 2006, with earlier adoption permitted. The Company does not expect that the adoption of this Statement will have a material impact on its financial position, results of operations or cash flows.

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” This interpretation applies to all tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 clarifies the application of SFAS No. 109 by defining the criteria that an individual tax position must meet in order for the position to be recognized within the financial statements and provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition for tax positions. This interpretation is effective for fiscal years beginning after December 15, 2006, with earlier adoption permitted. The Company has evaluated the impact of the adoption of this interpretation and has determined that it will not have a material impact on its financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. This Statement does not require any new fair value measurements, but rather, it provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. This Statement is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. The Company does not expect that the adoption of this Statement will have a material impact on its financial position, results of operations or cash flows.

At its September 2006 meeting, the Emerging Issues Task Force (“EITF”) reached a final consensus on Issue 06-04, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” The consensus stipulates that an agreement by an employer to share a portion of the proceeds of a life insurance policy with an employee during the postretirement period is a postretirement benefit arrangement required to be accounted for under SFAS No. 106 or Accounting Principles Board Opinion (“APB”) No. 12, “Omnibus Opinion - 1967.” The consensus concludes that the purchase of a split-dollar life insurance policy does not constitute a settlement under SFAS No. 106 and, therefore, a liability for the postretirement obligation must be recognized under SFAS No. 106 if the benefit is offered under an arrangement that constitutes a plan or under APB No. 12, if it is not part of a plan. Issue 06-04 is effective for annual or interim reporting periods beginning after December 15, 2007. The Company does not have split-dollar life insurance policiesand the adoption of this statement will not have a material effect on its financial position, results of operations or cash flows.

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.

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CARROLLTON BANCORP

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, 2006 and 2005, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years ended December 31, 2006. 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. The Company is not required to have, nor were we 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, 2006 and 2005, and the results of their operations and their cash flows for each of the three years ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, effective January 1, 2006, the Bank adopted the provisions of Statement of Financial Accounting Standard No. 123R, Share Based Payment, and effective December 31, 2006, Statement of Financial Accounting Standards, No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statement No. 87, 88, 106, and 132(R).

Rowles & Company, LLP, Certified Public Accountants

Baltimore, Maryland
February 23, 2007

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2006 ANNUAL REPORT

CONSOLIDATED BALANCE SHEETS

	December 31,
	2006		2005
ASSETS
Cash and due from banks	$	9,632,763	$	27,235,233
Federal funds sold and Federal Home Loan Bank deposit	3,990,003		11,855,332
Federal Home Loan Bank stock, at cost	1,704,500		2,431,600
Investment securities
Available for sale	35,934,647		29,095,003
Held to maturity	19,129,973		18,488,405
Loans held for sale	7,489,290		13,767,109
Loans, less allowance for loan losses of $3,131,021 and $3,337,163	256,870,293		244,605,910
Premises and equipment	5,599,988		5,433,628
Accrued interest receivable	1,713,653		1,418,829
Prepaid income taxes	—		256,482
Bank owned life insurance	4,279,830		4,123,544
Other real estate owned	1,383,163		—
Other assets	2,096,649		1,756,071
	$	349,824,752	$	360,467,146
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest-bearing	$	50,069,560	$	67,010,985
Interest-bearing	227,834,241		204,615,518
Total deposits	277,903,801		271,626,503
Federal funds purchased and securities sold under agreements to repurchase	13,405,463		9,280,348
Notes payable — U.S. Treasury	—		1,932,124
Advances from the Federal Home Loan Bank	22,000,000		40,000,000
Accrued interest payable	214,565		581,863
Other liabilities	1,589,545		2,406,143
	315,113,374		325,826,981
Shareholders’ equity
Common stock, par $1.00 per share; authorized 10,000,000 shares; issued and outstanding 2,806,705 in 2006 and 2,809,698 in 2005	2,806,705		2,809,698
Additional paid-in capital	18,372,351		18,425,528
Retained earnings	12,886,247		11,567,531
Accumulated other comprehensive income	646,075		1,837,408
	34,711,378		34,640,165
	$	349,824,752	$	360,467,146

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

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CARROLLTON BANCORP

CONSOLIDATED STATEMENTS OF INCOME

	Years Ended December 31,
	2006			2005		2004
INTEREST INCOME
Interest and fees on loans	$	20,041,704		$	16,826,955	$	13,584,677
Interest and dividends on securities
Taxable interest income	2,197,049			1,201,016		1,399,879
Nontaxable interest income	357,867			174,649		188,296
Dividends	148,259			244,849		210,572
Interest on federal funds sold and other interest income	382,625			623,910		116,899
Total interest income	23,127,504			19,071,379		15,500,323
INTEREST EXPENSE
Deposits	6,624,327			4,022,723		2,130,765
Borrowings	2,113,123			3,352,360		3,190,857
Total interest expense	8,737,450			7,375,083		5,321,622
Net interest income	14,390,054			11,696,296		10,178,701
PROVISION FOR LOAN LOSSES	—			—		—
Net interest income after provision for loan losses	14,390,054			11,696,296		10,178,701
NONINTEREST INCOME
Service charges on deposit accounts	1,121,271			1,082,568		948,386
Brokerage commissions	647,301			667,510		623,923
Electronic Banking fees	2,045,618			4,975,646		4,841,303
Mortgage banking fees and gains	2,465,814			2,705,785		1,917,883
Other fees and commissions	461,841			447,268		333,846
Gains on security sales	2,157,151			839,859		115,810
Total noninterest income	8,898,996			10,718,636		8,781,151
NONINTEREST EXPENSES
Salaries	7,001,847			7,444,463		6,837,035
Employee benefits	1,500,820			1,344,092		1,876,248
Occupancy	1,794,873			1,848,168		1,601,321
Furniture and equipment	633,004			1,211,349		1,590,436
Prepayment penalty	2,251,971			505,839		—
Check kiting loss	1,833,733			—		—
Write down of impaired securities	—			—		497,313
(Recovery) Impairment of ATM network	(106,221		)	563,400		—
Other noninterest expenses	4,470,976			5,716,813		5,348,647
Total noninterest expenses	19,381,003			18,634,124		17,751,000
Income before income taxes	3,908,047			3,780,808		1,208,852
INCOME TAXES	1,323,268			1,322,371		320,488
NET INCOME	$	2,584,779		$	2,458,437	$	888,364
NET INCOME PER SHARE — BASIC	$	0.92		$	0.87	$	0.31
NET INCOME PER SHARE — DILUTED	$	0.90		$	0.87	$	0.31

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

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2006 ANNUAL REPORT

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

	Common Stock				Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income				Comprehensive Income
BALANCE, DECEMBER 31, 2003		$	2,828,078		$	18,682,387		$	10,427,425			$	2,186,992
Net Income		—			—			888,364				—				$	888,364
Changes in net unrealized gains (losses) on available for sale securities, net of tax		—			—			—				179,661				179,661
Comprehensive Income																$	1,068,025
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				2,366,653
Net Income		—			—			2,458,437				—				$	2,458,437
Changes in net unrealized gains (losses) on available for sale securities, net of tax		—			—			—				(529,245		)		(529,245		)
Comprehensive income																$	1,929,192
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				1,837,408
Net Income		—			—			2,584,779								$	2,584,779
Changes in net unrealized gains (losses) on available for sale securities, net of tax		—			—			—				(1,191,817		)		(1,191,817		)
Adjustment to initially apply SFAS 158, net of tax effects of $306		—			—			—				484				484
Comprehensive income																$	1,393,446
Shares acquired and cancelled		(7,518		)	(121,332		)	—				—
Stock options exercised including tax benefit of $7,014		4,525			54,708			—				—
Stock based compensation		—			13,447			—				—
Cash dividends, $0.45 per share		—			—			(1,266,063		)		—
BALANCE, DECEMBER 31, 2006		$	2,806,705		$	18,372,351		$	12,886,247			$	646,075

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

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CARROLLTON BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2006			2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,584,779		$	2,458,437		$	888,364
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH ROVIDED BY (USED IN) OPERATING ACTIVITES:
Provision for loan losses	—			—			—
Deprecation and amortization	763,749			937,570			1,255,340
Deferred income taxes	60,631			153,209			(198,755		)
Amortization of premiums and discounts	(57,411		)	80,719			230,676
Gains on disposal of securities	(2,157,176		)	(839,859		)	(115,810		)
(Recovery) impairment of ATM network	(106,221		)	563,400			—
Write down of impaired securities	—			—			497,313
Loans held for sale made, net of principal sold	6,277,819			(3,547,380		)	(7,978,146		)
Gains on sale and write-down of premises and equipment	—			(6,246		)	(18,941		)
(Gains) losses on sale of foreclosed real estate	—			—			11,548
Write-down of foreclosed real estate	—			—			8,077
Stock based compensation expense	13,447			—			—
(Increase) decrease in:
Accrued interest receivable	(294,824		)	(123,110		)	125,835
Prepaid income taxes	256,482			(61,871		)	(160,701		)
Cash surrender value of bank owned life insurance	(156,286		)	(70,896		)	(52,949		)
Other assets	226,026			582,001			(547,860		)
Increase (decrease) in:
Accrued interest payable	(367,298		)	88,684			42,124
Deferred loan origination fees	(33,566		)	144,907			134,343
Other liabilities	1,288			622,669			(315,427		)
Net cash provided by (used in) operating activities	7,011,464			982,234			(6,194,969		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale	2,766,852			2,461,757			2,518,491
Proceeds from maturities of securities available for sale	3,554,884			19,174,448			30,660,807
Proceeds from maturities of securities held to maturity	1,353,243			541,881			25,000
Redemption (purchase) of Federal Home Loan Bank stock, net	727,100			191,300			(372,900		)
Purchase of securities available for sale	(15,030,741		)	(8,354,638		)	(13,528,310		)
Purchase of securities held to maturity	(1,952,570		)	(19,021,466		)	—
Loans made, net of principal collected	(12,230,817		)	(28,509,599		)	(20,811,745		)
Purchase of premises and equipment	(801,823		)	(902,943		)	(1,935,364		)
Proceeds from sale of premises and equipment	—			15,189			361,582
Proceeds from sale of foreclosed real estate	—			—			164,876
Net cash (used in) investing activities	(21,613,872		)	(34,404,071		)	(2,917,563		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in time deposits	25,486,897			20,085,651			7,124,050
Net increase (decrease) in other deposits	(19,209,599		)	25,694,707			11,665,996
Payment of Federal Home Loan Bank advance	(18,000,000		)	(5,000,000		)	—
Net increase (decrease) in other borrowed funds	2,192,991			(956,193		)	(1,808,269		)
Common stock repurchase and retirement	(128,850		)	(599,250		)	(32,655		)
Stock options exercised	52,219			207,039			110,168
Income tax benefit from exercise of stock options	7,014			18,166			21,293
Dividends paid	(1,266,063		)	(1,130,262		)	(1,076,433		)
Net cash provided by (used in) financing activities	(10,865,391		)	38,319,858			16,004,150
Net increase (decrease) in cash and cash equivalents	(25,467,799		)	4,898,021			6,891,618
Cash and cash equivalents at beginning of year	39,090,565			34,192,544			27,300,926
Cash and cash equivalents at end of year	$	13,622,766		$	39,090,565		$	34,192,544
SUPPLEMENTAL INFORMATION:
Interest paid on deposits and borrowings	$	9,104,758		$	7,286,399		$	5,279,498
Income taxes paid	$	837,661		$	1,525,204		$	545,609
NONCASH ACTIVITY:
Transfer of loans to foreclosed real estate	$	1,383,163		$	—		$	84,500

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

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2006 ANNUAL REPORT

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 2006. 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 income. Declines in the fair value of individual available for sale securities below

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CARROLLTON BANCORP

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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2006 ANNUAL REPORT

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Other Real Estate Owned (OREO)

OREO is comprised of properties acquired in partial or total satisfaction of problem loans. The properties 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, 2006 and 2005 was $431,110 and $554,284, respectively. Amortization expense was $123,180 for 2006, 2005, and 2004, 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 in a declining interest rate environment. 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 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

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CARROLLTON BANCORP

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(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, unrealized gains and losses on securities available for sale, changes in the fair value of the Floor and the adjustment from the adoption of Statement of Financial Accounting Standards No. 158, “Employees Accounting for Defined Benefit Pension and Other Post Retirement Plans” (“SFAS No. 158”) 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

On January 1, 2006, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Statement No. 123 (R), Share-Based Payment, (“SFAS No. 123R”), which requires companies to recognize expense related to the fair value of our stock-based compensation. Prior to January 1, 2006, the Company accounted for stock-based compensation under the recognition and measurement provisions of Accounting Principle Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). In accordance with APB No. 25, no compensation cost was required to be recognized for options granted that had an exercise price equal to the market value of the underlying common stock on the date of the grant.

The Company adopted SFAS No. 123R using the modified prospective transition method. Under this transition method, compensation cost recognized for the year ended December 31, 2006 includes: a)  compensation cost for all share-based compensation granted prior to, but not vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and b) compensation cost for all share-based compensation granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. Prior to January 1, 2006, no compensation expense was recognized for stock option grants, as all such grants had an exercise price equal to the fair market value on the date of the grant.

In December 2005, the Company 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.

As a result of adopting SFAS 123R on January 1, 2006, incremental stock-based compensation expense recognized was $13,447 during 2006. As of December 31, 2006, there was $10,928 of unrecognized compensation expense related to nonvested stock options, which will be recognized over the remaining vesting period.

The following illustrates the effect on the net income and earnings per share if the Company had applied the fair value method of SFAS No. 123, “Accounting for Stock-Based Compensation,” prior to January 1, 2006:

	2005			2004
Net Income:
As reported	$	2,458,437		$	888,364
Additional compensation	(162,222		)	(133,288		)
Income tax benefit on additional compensation	62,650			51,476
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

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2006 ANNUAL REPORT

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, 2006 and 2005, the required reserve balances were $1.4 million and $323,000, respectively. The Company sells federal funds on an unsecured basis to its correspondent banks. Average balances sold were $6.7 million in 2006 and $12.9 million in 2005.

3. INVESTMENT SECURITIES

Investment securities are summarized as follows:

	Amortized cost		Unrealized gains		Unrealized losses				Fair value
December 31, 2006
AVAILABLE FOR SALE
U.S. government agency	$	9,642,252	$	24,405		$	(28,897	)	$	9,637,760
Mortgage-backed securities	12,712,231		129,674			(116,352		)	12,725,553
State and municipal	5,691,067		42,133			(8,241		)	5,724,959
Corporate bonds	5,639,276		—			(17,747		)	5,621,529
	33,684,826		196,212			(171,237		)	33,709,801
Equity securities	1,140,856		1,090,934			(6,944		)	2,224,846
	$	34,825,682	$	1,287,146		$	(178,181	)	$	35,934,647
HELD TO MATURITY
U.S. government agency	$	6,456,069	$	—		$	(89,979	)	$	6,366,090
Mortgage-backed securities	8,761,200		—			(136,735		)	8,624,465
State and municipal	3,912,704		3,528			(16,519		)	3,899,713
	$	19,129,973	$	3,528		$	(243,233	)	$	18,890,268

	Amortized cost		Unrealized gains		Unrealized losses				Fair value
December 31, 2005
AVAILABLE FOR SALE
U.S. government agency	$	10,786,412	$	3,225		$	(49,302	)	$	10,740,335
Mortgage-backed securities	8,551,994		34,005			(95,874		)	8,490,125
State and municipal	3,613,458		76,401			—			3,689,859
Corporate bonds	1,516,345		—			(1,874		)	1,514,471
	24,468,209		113,631			(147,050		)	24,434,790
Equity securities	1,633,298		3,030,815			(3,900		)	4,660,213
	$	26,101,507	$	3,144,446		$	(150,950	)	$	29,095,003
HELD TO MATURITY
U.S. government agency	$	5,000,000	$	—		$	(64,050	)	$	4,935,950
Mortgage-backed securities	9,575,713		29,016			(98,260		)	9,506,469
State and municipal	3,912,692		—			(49,832		)	3,862,860
	$	18,488,405	$	29,016		$	(212,142	)	$	18,305,279

Information related to unrealized losses in the portfolio as of December 31, 2006 follows:

	December 31, 2006
	Less than 12 months						12 months or longer						Total
	Fair Value		Unrealized Losses				Fair Value		Unrealized Losses				Fair Value		Unrealized Losses
U.S. government agency	$	1,985,619		$	(14,380	)	$	10,533,310		$	(104,496	)	$	12,518,929		$	(118,876	)
Mortgage-backed securities	—			—			15,167,237			(253,087		)	15,167,237			(253,087		)
State and municipal	—			—			5,373,469			(24,760		)	5,373,469			(24,760		)
Corporate bonds	—			—			5,016,250			(17,748		)	5,016,250			(17,748		)
Equity securities	—			—			125,790			(6,944		)	125,790			(6,944		)
	$	1,985,619		$	(14,380	)	$	36,216,056		$	(407,035	)	$	38,201,675		$	(421,415	)

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CARROLLTON BANCORP

3. INVESTMENT SECURITIES (CONTINUED)

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.

At December 31, 2006, five marketable equity securities had unrealized losses of approximately $6,944 from the Company’s cost basis. At December 31, 2005, one marketable equity security had an unrealized loss with aggregate depreciation of approximately $3,900 from the Company’s cost basis. 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. 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, 2006 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, 2006 and 2005 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, 2006
	Available for sale				Held to maturity
Maturing	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	2,000,000	$	1,985,620	$	—	$	—
Over one to five years	4,923,172		4,924,303		—		—
Over five to ten years	3,928,823		3,958,428		8,414,510		8,324,424
Over ten years	10,120,600		10,115,898		1,954,263		1,941,379
Mortgage-backed securities	12,712,231		12,725,553		8,761,200		8,624,465
	$	33,684,826	$	33,709,802	$	19,129,973	$	18,890,268

	December 31, 2005
	Available for sale				Held to maturity
Maturing	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	250,000	$	250,161	$	250,000	$	250,161
Over one to five years	9,767,684		9,744,231		9,767,684		9,744,231
Over five to ten years	5,899,059		5,950,273		5,899,059		5,950,273
Mortgage-backed securities	8,551,466		8,490,125		8,551,466		8,490,125
	$	24,468,209	$	24,434,790	$	24,468,209	$	24,434,790

At December 31, 2006 and 2005, securities with an amortized cost of $17.9 million (fair value of $17.9 million) and $32.8 million (fair value of $32.6 million), respectively, were pledged as collateral for government deposits, securities sold under repurchase agreements, and advances from the Federal Home Loan Bank.

In 2006, 2005, and 2004, the Company realized gross gains on sales of securities of $2.2 million, $839,859, and $115,810, respectively. During 2004, the Company recognized an other than temporary impairment of $497,313. There were no realized losses in 2006 or 2005. Income taxes (benefit) on net security gains (losses) were $730,413, $293,783, and $(147,336), in 2006, 2005 and 2004, respectively.

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2006 ANNUAL REPORT

4. LOANS

Major classifications of loans at December 31 are as follows:

	2006		2005
Real estate:
Residential	$	55,057,625	$	53,148,211
Commercial	120,397,988		97,909,115
Construction and land development	29,996,306		37,415,478
Demand and time	51,549,802		56,118,527
Lease financing	969,113		1,936,482
Installment	2,030,480		1,415,260
	260,001,314		247,943,073
Allowance for loan losses	3,131,021		3,337,163
Loans, net	$	256,870,293	$	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:

	2006		2005
Repricing or maturing within one year	$	77,881,735	$	139,326,825
Maturing over one to five years	98,707,890		91,219,788
Maturing over five years	83,411,689		17,396,460
	$	260,001,314	$	247,943,073

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

	2006			2005
Deferred origination costs and premiums	$	538,554		$	392,075
Deferred origination fees and unearned discounts	(854,549		)	(741,636		)
Net deferred fees	$	(315,995	)	$	(349,561	)

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

	2006		2005		2004
Beginning balance	$	3,337,163	$	3,485,076	$	3,648,245
Provision charged to operations	—		—		—
Recoveries	49,692		167,128		113,953
	3,386,855		3,652,204		3,762,198
Loans charged off	255,834		315,041		277,122
Ending balance	$	3,131,021	$	3,337,163	$	3,485,076

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

	2006		2005		2004
Nonaccrual loans	$	3,699,397	$	1,413,925	$	615,394
Restructured loans	180,686		—		455,864
Foreclosed real estate	1,383,163		—		—
Total nonperforming assets	$	5,263,246	$	1,413,925	$	1,071,258
Accruing loans past-due 90 days or more	$	436,599	$	179,012	$	1,567,919
Unrecorded interest on nonaccrual loans	$	76,044	$	111,413	$	64,037
Interest income recognized on nonaccrual loans	$	300,650	$	58,718	$	32,318

At December 31, 2006 and 2005, there were no impaired loans.

At December 31, 2004, the Company had one impaired loan to the same borrower amounting to $455,864, which was classified as impaired because it had been restructured to accept interest only payments for a period of

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CARROLLTON BANCORP

4. LOANS (CONTINUED)

time. The average balance of impaired loans amounted to $298,406 and $530,680 in 2005 and  2004, respectively. During 2005 and 2004, the Company received total payments on impaired loans of $601,323 and $341,857, respectively. Of these amounts, $24,583 and $75,938, were recorded as interest income for 2005 and 2004, 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 $86.6 million and $86.2 million were pledged as collateral to the Federal Home Loan Bank of Atlanta as of December 31, 2006 and 2005, respectively. At December 31, 2006 and 2005, the Company serviced loans for others totaling $1.1million and $1.6 million, respectively.

5. CREDIT COMMITMENTS

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

	2006		2005		2004
LOAN COMMITMENTS
Mortgage loans	$	4,122,697	$	4,066,223	$	8,899,836
Construction and land development	29,501,299		14,913,344		9,438,961
Commercial loans	6,840,000		7,058,000		13,812,780
	$	40,463,996	$	26,037,567	$	32,151,577
UNUSED LINES OF CREDIT
Home equity lines	$	46,199,911	$	52,194,528	$	55,883,051
Commercial lines	44,279,428		26,095,802		25,467,308
Unsecured consumer lines	1,084,048		1,410,270		1,405,075
	$	91,563,387	$	79,700,600	$	82,755,434
LETTERS OF CREDIT	$	2,223,755	$	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.

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, 2006, 2005 and 2004, transactions in related party loans were as follows:

	2006			2005			2004
Beginning balance	$	1,894,784		$	1,820,717		$	3,209,200
Additions	7,918,876			179,452			1,040,580
Repayments	(1,837,046		)	(105,385		)	(2,429,063		)
Ending balance	$	7,976,614		$	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, 2006, 2005, and 2004, amounts paid to the law firm in connection with those services were $195,000, $220,000, and $249,000, respectively.

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2006 ANNUAL REPORT

6. RELATED PARTY TRANSACTIONS (CONTINUED)

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, 2006, 2005, and 2004, amounts paid to the insurance brokerage for insurance premiums were $282,000, $215,000, and $192,000, respectively.

A director of the Company is President of an electrical company through which the Company and the Bank may contract for electrical services. No such services were performed in 2006, 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 $356,000 in 2006, $169,000 in 2005, and $739,000 in 2004.

7. PREMISES AND EQUIPMENT

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

	2006			2005
Land and improvements	$	909,544		$	909,544
Buildings	2,995,117			2,885,994
Leasehold improvements	3,523,947			3,137,550
Equipment and fixtures	4,521,052			5,341,396
	11,949,660			12,274,484
Accumulated depreciation and amortization	(6,349,672		)	(6,840,856		)
	$	5,599,988		$	5,433,628

Depreciation and amortization of premises and equipment was $611,658, $673,022, and $1.1 million, for 2006, 2005, and 2004, respectively. Amortization of software was $108,364, $141,368, and $72,962 for 2006, 2005, and 2004, 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:

	2006		2005
NOW and Super NOW	$	33,112,772	$	33,396,380
Money market	52,072,965		50,482,662
Savings	27,608,013		31,182,882
Certificates of deposit of $100,000 or more	29,567,921		14,990,576
Other time deposits	85,472,570		74,563,018
	$	227,834,241	$	204,615,518

Time deposits mature as follows:

	December 31,
	2006		2005
Maturing within one year	$	92,053,740	$	67,555,717
Maturing over one to two years	13,479,273		12,087,661
Maturing over two to three years	5,197,865		3,353,809
Maturing over three to four years	3,503,735		2,445,906
Maturing over four to five years	805,878		4,110,501
	$	115,040,491	$	89,553,594

47

CARROLLTON BANCORP

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	2006			2005			2004
Amount outstanding at year-end:
Federal Home Loan Bank	March 26, 2008	$	5,000,000		$	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
Federal Home Loan Bank	Daily Rate Credit	17,000,000			—			—
Federal Home Loan Bank		$	22,000,000		$	40,000,000		$	45,000,000
Federal funds purchased and securities sold under repurchase agreements		$	13,405,463		$	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		5.43		%	6.67		%	6.84		%
Federal funds purchased and securities sold under repurchase agreements		4.86		%	3.59		%	1.91		%
Notes payable — U.S. Treasury		—			4.17		%	1.97		%
Maximum outstanding at any month-end:
Advances from the FHLB		$	40,000,000		$	45,000,000		$	45,000,000
Federal funds purchased and securities sold under repurchase agreements		13,405,463			11,742,108			13,540,231
Notes payable — U.S. Treasury		1,432,423			1,958,750			2,008,989
Average balance outstanding during the year:
Advances from the FHLB		$	24,603,287		$	44,876,712		$	45,000,000
Federal funds purchased and securities sold under repurchase agreements		9,040,071			8,986,714			10,102,501
Notes payable — U.S. Treasury		185,067			1,016,211			1,051,267
Weighted average interest rate during the year:
Advances from the FHLB		5.38		%	6.84		%	6.84		%
Federal funds purchased and securities sold under repurchase agreements		4.66		%	2.66		%	0.96		%
Notes payable — U.S. Treasury		4.18		%	3.06		%	1.10		%

Debt retirement expense of $2.3 million was incurred in 2006 due to the restructuring of a $35.0 million FHLB advance that had a maturity date of February 2, 2010 and an interest rate of  6.84%. 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 has available unsecured federal funds lines of credit of $5 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.

48

2006 ANNUAL REPORT

10. OTHER NONINTEREST EXPENSES

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

	2006		2005		2004
Data processing services	$	815,056	$	807,314	$	719,445
Professional services	521,231		226,965		187,784
Employee-related expenses	384,128		345,203		306,678
Marketing	303,903		355,921		287,343
Directors’ fees	238,850		173,050		165,950
Carrier service	210,703		496,714		479,131
Liability insurance	205,516		214,579		216,890
Printing, stationary, and supplies	202,541		257,865		282,914
Loan expenses	195,844		354,864		215,570
Postage and freight	164,606		167,681		228,030
Telephone	162,808		189,990		195,867
Deposit premium amortization	123,180		123,180		123,180
Shareholder expense	111,768		111,273		91,283
Software amortization	108,364		141,368		72,962
Coin/Currency service	103,480		84,429		80,201
ATM services	77,704		1,057,794		1,134,848
Bank account charges	51,643		80,592		88,134
Other	383,430		528,031		472,437
	$	4,364,755	$	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:

	2006						2005					2004
	Shares			Option Price Range			Shares		Option Price Range			Shares		Option Price Range
Outstanding at beginning of year	227,130						193,470					174,785
Granted	12,430				$	15.35 to $17.16	53,930			$	14.45 to $14.85	32,430			$	16.02 to $16.22
Exercised	(4,525		)		$	10.94 to $15.36	(17,375	)		$	9.71 to $14.50	(8,845	)		$	9.71 to $15.42
Expired/Canceled	(6,005		)		$	10.94 to $16.02	(2,895	)		$	12.67 to $15.48	(4,900	)		$	10.94 to $18.10
Outstanding at end of year	229,030				$	9.71 to $18.10	227,130			$	9.71 to $18.10	193,470			$	9.71 to $18.10
Exercisable at December 31	209,670						213,550					143,919
Aggregate intrinsic value at year end	$	558,473

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.

As a result of adopting SFAS 123R on January 1, 2006, incremental stock-based compensation expense recognized was $13,447 during 2006. As of December 31, 2006, there was $10,928 of unrecognized compensation expense related to nonvested stock options, which will be recognized over the remaining vesting period. The total intrinsic value of options excised during the year ended December 31, 2006 and 2005 was approximately $18,000 and $47,000, respectively.

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CARROLLTON BANCORP

11. STOCK OPTIONS (CONTINUED)

A summary of information about stock options outstanding is as follows at December 31, 2006:

Weighted Average Exercise Price			Shares		Weighted Average Remaining Life (Years)		Shares Underlying Options Currently Exercisable
	$	9.71		2,940		4.33		2,940
	10.54			630		4.16		630
	10.94			19,950		4.42		19,950
	12.11			4,620		5.33		4,620
	12.14			630		5.16		630
	12.67			21,000		5.58		21,000
	13.45			14,700		3.58		14,700
	13.45			3,150		3.33		3,150
	14.45			6,930		8.29		2,310
	14.50			5,670		6.33		5,670
	14.50			39,500		8.96		39,500
	14.85			5,000		8.43		5,000
	15.35			500		9.15		—
	15.36			2,930		2.33		2,930
	15.42			26,670		2.35		26,670
	16.02			24,000		7.58		24,000
	16.22			6,930		7.33		4,620
	16.31			6,930		9.29		—
	16.70			3,150		1.16		3,150
	17.16			5,000		10.0		—
	17.75			3,000		6.92		3,000
	17.79			22,050		1.35		22,050
	18.10			3,150		1.33		3,150
	14.70			229,030		5.41		209,670

As of December 31, 2006, the weighted average exercise price of shares underlying options currently exercisable is $14.58 per share.

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, 2006, 2005 and 2004:

	2006	2005	2004
Dividend yield	2.67%	2.67%	2.25%
Expected volatility	24.76%	26.94%	18.15%
Risk free rate	4.91% to 4.99%	3.96% to 4.47%	4.43%
Estimated life	10 years	10 years	10 years

The dividend yield is based on estimated future dividend yields. The risk-free rate for periods within the contractural term of the share option is based on the U.S. Treasury  yield curve in effect at the time of the grant. Expected volatilities are generally based on historical volatilitites.

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:

	2006		2005		2004
Weighted average common shares outstanding	2,812,289		2,827,747		2,831,880
Stock option adjustment	58,953		14,140		28,366
Weighted average common shares outstanding-diluted	2,871,242		2,841,887		2,860,246
Net income (applicable to common stock)	$	2,584,779	$	2,458,437	$	888,364
Basic net income per share	$	0.92	$	0.87	$	0.31
Diluted net income per share	$	0.90	$	0.87	$	0.31

50

2006 ANNUAL REPORT

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, changes in the fair value of the derivative interest rate floor transaction and the adjustment for the adoption of SFAS 158 related to the funded status of the defined benefit plan. These items, net of taxes, 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:

	2006			2005			2004
Net Income	$	2,584,779		$	2,458,437		$	888,364
Other comprehensive income:
Unrealized holding gains (losses) during the period	215,449			(22,384		)	(88,800		)
Add: Security impairment write down	—			—			497,313
Adoption of SFAS 158	790			—			—
Less: Adjustment for security gains	(2,157,151		)	(839,859		)	(115,810		)
Other comprehensive income before tax	(1,940,912		)	(862,243		)	292,703
Income taxes on comprehensive income	749,579			332,998			(113,042		)
Other comprehensive income after tax	(1,191,333		)	(529,245		)	179,661
Comprehensive income	$	1,393,446		$	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, 2006, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2006, the most recent notification from the Federal Reserve Bank and the FDIC categorized the Company and the Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes would change the Company’s or the Bank’s category.

	Actual			Minimum Capital Adequacy				To Be Well Capitalized
	Amount		Ratio	Amount		Ratio		Amount		Ratio
DECEMBER 31, 2006
Total Capital (to risk-weighted assets)
Consolidated	$	37,253,000	13.20%	$	22,573,000		8.0%	$	28,217,000	10.0%
Carrollton Bank	35,313,000		12.60%	22,428,000			8.0%	28,035,000		10.0%
Tier 1 Capital (to risk-weighted assets)
Consolidated	33,634,000		11.92%	$	11,287,000		4.0%	16,930,000		6.0%
Carrollton Bank	32,182,000		11.48%	11,214,000			4.0%	16,821,000		6.0%
Tier 1 Capital (to average assets)
Consolidated	33,634,000		9.74%	$	13,824,000		4.0%	17,280,000		5.0%
Carrollton Bank	32,182,000		9.30%	13,849,000			4.0%	17,311,000		5.0%
DECEMBER 31, 2005
Total Capital (to risk-weighted assets)
Consolidated	$	37,447,000	13.51%	$	22,176,000		8.0%	$	27,720,000	10.0%
Carrollton Bank	34,338,000		12.52%	21,945,000			8.0%	27,432,000		10.0%
Tier 1 Capital (to risk-weighted assets)
Consolidated	32,250,000		11.63%	11,088,000			4.0%	16,632,000		6.0%
Carrollton Bank	31,001,000		11.30%	10,973,000			4.0%	16,459,000		6.0%
Tier 1 Capital (to average assets)
Consolidated	32,250,000		8.96%	14,937,000			4.0%	17,996,000		5.0%
Carrollton Bank	31,001,000		8.72%	14,223,000			4.0%	17,779,000		5.0%

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CARROLLTON BANCORP

15. RETIREMENT PLANS

In the year ended December 31, 2006, the Company adopted Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”), which requires the recognition of the funded status of defined benefit postretirement plans and related disclosures. While it does not impact net income, this resulted in a one-time adjustment to accumulated other comprehensive income in shareholders’ equity of $484 (net of tax) for the Pension Plan. The Company’s 2005 and 2004 disclosures have not been changed as SFAS 158 prohibits retrospective application.

Effective December 31, 2004, the Company froze the Defined Benefit Pension Plan. Participant benefits stopped accruing as of the date of the freeze. No new participants entered the Plan after December 31, 2004.

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

	2006			2005			2004
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year	$	7,944,785		$	7,739,006		$	8,820,583
Service cost	—			—			528,407
Interest cost	469,361			477,203			545,710
Actuarial gain	230,830			61,831			69,083
Benefits paid	(354,637		)	(333,255		)	(331,542		)
Adjustment for special event — curtailment	—			—			(1,893,235		)
Benefit obligation at end of year	8,290,339			7,944,785			7,739,006
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year	7,952,987			7,730,718			7,399,746
Actual return on plan assets	767,957			591,608			271,153
Employer contribution	—			—			450,000
Benefits paid and administrative expenses	(429,815		)	(369,339		)	(390,181		)
Fair value of plan assets at end of year	8,291,129			7,952,987			7,730,718
Funded status
Status of plan overfunded (underfunded)	790			8,202			(8,288		)
Unrecognized net actuarial (gain) loss	256,285			45,450			(15,901		)
Prepaid (accrued) benefit cost before the adoption of SFAS 158	$	257,075		$	53,652		$	(24,189	)
Amounts Recognized in the Consolidated Balance Sheets:
Prepaid benefit cost	$	257,075		$	53,652		$	(24,189	)
Net amount recognized	$	257,075		$	53,652		$	(24,189	)
After the adoption of SFAS 158:
Other assets	$	790		$	—		$	—
Net amount recognized	$	790		$	—		$	—
Amounts recognized in accumulated other comprehensive income consist of:
Net loss	$	256,285		$	—		$	—
Net amount recognized (before tax effect)	$	256,285		$	—		$	—

The incremental effect of applying FASB Statement No. 158 on individual items in the consolidated balance sheet as of December 31, 2006 is as follows:

	Before Application of Statement 158				Adjustments			After Application of Statement 158
	Debit				Credit			Debit			Credit
Other assets, excluding prepaid pension cost and deferred taxes		$	1,338,781			$	—	$	—		$	1,338,781
Prepaid pension costs		257,075				—		(256,285		)	790
Deferred taxes		599,770				157,308		—			757,078
Total other assets		$	2,195,626			$	157,308	$	(256,285	)	$	2,096,649
Total assets		$	349,923,729			$	157,308	$	(256,285	)	$	349,824,752
Accumulated other comprehensive loss		$	(745,052	)		$	98,977	$	—		$	(646,075	)
Total stockholders’ equity		$	(34,810,355	)		$	98,977	$	—		$	(34,711,378	)

52

2006 ANNUAL REPORT

15. RETIREMENT PLANS (Continued)

	2006			2005			2004
ASSUMPTIONS USED IN MEASURING THE PROJECTED BENEFIT OBLIGATION WERE AS FOLLOWS FOR THE YEARS ENDED DECEMBER 31:
Discount rates	5.82		%	6.25		%	6.25		%
Rates of increase in compensation levels	N/A			N/A			4.25		%
Long-term rate of return on assets	8.00		%	8.00		%	8.00		%
NET PERIODIC PENSION EXPENSE INCLUDES THE FOLLOWING COMPONENTS:
Service cost	$	—		$	—		$	528,407
Interest cost	469,361			477,203			545,710
Expected return on plan assets	(622,784		)	(555,044		)	(558,384		)
Net amortization and deferral	—			—			148,670
Net periodic pension expense (benefit)	$	(153,423	)	$	(77,841	)	$	664,403
ACCUMULATED BENEFIT OBLIGATION AT YEAR END	$	8,290,339		$	7,944,785		$	7,739,006
ALLOCATION OF ASSETS
Equity securities	$	4,361,023		$	4,102,673		$	3,715,646
Fixed income-guaranteed fund	3,930,106			3,850,314			4,015,072
	$	8,291,129		$	7,952,987		$	7,730,718

There are no net transaction obligation (asset), prior service cost (credit) and estimated net loss (gain) for the Plan that are expected to be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year.

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

Year	Amount
2007	$	340,417
2008	363,113
2009	362,976
2010	390,677
2011	406,123
2012-2016	2,524,509

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

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

The Company has a contributory thrift plan qualifying under Section 401(K) of the Internal Revenue Code. Employees with one year of service are eligible for participation in the Plan. In conjunction with the curtailment of the pension plan, the Company expanded the thrift plan to make it a Safe Harbor Plan. Once an employee has been 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 $319,453, $292,080, and $92,485, for 2006, 2005, and 2004 , 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.

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CARROLLTON BANCORP

17. INCOME TAXES

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

	2006		2005		2004
CURRENT
Federal	$	1,082,628	$	989,907	$	428,205
State	180,009		179,255		91,038
	1,262,637		1,169,162		519,243
DEFERRED	60,631		153,209		(198,755		)
	$	1,323,268	$	1,322,371	$	320,488

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

	2006			2005			2004
Provision for loan losses	$	79,612		$	57,124		$	62,425
Deferred loan origination costs	(20,427		)	(4,812		)	6,794
Deferred compensation plan	16,466			(227		)	3,128
Depreciation	522			(120,334		)	7,004
Discount accretion	5,178			(666		)	(2,140		)
Retirement benefits	(20,720		)	30,062			(83,904		)
Impairment loss provisions	—			192,062			(192,062		)
	$	60,631		$	153,209		$	(198,755	)

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

	2006		2005			2004
DEFERRED TAX ASSETS
Allowance for loan losses	$	974,066	$	1,053,678		$	1,110,802
Deferred compensation plan	190,426		206,892			206,665
Depreciation	27,000		27,522			—
Accrued retirement benefits	—		—			9,342
	1,191,492		1,288,092			1,326,809
DEFERRED TAX LIABILITIES
Prepaid retirement benefits	—		20,720			—
	106,645		127,072			131,884
Unrealized gains on available for sale investment securities	317,406		1,156,088			1,297,024
Depreciation	—		—			92,812
Discount accretion	8,344		3,166			3,832
FHLB Stock dividends	2,019		2,019			2,019
	434,414		1,309,065			1,527,571
NET DEFERRED TAX ASSET (LIABILITY)	$	757,078	$	(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:

	_	2006			2005			2004
Statutory federal income tax rate			34.0	%		34.0	%		34.0	%
Increase (Decrease) resulting from:
Tax-exempt income			(4.5	)		(3.4	)		(10.2	)
State income taxes, net of federal income tax benefit			3.8			4.0			1.9
Nondeductible expense			0.6			0.4			0.8
			33.9	%		35.0	%		26.5	%

54

2006 ANNUAL REPORT

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 $937,160, $947,957, and $779,709, for 2006, 2005, and 2004, respectively.

Lease obligations will require minimum rent payments as follows:

Period	Minimum rentals
2007		$	959,293
2008		810,397
2009		723,251
2010		710,115
2011		547,557
Remaining years		4,700,487
		$	8,451,100

19. PARENT COMPANY FINANCIAL INFORMATION

The balance sheets as of December 31, 2006 and 2005 and statements of income and cash flows for Carrollton Bancorp (Parent Only) for 2006, 2005, and 2004, are presented below:

BALANCE SHEETS

	December 31,
	2006		2005
ASSETS
Cash	$	6,293	$	22,094
Interest-bearing deposits in subsidiary	956,518		217,679
Investment in subsidiary	32,593,361		31,536,069
Investment securities available for sale	2,224,846		4,660,213
Other assets	28,270		25,813
	$	35,809,288	$	36,461,868
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities	1,097,910		$	1,821,703
Shareholders’ Equity
Common Stock	2,806,705		2,809,698
Additional Paid-in Capital	18,372,351		18,425,528
Retained earnings	12,886,247		11,567,531
Accumulated other comprehensive income	646,075		1,837,408
	34,711,378		34,640,165
	$	35,809,288	$	36,461,868

55

CARROLLTON BANCORP

19. PARENT COMPANY FINANCIAL INFORMATION (Continued)

STATEMENTS OF INCOME

	Years ended December 31,
	2006		2005		2004
INCOME
Dividends from subsidiary	$	258,840	$	608,827	$	588,273
Interest and dividends	73,720		138,592		132,490
Security gains	2,157,151		766,772		—
	2,489,711		1,514,191		720,763
EXPENSES	161,751		163,639		105,403
Income before income taxes and equity in undistributed net income of subsidiary	2,327,960		1,350,552		615,360
Income tax expense (benefit)	785,790		249,895		(21,691		)
	1,542,170		1,100,657		637,051
Equity in undistributed net income of subsidiary	1,042,609		1,357,780		251,313
Net Income	$	2,584,779	$	2,458,437	$	888,364

STATEMENTS OF CASH FLOWS

		Years ended December 31,
	_	2006			2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	2,584,779		$	2,458,437		$	888,364
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Equity in undistributed net income of subsidiary		(1,042,609		)	(1,357,780		)	(251,313		)
Gains on disposal of securities		(2,157,151		)	(766,772		)	—
Stock based compensation expense		13,447			—			—
Decrease (increase) in other assets		(2,457		)	(74		)	662
Increase (decrease) in other liabilities		13,126			309,958			(99,454		)
Net cash (used in) provided by operating activities		(590,865)			661,935			559,552
Cash Flows from Investing Activities:
Purchase of securities available for sale		117,259			—			(100,000		)
Proceeds from sales of securities available for sale		2,766,852			1,016,133			—
Net cash provided by (used in) investing activities		2,649,593			1,016,133			(100,000		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid		(1,266,063		)	(1,130,262		)	(1,076,433		)
Common stock repurchase and retirement		(128,850		)	(599,250		)	(32,655		)
Stock options exercised		52,219			207,039			110,168
Income tax benefit from exercise of stock options		7,014			18,166			21,293
Net cash used in financing activities		(1,335,690		)	(1,522,473		)	(998,920		)
Net increase (decrease) in cash		723,038			155,595			(539,368		)
Cash and cash equivalents at beginning of year		239,773			84,178			623,546
Cash and cash equivalents at end of year		$	962,811		$	239,773		$	84,178
Noncash Activities:
Income taxes paid, net of cash received from subsidiaries		$	769,473		$	36,615		$	53,475

56

2006 ANNUAL REPORT

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.

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, 2006				December 31, 2005
	Carrying amount		Fair value		Carrying amount		Fair value
FINANCIAL ASSETS
Cash and cash equivalents	$	13,622,766	$	13,622,766	$	39,090,565	$	39,090,565
Investment securities (total)	55,064,620		54,824,915		47,583,408		47,400,282
Federal Home Loan Bank stock	1,704,500		1,704,500		2,431,600		2,431,600
Loans held for sale	7,489,290		7,524,363		13,767,109		13,798,773
Loans, net	256,870,293		258,073,223		244,605,910		245,175,511
FINANCIAL LIABILITIES
Noninterest-bearing deposits	50,069,560		50,069,560		67,010,985		67,010,985
Interest-bearing deposits	227,834,241		227,711,750		204,615,518		204,132,515
Federal funds purchased and securities sold under agreements to repurchase	13,405,463		13,405,463		9,280,348		9,280,348
Notes payable — U.S. Treasury	—		—		1,932,124		1,932,124
Advances from the Federal Home Loan Bank	22,000,000		21,995,650		40,000,000		42,069,827

57

CARROLLTON BANCORP

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 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.

Segment information for the Company for 2006 is as follows:

	Commercial/ Retail Bank			Electronic Banking			Brokerage				Mortgage Unit			Segment Totals			Eliminations			Consolidated
Interest income	$	22,680,213		$	—			$	—		$	1,222,566		$	23,902,779		$	(775,275	)	$	23,127,504
Interest expense	(9,512,725		)	—				—			—			(9,512,725		)	775,275			8,737,450
Net interest income	13,167,488			—				—			1,222,566			14,390,054			—			14,390,054
Provision for loan losses	—			—				—			—			—			—			—
Noninterest income	3,779,786			2,013,943				647,301			2,457,966			8,898,996			—			8,898,996
Intersegment income	793,360			23,285				1,398			(724,140		)	93,903			(93,903		)	—
Noninterest expenses	(16,102,581		)	(701,085		)		(402,917		)	(2,268,323		)	(19,474,906		)	93,903			19,381,003
Income before income taxes	1,638,053			1,336,143				245,782			688,069			3,908,047			—			3,908,047
Income taxes	(441,553		)	(516,018		)		(93,441		)	(272,276		)	(1,323,268		)	—			(1,323,268		)
Net income	$	1,196,520		$	820,125			$	152,341		$	415,793		$	2,584,779		$	—		$	2,584,779
Segment assets	$	348,578,067		$	15,848			$	26,702		$	17,736,965		$	366,357,582		$	(16,532,830	)	$	349,824,752
Expenditures for segment purchases of premises, equipment and software	$	885,945		$	—			$	—		$	15,456		$	901,401		$	—		$	901,401

A reconciliation of total segment assets to consolidated total assets follows as of December 31, 2006:

Total segment assets	$	366,357,582
Elimination of intersegment loans	(14,934,950		)
Elimination of intersegment deposit accounts	(1,597,880		)
	$	349,824,752

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		$	527,676		$	19,071,379
Interest expense	(6,741,963		)	(105,444		)		—			—			(6,847,407		)	(527,676		)	(7,375,083		)
Net interest income	10,435,337			(105,444		)		—			1,366,403			11,696,296			—			11,696,296
Provision for loan losses	—			—				—			—			—			—			—
Noninterest income	2,466,304			4,871,076				667,510			2,713,746			10,718,636			—			10,718,636
Intersegment income	598,180			—				2,906			(512,785		)	88,301			(88,301		)	—
Noninterest expenses	(11,919,891		)	(3,727,831		)		(412,222		)	(2,662,481		)	(18,722,425		)	88,301			(18,634,124		)
Income before income taxes	1,579,930			1,037,801				258,194			904,883			3,780,808			—			3,780,808
Income taxes	(472,393		)	(400,798		)		(99,714		)	(349,466		)	(1,322,371		)	—			(1,322,371		)
Net income	$	1,107,537		$	637,003			$	158,480		$	555,417		$	2,458,437		$	—		$	2,458,437
Segment assets	$	358,760,082		$	3,691,629			$	82,512		$	23,749,243		$	386,283,466		$	(25,816,320	)	$	360,467,146
Expenditures for segment purchases of premises, equipment and software	$	655,832		$	211,910			$	—		$	35,201		$	902,943		$	—		$	902,943

58

2006 ANNUAL REPORT

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

22. CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

	Year Ended December 31, 2006
	First Quarter			Second Quarter				Third Quarter			Fourth Quarter
Interest income		$	5,566706		$	5,652,219			$	5,855,415		$	6,053,164
Interest expense		2,082,985			2,052,221				2,237,219			2,365,025
Net interest income		3,483,721			3,599,998				3,618,196			3,688,139
Gains on security sales		2,157,176			—				—			—
Other noninterest income		1,783,075			1,986,531				1,555,033			1,417,182
Noninterest expenses		6,088,968			5,558,716				3,859,040			3,874,280
Income before income taxes		1,335,004			27,813				1,314,189			1,231,041
Income taxes		467,146			(30,557		)		459,078			427,601
Net income		$	867,858		$	58,370			$	855,111		$	803,440
Net income per share — basic		$	0.31		$	0.02			$	0.30		$	0.29
Cash dividends per share		$	0.11		$	0.11			$	0.11		$	0.12
Market prices: high		$	15.95		$	18.80			$	18.00		$	19.45
low		$	14.40		$	15.64			$	16.11		$	16.99

	Year Ended December 31, 2005
	First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Interest income		$	4,275,029			$	4,512,073			$	4,957,555			$	5,326,722
Interest expense		(1,555,268		)		(1,766,890		)		(1,937,526		)		(2,115,399		)
Net interest income		2,719,761				2,745,183				3,020,029				3,211,323
Gains on security sales		73,087				—				766,772				—
Other noninterest income		2,255,502				2,649,218				2,615,235				2,358,822
Noninterest expenses		(4,367,243		)		(4,435,408		)		(4,736,498		)		(5,094,975		)
Income before income taxes		681,107				958,993				1,665,538				475,170
Income taxes		(268,511		)		(324,661		)		(629,609		)		(99,590		)
Net income		$	412,596			$	634,332			$	1,035,929			$	375,580
Net income per share — basic		$	0.15			$	0.22			$	0.37			$	0.13
Cash dividends per share		$	0.10			$	0.10			$	0.10			$	0.10
Market prices: high		$	17.00			$	17.00			$	16.29			$	15.00
low		$	14.12			$	14.25			$	13.95			$	14.00

59

CARROLLTON BANCORP

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 2006.

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, 2006. There were no changes in the Company’s internal controls over financial reporting that occurred during the fourth fiscal quarter of 2006 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, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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 May 15, 2007.

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 May 15, 2007

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 May 15, 2007.

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

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 May 15, 2007.

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 May 15, 2007.

60

2006 ANNUAL REPORT

PART IV

ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

1.Financial Statements

Carrollton Bancorp and Subsidiaries:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2006 and 2005

Consolidated Statements of Income for the years ended December 31, 2006, 2005, and 2004

Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2006, 2005, and 2004

Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005, and 2004

Notes to Consolidated Financial Statements

2.Financial Statement Schedules

None

3.Exhibits

Exhibit Number	Description
3(i)	Articles of Incorporation of Carrollton Bancorp*
3(ii)	By-Laws of Carrollton Bancorp*
10.1	Lease dated January 24, 1989 by and between Hill Management Services, Inc. and The Carrollton Bank of Baltimore.*
10.2	Lease dated July 21, 1989 by and between Hill Management Services, Inc. and The Carrollton Bank of Baltimore.*
10.4	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
10.20	Lease dated January 13, 2006 by and between Scotts Corner LLLP and Carrollton Bank
10.21	Lease dated April 27, 2006 by and between Arbutus Shopping Center Limited Partnership and Carrollton Bank
21.1	Subsidiaries of Carrollton Bancorp
23.1	Consent of Independent Registered Public Accounting Firm by Exchange Act Rule 13-a-14(a)
31.1	Certification by the Principal Executive Officer required by Exchange Act Rule 13-a-14(a)
31.2	Certification by Principal Financial Officer required by Exchange Act Rule 13-a-14(a)
32.1	Certification by the Principal Executive Officer
32.2	Certification by the Principal Financial Officer

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

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

***Incorporated by reference from Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (1934 Act File No.: 000-23090)

61

CARROLLTON BANCORP

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, 2007	By:	/s/ Robert A. Altieri
	Robert 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, 2007	By:	/s/ Robert A. Altieri
	Robert A. Altieri
	President and Chief Executive Officer

PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER

March 1, 2007	By:	/s/ James M. Uveges
	James M. Uveges
	(Principal financial and accounting officer)
	Senior Vice President and Chief Financial Officer
	Board of Directors
March 1, 2007	By:	/s/ Robert J. Aumiller
	Robert J. Aumiller
	Director
March 1, 2007	By:	/s/ Steven K. Breeden
	Steven K. Breeden
	Director
March 1, 2007	By:	/s/ Albert R. Counselman
	Albert R. Counselman
	Chairman of the Board
March 1, 2007	By:	/s/ Harold I. Hackerman
	Harold I. Hackerman
	Director
March 1, 2007	By:	/s/ William L. Hermann
	William L. Hermann
	Director

62

2006 ANNUAL REPORT

March 1, 2007	By:	/s/ David P. Hessler
	David P. Hessler
	Director
March 1, 2007	By:	/s/ Howard S. Klein
	Howard S. Klein
	Director
March 1, 2007	By:	/s/ Ben F. Mason
	Ben F. Mason
	Director
March 1, 2007	By:	/s/ Charles E. Moore, Jr.
	Charles E. Moore, Jr.
	Director
March 1, 2007	By:	/s/ John Paul Rogers
	John Paul Rogers
	Director
March 1, 2007	By:	/s/ William C. Rogers, Jr.
	William C. Rogers, Jr.
	Director
March 1, 2007	By:	/s/ Francis X. Ryan
	Francis X. Ryan
	Director

63

CARROLLTON BANCORP

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.		*
10.4	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
10.20	Lease dated January 13, 2006 by and between Scotts Corner LLLP and Carrollton Bank
10.21	Lease dated April 27, 2006 by and between Arbutus Shopping Center Limited Partnership 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

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

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

***Incorporated by reference from Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (1934 Act File No.: 000-23090)

64

EX-10.20

Exhibit 10.20

GROUND LEASE

BETWEEN

SCOTTS CORNER LLLP
as Landlord

and

CARROLLTON BANK
as Tenant

Date: January 13, 2006

Premises:

10301 York Road
Cockeysville, Maryland 21030

Table of Contents

		Page
1.	Definitions	1
2A.	Flood Plan and Site Plan Submission; Regulatory Approval	4
2B.	Site Environmental and Soil Studies	5
3.	Lease Term	5
4.	Landlord’s Construction Obligations	6
5.	Tenant’s Construction Obligations	6
6.	Use of Premises	7
7.	Rent	7
8.	Repair and Maintenance Obligations	8
9.	Taxes and Assessments	8
10.	Utilities	9
11.	Alterations	9
12.	Trade Fixtures	9
13.	Signs	10
14.	Landlord’s Access	10
15.	Rules and Regulations	10
16.	Indemnification	11
17.	Insurance and Casualty	12
18.	Eminent Domain	13
19.	Assignment and Subletting	14
20.	Mechanics’ Liens and Other Liens	15
21.	Quiet Enjoyment	15
22.	Landlord’s Right to Mortgage; Attornment	15
23.	Estoppel Certificates	16
24.	Environmental Matters	16
25.	Defaults and Remedies	18
26.	Bankruptcy or Insolvency	20
27.	Miscellaneous Provisions	20

GROUND LEASE

THIS LEASE (the “Lease”), dated January 13, 2006 (the “Effective Date”), is made and entered into by and between SCOTTS CORNER LLLP, a Maryland limited liability limited partnership, f/k/a Scotts Corner Limited Partnership (the “Landlord”), having an office at 3457 Sweet Air Road, Phoenix, Maryland 21131, and CARROLLTON BANK, a Maryland state chartered commercial bank (the “Tenant”) having an office at 344 N. Charles Street, Baltimore, Maryland 21201, Attn: Robert A. Altieri, President.

INTRODUCTORY STATEMENT

Landlord is the owner of two (2) adjacent parcels of land (the “Land”) containing approximately 0.6650 acres and a triangular parcel containing approximately 460 square feet, located at the northeast corner of Scott Adam Road at its intersection with York Road (Tax Account Nos 08-19-011392 and 21-00-011592), Cockeysville, Maryland, as more particularly described on Exhibit A.  Landlord desires to lease the Land to Tenant and Tenant desires to rent the Land from Landlord, subject to and in accordance with the terms and conditions hereinafter set forth.

NOW, THEREFORE, for good and valuable consideration, Landlord leases to Tenant and Tenant rents from Landlord the Land during the Term (as hereinafter defined) of this Lease, and any renewal or extension thereof.  This Lease is made upon the following terms and conditions:

1. Definitions.  As used in this Lease, the following terms are defined as follows:

1.1 Additional Rent – see Section 7.2.

1.2. Annual Rent –

Applicable Portion of Initial Term			Monthly Installment
Beginning	Ending	Annual Rent	(Annual ÷ 12)
Year 1	Year 5	$140,000.00	$11,666.66
Year 6	Year 10	$157,500.00	$13,125.00
Year 11	Year 15	$177,187.50	$14,765.62
Year 16	Year 20	$199,355.94	$16,611.33

Renewal Terms, if exercised	Annual Rent	Monthly Installment  (Annual ÷ 12)
First Renewal Term	$224,252.93	$18,687.74
Second Renewal Term	$252,284.55	$21,023.71
Third Renewal Term	$283,820.12	$23,651.68
Fourth Renewal Term	$319,297.64	$26,608.14

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1.3 Commencement Date – the date of execution of this Lease by Landlord and Tenant.

1.4 Construction Period – the period during which Tenant shall have exclusive possession of the Land and shall commence erection of the Tenant Improvements

1.5 Environmental Laws – all applicable federal, state, or local law, ordinance, or regulation, including, but not limited to the Resource Conservation and Recovery Act, the Toxic Substances Control Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Clean Air Act, and the Clean Water Act that regulate any hazardous or toxic substance, material, or waste and amendments thereto.

1.6 Hazardous Materials – any hazardous or toxic substance, material, or waste, including, but not limited to, those substances, materials, and wastes listed in the United States Department of Transportation Hazardous Materials Table (49 CFR 172.101) or by the Environmental Protection Agency as hazardous substances (40 CFR Part 302) and amendments thereto, or such substances, materials and wastes regulated under any Environmental Laws.

1.7. Initial Term – See Section 3.1.

1.8. Land – as defined in the Introductory Statement.

1.9. Landlord’s Delivery Date – the date on which Landlord delivers the Land to Tenant with the Landlord’s Improvements removed in accordance with this Lease.

1.10. Landlord Improvements – those improvements, consisting of gas pumps, underground fuel tanks, gas station building, car wash building and other permanent improvements situate on the Land, which are to be removed by Landlord prior to commencement of the Construction Period.

1.11. Landlord’s Notice Address – the following address for notices or such other address as Landlord may designate in writing from time to time:

c/o DJF, Inc.
P.O. Box 264
Phoenix, Maryland 21131

With a copy to:

Eugene W. Cunningham, Jr., Esquire
Royston, Mueller, McLean & Reid, LLP
102 West Pennsylvania Avenue, Suite 600
Towson, Maryland 21204-4575

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1.12. Landlord’s Payment Address – the following address for rent payments or such other address as Landlord may designate in writing from time to time:

c/o DJF, Inc.
P.O. Box 264
Phoenix, Maryland 21131

1.13. Permitted Use – commercial banking and any business permitted by the Regulatory Authorities.

1.14. Permitting Period – the period during which Tenant shall obtain the permits necessary to construct the Tenant Improvements.

1.15. Premises – the Land and the Tenant Improvements.

1.16. Regulatory Approval Period – the period during which Tenant shall obtain the necessary approvals from applicable governmental regulatory bodies in order to operate a branch bank office at the Premises.

1.17. Regulatory Authorities – those governmental authorities having jurisdiction and regulatory power over Tenant’s operations.

1.18. Rent Commencement Date – the earlier to occur of

1)     the end of the Construction Period; or

2)     the date Tenant opens for business with the public at the Premises.

1.19. Renewal Term – See Section 3.2.

1.20. Rent – the payment of the Annual Rent, Interim Rent and Additional Rent specified in this Lease.

1.21. Tenant Improvements – the one-story masonry building, building sidewalks and curbs, building lighting fixtures and conduits, utility connections, paving and all improvements to be contracted by Tenant on the Land for the Permitted Use, in accordance with plans and specifications therefor approved in writing by Landlord (which approval shall not be unreasonably withheld or delayed) and in accordance with the other terms and conditions of this Lease.

1.22. Tenant’s Notice Address – the following address for notices or such other address as Landlord may designate in writing from time to time:

Carrollton Bank
344 N. Charles Street
Baltimore, Maryland 21201
Attn: Robert A. Altieri, President

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With a copy to:

Rogers, Moore & Rogers
6 S. Calvert Street
Baltimore, Maryland 21202
Attn:  William C. Rogers, Jr., Esquire

1.23. Term – the Initial Term or the applicable Renewal Term, whichever is then in effect.

2A. Flood Plan and Site Plan Submission; Regulatory Approval.

2.1 The parties acknowledge that Baltimore County, Maryland (the “County”) requires that Tenant submit a flood plain study of the Land in connection with submittal of Tenant’s site plan to begin the County plan review process.  Tenant shall promptly commission the preparation of the flood plain study (the “Flood Study”) and its site plan with Frederick Ward Associates, Inc.  (“FWA”) and provide both to County within sixty (60) days after the Effective Date.  In the event that the County fails to approval Tenant’s site plan as a result of any Flood Study issues and, as a result thereof, Tenant elects to terminate this Lease, then Landlord shall reimburse Tenant the cost of the Flood Study (not exceeding $12,500.00), provided FWA issues Landlord a letter confirming that Landlord has sole ownership rights to and use of the Flood Study.  In any event, if the County fails to approve Tenant’s site plan and Tenant does not, in its exercise of its sole discretion, modify the site plan to obtain County approval, this Lease shall terminate promptly upon the issuance of the County’s disapproval.

2.2 Additionally, as part of Tenant’s submission of its site plan, Tenant will cause an ALTA or boundary survey of the Land to be prepared (the “Land Survey”).  Upon the filing of Tenant’s site plan and Flood Study with the County and provision of a copy of the final Land Survey to Landlord, Landlord shall reimburse Tenant the cost of the Land Survey (not exceeding $15,000.00), provided FWA issues Landlord a letter confirming that Landlord has co-ownership rights to and use of the Land Survey.

2.3 If the County does not approve Tenant’s site plan on or before December 1, 2006, then either party may terminate this Lease prior to Issuance of County approval upon written notice to the other.

2.4 Upon County approval of Tenant’s site plan, Tenant, at its sole cost and expense, shall file for and thereafter diligently pursue Regulatory Approval.  Tenant shall notify Landlord in writing (the “Regulatory Approval Notice”) promptly after Tenant receives Regulatory Approval.  If Regulatory Approval is denied, this Lease shall be of no further force and effect, and neither party shall have any further rights or obligations hereunder.  Furthermore, If Tenant has not received Regulatory Approval within ninety (90) days after Tenant’s request is submitted, then either party may terminate this Lease prior to receipt of Regulatory Approval upon written notice to the other.

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2.5 Tenant shall provide Landlord with regular progress reports regarding Tenant’s pursuant of the matters described in Sections 2.1, 2.2, 2.3 and 2.4 including providing the dates of filing of documents with the County and of the request for Regulatory Approval, together with copies of all filing documents.  Tenant shall also provide copies of all correspondence from the County and Regulatory Authorities, promptly upon receipt.  Tenant shall use its good faith, diligent efforts to file for, seek and obtain the various approvals required for its construction and use of the Tenant Improvements.

2.6 If the Land is subject to any mortgage, deed of trust, ground lease, or other encumbrance superior to this Lease, Tenant shall receive a non-disturbance and attornment agreement from the mortgage, ground lessor, or other party holding an interest in the Premises superior to Tenant, which agreement must be in form reasonably accepted to Tenant.  If Tenant does not receive the non-disturbance and attornment agreement under this Section 2.6 within sixty (60) days after the Effective Date, Tenant may terminate this Lease upon written notice to Landlord within thirty (30) days thereafter.

2B.  Site, Environmental and Soil Studies.  Within sixty (60) days after the Effective Date, Tenant shall conduct its site review (including availability of utilities), environmental and soil studies to determine acceptability of the Land for the Permitted Use.  The Land is to be provided in its “as is “condition, without warranty or responsibility on Landlord’s part except (i) that Landlord shall deliver the Closure Letter in accordance with Section 4.1, and (ii) for Landlord’s indemnification obligations under Section 24 hereof.

3. Lease Term.

3.1 Initial Lease Term. The initial term (the “Initial Term”) of this Lease shall commence on the Commencement Date and shall expire at the end of the month that is twenty (20) years after the Rent Commencement Date unless sooner terminated in accordance with the provisions hereof.  After the Rent Commencement Date and upon Landlord’s request, Tenant shall promptly enter into a written agreement with Landlord, mutually acceptable and in recordable form, stipulating the Commencement Date, the Rent Commencement Date, and expiration date of the Initial Term.

3.2 Renewals; Annual Rent During Renewals. As long as (i) Tenant is not then in monetary default of this Lease nor in non-monetary default of this Lease beyond any applicable cure period and (ii) Tenant is occupying a portion of the entire Premises at the time of such election, Tenant may extend this Lease for four (4) additional periods of five (5) years each (each a “Renewal Term”) on the same term and conditions as provided in this Lease (except as set forth below), by delivering written notice of the exercise thereof to Landlord not later than nine (9) months before the expiration of the then current Term.

(a)   After the last scheduled Renewal Term hereunder, Tenant shall have no further extension options unless expressly granted by Landlord in writing; and

(b)   Landlord shall lease to Tenant the Premises in its then-current condition at the beginning of each Renewal Term.

5

Tenant’s rights under this Section 3.2 shall terminate if (i) this Lease or Tenant’s right to possession of the Premises is terminated, or (ii) Tenant fails to timely exercise its option under this Section 3.2, time being of the essence with respect to Tenant’s exercise thereof.

4. Landlord’s Construction Obligations.

4.1 Removal of Tanks and Improvements. Before the Effective Date, Landlord removed the existing gas pumps, underground fuel tanks and various other improvements existing on the Land.  The removal of the gas pumps and underground fuel tanks were undertaken in compliance with Maryland Department of the Environment (MDE) procedures including with the presence of an MDE official.  Landlord has been advised that a “closure and no further action required letter” (the “Closure Letter”) will be issued.  Landlord shall be responsible for obtaining the Closure Letter.  If the Closure Letter is not obtained within ninety (90) days after the Effective Date, then Tenant may terminate this Lease prior to issuance of the Closure Letter upon written notice to Landlord.  Landlord shall not be liable to Tenant for failure of MDE to timely issue the Closure Letter.

4.2 Otherwise  “AS IS” delivery. Except as provided in Section 4.1 with respect to Landlord’s delivery of the Closure Letter, the Land shall be delivered to Tenant in absolutely “AS IS” condition, without representation or warranty by Landlord as to the physical features thereof in any manner whatsoever.  Tenant acknowledges that it accepts delivery of the Land in the condition specified in this Section 4.2.

5. Tenant’s Construction Obligations.

5.1 General. Tenant shall construct or cause to be constructed the Tenant Improvements in a good and workmanlike manner.  All construction by Tenant shall be done pursuant to plans and specifications therefor prepared by a licensed architect or engineer.  All such plans and specifications for the Tenant Improvements and the contractor or contractors engaged by Tenant to perform such work shall be subject to Landlord’s prior written approval, which approval shall not be unreasonably withheld or delayed.  Tenant shall bear all risk of theft, loss or damage to its personal property, including building materials stored on the Land or incorporated into Tenant Improvements, from whatsoever cause, unless such loss or damage is due to the negligence or willful misconduct of Landlord.

5.2 Permitting Period. Tenant shall prepare, or cause to be prepared, complete plans and specifications for the Tenant Improvements (the “Plans”) and shall submit the same to Landlord for Landlord’s approval, which approval shall not be unreasonably withheld or delayed.  If Landlord does not respond within fifteen (15) days after Tenant’s submission of the Plans, the Plans will be deemed approved.  After Landlord and Tenant have agreed to final plans and specifications for the building portion of Tenant Improvements and  Tenant has received the necessary County site plan approvals pursuant to Section 2.3 and the necessary Regulatory Approval pursuant to Section 2.4, Tenant shall make application to the County for a building permit and to all other appropriate governmental agencies, quasi-governmental agencies and utility companies for all permits and approvals necessary to construct the Tenant Improvements (collectively, “Tenant’s Permits”).  Tenant shall use diligent efforts

6

to obtain the Tenant’s Permits on or before August 1, 2007 (this is the “Permitting Period”).  If Tenant is unable to obtain Tenant’s Permits by the conclusion of the Permitting Period, either party may terminate this Lease upon written notice to the other.

5.3 Construction Period. Promptly upon issuance of Tenant’s Permits, Tenant shall commence construction of the Tenant Improvements and use its best efforts to complete the same within one hundred twenty (120) days after issuance of Tenant’s Permits (this 120 day period is the “Construction Period”).  Whether or not Tenant has complete Tenant Improvements by the conclusion of the Construction Period, the Rent Commencement Date shall begin not later than the end thereof.

5.4 Interim Payments to Landlord. During the Construction Period, Tenant shall pay interim rent to Landlord of $2,500.00 per month.

6. Use of Premises.

6.1 Throughout the Term, Tenant shall use the Premises solely for the Permitted Use or in the event of assignment or sublease of the Premises (so long as Tenant remains liable under this Lease), for any legally permitted use.

6.2 Upon substantial completion of the Tenant Improvements and the obtaining of all necessary use and occupancy permits, Tenant shall occupy the Premises and promptly open for business.

6.3 Tenant shall promptly comply with all laws, rules, regulations, requirements, notices of governmental bodies and public authorities and the reasonable recommendations of the local board of fire underwriters rating bureau or other fire insurance rating organization for Baltimore County, Maryland and of the Landlord’s insurers, pertaining to the Premises, the improvements thereon or their use, occupancy or maintenance.

6.4 Tenant will comply with all provisions of the Americans With Disabilities Act (the “ADA”) with respect to the Premises.

7. Rent

7.1 Commencing on the Rent Commencement Date and continuing throughout the Initial Term, Tenant shall pay Annual Rent in equal monthly installments, in advance, on the first day of each calendar month.  If the Rent Commencement Date falls on a day other than the first day of a calendar month, then the Annual Rent for any fractional month during the Term shall be apportioned on a daily basis based upon a thirty (30) day month.

7.2 Whenever under the terms of this Lease any sum of money is required to be paid by Tenant in addition to the Annual Rent herein reserved, said sum shall be deemed to be additional rent (“Additional Rent”) and collectible as rent whether or not so designated.  All Annual Rent and Additional Rent shall be paid without prior demand, except as provided otherwise by the terms of this Lease, and without any setoff, abatement or deduction of any

7

nature whatsoever.  Any payment by Tenant of a lesser amount of Annual Rent or Additional Rent than is then due shall be applied to such category of arrearage as Landlord may designate irrespective of any contrary designation by Tenant and to the oldest, most recent or other portion of the sum due as the Landlord may determine; and Landlord’s acceptance of any such partial payment shall not be deemed an accord and satisfaction, and shall be without prejudice to Landlord’s right to pursue any other remedies.

7.3 All rent under this Lease shall be paid to Landlord at Landlord’s Payment Address.

8. Repair and Maintenance Obligations.

8.1 Except for matters pertaining to hazardous materials addressed elsewhere in this Lease, Landlord shall have no obligation to repair, maintain or address any condition with the Land.  Except as set forth in the preceding sentence, Tenant shall be solely responsible for the repair, maintenance and upkeep of the Land and, with respect to the Tenant Improvements, the repair and maintenance thereof, in good condition and repair and in compliance with all applicable governmental regulations, for the entire Term of the Lease.

8.2 Without limiting the provisions of Section 8.1, Tenant shall perform all grass cutting, landscaping, upgrades to or replacements of the Tenant’s Improvements as may be necessary in connection with the use and occupancy thereof and/or as may be required to comply with all applicable governmental regulations.

9. Taxes and Assessments.

9.1 During the Term, Tenant shall bear, pay and discharge all real estate taxes, special and benefit assessments, minor privilege charges, metropolitan district charges and other public charges levied or imposed by any governmental agency upon or with respect to ownership, use or occupancy of the Premises, including taxes on rents (whether imposed on Landlord or Tenant), but excluding taxes identified as income taxes.

9.2 All sums payable by Tenant under this Section 9 shall be paid prior to accrual of interest or penalty for nonpayment.  With respect to real estate taxes and/or special and benefit assessments and other charges assessed separately and directly to Tenant, Tenant shall furnish Landlord with evidence of payment in the form of copies of the paid receipts promptly after payment.  In any case in which Tenant contests in good faith any such imposition Tenant may defer payment to the extent that it is necessary and legally possible to defer the same in order to make such contest and diligently pursue the same, but in such event it shall be a condition of Tenant’s privilege to defer any payment, that Tenant shall, if so requested by Landlord, furnish Landlord, with a bond, reasonably satisfactory to Landlord as to surety, in an amount and upon such conditions as shall reasonably be necessary to protect the interest of Landlord against any loss or impairment resulting from such delay.

9.3 Upon the Rent Commencement Date, the parties shall take such action as may be necessary or appropriate in order that proposed assessment notices and separate tax bills

8

for the Premises are sent by taxing authorities directly to Tenant, including, if necessary, a designation of Tenant’s address as address of record for the owner for tax assessment and billing purposes. Tenant shall promptly furnish to Landlord copies of all such proposed assessment notices and separate tax bills that Tenant receives from the taxing authorities. Tenant shall have the right to contest the validity and/or seek a reduction of said assessment at Tenant’s sole cost and expense. Tenant shall indemnify Landlord, for the amount of any interest, penalty and additional cost payable by Landlord as a result of Tenant’s contest of the validity of or attempt to reduce such assessment. Tenant shall have the right to institute such proceedings in the name of the Landlord as Tenant may deem necessary to contest the validity or seek a reduction of said assessment; provided that, if it is necessary to institute said proceedings in the name of the Landlord, the Landlord shall be given prior written notice of said proceedings. Landlord will, at Tenant’s sole cost and expense, execute and deliver to Tenant such documents and/or information as Tenant may reasonably require in connection with Tenant’s contest of the validity of or attempt to reduce said assessment.

9.4 Nothing contained in this Lease shall be deemed to include within the definition of the term “real estate taxes” any tax such as inheritance, estate, succession, gift and/or federal or state income taxes that are or may be imposed upon Landlord.

10. Utilities.

10.1 Beginning on the date that Tenant enters the Land for construction of the Tenant Improvements, Tenant shall pay, when due, all consumption charges for all utility services furnished to the Premises.

10.2 Landlord shall not be liable to Tenant for damages because of interruptions in utility services unless such interruption is due to the negligent or willful act of Landlord, its employees, agents, contractors, or subcontractors. No interruption in utility service shall cause any abatement in Tenant’s obligation to pay Rent.

11. Alterations.

                After the Tenant Improvements have been completed in accordance with the Plans, Tenant shall not thereafter make any alterations, additions, or improvements affecting structural or support elements of or in the building or affecting any utility systems servicing the Premises without Landlord’s prior written approval, which approval shall not be unreasonably withheld or delayed. Any alterations, additions, or improvements by Tenant that are permitted hereunder or thereafter approved by Landlord shall, at the end of the Term or sooner expiration of this Lease, become the property of Landlord and remain upon the Premises.

12. Trade Fixtures.

                All furniture, counters, business machinery, banking equipment, computers (regardless of the manner of installation), and interior removable partitions placed upon the Premises during the Term of this Lease, shall be considered as chattels (for subsequent removal purposes) and shall not become part or parcel of the real property, thereby permitting the same to

9

be removable by the Tenant at the termination of this Lease. Any damage caused by any such removals shall be repaired by Tenant. Upon any termination of this Lease all Tenant Improvements, other than the above (which shall be the property of the Tenant and shall be timely removed by Tenant) shall become the property of Landlord.

13. Signs.

                Subject to Landlord’s prior approval as to design, location, height and color (which approval shall not be unreasonably withheld or delayed), Tenant shall be entitled to install and maintain on the Premises, at its cost and expense, permanent professionally prepared signs containing Tenant’s trade name or logo (and/or those of its subsidiaries and affiliates conducting business from the Premises) so long as such signs comply with applicable law. Subject to Landlord’s prior written approval (which approval shall not be unreasonably withheld or delayed) as to design, location, height and color, Tenant may, if permissible under applicable governmental sign regulations, construct a free standing pylon sign on the Premises as well. Tenant may also, if permissible under applicable governmental regulations, install a corporate-standard environmental surround and/or shield for each of Tenant’s automatic teller machines (“ATM”).

14. Landlord’s Access.

                Landlord and its duly authorized representatives may enter the Premises only upon reasonable advance notice to Tenant and subject to Tenant’s security requirements (including the requirement for Landlord’s representative to be escorted at all times by Tenant’s representative), to inspect the Premises and to rectify defaults of Tenant pursuant to the rights granted to Landlord under Section 25.2 (but only after Tenant has failed to commence and diligently pursue a cure of the default within any applicable cure period granted elsewhere in this Lease); provided, however, that any such entry by Landlord and its representatives shall be done in such a manner so as to not unreasonably interfere with the conduct of Tenant’s business operations on the Premises or compromise security of the Premises and provided further that Tenant consents to Landlord’s immediate entry (without prior notice and escort) if an emergency occurs as reasonably determined by Landlord. Landlord shall promptly restore any disturbance to the Premises caused by any work performed by Landlord on the Premises. Landlord may bring upon the Premises all things reasonably necessary to perform any work done in the Premises pursuant to this Section 14. Nothing herein contained shall be deemed or construed to impose upon Landlord any obligation or responsibility whatsoever for the care, maintenance or repair of the Premises, except as otherwise specifically provided in this Lease.

15. Rules and Regulations. Tenant further warrants, represents, covenants, and agrees to:

15.1 Keep the Premises (including exterior and interior portions of all windows, doors and all other glass) in a neat and clean condition;

15.2 Pay before delinquency any and all taxes, assessments and public charges levied, assessed, or imposed upon Tenant’s business or upon Tenant’s fixtures, furnishings or

10

equipment in the Premises and pay when and as due all license fees, permit fees and charges of a similar nature for the conduct by Tenant or any permitted subtenant of any business or undertaking authorized hereunder to be conducted in the Premises;

15.3 Not permit the accumulation (unless in concealed metal containers) or burning of any of Tenant’s rubbish or garbage in, on or about any part of the Premises;

15.4 Except for newspaper vending machines, not use the parking areas, sidewalks adjacent to or any other space outside the improvements constructed on the Premises for display, sale, storage or any other similar undertaking; provided that such limitation shall not affect the use of the drive-in area, the night depository, and the ATM’s for their intended purposes nor the placement of outdoor smoking receptacles for use by Tenant’s employees and customers;

15.5 Not use any advertising medium or sound devices inside the improvements constructed on the Premises that may be heard outside the Premises, or permit any objectionable odors to emanate from such improvements; provided that such limitation shall not affect the use of the drive-in area, the night depository, and the ATM’s for their intended purposes;

15.6 Not use the plumbing facilities in the Premises for any purpose other than that for which they were constructed, or dispose of any foreign substances therein, whether through the utilization of “garbage disposal” units or otherwise;

15.7 Not use for any purpose all or any portion of the roof or exterior walls of the Premises other than for Tenant’s signs as provided in this Lease; and

15.8 Not place any paper or cardboard or other temporary signs on the exterior of the improvements unless any such temporary signs are professionally done and neat in appearance.

16. Indemnification.

16.1 Tenant shall defend, indemnify and save Landlord harmless from and against any and all claims, actions, demands, damages, liability and expenses (including reasonable attorney’s fees) for injury to the property of others and injury or death of persons which is caused by or arises (i) out of or in connection with Tenant’s use or occupancy of the Premises or any negligent act or omission of Tenant, its agents, employees, servants or contractors, or (ii) out of breach by Tenant of any term, covenant or condition of this Lease to be performed or observed by Tenant. Tenant shall not be liable, however, for any claims, actions, demands, damages, liability and expenses (including reasonable counsel fees) described in the preceding sentence that result from the negligence of Landlord, its agents, employees, servants, or contractors and Landlord shall indemnify and save Tenant harmless from any claims, actions, demands, damages, liability and expenses (including reasonable attorneys’ fees) resulting from such negligence..

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17.          Insurance and Casualty.

17.1   Property Insurance. During the Term, Tenant shall, at its expense, keep in force insurance on the Tenant Improvements, whether now or hereafter constructed, for their full insurable value (written on a 100% replacement cost basis), less a reasonable deductible, and covering against loss from fire and perils including Basic Form Causes of Loss. Such policy shall name Tenant and Landlord as insured as their interests may appear. During the Term, Landlord shall, at its expense, maintain insurance on any improvements on the balance of the Center for one hundred percent (100%) of the full insurable value, less a reasonable deductible, (written on a replacement cost basis) and covering against loss from fire, and perils including Basic Form Causes of Loss written on an agreed amount basis.

(a)   Restoration After Casualty Loss. In the event of casualty damage to the Premises, Tenant shall be entitled to all insurance proceeds for restoration of the Tenant Improvements; provided that Tenant shall diligently repair, restore and reconstruct the Tenant Improvements to substantially the same condition existing prior to such casualty. If Tenant does not commence and diligently pursue the restoration of the Tenant Improvements as herein required within one hundred eighty (180) days after the date of casualty, then, in addition to any other rights or remedies available to Landlord, Landlord shall be entitled to receive all insurance proceeds and, at Landlord’s option, exercisable after thirty (30) days’ written notice to Tenant, either (a) restore the Tenant Improvements to the extent of net insurance proceeds received, or (b) raze and demolish any remaining Tenant Improvements and pave the Land, paying any excess insurance proceeds to Tenant. Notwithstanding anything to the contrary set forth in this Lease, if the Tenant Improvements, or any additions, replacements, or alterations thereto, shall be substantially damaged or destroyed by casualty during the final year of the Initial Term or during the final year of any Renewal Term unless Tenant exercises or has exercised an available renewal option, then this Lease shall terminate as of the date of such damage or destruction and all insurance proceeds shall be paid solely to Landlord. Except as provided in the preceding sentence, no casualty shall affect the obligation of Tenant to pay Rent under this Lease for the entire Term hereof.

During all periods when Tenant’s use of the Tenant Improvements is limited due to repair or casualty, Tenant may place or erect temporary facilities on the Land for its operations, provided such temporary facilities comply with all governmental requirements.

17.2   Liability Insurance of Tenant. Commencing on the date Tenant enters the Land for construction of the Tenant Improvements and throughout the Term, Tenant shall, at its expense, keep in force commercial general public liability insurance, automobile liability insurance, boiler liability insurance and sprinkler damage liability insurance, covering bodily injury and property damage occurring on the Premises, including contractual liability coverage for Tenant’s indemnity obligations under this Lease with a limit of not less than One Million Dollars ($1,000,000.00) for bodily injury and death and for property damage and with not less than Two Million Dollars ($2,000,000.00) in the aggregate; which policy shall be written on an occurrence basis. During any period of construction, the liability policy shall include an endorsement covering construction operations. The minimum coverage limits set forth above

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shall, at Landlord’s option, be increased on every fifth anniversary of the Rent Commencement Date to a minimum coverage limit that is then commercially reasonable for Tenant’s type of business.

17.3   General Requirements. All liability insurance required to be maintained by Tenant shall name Tenant as named insured and shall include Landlord as additional insured. All liability insurance required to be maintained by Landlord shall name Landlord as named insured and shall include Tenant as additional insured. All insurance required to be maintained by either Landlord or Tenant shall contain a provision that the insurer shall not cancel or reduce the coverage of any such policy without sending thirty (30) days’ prior written notice to Landlord in case of Tenant’s insurance or to Tenant in the case of Landlord’s insurance. If Tenant fails to keep the required insurance in force after ten (10) days’ notice from Landlord, Landlord may do so and shall be entitled to collect the premiums therefor from Tenant as Additional Rent on demand. All insurance policies shall be written with insurance companies licensed to do business in the state of Maryland having a Best Manual rating of A- or better as to general policy holders rating and of VII or better as to financial rating (or equivalent ratings as such ratings may be revised from time to time). The insurance required to be maintained under this Lease may be carried under a policy commonly known as a “blanket policy.” Within ten (10) days after the Landlord’s Delivery Date and prior to any entry upon the Premises by Tenant, its agents or contractors, Tenant shall furnish to Landlord copies and/or certificates of the insurance policies required to be carried by it under this Section 17. Within ten (10) days after the Landlord’s Delivery Date, Landlord shall furnish to Tenant copies and/or certificates of the insurance policies requires to be carried by it under this Section 17.

17.4   Workers’ Compensation Insurance. Landlord and Tenant and any contractors employed or engaged by Landlord or Tenant shall obtain, keep in force and pay for workers’ compensation insurance as required by law.

18.          Eminent Domain.

18.1   If the Premises is condemned in whole or in part under the power of eminent domain, this Lease shall terminate as to the part condemned on the date title or possession vests in the condemning authority, whichever is first. As used herein, the terms “condemned” and “condemnation” include sale by Landlord to a condemning authority under threat of condemnation. Landlord shall have the power and authority to convey the entire Landlord’s interest in all or any part of the Premises to the condemning authority without Tenant’s joinder, any such conveyance by Landlord alone shall be deemed free and clear of any leasehold or other interest by Tenant therein, any condemning authority shall be entitled to rely upon the provisions of this sentence in accepting a deed from Landlord alone. As used herein the term “condemnation award” includes the proceeds of any sale by Landlord to a condemning authority under the threat of condemnation.

18.2   If any condemning authority notifies Landlord of a proposed condemnation of any part of the Land, Landlord shall give Tenant written notice of the proposed condemnation together with whatever plats and data are furnished to Landlord by the condemnor concerning the extent of the proposed condemnation of the Premises. If any part of the improved

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portion of the Land is the subject of the proposed condemnation which will result, in Tenant’s reasonable opinion, in a material adverse impact on Tenant’s ability to operate its business, Tenant shall have one hundred twenty (120) days after the date of such notice in which to elect to cancel this Lease effective upon taking of possession pursuant to the condemnation. If Tenant gives written notice of such election within such one hundred twenty (120) days, and if the proposed condemnation is consummated, then this Lease shall terminate entirely on the same date that this Lease terminates as to the condemned portion of the Premises under Section 18.1 above. If Tenant does not make a timely election to cancel this Lease, then this Lease shall continue in effect without adjustment to the Annual Rent.

18.3   In the event of the condemnation of all or any part of the Land, Tenant shall not be entitled to share in any part of the condemnation award, including consequential damages, for the taking of its leasehold estate, whether or not this Lease is terminated under the provisions of this Section 18 by reason of such condemnation. Tenant shall, however, be entitled to (i) a portion of any condemnation award attributable to the Tenant Improvements and (ii) any separate award obtained by Tenant from the condemning authority for moving expenses, loss of trade fixtures, and loss of business. If this Lease is terminated, any condemnation award attributable to the Tenant Improvements shall be allocated between Landlord and Tenant in the same ratio as the reversionary interest of Landlord in the Tenant Improvements bears to the then fair market value of the Tenant Improvements. In the event that this Lease is not terminated, then all proceeds attributable to the Tenant Improvements shall be made available to Tenant for restoration.

19.          Assignment and Subletting.

19.1   Except as provided in Section 19.2 below, Tenant shall not assign this Lease in whole or in part without Landlord’s prior written approval, which approval shall not be unreasonably withheld or delayed. No Landlord consent shall be required for any subleasing of the Premises, in whole or in part, by Tenant provided that Tenant shall provide Landlord with advance written notice of the possession by any third party pursuant to any sublease. Except as otherwise permitted by this Lease, any assignment by operation of law, attachment or assignment for the benefit of creditors, shall, at Landlord’s option, be inoperative. If Landlord at anytime consents in writing to any assignment as defined in and prohibited by this Section 19, in addition to any other consideration that may pass between the parties in connection therewith, Tenant and any such assignee or sublessee shall be deemed to have covenanted not to make any further assignment contrary to the provisions of this Section 19, and such covenants shall be deemed to have made as of the date of such consent and shall take effect prospectively from the date thereof.

19.2   Notwithstanding anything contained in Section 19.1 to the contrary, Tenant may, at any time, without the consent of Landlord assign or otherwise transfer this Lease or any portion thereof to a parent, subsidiary or affiliate corporation or entity; or any corporation or entity resulting from the consolidation or merger of Tenant into or with any other entity; or to any person, firm or corporation acquiring a majority of Tenant’s issued and outstanding capital stock or a substantial part of Tenant’s physical assets; provided, however, that in the event of any

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such assignment or transfer, the assignee shall assume in writing the performance and observance of all the terms and conditions of this Lease.

19.3   No assignment or sublease shall relieve Tenant from any of its obligations under this Lease.

20.          Mechanics’ Liens and Other Liens.

20.1   If any mechanics’ or other lien is filed against the Premises by reason of any labor, material or service furnished or alleged to have been furnished to Tenant in connection with construction, alteration or repair of improvements on the Premises made by Tenant, Tenant shall cause such lien to be released of record by payment, bond or otherwise as allowed by law, at Tenant’s expense, within ten (10) business days after the filing and service thereof; and Tenant shall, at its expense, defend any proceeding for the enforcement of such lien, discharge and judgment thereon and save Landlord and any mortgagee harmless from all losses and expenses resulting therefrom including reasonable counsel fees and other expenses incurred by Landlord and any mortgagee, if any of them elect to defend or participate in the defense of such proceedings. Nothing in this Section 20 or elsewhere in this Lease shall be construed as a consent by Landlord that a mechanics’ lien for any work authorized or contracted for by Tenant or required by this Lease may attach to or constitute a lien against Landlord’s estate.

20.2   Tenant shall not permit the Premises to be subjected to any statutory lien or any other lien or encumbrance that might obtain priority over Landlord’s interest in the Premises or be in parity therewith by reason of any act or omission on the part of Tenant or any of its approved licensees or subtenants or their respective agents, servants, employees or contractors other than real estate taxes for which no interest or penalty has yet been incurred; and in the event that any such lien attaches to the Premises, Tenant shall discharge such lien promptly by payment, bond or otherwise as allowed by law, at its own expense, within ten (10) business days after the filing (and service or notice) thereof.

21.          Quiet Enjoyment.

So long as no default exists beyond any applicable cure period Tenant shall have the peaceful and quiet use of the Premises, subject to the terms, covenants and conditions of this Lease, without interference with possession by Landlord or any one claiming by, through or under Landlord.

22.          Right to Mortgage; Attornment.

22.1   Landlord’s Right to Mortgage.   Landlord shall have the absolute right and/or power to mortgage or otherwise create any security interest or other lien or encumbrance upon or affecting the Landlord’s reversionary interest in the Premises or any improvements thereon or any part thereof at any time and from time to time, and Landlord shall further have the right and/or power to modify, extend, renew, replace, refinance or otherwise change or effect any such mortgage, security interest, lien or encumbrance created by Landlord pursuant to this Lease. As a condition to the granting of any such mortgage or security interest, however, Landlord shall

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obtain from the mortgagee or other lender or creditor, a non-disturbance agreement recognizing Tenant’s rights under this Lease.

22.2   Attornment.   When requested by Landlord, Tenant shall promptly execute an agreement with any mortgagee or prospective mortgagee, or purchaser or prospective purchaser, of Landlord’s estate in the Premises, under which Tenant agrees, in the event that any such person succeeds to the interest of Landlord under this Lease, to attorn to such person as its landlord, as long as such person executes such agreement for the purpose of recognizing Tenant’s rights under this Lease.

22.3   Tenant Financing.   Tenant shall be permitted, from time to time, to mortgage or otherwise finance its leasehold interest in the Premises. In no event, however, shall any such mortgage or other financing encumber Landlord’s fee interest or affect Tenant’s obligations under this Lease.

23.          Estoppel Certificates.

When requested in writing by either party to this Lease (the “Requesting Party”), the other party (the “Responding Party”) shall acknowledge in writing to the Requesting Party, a mortgagee or prospective mortgagee, a purchaser or prospective purchaser, of the Requesting Party’s estate, that this Lease is unmodified, in full force and effect, free of defaults of the Requesting Party and free of defenses against enforceability (or setting forth any modifications, defaults, disclaimers of the Lease or defenses against enforceability); that the Responding Party has no outstanding claims against the Requesting Party (or setting forth the nature and amount of claims, if any); stating the date to which rent has been paid and the amount of any advance rental paid; stating the Rent Commencement Date and expiration date of this Lease; and the status of any other obligation of the Requesting Party under or with respect to this Lease; it being intended that any such statement may be relied upon by the Requesting Party, any mortgagee or prospective mortgagee, or any purchaser or prospective purchaser, of the Requesting Party’s estate.

24.          Environmental Matters.

24.1   If at any time any Hazardous Materials are determined to be located on, in or affecting the Land and the presence of such Hazardous Materials is the result of introduction onto the Land by Landlord, any condition existing prior to the Effective Date, any migration from adjoining parcels or from any other cause other than that described in Section 24.4 below (collectively “Landlord’s Responsibility”), then Landlord shall (y) within thirty (30) days after written notice from Tenant or any governmental authority of the presence thereof, take or cause to be taken, at its sole expense, such actions as may be necessary to remediate the contamination caused by the presence of Hazardous Materials, and (z) within thirty (30) days after written demand therefor, reimburse Tenant for any amounts expended by Tenant (i) to remediate the contamination caused by the presence of Hazardous Materials with respect to the Premises if Landlord has failed to do so after notice and reasonable opportunity to do so, or (ii) in connection with any judicial or administrative investigation or proceeding relating thereto, including, without limitation, reasonable attorneys’ fees, fines, or other penalty payments. If Landlord fails

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to take, or cause to be taken, such actions as may be required by this Section 24.1 within ninety (90) days after Tenant’s written demand, Tenant shall have the right to terminate this Lease upon written notice to Landlord, provided that if the required action is diligently undertaken by Landlord but cannot be completed within the 90 day period and Tenant’s use and operation of the Premises is not materially, adversely affected by the delay, then Landlord shall have such additional time as may be reasonably necessary to complete the required action. During any period where Tenant cannot operate from the Premises, then Rent shall abate; otherwise, no abatement of Rent shall occur during Landlord’s required actions. In no event shall Landlord be liable to Tenant for any damages resulting from any closure of Tenant’s business, Tenant’s remedies being limited to abatement of rent during periods of closure and/or termination of the Lease if Landlord does not timely provide the required action. Landlord shall indemnify and hold Tenant harmless from and against any loss or damages arising from Landlord’s failure to perform Landlord’s Responsibility.

24.2   Landlord will provide Tenant with copies of all notices Landlord receives from any governmental authority regarding environmental matters in respect of the Premises.

24.3   During the Term of this Lease, Tenant shall: (1) keep the Premises (including the Land, surface water, ground water, and improvements to the Land) free of any contamination by Hazardous Materials resulting from any act or omission of Tenant; and (2) comply with all Environmental Laws in its use and occupancy of the Premises; provided, however, that Tenant shall be permitted to maintain and use on the Premises Hazardous Materials that are customarily maintained and used by businesses similar to Tenant as long as such Hazardous Materials are maintained in appropriate quantities and properly stored and used and otherwise in accordance with all applicable laws.

24.4   Tenant expressly acknowledges and agrees that it will reimburse, defend, indemnify and hold harmless Landlord, its successors, assigns and other parties claiming any interest in the Premises by, through or under Landlord, from and against any and all liabilities, claims, damages, penalties, expenditures, losses or charges (including, but not limited to, all costs of investigation, monitoring, legal fees, remedial response, removal, restoration or permit acquisition) which may, now or in the future, be undertaken, suffered, paid, awarded, assessed, or otherwise incurred as the result of:

(a)           any contamination by Hazardous Materials existing on, above or under the Premises during the Term that results from the acts or omissions of Tenant, its subtenants, agents, employees, contractors, or invitees (including, but not limited to, contaminated soil, buildings, facilities and/or ground water) or which introduction is not the result of Landlord Introduction; and

(b)           any investigation, monitoring, clean up, removal, restoration, remedial response or remedial work with respect to Hazardous Materials for which Tenant would be liable under (a) above and reasonably undertaken by or on behalf of Landlord after Landlord has provided Tenant written notice of the need for such investigation, monitoring, clean up, removal, restoration, remedial response or remedial work and Tenant has failed to undertake the appropriate action within a reasonable time.

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24.5   Tenant and Landlord acknowledge and agree that the expiration or termination of this Lease shall not and does not relieve or release either party of any legal liability and responsibility (under common law, statute or regulation) either would otherwise have as tenant or landlord, respectively, of the Premises under this Section 24, whether by way of damages, penalties, remedial actions, or otherwise for any adverse effects or consequences resulting at any time from any contamination by Hazardous Materials of the soil, facilities, buildings and/or ground waters which existed on, above or under the Premises during the Term.

25.          Defaults and Remedies.

25.1   Defaults by Tenant.   If Tenant

(a)           defaults in the payment of Annual Rent and Additional Rent payable under this Lease, and such default continues for more than ten (10) days after receipt of written notice thereof; or

(b)           defaults in the performance or observance of any term, covenant or condition to be performed by it hereunder that may be performed merely by the payment of money and such default is not rectified within ten (10) days after receipt of written notice thereof; or

(c)           shall allow any insurance policy required to be carried by it hereunder to lapse or to be cancelled and does not cause such insurance to be replaced within ten (10) days after receipt of written notice of such lapse or cancellation from Landlord; or

(d)           defaults in the performance or observance of any other term, covenant or condition of this Lease on Tenant’s part to be performed or observed and does not commence to rectify such default within thirty (30) days after written notice thereof or does not thereafter diligently complete the rectification thereof,

then, in any of such foregoing events, Landlord may, at its option, (i) terminate this Lease and reenter the Premises or (ii) reenter the Premises without terminating this Lease, and, using due care, assume custody and control thereof for the purpose of protecting the Premises and/or for reletting the Premises as agent for Tenant and such agency shall be deemed as a power coupled with an interest and shall be irrevocable. In either such event Landlord shall make a reasonable effort to relet the Premises and shall be entitled to the benefit of all provisions of the public general laws of Maryland and the public local laws and ordinances of Baltimore County respecting the summary eviction of tenants in default or tenants holding over, or respecting proceedings in forcible entry and detainer. Notwithstanding termination and/or re-entry, Tenant shall remain liable for any Annual Rent, Additional Rent, and damages (exclusive of consequential damages) having accrued prior thereto and for any Annual Rent, Additional Rent, and damages (exclusive of consequential damages) which shall become due thereafter and shall pay Landlord for all reasonable costs and expenses, including but not limited to, attorneys’ and brokers’ fees and expenses, paid or incurred by Landlord in connection with: (1) obtaining possession of the Premises; (2) removal and storage of Tenant’s or other occupant’s property; (3) care, maintenance and repair of the Premises while vacant; (4) re-letting the whole or any

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part of the Premises; and (5) repairing, altering, renovating, partitioning, enlarging, remodeling or otherwise putting the Premises into condition acceptable to, and reasonably necessary to obtain new tenants.

25.2   Other Remedies for Tenant Default.   In addition to the remedies available to Landlord in the preceding Section 25.1, if Tenant fails to maintain any insurance required to be maintained by Tenant under this Lease, or fails to furnish evidence of insurance renewals at the times in this Lease required, or allows such insurance to lapse or be cancelled, Landlord may obtain such insurance for Tenant five (5) days following notice from Landlord, and Tenant shall reimburse Landlord for the cost thereof promptly on demand. If Tenant defaults in the performance or observance of any term, covenant or condition, other than the covenant to pay rent, to be performed or observed by it under this Lease, and such default continues without cure or commencement of a reasonable effort to cure same for more than thirty (30) days after written notice thereof, Landlord may take action to rectify such default on Tenant’s behalf; provided, however, that except in the case of an emergency, Landlord shall not make any payment or cause the performance of any act to cure such default without giving Tenant fifteen (15) days’ notice of Landlord’s intention to do so. Landlord may rectify such default on Tenant’s behalf immediately and without such notice if immediate action is reasonably believed to be required in order to avoid injury or damage to other persons or property (including Landlord’s property). Subject to Tenant’s security and privacy requirements, Landlord may enter the Premises to rectify such defaults. All money advanced and costs and expenses incurred by Landlord in rectifying any default (including Landlord’s reasonable attorney’s fees) together with interest thereon at the “Prime Rate” announced from time to time by Carrollton Bank as its Prime Rate plus two percent (2%) per annum from the date advanced until the date paid by Tenant, shall be repaid by Tenant to Landlord on demand.

25.3   Late Fee.   In the event that any installment of Rent is not paid within five (5) days of the due date, Landlord may impose a late fee equal to five percent (5%) of the amount of the delinquent installment. Payment of such late fee, if imposed by Landlord, shall be a condition to Landlord’s obligation to accept any delinquent installment of Rent. Any late fee shall not be deemed a penalty but a payment to defray the administrative cost to Landlord of addressing Tenant’s delinquency.

25.4   Payment of Landlord’s Costs.   If Landlord files an action against Tenant to collect Annual Rent or Additional Rent payable under this Lease or any other sum for which Tenant is legally liable to Landlord, and a judgment is rendered for Landlord with respect thereto, then Tenant shall pay all reasonable attorney’s fees and out of pocket costs of collection incurred by Landlord in such action.

25.5   Waiver of Lien.   Landlord expressly waives any right to a statutory landlord’s lien. Notwithstanding anything contained in this Lease to the contrary, Landlord shall never have any property interest in or lien on or right of distraint against any cash, checks, notes, bonds, securities, passbook, records, or other property held by Tenant for its customers on the Premises, whether for safekeeping or collateral, and whether in its vaults, safe deposit boxes, night depository, or safes.

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25.6   Landlord’s Default.   In the event that Landlord defaults in any of Landlord’s obligations under this Lease that affect Tenant’s use and occupancy of the Premises, and fails to cure such default within thirty (30) days after Tenant gives Landlord notice of the Landlord’s default, then Tenant shall be entitled, but not obligated, to cure Landlord’s default, in which event upon Tenant’s demand Landlord shall pay Tenant the reasonable expenses, including reasonable attorneys’ fees, incurred by Tenant in curing Landlord’s default; provided, however, that except in the case of an emergency, Tenant shall not make any payment or cause the performance of any act to cure Landlord’s default without giving Landlord fifteen (15) days’ notice of Tenant’s intention to do so. Notwithstanding the foregoing, if Landlord’s default is such that it cannot reasonably be cured within thirty (30) days, then, provided that Landlord shall commence to cure the default within thrity (30) days after Tenant gives Landlord notice of the default and diligently pursues the same, Landlord shall be permitted an additional reasonable period of time in which to cure the default before Tenant exercises Tenant’s remedies under this Section 25.6.

26.          Bankruptcy or Insolvency.

If any transfer of Tenant’s interest in the Premises created by this Lease shall be made under execution or similar legal process, or if a petition is filed by or against Tenant to adjudicate Tenant a bankrupt or insolvent under any federal or state law, or if a receiver or trustee shall be appointed for Tenant’s business or property and such appointment is not vacated within ninety (90) days, or if a petition is filed by or against Tenant under any provision of federal or state law for a corporate reorganization of Tenant of an arrangement with its creditors, of if Tenant makes an assignment for the benefit of its creditors, or if in any other manner Tenant’s interest under this Lease passes to another by operation of law (except by merger), then, in any of said events, Tenant shall be deemed to have committed a material breach of this Lease, and Landlord may, at its option, terminate this Lease and re-enter the Premises; but notwithstanding such termination, Tenant shall remain liable for all rent and damages, suffered or incurred by Landlord.

27.          Miscellaneous Provisions.

27.1   Notices.   All notices from either party to the other under this Lease shall be sent by telegram or Certified Mail, Return Receipt Requested, or hand-delivered with a signed receipt. Whenever in this Lease reference is made to a notice to be given, such notice shall be deemed to have been given when mailed, wired or hand-delivered to the proper notice address of the party to be notified; provided that notices mailed within a time period set forth in the Lease for giving notice shall be deemed given within such time period, if mailed within such time period. Notices to Landlord shall be addressed to Landlord’s Notice Address. Notices to Tenant shall be addressed to Tenant’s Notice Address.

27.2   Successors and Assigns.   This Lease and covenants, terms and conditions herein contained shall inure to the benefit of and be binding upon Landlord, its successors and assigns, and shall be binding upon and inure to the benefit of Tenant and its permitted successors and assigns. As used herein the term “Tenant” includes its permitted successors and assigns, and the term “Landlord” includes its successors and assigns.

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27.3   Effect of Termination.   Except as specifically provided elsewhere in this Lease, if this Lease is terminated for any reason other than default of Tenant, all liabilities of the parties shall be adjusted as of the effective date of termination. Any termination hereof by reason of a default of the Tenant shall not affect any obligation or liability of Tenant under this Lease.

27.4   Date of Termination.   If this Lease is terminated under any provision hereof, the parties shall, at the request of either, stipulate the termination date in a written agreement to be executed and acknowledged by the parties.

27.5   Severability.   If any term, covenant or condition of this Lease or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Lease shall be valid and be enforceable to the fullest extent permitted by law.

27.6   Final Agreement.   This Lease contains the final and entire agreement between the parties hereto. Neither Landlord nor Tenant shall have any obligation not expressly set forth herein; and neither party shall be bound by any promises, conditions or representations prior to the date hereof which are not expressly set forth therein.

27.7   Governing Law.   The parties agree that this Lease shall be construed in accordance with the Laws of the State of Maryland.

27.8   Liability of Landlord.   If Landlord or any successor in interest to Landlord shall be an individual, joint venture, tenancy in common, firm or partnership, general or limited, there shall be no personal liability on such individual, or the members of such firm, partnership or joint venture with respect to any of the provisions of this Lease, any obligation arising therefrom or in connection therewith. In such event, Tenant shall look solely to the equity of the then owner of Landlord’s interest in the Center for the satisfaction of any remedies of Tenant in the event of a breach by the Landlord of any of its obligations hereunder.

27.9   Brokers.   Tenant warrants that it employed no broker or agent concerning the renting of the Premises. Similarly, Landlord warrants that there was no broker or agent acting on behalf of Landlord and instrumental in consummating this Lease. Each party shall indemnify and hold harmless the other party from and against any claims for other brokers or other commissions arising by reason of a breach by such party of the foregoing warranty.

27.10   No Joint Venture.   Nothing contained in this Lease shall be deemed to give Landlord any interest, control or discretion in the operation of Tenant’s business on the Premises and nothing contained in this Lease shall be construed to be or to create a partnership or joint venture between Landlord and Tenant.

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27.11   Recording.   All costs of recording this Lease, or a short form thereof, if it is recorded (including documentary stamps and transfer taxes), shall be borne by the party desiring recordation, notwithstanding any statute to the contrary.

27.11   Force Majeure.   If Landlord or Tenant shall be delayed, hindered in or prevented from the performance of any act or obligation required under this Lease (other than Tenant’s obligation to pay Annual Rent and Additional Rent hereunder) by reason of acts of God, strikes, lockouts, labor troubles or disputes, inability to procure or shortage of materials or labor, failure of power or utilities, delay in transportation, fire, vandalism, accident, flood, severe weather, other casualty, governmental requirements (including mandated changes in the Plans or the Tenant Improvements resulting from changes in pertinent governmental requirements or interpretations thereof), riot, insurrection, civil commotion, sabotage, explosion, war, natural or local emergency, acts or omissions of others, or other reasons of a similar or dissimilar nature not solely the fault of, or under the exclusive control of, the delayed party, then performance of such act or obligation shall be excused for the period of the delay and the period for the performance of any such act or obligation shall be extended for the period equivalent to the period of such delay.

27.12   Landlord’s Consent.   Unless otherwise provided in this Lease, whenever Landlord’s consent, approval or other action is required under the terms of this Lease, such consent, approval or action shall be subject to Landlord’s reasonable judgment or discretion exercised in good faith and shall be delivered in writing and, accordingly, such approval will not be unreasonably withheld, delayed or conditioned by Landlord.

27.13   Time of Essence.   Time is of the essence with respect to the performance of every covenant and condition of this Lease.

27.14   Waiver of Jury Trial.   LANDLORD AND TENANT IRREVOCABLY WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER AGAINST THE OTHER (WHETHER IN CONTRACT OR TORT) ON ANY MATTER ARISING OUT OF OR RELATING IN ANY WAY TO THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT OR TENANT’S USE OR OCCUPANCY OF THE PREMISES.

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IN WITNESS WHEREOF, the parties hereto have executed this Lease under their respective hands and seals as of the day and year first above written.

ATTEST:	LANDLORD:
	SCOTTS CORNER LLLP, a Maryland limited liability limited partnership
/s/ ILLEGIBLE	By:	/s/ Daniel J. Feeley		(SEAL)
		Name:	Daniel J. Feeley
		Title:	General Partner
	TENANT:
	CARROLLTON BANK, a Maryland state chartered commercial bank
/s/ Kim John	By:	/s/ Robert A. Altieri		(SEAL)
		Robert A. Altieri, President

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STATE OF MARYLAND	)
	) SS:
COUNTY OF Baltimore	)

I HEREBY CERTIFY that on this 13th day of January, 2006, before me, the undersigned officer, personally appeared Daniel J. Feeley, who acknowledged himself to be the General Partner of Scotts Corner LLLP, a Maryland limited liability limited partnership, and that he, in such capacity, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the partnership, as General Partner.

IN WITNESS WHEREOF I hereunto set my hand and Notarial Seal.

		/s/ ILLEGIBLE
		Notary Public
My Commission expires:
12/01/06	[SEAL]

STATE OF MARYLAND	)
	) SS:
COUNTY OF Baltimore	)

I HEREBY CERTIFY that on this 5th day of January, 2006, before me, the undersigned officer, personally appeared Robert A. Altieri, who acknowledged himself to be the President of Carrollton Bank, a Maryland state chartered commercial bank, and that he, in such capacity, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the bank, as President.

IN WITNESS WHEREOF I hereunto set my hand and Notarial Seal.

/s/ ILLEGIBLE

Notary Public

My Commission expires: 7-1-06

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EX-10.21

Exhibit 10.21

LEASE

This Lease is made as of the 27 day of APRIL, 2006, by and between ARBUTUS SHOPPING CENTER LIMITED PARTNERSHIP, with an office c/o AmCap, Incorporated, 1281 E. Main Street, Stamford, CT 06902 (“Landlord”) and CARROLLTON BANK, a commercial banking institution organized and existing under the laws of the state of Maryland, having an address at 344 North Charles Street, Suite 300, Baltimore, MD 21201 (“Tenant”).

ARTICLE 1.   FUNDAMENTAL LEASE PROVISIONS

Section 1.1   Fundamental Lease Provisions.   The fundamental provisions of this Lease (the “Fundamental Lease Provisions”) are as follows:

Shopping Center:   The premises (including land and buildings thereon and any extensions thereof or additions thereto) generally known as the Arbutus Shopping Center on Maiden Choice Lane in Arbutus, Maryland.

Tenant’s Trade Name:         CARROLLTON BANK

Leased Premises:   Those premises located in the Shopping Center, currently consisting of the Ground Leased Premises together with Tenant’s improvements constructed thereon as well as the In-Line Leased Premises (collectively, the Leased Premises) crosshatched on Exhibit A attached hereto and made part hereof.

Square Footage:   Approximately 8,436 square feet total

Permitted Use:   Said Leased Premises are leased only for the conduct and operation of a commercial bank with drive-through facilities, and for no other uses or purposes.

Lease Commencement Date:              May 1, 2006

Rent Commencement Date:                May 1, 2006

Lease Term:           The Lease Commencement Date through the Lease Termination Date.

Extension Option:                Four (4) five-year periods (see Addendum)

Lease Termination Date:     April 30, 2011

Lease Year:            The first Lease Year shall commence on the Lease Commencement Date and shall end on April 30, 2007, and each succeeding Lease Year shall run concurrently with each succeeding period of twelve (12) months of the term of the Lease.

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Minimum Rent:			Monthly Installment
5/1/06-4/30/07:	$	210,900.00	$	17,575.00
5/1/07-4/30/08:	$	217,227.00	$	18,102.25
5/1/08-4/30/09:	$	223,743.81	$	18,645.32
5/1/09-4/30/10:	$	230,456.12	$	19,204.68
5/1/10-4/30/11:	$	237,369.81	$	19,780.82

Percentage Rent rate:          None

Security Deposit:                 None

Promotion Charge Rate:      None

Broker:   AmCap, Inc.

Section 1.2             Effect of Reference to Fundamental Lease Provisions.   Each reference in this Lease to any of the Fundamental Lease Provisions shall be construed to incorporate all of the terms provided under each such Fundamental Lease Provision.

ARTICLE 2.   PREMISES AND TERM

Section 2.1             Lease of Leased Premises.   Landlord hereby leases Tenant, and Tenant hereby leases from Landlord, the Leased Premises which shall include a non-exclusive license to use the common areas of the Shopping Center (the “Leased Premises”).

Section 2.2             Term.   The term of this Lease shall be the Lease Term.

ARTICLE 3.   RENT

Section 3.1             Minimum Rent.   Tenant shall pay to Landlord the Minimum Rent due for each Lease Year, without notice, demand, setoff or deduction, in equal monthly installments, in advance, on the first day of each and every month of the Lease Term commencing on the Rent Commencement Date.  If the Lease Term shall commence on a date other than the last day of the month, the Minimum Rent shall be prorated for such fraction of a month based on the actual number of days in such month.

Section 3.2             Additional Rent.   All payments and charges of any nature whatsoever due from Tenant under the terms of this Lease, including, without limitation, all payments to be considered to be additional rent due hereunder.

ARTICLE 4.   NET LEASE

Section 4.1             Net Lease.   This is intended to be a net lease, so that all Minimum Rent and additional rent provided for herein shall be received by Landlord free and clear of any offsetting costs or expenses relating to the Shopping Center, whether capital in nature or not, except as set forth in Section 4.2.  Accordingly, Tenant shall be responsible for and obligated to pay Tenant’s Share of all costs and expenses incurred by or

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on behalf of Landlord in connection with the ownership and operation of the Shopping Center, excluding only those costs set forth in Section 4.2.

Section 4.2             Landlord’s Cost.   Tenant shall not be responsible for certain income taxes expressly excluded from Tenant’s responsibility in Section 5.2, the cost of construction of new building areas, the cost of initial improvements to premises leased to tenants of the Shopping Center other than Tenant, leasing commissions, ground rent and debt service payable under any Mortgage (as hereinafter defined).

ARTICLE 5.   REAL ESTATE TAXES

Section 5.1             Tenant’s Payments.   Tenant shall pay to Landlord, as additional rent, Tenant’s Share (as defined in Section 6.1) of all Real Estate Taxes (as defined below).

Section 5.2             Definition of Real Estate Taxes.   “Real Estate Taxes” shall mean all real estate taxes, assessments, water and sewer rents (except water meter charges and sewage charges based on usage) and other governmental impositions and charges of every kind and nature whatsoever, extraordinary as well as ordinary, general and special, foreseen and unforeseen, including those for public improvements or otherwise, which shall or may, during the Lease Term, be assessed against, levied or imposed upon, become a lien upon, or become due and payable in connection with the ownership, use, occupancy or possession of the Shopping Center or any part thereof and any expenditure incurred by Landlord in the contest or protest of any Real Estate Tax or assessed valuation, when incurred.  Real Estate Taxes shall not include any inheritance, estate, succession, transfer, gift, franchise, corporation, or income or profit tax that is or may be imposed upon Landlord; provided, however, that if, at any time after the date hereof, the methods of taxation shall be altered so that, in lieu of, or as a substitute for, or in addition to, the whole or any part of the taxes now levied, assessed or imposed on real estate as such, there shall be levied, assessed or imposed (i) a tax on the rents received from such real estate, or (ii) a license fee measured by the rents receivable by Landlord from the Shopping Center or any portion thereof, or (iii) a tax, license fee or other charge imposed upon Landlord which is otherwise measured by or based in whole or in part upon the Shopping Center or any portion thereof, or (iv) if an income or franchise tax is imposed upon Landlord in addition to the taxes now levied, assessed or imposed on real estate, then the same shall be included in the computation of Real Estate Taxes, provided the Shopping Center is the only property of Landlord subject to such tax or fee.

Section 5.3             Estimated Tax Payments.   On each date that an installment of Minimum Rent is due, Tenant shall pay to Landlord an amount equal to 1/12 of Tenant’s Share of the estimated Real Estate Taxes (as determined by Landlord) next due for the Shopping Center (or such other fraction as Landlord determines to be needed) to assure that prior to the due date of Real Estate Taxes due for the Shopping Center Landlord shall have received from Tenant funds sufficient to pay Tenant’s Share in full.  Landlord shall provide Tenant with a copy of each tax bill for the Shopping Center and a statement setting forth the amount due from Tenant as Tenant’s Share.  If the amount due from Tenant exceeds the amount of the estimated payments collected from Tenant, Tenant shall pay the difference to

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Landlord within ten (10) days of the receipt of such statement.  If the amount of estimated payments exceeds the amount due, Landlord shall credit such difference to the next installment or installments or estimated payments due under this Section.  If the Lease Term shall commence or expire on a date other than the fiscal year end for any such tax, Tenant’s Share for each fraction of a fiscal year shall be prorated.

Section 5.4             Right to Contest Real Estate Taxes.   Landlord shall be under no duty or obligation whatsoever to protest or contest any assessed valuation or Real Estate Tax assessed against the Shopping Center or the Leased Premises.  If Landlord shall elect to contest any assessed valuation or Real Estate Tax, no such contest by Landlord shall give Tenant the right to withhold or reduce any payment or estimated payment of Real Estate Taxes due under this Lease.  If Landlord shall receive a refund of Real Estate Taxes for which Tenant has paid Tenant’s Tax Payment, Tenant shall receive its prorate share thereof after deducting all costs, fees and expenses incurred by Landlord in connection with obtaining such refund, and not previously charged to Tenant.  Tenant shall have no right whatsoever to protest or contest any assessed valuation or Real Estate Tax assessed against the Shopping Center or the Leased Premises.

ARTICLE 6.   COMMON CHARGES

Section 6.1             Tenant’s Payments.   Tenant shall pay to Landlord as additional rent the fraction represented by Square Footage of the Leased Premises (8,436 square feet on the Rent Commencement Date) divided by the total first floor leasable square footage in the Shopping Center (91,434 square feet as of the Rent Commencement Date) as determined by Landlord from time to time (“Tenant’s Share”) of all Common Charges (as defined below).

Section 6.2             Definition of Common Charges.   “Common Charges” shall mean all costs and expenses incurred by Landlord or Landlord’s employees, agents or contractors, either pursuant to this Lease or otherwise, arising from or in connection with or as a result of the operating, equipping, policing, protecting, lighting, providing sanitation, sewer and other services, insuring, maintaining, repairing and replacing the Common Areas (as hereinafter defined), all buildings and improvements within the Shopping Center and all other areas and facilities of the Shopping Center.  Common Charges shall include, but shall not be limited to:    (i) the maintenance, repair and replacement of all roofs, exterior walls and other structural and exterior portions of the Shopping Center, curbs, gutters, sidewalks, pylons and signs, drainage and irrigation ditches, conduits and pipes, utility systems (permanent and temporary), sewage disposal or treatment systems, public toilets and sound systems whether within or without the Shopping Center; (ii) the removal of trash, snow and ice; (iii) landscaping; (iv) supplies; (v) licensing, permits, service and usage charges; (vi) obtaining and maintaining the insurance policies described in Section 10.3 of this Lease and the cost of any insured event deductible amounts under such policies; (vii) the settlement or disposition of any claims against Landlord to the extent the same are not covered by insurance; (viii) all capital expenditures together with reserves for capital improvements required by the holder of any Mortgage; (ix) the repaving, restriping, regrading and general maintenance of parking areas;

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(x) compliance with all rules, regulations and orders of governmental authorities pertaining to the Shopping Center, including those pertaining to traffic control, engineering and environmental issues, air pollution control and the cost of monitoring air quality; (xi) (intentionally deleted); (xiii) licensing and permit fees and taxes; (xiv) audit fees and expenses and other costs and expenses of enforcing the rules and regulations established by Landlord for the Shopping Center; (xv) the cost, lease payment or depreciation of any equipment used in the operation or maintenance of the Shopping Center; (xvi) total compensation and benefits (including premiums for workers’ compensation or any other insurance or other retirement or employee benefits, and including all costs incurred in providing such benefits) paid to or on behalf of employees involved in the performance of the work specified in this Section or employees otherwise providing services to tenants or customers of the Shopping Center whether on or off site; (xvii) the maintenance, repair and operation of any mall or enclosed common area; (xviii) the costs of performance of all of Landlord’s obligations pursuant to this Lease or as contemplated herein except those costs set forth in Section 4.2; (xix) other costs and expenses incurred in connection with the operation and management of the Shopping Center;  plus (xx) an amount equal to fifteen  percent (15%) of all of the foregoing costs and expenses to compensate Landlord for administrative and overhead expenses.  Common Charges shall include costs and expenses for services, equipment or materials furnished by Landlord or its affiliates, including management fees, provided the same are furnished at rates similar to those generally paid.

Section 6.3             Estimated Payments.   On each date that an installment of Minimum Rent is due, Tenant shall pay to Landlord an amount equal to 1/12 of the estimated Common Charges (as determined by Landlord) for the calendar year in which such payment is made.  On or before March 1 of each year, Landlord shall provide Tenant with a statement setting forth Tenant’s Share for the preceding calendar year and the amount of estimated Common Charges paid by tenant during such year.  If the amount due from Tenant exceeds the amount of the estimated payments, Tenant shall pay the difference to Landlord within ten (10) days of the receipt of such statement.  If the amount of estimated payments exceeds the amount due, Landlord shall credit such difference to the next installment or installments of estimated payments due under this Section.  Landlord’s failure to provide such statement by the date provided under this Section shall in no way excuse Tenant from its obligation to pay Tenant’s Share of the Common Charges or constitute a waiver of Landlord’s right to bill and collect Tenant’s Share of Common Charges from Tenant in accordance with this Section.  If the term of the Lease shall commence on a day other than January 1 or expire on a day other than December 31, Common Charges due from Tenant for such fraction of a calendar year shall be prorated.  During any year, Landlord, from time to time, may revise its estimate of the Common Charges which will be due for that year and the monthly payments to be made by Tenant on account thereof.

ARTICLE 7.   USE OF PREMISES

Section 7.1             Permitted Use.   The Leased Premises shall be occupied and used by Tenant solely for the Permitted Use and for no other use or purpose.

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Section 7.2             Operation of the Leased Premises.   Tenant shall use, occupy and operate the entire Leased Premises continuously and without interruption during the Lease Term, shall not abandon or vacate the Leased Premises, shall not permit, license, or suffer the occupancy of any other party in the Leased Premises and shall:

a.   Keep the Leased Premises open for business continuously and without interruption at least from 9:00 a.m. to 5:00 p.m. Monday through Friday and 9:00 a.m. to 12:00 p.m. Saturday, or such other hours as Landlord may reasonably designate, unless prohibited by applicable laws or regulations;

b.   Operate its business as a financial institution in a manner as will enhance the Shopping Center;

c.   (intentionally deleted);

d.   Erect no displays outside the Leased Premises or in any way obstruct the Common Areas;

e.   Load or unload all supplies, fixtures, equipment and furniture and cause the collection of rubbish only through the rear service door or doors of the Leased Premises;

f.   Keep the Leased Premises in a safe, clean and proper manner; and not permit any rubbish or refuse of any nature to accumulate in the Common Areas;

g.   Keep the Leased Premises free from vermin;

h.   Prevent the Leased Premises from being used in any way which will injure the reputation of the same or of the Shopping Center or from being used in any way which may be a nuisance, annoyance, inconvenience or damage to the other tenants or occupants of the Shopping Center, including, without limitation, noise by the playing of any musical instrument or radio or television or the use of a microphone, loud speaker, electrical equipment or other equipment which may be heard outside the Leased Premises;

i.   Not violate the exclusive covenants of any other tenant in the Shopping Center; and

j.   Abide by all rules and regulations established by Landlord, from time to time, with respect to the Common Areas, the Shopping Center, and the operation of the Leased Premises.

Section 7.3             Radius Restriction.   (intentionally deleted).

Section 7.4             Compliance with Laws.   Tenant shall not use or occupy or suffer or permit the Leased Premises or any part thereof to be used or occupied for any purpose contrary to law or the rules or regulations of any public authority or the requirements of any insurance underwriters or rating bureaus or in any manner so as to increase the cost of insurance over and above the normal cost of such insurance for the Permitted Use for the type and location of the building of which the Leased Premises are a part.  Tenant shall promptly obtain all permits and licenses required by and otherwise comply with all present and future laws (including Environmental Laws as defined in Section 32.4), regulations or rules of any local, county, state,

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federal and other governmental authority and any bureau or department thereof, and of the National Board of Fire Underwriters or any other body exercising a similar function which may be applicable to the Leased Premises or Shopping Center, including the maintenance, service, repair, replacement and disposal of any structure, equipment or system thereon.  If Tenant shall install any electrical equipment that overloads the lines in the Leased Premises, or handle any Hazardous Substances (as defined in Section 32.4), Tenant shall, at Landlord’s option, immediately terminate the use of such electrical equipment or Hazardous Substances or, at Tenant’s expense, make such changes as Landlord may request to prevent such overload or hazard or otherwise and as may be necessary to comply with the requirements of any insurance underwriters and governmental authorities having jurisdiction.

ARTICLE 8.   ALTERATIONS

Section 8.1             Landlord’s Consent Required.   Tenant shall not make or permit to be made any alterations, improvements or additions of any kind or nature (excluding interior repainting, recarpeting or other normal interior decorative changes) to the Leased Premises or any part thereof except by and with the prior written consent of Landlord.  Plans and specifications for all desired work, (including Tenant’s Construction associated with Tenant’s downsizing), shall be submitted by Tenant to Landlord for Landlord’s approval prior to the commencement of any work.  The actual out-of-pocket cost of Landlord’s review shall be paid by Tenant within ten (10) days of receipt of Landlord’s statement therefor.  Landlord’s approval of the plans, specifications and/or working drawings for Tenant’s alterations or improvements shall create no responsibility or liability on the part of Landlord for their completeness, design sufficiency, or compliance with all laws, rules and regulations of governmental agencies or authorities.

Section 8.2             Compliance with Law, Ownership and Indemnification.   All alterations, improvements and additions to the Leased Premises shall be made in compliance with all applicable laws (including Environmental Laws) and governmental requirements and when made or installed shall be deemed to have attached to the real property and to have become the property of the Lease Term, or other expiration of this Lease, in as good order and condition as they were when installed, reasonable wear and tear excepted; provided, however, that if, prior to the termination of this Lease, or within fifteen (15) days thereafter, Landlord so directs, Tenant shall promptly and in compliance with all applicable laws (including Environmental Laws), remove, and if necessary dispose of, the additions, improvements, fixtures and installations which were placed in the Leased Premises by Tenant including Tenant’s vault and which are designated in such notice, and repair any damage occasioned by such removal, and, in default thereof, Landlord may effect such removals and repairs at Tenant’s expense.  In the event Tenant undertakes any alterations, improvements or additions as herein provided, Tenant shall indemnify and save Landlord harmless from and against all costs, expenses, liens, claims or damages (including attorneys’ fees) to either persons or property arising out of or resulting from the undertaking or making of such alterations, additions and improvements, including without limitation any costs or expenses to comply with The Americans With Disabilities Act and the Regulations

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thereunder, and Tenant shall provide Landlord with evidence of workmen’s compensation insurance and such other insurance as Landlord may reasonably request.

ARTICLE 9.   REPAIRS AND MAINTENANCE

Section 9.1             Landlord’s Obligations. (a) In-Line Leased Premises: Landlord shall keep and maintain the structural portions of the Leased Premises and the exterior area, including, but not limited to, the roof, foundation and exterior walls of the Leased Premises, except with respect to any damage thereto caused by any alterations or installations by Tenant or any act or negligence of Tenant, its employees, agents, invitees, licensees, subtenants, assignees or contractors or otherwise arising out of Tenant’s use or occupancy of the Leased Premises, in which event such damage shall be promptly repaired by Tenant. Except as otherwise herein provided, Landlord shall not be responsible for maintenance, repairs or improvement of any kind in or upon the Leased Premises.

                (b) Ground Leased Premises: Landlord shall not be responsible for maintenance, repairs or improvements of any kind in or upon the Ground Leased Premises or improvements thereon.

Section 9.2             Tenant’s Obligations. (a) In-Line Leased Premises: Tenant accepts the Leased Premises “as is”. Landlord has made no representation, warranty or other assurance with respect to the Leased Premises or the Shopping Center. Tenant shall keep and maintain the Leased Premises and every part thereof (excluding only the structural elements and the roof unless repair of same arises out of Tenant’s use or occupancy of the Leased Premises or negligence as described in Section 9.1) in good order, condition and repair, in compliance with Environmental Laws, as defined in Section 32.4, including, without limitation, the exterior and interior portions of all doors, door checks, security gates, windows and glass, all utility, plumbing and sewage facilities within the Leased Premises or under the floor slab thereof, fixtures, heating and air-conditioning equipment, exterior mechanical equipment, exterior utility facilities and exterior electrical equipment serving the Leased Premises and interior walls, floors and ceilings, and including compliance with applicable building and fire codes relative to fire extinguishers, sprinkler systems and other preservative measures. Tenant shall conduct all such maintenance, service, repair, replacement and disposal activities, including those with respect to any structure, equipment or system, in compliance with applicable laws, including Environmental Laws. As part of its HVAC maintenance obligation, Tenant shall enter into an annual contract with an HVAC repair firm, fully licensed to repair HVAC units in the state in which the Shopping Center is located and approved by Landlord, which firm shall (a) regularly service the HVAC unit(s) on the Leased Premises on no less than a quarterly basis, changing belts, filters and other parts as required; (b) perform emergency and extraordinary repairs on the HVAC unit(s); and (c) keep a detailed record of all services performed on the Leased Premises and prepare a yearly service report to be furnished to the Tenant at the end of each calendar year. Tenant shall furnish to Landlord, at the end of each calendar year, a copy of the HVAC maintenance contract and report described above, and proof that the annual premium for the maintenance contract has been paid. Nothing stated herein shall

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limit Tenant’s obligation to maintain the HVAC unit(s) in good condition and repair throughout the term of this Lease. If Tenant fails or refuses to comply with its obligations in this Section 9.2, Landlord may (but shall not be required to) make or complete such repairs and Tenant shall pay the cost thereof to Landlord upon demand.

(b) Ground Leased Premises: Tenant shall keep and maintain its parking area, drive-through lanes and all other portions of the Leased Premises including all improvements constructed thereon and every part thereof in good order, condition and repair (normal wear and tear excepted), in compliance with “Environmental Laws”, as defined in Section 32.4, including, without limitation, the roof and structural portions of the building, sidewalks and passageways, exterior and interior portions of all doors, door checks, security gates, windows and glass, all utility, plumbing and sewage facilities within the Leased Premises or under the floor slab thereof, fixtures, heating and air-conditioning equipment, exterior mechanical equipment, exterior utility facilities and exterior electrical equipment serving the Leased Premises and interior walls, floors and ceilings, and including compliance with applicable building and fire codes relative to fire extinguishers, sprinkler systems and other preservative measures. Tenant shall conduct all such maintenance, service, repair, replacement and disposal activities, including those with respect to any structure, equipment or system, in compliance with applicable laws, including Environmental Laws.

ARTICLE 10.   INSURANCE

Section 10.1           Tenant’s Obligation.  During the Lease Term, Tenant, at its own expense, shall maintain the following:

(a) a commercial general liability insurance policy relating to the Leased Premises providing for coverage of at least Two Million Dollars ($2,000,000) with respect to injury or death and property damage combined;

(b) (i) In-Line Leased Premises: special form property insurance, including theft and, if applicable, boiler and machinery coverage, written at replacement cost value in an adequate amount to avoid coinsurance and a replacement cost endorsement insuring Tenant’s furnishings, equipment and all items of personal property of Tenant and including property of Tenant’s customers located in the Leased Premises;

(ii) Ground Leased Premises and the improvements thereon: “all risk” property insurance (with extended coverage and such other coverage as Landlord may reasonably designate) insuring the improvements constructed by Tenant upon the Leased Premises and all fixtures and equipment, including personal property, thereon to ninety percent (90%) of their actual replacement value without deduction for physical depreciation, having a deductible of not more than $10,000:

(c) workers’ compensation coverage as required by law;

(d) with respect to alterations, improvements and the like required or permitted to be made by Tenant hereunder, contingent liability and builder’s risk insurance, in amounts reasonably satisfactory to Landlord;

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(e) (intentionally deleted)

(f) plate glass insurance covering the glass in the Leased Premises for which Tenant shall be entitled to self-insure;

(g) flood insurance if applicable; and

(h) such other insurance covering such other insurable risks as Landlord deems reasonably necessary.

Section 10.2           Requirements of Policy.  The insurance policies required by Section 10.1 shall be issued by a company and in a form satisfactory to Landlord and may not be cancelable without thirty (30) days’ written notice to Landlord. Tenant shall deliver to Landlord the original of such policy, or a certificate evidencing such policy, prior to the commencement of the Lease Term and, thereafter, at least thirty (30) days prior to the expiration of each policy. Each policy or certificate shall be accompanied by proof of payment of such policy. Provided Landlord has furnished Tenant with names and addresses of the same, each policy required under this Article shall name Landlord, Landlord’s agents, the holder of any Mortgage and any other party with an interest in the Shopping center as an insured as their interests may appear. Any required insurance may be effected by a policy of blanket insurance covering additional items or locations provided however that (1) the coverage afforded Landlord and any other parties in interest will not be reduced or diminished by reason of the use of such blanket policy of insurance; (ii) any such policy shall specify therein (or Tenant shall furnish Landlord with a written statement from the insurer under such policy specifying) the amount of the insurance allocated to the Leased Premises; and (iii) all other requirements set forth herein are otherwise satisfied.

Section 10.3           Shopping Center Insurance.  Landlord shall maintain, if available at standard rates, such availability to be determined solely by Landlord, the following:

(a) fire insurance (with extended coverage and such other coverage as Landlord nay choose) insuring the Shopping Center and all fixtures and improvements thereon to their full insurable value;

(b) rent insurance covering the risks described in paragraph (a) above in an amount equal to all Minimum Rent, Percentage Rent (as estimated by Landlord) and additional rent due under all leases relating to the Shopping Center for a period of at least one year;

(c) comprehensive general public liability insurance against any claims upon Landlord arising from the ownership, operation or control of the Shopping Center with respect to bodily injury, death, property damage or other risks of similar nature with combined limits as Landlord deems appropriate, but in no event less than Five Million Dollars ($5,000,000); and

(d) any such insurance coverage, in addition to or in substitution for the coverage set forth above, as the holder of any Mortgage may require or as Landlord may otherwise determine.

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Section 10.4           Policy Limits. The coverage limits of all insurance policies referred to in this Lease, in the discretion of Landlord or the holder of any Mortgage, may be increased at any time during the Lease Term.

Section 10.5           Waiver of Subrogation. Landlord and Tenant hereby mutually waive any rights they may have against each other to recover for loss or damage to property arising from a casualty insured against hereunder or which is required to be insured against hereunder. In addition, all insurance policies carried by Landlord or Tenant covering the Leased Premises shall expressly waive any right on the part of the insurer against the other party for damage to or destruction of the Leased Premises resulting from the acts, omissions or negligence of the other party.

ARTICLE 11.   TENANTS’ ASSOCIATION AND PROMOTION

(intentionally deleted)

ARTICLE 12.   COMMON AREAS

Section 12.1           Definition. “Common Areas” shall mean all sidewalks, parking lots, driveways, landscaped areas, loading areas, service areas, pedestrian malls and other areas at the Shopping Center which may, from time to time, be provided by Landlord for general use.

Section 12.2           Tenant’s Use. Landlord hereby grants to Tenant during the Lease Term a nonexclusive license to use the Common Areas. The Common Areas shall be subject to the exclusive control and management of Landlord and to such rules and regulations as Landlord may, from time to time, establish, and Landlord reserves the right to make such changes, additions, deletions, alterations or improvements in and to such Common Areas, as Landlord deems desirable, provided that there shall be no permanent and material obstruction of Tenant’s right of ingress to or egress from the Leased Premises.

Section 12.3           Maintenance. Landlord shall maintain the Common Areas in good repair, reasonably clear of debris and lighted and open during business hours.

Section 12.4           Kiosks. Landlord reserves the right to construct and sublease non-financial kiosks and sales areas on any portion of the enclosed mall, if any, or other parts of the Common Area of the Shopping Center.

ARTICLE 13. DAMAGE OR DESTRUCTION

Section 13.1           Landlord’s Obligation. If all or any part of the Shopping Center is damaged or destroyed by fire or other casualty insured under the hazard policy maintained by Landlord, Landlord shall, to the extent that insurance proceeds are available therefor, and except as otherwise provided herein, repair or rebuild the structural portions of the Shopping Center with reasonable diligence. Landlord shall have no obligation to repair or rebuild any property belonging to Tenant.

Section 13.2           Abatement. If, as a result of the damage or destruction referred to in Section 13.1, there is a substantial interference with the operation of  Tenant’s business which requires Tenant to cease doing business at the In-Line Leased Premises, then the Minimum Rent and additional rent

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payable hereunder shall abate in accordance with the square footage of In-Line Leased Premises so affected. However, if Tenant has not been able to reopen for business after six (6) months from the date of the damage or destruction, Tenant may, upon thirty (30) days’ written notice, cancel this Lease and have no further obligations to Landlord hereunder.

Section 13.3           Tenant’s Obligations. (a) Unless this Lease is terminated as provided below, Tenant, upon any damage or destruction to the In-Line Leased Premises, and subject to Landlord’s requirement to rebuild as set forth in Section 13.1, promptly shall repair, rebuild and redecorate such Leased Premises in a manner at least equal in quality to that existing prior to such damage or destruction.

(b) Unless this Lease is terminated as provided below, Tenant, upon any damage or destruction to the Ground Leased Premises or the improvements thereon, promptly shall rebuild, repair, rebuild and redecorate such Leased Premises in a manner at least equal in quality to that existing prior to such damage or destruction. There shall no be abatement of Minimum Rent or additional rent while Tenant rebuilds or repairs the improvements on the Ground Leased Premises

Section 13.4           Termination. Notwithstanding anything which may be contained in this Article 13 to the contrary, Landlord, at its option, may terminate this Lease on thirty (30) days’ written notice to Tenant given within ninety (90) days after the occurrence of any damage or destruction to the Shopping Center or any portion thereof if (i) such damage or destruction resulted from a risk not covered by Landlord’s insurance or covered in a manner which fails to yield proceeds in an amount equal to Landlord’s estimated cost of repair, or (ii) the portion of the Leased Premises which Landlord is required to repair is damaged and the estimated cost to repair such damage is more than twenty-five (25%) percent of the replacement cost of the Leased Premises, or (iii) the Shopping Center is damaged and the cost to repair such damage is more than twenty-five (25%) percent of the replacement cost of the entire Shopping Center.

ARTICLE 14. EMINENT DOMAIN

Section 14.1           Condemnation of Entire Leased Premises. If all or substantially all of the In-Line Leased Premises or the Ground Leased Premises shall be taken by condemnation or by transfer in lieu thereof, then this Lease shall terminate as of the date title is vested in the condemning authority.

Section 14.2           Partial Condemnation of the Leased Premises. If less than all or substantially all of the Leased Premises is taken by condemnation or private purchase in lieu thereof, then, if the remainder of the Leased Premises not so taken is determined by Landlord to be unusable for the purposes for which such Premises were leased, either Landlord or Tenant may terminate this Lease upon thirty (30) days’ written notice to the other, which notice must be given within thirty (30) days after such taking.

Section 14.3           Condemnation of Shopping Center. If proceedings are commenced to take any portion of the Shopping Center by condemnation or by private transfer in lieu thereof, and Landlord, in its sole discretion, elects to discontinue the

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operation of the Shopping Center or the portion thereof in which the Leased Premises are located as a shopping center, then Landlord may terminate this Lease upon thirty (30) days’ notice to Tenant.

Section 14.4           Rentals Upon Condemnation. If this Lease is terminated pursuant to any provision of this Article, then the Minimum Rent and all additional rent and charges payable hereunder shall be prorated as of the date of such termination. If, upon partial condemnation as provided in Section 14.2, this Lease is not terminated, the Minimum Rent, additional rent and all other charges shall be equitably adjusted. Tenant shall continue to make all payments of Minimum Rent and additional rent, as heretofore provided, until the adjusted rent is agreed upon, whereupon Landlord and Tenant shall settle any excess rent or shortfall.

Section 14.5           Proceeds of Condemnation. Landlord shall be entitled to the entire proceeds of any and all awards made as a result of any condemnation affecting the Shopping Center and the proceeds of any private purchase or transfer in lieu of such condemnation. Tenant shall not be entitled to any award or proceeds as a result of any value attributable to Tenant’s interest in this Lease or the unexpired portion of the Lease Term. However, in the event that the condemning authority shall entertain such claim, Tenant shall have the right to prosecute a claim directly against the condemning authority for its trade fixtures and relocation costs, provided that no such claim shall diminish or otherwise adversely affect Landlord’s claims and the claims of any mortgagees, ground lessors or owners of any interest in the Shopping Center.

ARTICLE 15.   ASSIGNMENT AND SUBLETTING

Section 15.1           Consent Required. Tenant shall not, voluntarily, involuntarily or by operation of law, assign, pledge or encumber this Lease or any interest or Tenant herein, in whole or in part, or sublet the whole or any part of the Leased Premises, or permit any other persons to Occupy the Leased Premises, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed. Notwithstanding the foregoing, Tenant may assign this Lease and the right to occupy the Leased Premises to any entity controlling, controlled by or under common control with Tenant or into which Tenant may be merged, without the prior written consent or Landlord. The acceptance of rent from any person other than Tenant shall not be deemed to be a waiver of any of the provisions of this Lease or to be a consent to the assignment of this Lease or subletting of the Leased Premises. The consent of Landlord in any instance to an assignment or subletting shall not be deemed to be a consent, or a waiver of the requirement for the Tenant to obtain consent, to any subsequent assignment or subletting.

Section 15.2           Corporation or Other Entity. Tenant may, at any time, without the consent of the Landlord, assign or otherwise transfer this Lease or any portion thereof to a parent, subsidiary, or affiliate corporation or entity; or any corporation or entity resulting from the consolidation or merger of Tenant into or with any other entity: or to any person, firm or corporation acquiring a majority of Tenant’s issued or outstanding capital stock or a substantial part of the Tenant’s physical assets: provided, however, that in the event of any

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such assignment or transfer, the assignee shall assume in writing the performance and observance of all the terms and conditions of this Lease.

Section 15.3           Creditors. An assignment for the benefit of creditors or by operation of law shall not be effective to transfer any rights to any assignee without the prior written consent of Landlord.

Section 15.4           Permitted Assignment. Any subletting or assignment consented to by Landlord pursuant to this Article 15 shall be subject to and conditioned upon the following: (i) at the time of any proposed subletting or assignment, Tenant shall not be in default under any of the terms, provisions or conditions of this Lease; (ii) the sublessee or assignee shall occupy only the Leased Premises and conduct its business in accordance with the Permitted Use; (iii) if the rents, charges or other sums required to be paid by any such sublessee or assignee exceed the rents, charges or other sums reserved hereunder, then Tenant shall pay to Landlord monthly the entire amount of such excess, which shall be deemed additional rent; (iv) prior to occupancy, Tenant and its assignee or sublessee shall execute, acknowledge and deliver to Landlord a fully executed counterpart of a written assignment of lease or sublease, as the case may be, by the terms of which: (x) in case of an assignment, Tenant will assign to the assignee Tenant’s entire interest in this Lease, together with all prepaid rents and security deposited hereunder, and the assignee will accept said assignment and assume and agree to perform, directly for the benefit of Landlord, all of the terms, covenants and conditions of this Lease on the Tenant’s part to be performed; or (y) in case of a subletting, the sublease in all respects will be subject and subordinate to all of the terms, covenants and conditions of this Lease and the sublessee thereunder will agree to be bound by and to perform all of the terms, covenants and conditions of this Lease on the Tenant’s part to be performed; (v) in the event of an assignment of this Lease or subletting of all or part of the Leased Premises, Tenant shall, at its expense, comply with all requirements of The Americans With Disabilities Act relating to the assignee or sublessee, as the case may be, and its business; (vi) notwithstanding any such assignment or subletting under the terms of this paragraph, Tenant will not be released or discharged from any liability whatsoever under this Lease including the liability for payment of Minimum Rent, additional rent and any other sums reserved hereunder and will continue to be liable for all obligations of Tenant set forth herein with the same force and effect as though no assignment or sublease had been made and Tenant shall confirm same to Landlord: (vi) Tenant shall pay to Landlord Landlord’s administrative costs, overhead and attorneys’ fees in connection with such assignment or subletting, which costs, overhead and fees are now estimated at Five Hundred Dollars ($300); and (viii) such other conditions as Landlord may impose.

ARTICLE 16.   UTILITIES

Section 16.1           Tenant’s Obligations. Tenant agrees to pay promptly, as and when the same become due and payable, all water rents, rates and charges, all sewer rents and all charges for electricity, gas, heat, steam, hot and chilled water and other utilities supplied to the Leased Premises (whether prior to or during the Lease Term or subsequent thereto if relating to

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Tenant’s use of the Leased Premises). If any such utilities are not separately metered or assessed or are only partially separately metered or assessed and are used in common with other tenants of the Shopping Center, Tenant will pay to Landlord, in addition to Tenant’s payments of the separately metered charges, Tenant’s pro rata share of the cost of utilities used in common with other tenants, based on the leasable square footage of floor space leased to each tenant using such common facilities, or such other basis as Landlord may reasonably determine.

Section 16.2           Meters. If Landlord shall so desire, Landlord shall install utility meters at the Leased Premises. The costs incurred in the installation and maintenance of such meters shall be paid by Tenant. Further, Tenant shall pay all charges for consumption directly to the proper public or private utility company or government unit, promptly when due.

ARTICLE 17.   ESTOPPEL CERTIFICATE,

ATTORNMENT AND SUBORDINATION

Section 17.1           Estoppel. Tenant agrees, at any time and from time to time, as requested by Landlord or any Lender (as hereinafter defined), upon not less than fifteen (15) days’ prior notice, to execute and deliver without cost or expense to the Landlord or such Lender an estoppel certificate certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications), certifying the dates to which all fixed or minimum rent and any additional rent have been paid, and stating whether or not, to the best knowledge of Tenant, Landlord is in default in the performance of any of its obligations under this Lease, and, if so, specifying each such default of which Tenant may have knowledge, it being intended that any such statement delivered pursuant thereto may be relied upon by any other person with whom Landlord or such Lender may be dealing. Upon Tenant’s failure to timely deliver any estoppel, at provided such failure continues after five (5) days written notice, Tenant shall, in addition to any other remedy of Landlord, pay to Landlord the amount of One Hundred Dollars ($100) per day for each day the same remains undelivered.

Section 17.2           Notice to Lender and Right to Cure. Once Tenant has received written notice identifying the name and address of any lender (a “Lender”) holding a mortgage or deed of trust (a “Mortgage”) on the property of which these premises form a part (the “Property”), Tenant agrees to notify such Lender by certified mail, return receipt requested, with postage prepaid, of any default on the part of Landlord under this Lease, and Tenant further agrees that, notwithstanding any provisions of this Lease, no cancellation or termination of this Lease and no abatement or reduction of the rent payable hereunder shall be effective unless the Lender has received notice of the same and have failed within thirty (30) days after the time when it shall have become entitled under the Mortgage to remedy the same, to commence to cure such default and thereafter diligently prosecute such cure to completion, provided that such period may be extended, if the Lender needs to obtain possession of the Property to cure such default, to allow the Lender to obtain possession of the Property provided the Lender commences judicial or nonjudicial proceedings to obtain possession within such period and thereafter diligently prosecutes such efforts and cure to completion. It is

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understood that the Lender shall have the right, but not obligation, to cure any default on the part of Landlord.

Tenant agrees that if a Lender shall succeed to the interest of Landlord under this Lease, neither the Lender nor its successors or assigns shall be: liable for any prior act or omission of Landlord; subject to any claims, offsets, credits or defenses which Tenant might have against any prior landlord (including Landlord); or bound by any assignment (except as otherwise expressly permitted hereunder), surrender, release, waiver, amendment or modification of the Lease made without such Lender’s prior written consent; or obligated to make any payment to Tenant or liable for refund of all or any part of any security deposit or other prepaid charge to Tenant held by Landlord for any purpose unless the Lender shall have come into exclusive possession of such deposit or charge. In addition, if a Lender shall succeed to the interest of Landlord under this Lease, the Lender shall have no obligation, nor incur any liability, beyond its then equity interest, if any, in the Property.

In the event that a Lender (or any person or entity to whom the Mortgage may subsequently be assigned) notifies Tenant of a default under the Mortgage and demands that Tenant pay its rent and all other sums due under this Lease to the Lender, Tenant shall honor such demand without inquiry and pay its rent and all other sums due under this Lease directly to the Lender or as otherwise required pursuant to such notice and shall not thereby incur any obligation or liability to Landlord.

Section 17.3           Subordination and Attornment. Tenant agrees and acknowledges that this Lease is subordinate to the lien of any Mortgage, but that, at the Lender’s election, this Lease may be made prior to the lien of any Mortgage, and in the event a Lender succeeds to the interests of Landlord under this Lease, then, at the Lender’s election (a) Tenant shall be bound to the Lender under all of the terms, covenants and conditions of this Lease for the remaining balance of the term hereof, with the same force and effect as if the Lender were the lessor hereunder, and Tenant does hereby agree to attorn to the Lender as its lessor without requiring the execution of any further instruments immediately upon the Lender succeeding to the interests of Landlord under this Lease; provided, however, that Tenant agrees to execute and deliver to the Lender any instrument reasonably requested by it to evidence such attornment; and (b) subject to the observance and performance by Tenant of all the terms, covenants and conditions of this Lease on the part of Tenant to be observed and performed, the Lender shall recognize the leasehold estate of Tenant under all of the terms and conditions of this Lease for the remaining balance of the term with the same force and effect as if the Lender were the lessor under the Lease.

Section 17.4           Execution. Tenant, upon request of Landlord or any party in interest, shall execute promptly such instruments or certificates as may be required to carry out the intent and effectuate the above provisions of this Article. Tenant hereby irrevocably appoints Landlord as attorney-in-fact for Tenant with full power and authority to execute and deliver in the name of Tenant any such instruments or certificates.

Section 17.5           Recording. This Lease shall not be recorded without the prior consent of Landlord. Upon the

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request of Landlord, Tenant shall execute a short form or other memorandum of this Lease which may, in Landlord’s sole discretion, be recorded.

ARTICLE 18.   INDEMNIFICATION

Section 18.1           Tenant’s Indemnification of Landlord. Tenant shall protect, indemnify, save and keep harmless Landlord against and from all claims, loss, liability, cost, damage or expense (including reasonable attorneys’ fees) ln connection with any accident, personal injury or death, property damage occurring in, on or at the Leased Premises, or arising, directly or indirectly, out of or from Tenant’s occupancy or use of the Leased Premises or the Shopping Center, the use of the utilities and fuel located therein or thereunder, any breach of this Lease, the business conducted in the Leased Premises or, without limiting the foregoing, as a result of any act or omission of Tenant, its employees, agents, invitees, subtenants, licensees, assignees or contractors. Tenant shall protect and save and keep Landlord harmless and indemnified against and from any penalty, damage or charges imposed for any violations of any law or ordinance. Tenant shall also protect, indemnify, save and keep harmless Landlord against and from any and all claims, loss, liability, cost, damage, liens or expense (including attorneys’ fees) arising out of any failure of Tenant or its employees, agents, contractors or representatives in any respect to comply with and perform all the requirements and provisions of this Lease.

Section 18.2           Landlord’s Indemnification of Tenant. Landlord shall protect, indemnify, save and keep harmless Tenant against and from all claims, loss, liability, cost, damage or expense (including reasonable attorneys’ fees) in connection with any accident, personal injury or death, property damage occurring in, on or at the Common Areas, as a result of any act or omission of Landlord, its employees, agents, contractors or representatives.

ARTICLE 19. MECHANIC’S LIEN OR CLAIMS

Section 19.1           Mechanic’s Liens. Tenant shall not permit to be created or to remain undischarged any lien, encumbrance or charge arising from or out of any work of any contractor, mechanic, laborer or materialman, which shall be or become a lien or encumbrance or charge upon the Leased Premises or the Shopping Center or the income therefrom, and Tenant shall not suffer any other matter or thing whereby the estate, right and interest of Landlord in the Leased Premises or in the Shopping Center might be impaired. If any lien or notice of lien on account of an alleged debt of Tenant shall be filed against the Leased Premises or the Shopping Center, Tenant shall, within ten (10) days after notice of the filing thereof, cause the same to be discharged of record by payment, deposit, bond, order of a court of competent jurisdiction or otherwise. If Tenant shall fail to cause such lien or notice of lien to be discharged within the period provided, then Landlord, in addition to any other rights or remedies, may, but shall not be obligated to, discharge the same by either paying the amounts claimed to be due or by procuring the discharge of such lien by deposit or by bonding proceedings. In any such event, Landlord shall be entitled, if Landlord so elects, to defend any prosecution of an action for foreclosure of such lien by the lienor and to pay the amount of the judgment in favor of the

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lienor with interest, costs and allowances. Any amount paid by Landlord and all costs and expenses, including attorneys’ fees, incurred by Landlord in connection therewith, together with interest thereon, at the rate set forth in Section 28.7, from the respective dates of Landlord’s making of the payment or incurring of the cost and expense, shall be paid by Tenant to Landlord on demand. Notwithstanding the foregoing, not less than five (5) days prior to the commencement of any work to be performed by or on behalf of Tenant at the Leased Premises, Tenant shall notify Landlord of the proposed work and the names and addresses of the persons supplying labor and materials for the proposed work so that Landlord may avail itself of the provisions of any laws regarding the protection of Landlord’s interest in the Leased Premises and the Shopping Center from mechanic’s liens. During the progression of any such work on the Leased Premises, Landlord and its representatives shall have the right, upon at least 24 hours verbal notice, to go upon and inspect the Leased Premises at all reasonable times, and shall have the right to post and keep posted thereon notices regarding mechanic’s liens or to take any further reasonable action which Landlord may deem to be proper for the protection of Landlord’s interest in the Leased Premises and the Shopping Center.

ARTICLE 20.   ACCESS TO LEASED PREMISES

Section 20.1           Landlord’s Access. Tenant shall permit Landlord and Landlord’s agents or designees to inspect or examine the Leased premises at any time upon reasonable notice and shall permit Landlord access to the Leased Premises upon reasonable notice for the purpose of making such repairs, alterations, improvements or additions in the Leased premises or to any portion of the Shopping Center that Landlord may deem desirable or necessary or which Tenant has covenanted in this Lease to do and has failed to do. Such access shall not be construed as an eviction of Tenant in whole or in part and the rent payable hereunder, shall in no manner abate while such repairs, alterations, improvements or additions are being made by reason of loss or interruption of the business of Tenant because of the performance of such work. Landlord shall use commercially reasonable efforts not to cause disruption to Tenant’s business during such access and will coordinate any access with respect to Tenant’s security and privacy requirements.

ARTICLE 21.   SURRENDER OF LEASED PREMISES

Section 21.1           Surrender by Tenant. Tenant shall deliver and surrender to Landlord possession of the Leased Premises upon expiration of this Lease, or its earlier termination as herein provided, broom clean and in as good condition and repair as the same shall be at the commencement of the Lease Term.

Section 21.2           Removal of Property. Tenant shall remove all property of Tenant and all alterations, additions and improvements as to which Landlord shall have made the election provided in Section 8.2, shall repair all damage to the Leased Premises caused by such removal and restore the Leased Premises to the condition in which they were prior to the installation of the articles so removed. Except for Tenant’s obligation to remove its value, any property not so removed at the expiration of the Lease Term and as to which Landlord shall have not made such election shall be deemed to have been abandoned by Tenant

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and to be Landlord’s property and may be retained or disposed of by Landlord, as Landlord shall desire. tenant’s obligation to observe or perform this covenant shall survive the expiration or termination of this Lease.

ARTICLE 22.   SECURITY AGREEMENT

(intentionally deleted)

ARTICLE 23.   QUIET ENJOYMENT

Section 23.1           Landlord’s Covenant. Landlord agrees that if Tenant pays the Minimum Rent, additional rent and all other charges provided in this Lease, if any, and shall perform all of the covenants and agreements contained herein to be performed on Tenant’s part, Tenant shall have the peaceable and quiet enjoyment and possession of the Leased Premises during the Lease Term, without any manner of hindrance from Landlord or any persons lawfully claiming through Landlord, except as to such portion of the Leased Premises as shall be taken under the power of eminent domain and otherwise subject to the terms and provisions of this Lease, including without limitation the terms and provisions of any Mortgage.

ARTICLE 24.   NOTICES

Section 24.1           How Given. Any notice, consent, approval, waiver or other communication which Landlord or Tenant may be required or permitted to give to the other under the terms of this lease shall be in writing and shall be deemed to be delivered upon receipt or refusal, if delivered by hand or by personal or overnight delivery service, with receipts for delivery, or upon deposit if mailed by certified or registered mail, return receipt requested, addressed it to Tenant, at the address of Tenant set forth in the preamble hereto, and if to Landlord, at the address of Landlord set forth in the preamble hereto, or to such other address as either party shall have designated by notice to the other with a copy of all notices or other communications delivered or sent to Landlord delivered or sent to Richard Crystal, Esq., Brown Raysman Millstein Felder & Steiner LLP, 900 Third Avenue, New York, NY 10022.

ARTICLE 25.   BROKERAGE

Section 25.1           Broker. Tenant covenants, warrants and represents to Landlord that there was not broker, finder or other agent, other than Broker, instrumental in consummating this Lease and that no conversation or prior negotiations were had by Tenant with any other broker, finder or agent concerning renting of the Leased Premises. Tenant agrees to protect, defend, indemnify, save and keep Landlord harmless against and from all liabilities, claims, losses, costs, damages and expenses, including attorneys’ fees, arising out of or from any claims for brokerage commissions or finders’ fees resulting from any conversation or negotiations had by Tenant with any other broker or any other person.

ARTICLE 26.   SECURITY DEPOSIT

(intentionally deleted)

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ARTICLE 27.   TENANT’S ADDITIONAL AGREEMENTS

Section 27.1.          Affirmative Obligations.   Tenant agrees, at its own cost and expense, to:

(1)           Light Display Windows:   keep the display windows and signs, if any, in or on the Leased Premises electrically lighted from dusk until 10:00 p.m. on all days during which the majority of stores in the Shopping Center are open for business and during such other periods as Landlord may reasonably designate;

(2)           Keep Premises Clean:   keep the Leased Premises (including, without limitation, exterior and interior portions of all windows, doors and all other glass) in a neat and clean condition;

(3)           Storing Merchandise:   (intentionally deleted);

(4)           Non-selling Space:    (intentionally deleted)

(5)           Keep Premises Attractive:   maintain the Leased Premises and Tenant’s personal property therein as an attractive shopping area in accordance with the general character of the Shopping Center and to that end Tenant shall repaint the interior of the Leased Premises and clean and replace carpeting or other floor covering on a regular basis;

(6)           Labor Regulations:   take no action which would violate Landlord’s union contracts, if any, affecting the Shopping Center, nor create any work stoppage, picketing, labor disruption or dispute, or any interference with the business of the Landlord or any tenant or occupant in the Shopping Center or with the rights and privileges of any customer or other persons lawfully in and upon the Shopping Center, not cause any impairment or reduction of the good will of the Shopping Center;

(7)           Pay Taxes:   pay before delinquency any and all taxes, assessments and public charges levied, assessed or imposed upon Tenant’s business or upon Tenant’s fixtures, furnishings or equipment in the Leased Premises;

(8)           Pay License Fees:   pay when and as due all license fees, permit fees and charges of a similar nature for the conduct by Tenant or any concessionaire of any business or undertaking authorized hereunder and conducted in the Leased Premises;

(9)           Shopping Center Name:   (intentionally deleted);

(10)         Cleaning Program:   participate in any widow cleaning and exterminating program that may be established by Landlord for any businesses in the Shopping Center;

(11)         Tenant’s Fixtures:   operate its business in the Leased Premises with adequate equipment which when initially installed, shall, be like-new, functional, sufficient and of first-class workmanship;

(12)         Garbage:   handle and dispose of all rubbish, garbage and waste from Tenant’s operations in accordance with regulations established by Landlord and not permit the accumulation (unless in concealed metal containers to be located

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at the rear of the Leased Premises) or burning of any rubbish or garbage in, on or about any part of the Shopping Center.

Section 27.2           Negative Obligations.   Tenant agrees that it shall not at any time without first obtaining Landlord’s consent:

(1)           Not Change Exterior Architecture:   change (whether by alteration, replacement, rebuilding or otherwise) the exterior color or architectural treatment of the Leased Premises or of the building in which the same are located, or any part thereof;

(2)           Not Use Sidewalks or Common Areas:   use, or permit to be used, the sidewalk or mall corridor adjacent to, or any other space outside, the Leased Premises for display, sale or any other similar activity;

(3)           Not Use Roof:   use, or permit to be used, for the storage of equipment other than the accommodation of air conditioning equipment, or for any other purpose whatsoever, the roof areas of the Leased Premises or the Shopping Center; allow any air conditioning service representative or any other person access to the roof without prior notice to Landlord;

(4)           No Loud Speaker:   use, or permit to be used, any advertising medium, loud speaker, sound amplifier, or radio or television broadcast which may be heard outside the Leased Premises or which does not comply with the general policies or rules and regulations then in effect;

(5)           Not Misuse Plumbing Facilities:   use the plumbing facilities for any purpose other than that for which they were constructed, or dispose of any garbage or other foreign substance therein, whether through the utilization of so-called “disposal” or similar units, or otherwise;

(6)           No Liens:   subject any fixtures, furnishings or equipment in or on the Leased Premises which are affixed to the realty to any mortgages, liens, conditional sales agreements, security interests, encumbrances or the like;

(7)           Not Damage the Premises:   perform any act or carry on any practice which may damage, mar or deface the Leased Premises or any other portion of the Shopping Center;

(8)           No Vending Machines:   except as expressly identified herein and permitted hereby, operate on the Premises or in any part of the Shopping Center any coin or token operated vending machine or similar device (including, without limitation, amusement devices and machines for the sale of beverages, foods, candy, cigarettes or other merchandise or commodities);

(9)           No Awnings:   install any awnings in or on the Leased Premises which are visible to public view outside the Leased Premises;

(10)         Window Cleaning and Janitorial Services:   permit window cleaning or other exterior maintenance and janitorial services in and for the Leased Premises to be performed, except by such persons as shall be approved by Landlord and except during hours designated for such purposes by Landlord;

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(11)         Freight Handling Equipment:   use any fork-lift truck, tow truck or any other powered machine for handling freight in the interior delivery system, if any, except the truck passageway portion thereof, or in the Leased Premises;

(12)         Not Exceed Floor Loads:   place a load on any floor in the interior delivery system, if any, or in the Leased Premises exceeding the floor load per square foot which such floor was designed to carry, or install, operate or maintain therein any heavy item of equipment except in such manner as to achieve a proper distribution of the weight;

(13)         Not Exceed Electrical Load:   install, operate or maintain in the Leased Premises any electrical equipment which has not been approved by Landlord, in light of the overall system and requirements therefor in the Shopping Center;

(14)         Not Permit Odors, Noise, etc.:   suffer, allow or permit any offensive or obnoxious vibration, noise, odor or other undesirable effect to emanate from the Leased Premises, or any machine or other installation therein, or otherwise suffer, allow or permit the same to constitute a nuisance or otherwise interfere with the safety, comfort or convenience of Landlord or any of the other occupants of the Shopping Center or their customers, agents or invitees or any others;

(15)         Not Invalidate Insurance:   use or occupy the Leased Premises or any part of the Shopping Center or do or permit anything to be done thereon in any manner which shall make it more difficult for Landlord or Tenant to obtain at standard rates any insurance required hereunder or desired, or which will invalidate or increase the cost to Landlord of any existing insurance, or which will cause structural injury to any building or Common Area, or which would constitute a public or private nuisance or which would violate any present or future laws, regulations, ordinances or requirements (ordinary or extraordinary, foreseen or unforeseen) of the federal, state or municipal governments, of any department, subdivisions, bureaus or offices thereof, or of any other governmental public or quasi-public authorities now existing or hereafter created having jurisdiction in the Leased Premises or the Shopping Center;

(16)         Not Injure Reputation:   use or occupy the Leased Premises for any purpose which may injure the reputation of the Leased Premises or the Shopping Center or of the neighborhood in which the same are located or impair the value of the Leased Premises or the Shopping Center; Tenant agrees that Landlord shall have the right to prohibit the continued use by Tenant of any unethical or unfair method of business operation, advertising or interior display, if, in Landlord’s opinion, the continued use thereof would impair the reputation of the Shopping Center as a desirable place to shop or otherwise be out of harmony with the general character thereof, and upon notice from Landlord, Tenant shall forthwith refrain from or discontinue such activities;

(17)         No Solicitation:   solicit business or distribute advertising or promotional matter in the Common Areas; and

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(18)         Employee Parking:   allow or permit any employee to park in any area other than as specifically designated by Landlord for employee parking.

ARTICLE 28.   DEFAULT

Section 28.1           Default of Tenant.   Tenant shall be in default under the terms of this Lease if:

(i)            Tenant shall fail to pay when due the Minimum Rent or any additional rent or other charges due hereunder provided Tenant shall have five (5) days to cure such default upon written notice from Landlord; or

(ii)           Tenant shall fail to observe or perform any of the terms, covenants or conditions of this Lease other than those set forth in Subsection 28.1(i), and such failure shall continue after ten (10) days’ notice thereof by Landlord, or, if the default is of such a nature that it cannot be cured within ten (10) days, if Tenant shall not have commenced the curing of such default within such ten-day period and thereafter proceed diligently to cure the default; or

(iii)          Tenant or any guarantor of this Lease (a “Guarantor”) shall file a voluntary petition in bankruptcy or apply for reorganization or make an assignment for the benefit of creditors, or if any receiver or trustee is appointed for any of Tenant’s (or any Guarantor’s) property or business or any petition in bankruptcy is filed against Tenant (or any Guarantor), and such receiver, trustee or petition is not discharged within sixty (60) days; or

(iv)          any final judgment against Tenant (or any Guarantors) is not satisfied within sixty (60) days or any execution or attachment is issued against Tenant (or any Guarantor) or Tenant’s (or any Guarantor’s) property and remains unsatisfied or undischarged for ten (10) days; or

(v)           Tenant shall vacate or abandon the Leased Premises.

Section 28.2           Remedies of Landlord.   Upon any default by Tenant as described in Section 28.1, Landlord shall have the immediate right to re-enter the Leased Premises by summary proceedings, force or otherwise and the right to change locks and to dispossess all persons therefrom and to remove and dispose of all property therein or, at Landlord’s election, to store such property in a public warehouse or elsewhere at the cost and for the account of Tenant, all without service of any notice of intention to re-enter and with or without resort to legal process (which Tenant hereby expressly waives) and without Landlord being deemed guilty of trespass or becoming liable for any loss or damage which may be occasioned thereby.  Upon any default of Tenant as described in Section 28.1, Landlord shall also have the right, at its option, in addition to and not in limitation of any other right or remedy if the Lease Term shall not have commenced, to cancel this Lease by notice to Tenant, or, if the Lease Term shall have commenced, to serve upon Tenant a written notice that this Lease and the Lease Term will terminate on a date specified therein, which date shall be not less than three (3) days after the serving of such notice, and, upon the date so specified, this Lease and the Lease Term shall terminate and expire as fully and completely as if such date

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were the day herein definitely fixed for the expiration of this Lease and the Lease Term, and thereupon Landlord shall have the immediate right of re-entry and Tenant shall surrender the Leased Premises, but Tenant shall remain liable as provided below.  If Tenant shall be served with a demand for the payment of past due rent, any payments tendered thereafter to cure any default by Tenant shall be made only be cashier’s or certified check.  In the event of any default, re-entry or termination or dispossess, by summary proceedings or otherwise, (i) all Minimum Rent and additional rent due at the time of such default, re-entry, termination or dispossess shall be paid in full; and (ii) Tenant shall pay to Landlord all expenses, including court costs and attorneys’ fees and disbursements incurred by Landlord in recovering possession of the Leased Premises; and (iii) Landlord may relet the Leased Premises or any part or parts thereof, either in the name of Landlord or Tenant or otherwise, as Landlord may determine, for a term which at Landlord’s option may be less than or exceed the period which would otherwise have constituted the balance of the Lease Term, and may grant concessions or free rent; and (iv) Tenant or the legal representative of Tenant also shall pay Landlord, as liquidated damages for the failure of Tenant to observe and perform Tenant’s covenants herein contained, for each month of the period which would otherwise have constituted the balance of the Lease Term, the amount by which (x) the sum of (a) the Minimum Rent and all additional rent which would have been due, plus (y) the net amount, if any, of the rents collected on account of the lease or leases of the Leased Premises.  Any such liquidated damages shall be paid in monthly installments by Tenant on the day specified in this Lease for the collection of Minimum Rent, any suit brought to collect the amount of the deficiency for any month shall not prejudice in any way the rights of Landlord to collect the deficiency for any subsequent month by a similar proceeding, or, at Landlord’s option, and if permitted by law, Tenant shall pay such deficiency on either of the accelerated bases as hereinafter set forth.  In computing such liquidated damages there shall be added to such deficiency all expenses that Landlord may incur in connection with reletting, such as attorneys’ fees and disbursements, brokerage and expenses of placing and keeping the Leased Premises in good order or of preparing the same for reletting as hereinafter provided and Landlord’s costs of performing its covenants under the new lease of the Leased Premises to the extent that the same are greater than Landlord’s duties hereunder.  Landlord, at Landlord’s option, may make such alterations, repairs, replacements or decorations in the Premises as Landlord in Landlord’s sole judgment considers advisable and necessary for the purpose of reletting the Premises; and the making of such alterations, repairs, replacements or decorations shall not operate or be construed to release Tenant from liability hereunder.  Unless otherwise required by law, Landlord shall in no event be liable in any way whatsoever for failure to relet the Premises, or, in the event that the Premises are relet, for failure to collect the rent thereof under such reletting nor shall the refusal or failure of Landlord to relet the Leased Premises or any part or parts thereof release or affect Tenant’s liability for damages.  Notwithstanding anything contained herein to the contrary, in the event that this Lease is terminated pursuant to the provisions of this Lease, Landlord may recover from Tenant all damages it may sustain by reason of Tenant’s default, including the cost of recovering the Leased Premises and attorneys’ fees, and, upon so electing and in lieu of the damages that might otherwise be recoverable under this

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Section or Section 28.3, Landlord shall be entitled to recover from Tenant, as and for Landlord’s damages, an amount equal to the total Minimum Rent and projected additional rent and charges for the entire remaining term of the Lease agreement of the parties.  Said amount shall be due and payable in full upon the Tenant’s breach of this Lease agreement.  Tenant specifically acknowledges that Landlord shall have no obligation to mitigate the damages provided for in the foregoing portion of this paragraph, by reletting the premises or otherwise.  Landlord and Tenant specifically acknowledge that this remedy is a provision for liquidated damages and is not a penalty, that the damages which Landlord is likely to suffer should Tenant breach this Lease agreement are impossible to calculate at the time this agreement is executed, and the parties have specifically negotiated this portion of the agreement.  If, for any reason, it is determined that Landlord cannot collect the damages provided for in the immediately foregoing portion of this paragraph then Landlord shall be entitled to recover from Tenant, as and for Landlord’s damages, an amount equal to the difference between the Minimum Rent and additional rent reserved under this Lease for the period which otherwise would have constituted the balance of the Lease Term and the then present rental value of the Leased Premises for such period, without discount to present worth, all of which shall immediately be due and payable by Tenant to Landlord.

Section 28.3           Other Legal Remedies.   Each right and remedy of Landlord provided for in this Lease shall be cumulative and shall be in addition to every other right and remedy provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by Landlord of any one or more of the rights or remedies provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise by Landlord of any or all other rights or remedies provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise.  Further, nothing herein contained shall be construed as limiting or precluding the recovery by Landlord against Tenant of any sums or damages to which, in addition to or in lieu of the damages particularly provided for in Section 28.2 and otherwise herein, Landlord may lawfully be entitled at the time when such damages are to be proved, by reason of any default hereunder on the part of the Tenant.

Section 28.4           Waiver of Trial by Jury and Counterclaim.   Landlord and Tenant hereby waive trial by jury in any action, proceeding or counterclaim brought by either against the other upon any matters whatsoever arising out of or in any way connected with this Lease, Tenant’s use or occupancy of the Premises, or any claim of injury or damage.  It is further mutually agreed that in the event Landlord commences any summary proceedings for nonpayment of Minimum Rent or additional rent, Tenant will not interpose any counterclaim or offset of whatever nature or description in any such proceeding.  It is specifically agreed that in the event that Landlord commences any judicial proceeding against Tenant, including a proceeding for nonpayment of Minimum Rent or additional rent, Tenant will not interpose any defense, counterclaim or offset of whatever nature or description.  Nor will Tenant raise any defense of waiver or challenge the jurisdiction of the Court hearing any proceeding on the basis of the receipt by Landlord of any rent at any time including receipt subsequent to receipt of notice of

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termination, termination or claimed termination of the Lease by the Landlord and prior to commencement of judicial proceedings.  The parties specifically agree that receipt of rent shall under no circumstances give rise to a month to month tenancy.

Section 28.5           Holding Over.   If Tenant remains in possession of the Leased Premises after the expiration of the term of this Lease, Tenant, at Landlord’s election, may be deemed to be occupying the Leased Premises as a tenant from month-to-month, at a monthly rental equal to 150% of the sum of (i) the monthly installment of Minimum Rent payable during the last month of the Lease Term, plus (ii) 1/12 of one hundred and twenty-five (125%) percent of Common Charges and Real Estate Taxes payable during the last year of the term.  Such tenancy shall be subject to all of the other terms, provisions, conditions and obligations of this Lease insofar as they may be applicable to a month-to-month tenancy.

Section 28.6           Waiver of Redemption.   To the extent permitted by law, Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Landlord obtaining possession of the Leased Premises, by reason of the violation by Tenant of any of the covenants or conditions of this Lease.

Section 28.7           Late Payments.   In addition to any other remedies available to Landlord hereunder, Tenant shall pay to Landlord a bookkeeping and processing charge equal to the greater of (i) 5% of any delinquent payment of Minimum Rent or additional rent or (ii) One Hundred Dollars ($100), when any such Minimum Rent or additional rent is paid more than ten (10) days after the due date thereof.  Such payment shall be for the purpose of defraying the extra expense involved in processing, collecting and/or handling delinquent payments and shall be payable by Tenant to Landlord upon demand.  Tenant also shall pay interest, at the annual rate of 15% or the highest rate allowed by law, whichever is less, on payments which are delinquent by more than ten (10) days and shall pay all attorneys’ fees incurred by Landlord in the collection of past due rents with interest at the aforesaid rate.

ARTICLE 29.   LIMITED LIABILITY OF LANDLORD

Section 29.1           Damage to Leased Premises.   The Landlord and the Landlord’s agents and employees shall not be liable for, and Tenant waives, any and all claims for damages to person and property or otherwise sustained by Tenant or Tenant’s agents, employees, assigns, licensees, concessionaires, invitees or any person claiming through said parties resulting from any accident or occurrence in or upon the Leased Premises, or any part of the Shopping Center.  Said waiver shall include, but not be limited to, claims for damage to person or property resulting from any equipment or appurtenance out of repair, defective electrical, heating, air conditioning, plumbing, sewer, water system or installations or from the operation of said equipment or installation, or damage by fire, steam, broken glass, ice, water, snow, gas entering the Leased Premises or for the acts, omissions or negligence of trespassers or other occupants of the Shopping Center.

Section 29.2           Definition of Landlord.   The term “Landlord” as used in this Lease means only the owner or the

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mortgagee in possession, for the time being, of the building in which the Leased Premises are located so that, in the event of any sale of such building, Landlord shall be and hereby is entirely freed and relieved of all obligations of Landlord hereunder arising after the date of transfer and it shall be deemed without further agreement between the parties and such purchaser that the purchaser has assumed and agreed to observe and perform all obligations of Landlord hereunder arising after the date of transfer.

Section 29.3           Non-recourse to Landlord.   It is specifically understood and agreed that neither Landlord, nor any partner of Landlord, shall have any personal liability with respect to any of the terms, covenants, conditions or provisions of this Lease.  In the event of a breach or default by Landlord of any of its obligations under this Lease, Tenant shall look solely to the equity of the Landlord in the Shopping Center for the satisfaction of any claims which it may have against Landlord.

ARTICLE 30.   RIGHT TO CURE DEFAULTS

Section 30.1           Landlord’s Rights.   If Tenant shall fail to comply fully with any of its obligations under this Lease (including, without limitation, its obligations to make repairs, maintain various policies of insurance, comply with all laws, ordinances and regulations and pay all bills for utilities), then Landlord shall have the right, at its option and in addition to any other remedies it has under this Lease and without hereby waiving such default, to cure such breach at Tenant’s expense without notice in the case of emergency and in any other case if such default continues after five (5) days written notice by Landlord.  Tenant agrees to reimburse Landlord (as additional rent) for all costs and expenses incurred as a result thereof together with interest thereon at the rate set forth in Section 28.7 promptly upon demand.

ARTICLE 31.   SIGNS

Section 31.1           Installation.   Tenant shall not, without Landlord’s prior consent, place or install any sign on the roof or on any exterior wall of the Leased Premises (including, without limitation, both the interior and exterior surfaces of windows and doors) except that Tenant may install and maintain at its own cost and expense, including payments for permits, a storefront sign, provided same is approved by Landlord as to dimensions, content, material, location and design, which approval shall not be unreasonably withheld.  Tenant agrees that, if required by Landlord, all signs shall be union made and shall not be installed on the Leased Premises or the building in which the Leased Premises are located until all approvals and permits from all governmental agencies having jurisdiction are first obtained and copies thereof delivered to Landlord together with evidence of payment for any fees pertaining to Tenant’s signs.  Notwithstanding the foregoing, Landlord’s consent shall not be required for a banking regulation signage on the Leased Premises.

Section 31.2           General Provisions.   Tenant shall procure appropriate workmen’s compensation and liability insurance policies covering the installation and maintenance of any signs, and all such policies or certificates of such policies shall be delivered to Landlord prior to the

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commencement of any work and shall provide that such policies are not cancelable, except upon ten (10) days’ written notice to Landlord.  In the event Landlord shall deem it necessary to remove such sign or signs in order to paint or make any repairs, alterations or improvements in and upon the Leased Premises, or the building in which same is situated, or any part thereof, Landlord shall have the right to do so, provided the same be removed and replaced at Landlord’s expense, whenever such repairs, alterations or improvements shall have been completed.

ARTICLE 32.   MISCELLANEOUS PROVISIONS

Section 32.1           Right to Relocate.    (intentionally deleted)

Section 32.2           Right to Change Payments Due.   (intentionally deleted)

Section 32.3           Easement for Pipes.   Tenants shall permit Landlord or its designees to erect, use, maintain and repair pipes, cables, conduits, plumbing, vents and wires, in, to and through the Leased Premises, as and to the extent that Landlord may now or hereafter deem it to be necessary or appropriate for the proper operation and management of the Shopping Center.  All such work shall be done, so far as practicable in the sole determination of Landlord, in such manner as to avoid unreasonable interference with Tenant’s use of the Leased Premises and will coordinate any access with respect to Tenant’s security and privacy requirements.

Section 32.4           Environmental Matters.  (a) Tenant agrees that it shall comply with all local, state and federal laws, rules and regulations dealing with the manufacture, generation, use, storage, treatment, transportation, disposal, release or removal of hazardous substances, materials, pollutants, contaminants, wastes, including but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), 42 U.S.C. 9601 et seq., the Federal Water Pollution Control Act, 33 U.S.C. 1231, et seq., the Emergency Planning and Community Right to Know Act, 33 U.S.C. 11000 et seq., the Resource Conservation and Recovery Act (“RCRA”), 42 U.S.C. 6901 et seq. and the Clean Air Act, 42 U.S.C. 7401 et seq., as such laws may be amended or modified, whether such laws are presently in existence or promulgated during the Lease Term and all rules and regulations promulgated hereunder (“Environmental Laws”).  Without limiting the foregoing, Tenant agrees that it will (i) give written notice to Landlord at least seven (7) days in advance of any manufacture, generation, use, storage, treatment, transportation, disposal, release or removal of Hazardous Substances from or on the Leased Premises,  (ii) give written notice to Landlord within two (2) days of receipt of any notice of violation, claim, suit, or investigation relating to Hazardous Substances,  (iii) immediately notify Landlord of any Hazardous Substance spill, release or discharge at or affecting the Leased Premises and immediately clean up any such spill, release or discharge in compliance with all applicable Environmental Laws, (iv) not use or employ the property, facilities, equipment or services of the Shopping Center to manufacture, generate, use, store, treat or dispose of or release Hazardous Substances, whether or not they were generated or produced on the Leased Premises, and (v) defend, indemnify and hold harmless Landlord against any and all claims (including reasonable attorney and expert fees and

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cleanup costs), damage, liability and costs which Landlord may suffer, incur or pay resulting from or arising out of any manufacture, generation, use, storage, treatment, transportation, disposal, release or threat of release of Hazardous Substances from or on the Leased Premises or the Shopping Center (x) as a result of Tenant’s actions or actions of Tenant’s agents, employees, guests or invitees or (y) arising during or attributable to all periods of Tenant’s possession of the Leased Premises.  “Hazardous Substances” means and includes all toxic or hazardous substances, materials, chemicals, contaminants, pollutants, and wastes, of whatever kind or nature, regulated under, defined in, or listed in any Environmental Laws.  Hazardous Substances include, without limitation, asbestos, PCBs, CFCs, petroleum and lead-based paint.

(b)  If Tenant fails to fully comply with the terms of this Section, Landlord may, at its option, perform any or all of Tenant’s obligations thereunder and all costs and expenses incurred by Landlord (including reasonable attorney and expert fees and clean up costs) in connection therewith shall be deemed to be additional rent payable by Tenant on demand therefor.

(c)  Landlord agrees that it shall comply with all local, state and federal laws, rules and regulations dealing with Hazardous Substances which apply to the Leased Premises, whether such laws are presently in existence or promulgated during the Lease Term, relating to environmental conditions existing or arising prior to the commencement of the Lease Term, except for any and all laws or matters relating to the presence of asbestos or asbestos containing materials (hereafter“ACM”) at the Leased Premises.

(d)  Except for any and all laws or matters relating to ACM at the Leased Premises, Landlord agrees that it shall defend, indemnify and hold harmless Tenant against any and all claims, damage, liability and costs which Tenant may suffer, incur or pay resulting from or arising out of any handling, storage, treatment, transportation, disposal, release or threat of release of Hazardous Substances from or on the Leased Premises as a result of (i) Landlord’s actions, or (ii) conditions existing at the Leased Premises prior to the commencement of the Lease Term.

(e)  With respect to ACM, Tenant accepts the Leased Premises “as is” and understands that ACM may be present in the insulation, ceiling tiles or otherwise in the Leased Premises.  Tenant agrees (i) not to conduct or permit activities at the Leased Premises which would result in the disturbance of ACM or the release of asbestos fibers into the air, (ii) to comply with all local, state and federal laws, rules and regulations governing to the disturbance, monitoring, removal, encapsulation, repair, transportation and disposal of ACM applicable to the Leased Premises or Tenant’s employees, guests and invitees, and (iii) defend, indemnify and hold harmless Landlord against any and all claims, damage, liability and costs which Landlord may suffer, incur or pay resulting from or arising out of any matters related to ACM, including but no limited to, fines, penalties, personal injury lawsuits, or wrongful death actions.

(f)  The terms of this Section shall survive the expiration or termination of this Lease.

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Section 32.5           Force Majeure.   The provisions of this Section shall be applicable if there shall occur during the Lease Term, or prior to the Lease Commencement Date, any (i) strike, lockout or labor dispute; (ii) the inability to obtain labor or materials, or reasonable substitutes therefor; (iii) Acts of God, adverse weather conditions, governmental restrictions, regulations or controls, enemy or hostile governmental actions, civil commotion, fire or other casualty or other conditions similar to those enumerated in this item (iii) beyond the reasonable control of the party obligated to perform; or (iv) delays due to the act or omission of the other party.  If Landlord or Tenant shall, as the result of any of the above described events, fail punctually to perform any obligation on its part to be performed under this Lease, then such failure shall be excused and not be a breach of this Lease by the party in question, but only to the extent occasioned by such event.  If any right or option of either party to take any action under or with respect to this Lease is conditioned upon the same being exercised within any prescribed period of time and such named date shall be deemed to be extended or delayed, as the case may be, for a period equal to the period of the delay occasioned by any above described event.  Notwithstanding anything herein contained, however, (a) the provisions of this Section shall not be applicable to Tenant’s obligation to pay Minimum Rent or additional rent or any other charge required to be paid by Tenant hereunder, and (b) with respect to any other obligation of Tenant pursuant to this Lease, only the events described in item (iii) of the first sentence of this Section shall be deemed to excuse performance for the purpose of this Section.

Section 32.6           Time of the Essence.   Time shall be of the essence as to each and every obligation of Tenant hereunder.

Section 32.7           Landlord’s Consent.   Whenever Landlord’s consent or approval is required pursuant to the terms of this Lease, Landlord may grant or withhold such consent or approval, or may grant such consent or approval upon such terms and conditions as Landlord may deem advisable, in Landlord’s sole and absolute discretion.  Any such consent or approval must be expressly given in writing signed by Landlord in order to be binding upon Landlord.

Section 32.8           Landlord’s Costs.   Any reference contained in this Lease to “costs incurred by Landlord” or “expenses incurred by Landlord” or similar reference shall be deemed to include all costs and expenses incurred by Landlord, Landlord’s agents and employees and, with respect to any activities carried out by Landlord, Landlord’s agents, and employees, shall further include an amount equal to the value of the time spent engaged in such activities, as if the same were accomplished by an independent party.

Section 32.9           Partial Payments.   No payment by Tenant or receipt by Landlord of a lesser amount of Minimum Rent or additional rent than that provided herein shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of such rent or pursue any other remedy provided herein.

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Section 32.10         Attorney’s Fees.   Should it be necessary for Landlord to employ legal counsel to enforce any of the provisions of this Lease, Tenant agrees to pay all reasonable attorneys’ fees and other costs and expenses including court costs incurred.  In the event of any action or proceeding brought by either party against the other under this Lease, the prevailing party shall be entitled to recover all reasonable attorneys’ fees and other costs and expenses incurred in connection with such action or proceeding, including the cost of appeal, if any.

Section 32.11         No Waiver.   One or more waivers of any covenant or condition by Landlord shall not be construed as a waiver of a subsequent breach of the same or any other covenant or condition, and the consent of approval by Landlord to or of any act by Tenant requiring Landlord’s consent or approval shall not be construed to waive or render unnecessary Landlord’s consent or approval to or of any subsequent similar act by Tenant.

Section 32.12         Titles of Articles.   The titles of the Articles throughout this Lease are for convenience and reference only, and the words contained therein shall in no way be held to explain, modify, amplify or aid in the interpretation, construction or meaning of the provisions of this instrument.

Section 32.13         Invalidity of Particular Provisions.   If any term or provision of this Lease or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such term of provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law.

Section 32.14         Successors and Assigns.   Except as herein otherwise expressly provided, the terms and provisions hereof shall be binding upon and shall inure to the benefit of the heirs, executors, administrators, successors and permitted assigns, respectively, of Landlord and Tenant.  Each term and each provision of this Lease to be performed by Tenant shall be construed to be both an independent covenant and a condition.  The reference contained to successors and assigns of Tenant is not intended to constitute a consent to assignment by Tenant, but has reference only to those instances in which Landlord may have given written consent to a particular assignment.

Section 32.15         Guarantors.   (intentionally deleted)

Section 32.16         Relationship of Parities.   Nothing contained in this Lease shall be deemed or construed by the parties hereto or by any third party to create the relationship of principal and agent or of partnership or of joint venture or of any association whatsoever between Landlord and Tenant, it being expressly understood and agreed that neither the computation of rent nor any other provisions contained in this Lease nor any act or acts of the parties hereto shall be deemed to create any relationship between Landlord and Tenant other than the relationship of landlord and tenant.

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Section 32.17         Multiple Tenants.   If this Lease is executed by more than one party, it is specifically agreed that the Landlord may enforce the provisions hereof with respect to one or more of such parties without seeking to enforce the same as to all or any other such parties, and each of the tenants hereby waives any requirement of joinder of all or any other of the parties hereto in any suit or proceeding to enforce the provisions hereof.  The liability hereunder of all parties hereto shall be joint and several.

Section 32.18         Complete Agreement.   This writing contains the entire agreement between the parties hereto, and no agent, representative, salesperson or officer of Landlord hereto has authority to make or has made any statement, agreement or representation, either oral or written, in connection herewith, modifying, adding or changing the terms and conditions herein set forth.  No amendment or modification of this Lease shall be binding unless such amendment or modification is in writing and signed by the party against whom such amendment or modification is being enforced.  Tenant further agrees that this Lease shall have no force or validity until and unless it is returned to Tenant duly executed by Landlord.

Section 32.19         Corporate or Other Authority.   If the Tenant is a corporation or other entity, each individual executing this Lease on behalf of said entity represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said entity in accordance with the Charter, By-Laws or other governing documents of said entity and that this Lease is a valid and binding obligation of Tenant and any Guarantor of this Lease, enforceable in accordance with its terms.

Section 32.20         Governing Law.   This Lease shall be governed by and construed in accordance with the laws of the State in which the Shopping Center is located.

Section 32.21         Exhibits.   The following Exhibits are attached to this Lease and are made a part of this Lease by this reference:

Exhibit A - Leased Premises

Addendum - Extension Option

Landlord and Tenant have duly executed this Lease.

Landlord:		ARBUTUS SHOPPING CENTER
		LIMITED PARTNERSHIP
		by: KSB Realty, L.L.C.
		its: General Partner
Date:	4/28/06	By:	/s/ Ricki Singer
		its	member
Tenant:		CARROLLTON BANK
Date:		By:	/s/ Robert A. Altieri
		its

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LANDLORD

STATE OF                                                            )

                                                                                )

COUNTY OF                                                         )

On the            day of              , 20   , before me personally came                      ,  to me known, who, being by me dully sworn, did depose and say that he is a Member of KSB Realty, L.L.C. and that    he executed the foregoing instrument with authority on behalf of said L.L.C.

NOTARY PUBLIC

TENANT (Corporate)

STATE OF Maryland    )

                                       )

COUNTY OF Baltimore)

On the 27th day of April, 2006, before me personally came Robert Altieri, to me known, who, being by me duly sworn, did depose and say that he is the                          of             ,      a                    corporation and that    he executed the    foregoing instrument on behalf of said corporation.

MY COMMISSION EXPIRES JAN. 1, 2007

[ILLEGIBLE]

NOTARY PUBLIC

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EXHIBIT A

Leased Premises

(ARBUTUS SHOPPING CENTER ARBUTUS, MARYLAND IMAGE)

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ADDENDUM TO LEASE

BETWEEN

ARBUTUS SHOPPING CENTER LIMITED PARTNERSHIP

AND

CARROLLTON BANK

1)  Extension Option(s).  (a)  Tenant shall have the right, at its option, to extend the term of this Lease for the Extension Period(s) upon the same terms, covenants and conditions herein set forth; provided, however, that the Minimum Rent for the first Lease Year of each Extension Period shall be increased to the greater of (i) the market rate then being charged for similar space in the Shopping Center or (ii) the Minimum Rent for the preceding Lease Year increased by three percent (3%).  Thereafter, the Minimum Rent for each successive Lease Year during each Extension Period shall be an amount equal to the Minimum Rent for the last preceding Lease Year, increased by three percent (3%) per annum.

In order to exercise the Extension Option, Tenant shall be required to give written notice of its intention to extend at least six (6) months but not more than nine (9) months prior to the Lease Termination Date, or expiration of the then current Extension Period, as the case may be.  Failure to deliver timely notice as required above shall cause the Extension Option, and all remaining Extension Options, to lapse and be of no further force and effect.  Further, if Tenant shall be in default of the terms of this Lease, Tenant shall not have the right to exercise the Extension Option and if Tenant shall default hereunder after such right has been exercised but within the six (6) month period preceding the Extension Period such election shall, at Landlord’s option, be null and void.

(b)  In the event that Tenant shall dispute Landlord’s determination of the market rate of rent being charged for similar space pursuant to the paragraph above, Tenant shall give notice to Landlord within ten (10) days of Tenant’s receipt of such Landlord’s determination, and the market rate shall be determined as follows:  The market rate shall be determined by a single arbitrator appointed in accordance with the American Arbitration Association Real Estate Valuation Arbitration Proceeding Rules.  Such arbitrator shall be impartial and shall have not less than ten (10) year’s experience in the County where the Shopping Center is located, in a calling related to the leasing of commercial space in premises comparable to the Shopping Center.  Within fifteen (15) days following the appointment of such arbitrator each party shall submit a report setting forth its determination of the market rate of the Leased Premises for the applicable term, together with such other information as such party shall deem relevant.  The arbitrator shall, within thirty (30) days following such hearing and submission of evidence render his decision by selecting the determination of market rate then being charged for similar space in the Shopping Center.  It is expressly understood that such arbitrator shall have no power or authority to select any market rate other than the market rate submitted by Landlord or Tenant, and the decision of such arbitrator shall be final and binding upon the Landlord and Tenant.  Prior to the determination of the arbitrator, Tenant shall pay Minimum Rent in an amount equal to the Landlord’s determination of market rate submitted to Tenant pursuant to this Section, and following the arbitrator’s final determination, the amount of any overpayment or underpayment shall be adjusted between the parties on demand.  The cost of arbitration shall be borne by the party whose determination of Market Rate is not selected by the arbitrator.

35

EX-21.1

2006 ANNUAL REPORT

EXHIBIT 21.1

Subsidiaries of Carrollton Bancorp	State of Incorporation	Owned by	Percentage Ownership
Carrollton Bank	Maryland	Carrollton Bancorp	100%
Carrollton Financial Services Inc.	Maryland	Carrollton Bank	100%
Carrollton Community Development Corp.	Maryland	Carrollton Bank	96.4%
Carrollton Mortgage Services, Inc.	Maryland	Carrollton Bank	100%
Mulberry Street, LLC	Maryland	Carrollton Bank	100%

65

EX-23.1

CARROLLTON BANCORP

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Carrollton Bancorp

As Independent Registered Public Accounting Firm, we hereby consent to the incorporation of our report dated February 23, 2007 on the consolidated financial statements of Carrollton Bancorp and Subsidiary included in this Form 10-K into Carrollton Bancorp’s previously filed registration statements on Form S-8, File Nos. 333-82915 and 333-120929.

/s/ Rowles & Company, LLP

Baltimore, Maryland
February 23, 2007

66

EX-31.1

2006 ANNUAL REPORT

EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER (EXCHANGE ACT RULE 13-A-14(A)

I, Robert A. Altieri, President and Chief Executive Officer, certify that:

(1) I have reviewed this annual report on Form 10-K of Carrollton Bancorp;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which the statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15-15(c) for the registrant and have;

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of this disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officers and I have disclosed to the registrant’s auditors and the registrant’s audit committee of the board of directors:

(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which could adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

	/s/ ROBERT A. ALTIERI
	Robert A. Altieri
Date: March 1, 2007	President and Chief Executive Officer

67

EX-31.2

CARROLLTON BANCORP

EXHIBIT 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, James M. Uveges, Chief Financial Officer, certify that:

(1) I have reviewed this annual report on Form 10-K of Carrollton Bancorp;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have;

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of this disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officers and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably like to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ JAMES M. UVEGES
	James M. Uveges
Date: March 1, 2007	Senior Vice President and Chief Financial Officer

68

EX-32.1

2006 ANNUAL REPORT

EXHIBIT 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Robert A. Altieri, President and Chief Executive Officer (Principal Executive Officer) of Carrollton Bancorp (the “Registrant’), hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes/Oxley Act of 2002, to the best of my knowledge and belief, that:

(1) such Form 10-K for the year ended December 31, 2006, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in such Form 10-K for the year ended December 31, 2006, fairly presents, in all material respects, the financial conditions and results of operations of Carrollton Bancorp.

/s/ ROBERT A. ALTIERI

Robert A. Altieri

President and Chief Executive Officer

March 1, 2007

69

EX-32.2

CARROLLTON BANCORP

EXHIBIT 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, James M. Uveges, Senior Vice President and Chief Financial Officer (principal financial officer) of Carrollton Bancorp, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes/Oxley Act of 2002, to the best of my knowledge and belief, that:

(1) such Form 10-K for the year ended December 31, 2006, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in such Form 10-K for the year ended December 31, 2006, fairly presents, in all material respects, the financial conditions and results of operations of Carrollton Bancorp.

/s/ JAMES M. UVEGES

James M. Uveges

Senior Vice President and Chief Financial Officer

March 1, 2007

70