THE COMPANY

Carrollton Bancorp was formed on January 11, 1990, and is a Maryland chartered bank holding company. The Company holds all of the outstanding shares of common stock of Carrollton Bank. The Bank, formed on April 10, 1900, is a commercial bank that provides a full range of financial services to individuals, businesses and organizations through its branch and loan origination offices. Deposits in the Bank are insured by the Federal Deposit Insurance Corporation. The Bank considers its core market area to be the Baltimore-Washington Metropolitan Area.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q 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, collectibility of loans, anticipated changes in noninterest 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 the 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.

BUSINESS AND OVERVIEW

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

The Bank is engaged in general commercial and retail banking business with ten branch locations. CMSI is in the business of originating residential mortgage loans and has three branch locations. CFS provides brokerage services to customers, MSLLC is used to dispose of other real estate owned and CCDC promotes, develops and improves the housing and economic conditions of people in Maryland.

Additionally, the Company enters into commitments to originate residential mortgage loans to be sold.

Net income increased $59,000 or 13.8% for the three months ended March 31, 2009 compared to the same period in 2008. The Company's earning performance in the first quarter of 2008 was impacted by the $368,000 pretax charge to close the Wilkens drive-thru effective April 30, 2008, partially offset by the $80,000 gain related to the Visa, Inc. initial public offering that occurred in March 2008. The net interest margin decreased to 3.63% for the quarter ended March 31, 2009 from 4.18% in the comparable quarter in 2008.

The Company paid dividends of $0.08 per share to shareholders during the first quarter of 2009. This represents a 33% reduction in the quarterly dividend. Because of the unprecedented state of the economy and its impact on our borrowers, the decision to reduce the dividend was made after much thought, market evaluation and capital needs analysis in order to preserve the capital position of the Company.

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 areas. 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.

FINANCIAL CONDITION

Summary

Total assets increased $11.0 million to $415.2 million at March 31, 2009, compared to $404.2 million at the end of 2008. The increase was due primarily to the $9.4 million increase in loans held for sale due to the high demand for refinancing existing residential loans because of the low interest rates. Loans increased by $1.7 million or 0.60% to $282.2 million during the period. Total average interest-earning assets increased $29.5 million during the period to $390.8 million and were 96.4% of total average assets at March 31, 2009. Total deposits increased by $19.5 million or 6.7% to $311.8 million as of March 31, 2009 from $292.4 million as of December 31, 2008. Certificate of deposit accounts increased $14.3 million while non-interest bearing checking, lower interest bearing checking, savings accounts and money market accounts increased $1.5 million, $1.3 million, $1.3 million and $1.1 million respectively. Stockholders' equity increased 29.9% or $8.2 million to $35.6 million at March 31, 2009. The increase was due primarily to the $9.2 million raised through the sale of Series A Preferred Stock, net income of $488,000, all of which was partially offset by dividends paid of $205,000 and a decrease in accumulated other comprehensive income of $1.3 million. The decrease in accumulated other comprehensive income was due to the decrease in the fair market value of the available for sale securities and the decrease in the fair market value of the effective cash flow hedge.

Investment Securities

The investment portfolio consists of securities available for sale and securities held to maturity. 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. 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 amortized cost.

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 were $67.1 million at March 31, 2009, increased slightly from December 31, 2008. The Company continues to restructure its investment portfolio to manage interest rate risk.

Loans Held for Sale

Loans held for sale increased $9.4 million or 43.2% to $31.1 million at March 31, 2009 from $21.7 million at December 31, 2008, due to the increase in origination activity during the first three months of 2009 due to the decline in interest rates. Loans held for sale are carried at the lower of cost or the committed sale price, determined on an individual loan basis.

Loans

Loans increased $1.7 million or 0.6% to $282.2 million at March 31, 2009, from $280.5 million at December 31, 2008. The increase was due to originations exceeding payoffs during the winter months.

Loans are placed on 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. 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 remains on 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.

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. Impaired loans are measured based on the fair value of the collateral for collateral dependent loans and at the present value of expected future cash flows using the effective interest rates for loans that are not collateral dependent.

At March 31, 2009, the Company had eighteen impaired loans totaling approximately $3,741,000, all of which have been classified as nonaccrual. The valuation allowance for impaired loans was $510,000 as of March 31, 2009.

The following table provides information concerning nonperforming assets and past due loans:

                                             March 31,  December 31,   March 31,
                                               2009         2008         2008
                                            ----------   ----------   ----------

Nonaccrual loans                            $6,773,285   $5,027,767   $5,288,555
Restructured loans                           1,231,204      771,216      177,290
Foreclosed real estate                       1,707,679    1,736,018      591,540
                                            ----------   ----------   ----------

   Total nonperforming assets               $9,712,168   $7,535,001   $6,057,385
                                            ----------   ----------   ----------

Accruing loans past-due 90 days or more     $1,277,275   $2,216,728   $  166,838
                                            ==========   ==========   ==========

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 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.

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

During the quarter ended March 31, 2009 and the year ended December 31, 2008, 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.

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 allowance for loan losses was $3.3 million at March 31, 2009, which was 1.17% of loans compared to $3.2 million at December 31, 2008, which was 1.12% of loans. During the first three months of 2009, the Company experienced net recoveries of $487. The ratio of net loan losses to average loans outstanding decreased to 0.00% for the three months ended March 31, 2009 from 0.82% for the year ended December 31, 2008. The ratio of nonperforming assets as a percent of period-end loans and foreclosed real estate increased slightly to 3.81% as of March 31, 2009 compared to 3.42% at December 31, 2008 due to the increase in delinquent commercial and residential loans partially offset by a slight decrease in other real estate owned property.

The following table summarizes the activity in the allowance for loan losses:

                                                 Three months Ended        Year ended
                                                     March 31,              December
                                            --------------------------    -----------
                                                 2009         2008            2008
                                            -----------    -----------    -----------
Allowance for loan losses - beginning of
   period                                   $ 3,179,741    $ 3,270,425    $ 3,270,425

Provision for loan losses                       165,000         99,000      2,096,000
Charge-offs                                     (59,060)      (130,168)    (2,268,477)
Recoveries                                       59,547         13,608         81,793
                                            -----------    -----------    -----------

Allowance for loan losses - end of period   $ 3,345,228    $ 3,252,865    $ 3,179,741

Funding Sources

Deposits

Total deposits increased by $19.5 million or 6.7% to $311.8 million as of March 31, 2009, from $292.4 million as of December 31, 2008. Certificate of deposit accounts increased $14.3 million while non-interest bearing checking, lower-interest bearing checking, savings accounts and money market accounts increased $1.5 million, $1.3 million, $1.3 million and $1.1 million, respectively.

Borrowings

Advances from the Federal Home Loan Bank (FHLB) decreased $13.7 million to $51.5 million at March 31, 2009. The increase in deposits was used to pay down the advances. Total borrowings decreased $16.4 million to $63.0 million at March 31, 2009, compared to $79.4 million at the end of 2008.

Capital Resources

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 Company's subsidiary bank also exceeded the FDIC required minimum capital levels at those dates by a substantial margin. As of March 31, 2009 and December 31, 2008, the Company is considered well capitalized. Management knows of no conditions or events that would change this classification.

The following table summarizes the Company's capital ratios:

                                                                Minimum
                                 March 31,    December 31,     Regulatory         To Be
                                    2009         2008         Requirements   Well Capitalized
                                 ---------    ------------    ------------   ----------------
Risk-based capital ratios:
   Tier 1 capital                  12.28%         9.84%                4%                  6%
   Total capital                   13.32%        10.91%                8%                 10%

Tier 1 leverage ratio               9.71%         8.17%                4%                  5%

Total shareholders' equity increased 29.9% or $8.2 million to $35.6 million at March 31, 2009. The increase was due primarily to the $9.2 million raised through the sale of Series A Preferred Stock, net income of $488,000, all of which was partially offset by dividends paid of $205,000 and a decrease in accumulated other comprehensive income of $1.3 million. The decrease in accumulated other comprehensive income was due to the decrease in the fair market value of the available for sale securities and the decrease in the fair market value of the effective cash flow hedge.

RESULTS OF OPERATIONS

Summary

Carrollton Bancorp reported net income for the first three months of 2009 of $488,000 compared to $429,000 for the same period of 2008. Net income available to common shareholders for the first three months of 2009 was $428,000, or $0.17 per diluted share compared to $429,000, or $0.16 per diluted share for the same period of 2008..

The Company's earning performance in the first quarter of 2008 was impacted by the $368,000 pretax charge to close the Wilkens drive-thru effective April 30, 2008, partially offset by the $80,000 gain related to the Visa, Inc. initial public offering that occurred in March 2008. The net interest margin decreased to 3.63% for the quarter ended March 31, 2009 from 4.18% in the comparable quarter in 2008. Noninterest income increased $156,000 or 9.4% to $1.8 million in the first quarter of 2009 compared to the first quarter of 2008. Noninterest expenses decreased by $47,000 or 1.1% to $4.4 million in the first quarter of 2009 compared to the first quarter of 2008.

Return on average assets and return on average equity are key measures of a bank's performance. Return on average assets, the product of net income divided by total average assets, measures how effectively the Company utilizes its assets to produce income. The Company's return on average assets for the three months ended March 31, 2009 and 2008 was 0.49%. Return on average common equity, the product of net income divided by average common equity, measures how effectively the company invests its capital to produce income. Return on average equity for the three months ended March 31, 2009 was 5.48%, compared to 4.97% for the corresponding period in 2008.

Interest and fee income on loans decreased 3.0% primarily due to the decline in interest rates, with total interest income decreasing 1.4%. Net interest income was substantially the same at $3.4 million for the quarter ended March 31, 2009 and 2008. The decrease in net interest income due to compression of the Company's net interest margin to 3.63% for the three months ended March 31, 2009 from 4.18% in the comparable period in 2008 was offset by the $58.1 million or 17.5% increase in average interest earning assets. Non interest income increased 9.4% or $156,000 to $1.8 million in the first quarter of 2009 compared to the first quarter of 2008. The increase was due to the $381,000 increase in mortgage banking fees and gains partially offset by the $87,000 decrease in brokerage commissions, $43,000 decrease in Electronic Banking and the $81,000 decrease in security gains.

Noninterest expenses were $4.4 million in the first quarter of 2009 and 2008. Salaries increased $113,000 due to normal salary increases and increased commissions paid primarily to the loan originators in the mortgage subsidiary (CMSI). Because of the low interest rates, loan originations due to refinancing of residential loans increased significantly in 2009, compared to the same period in 2008. Professional fees increased $45,000 due to an increase in consulting fees and legal fees related to delinquencies and foreclosures. Other operating expenses increased $160,000 due to the $116,000 increase in the FDIC insurance premiums due to the FDIC raising premiums, deposits increasing $34.1 million and the one time credit assessment fully utilized as of December 31, 2008. Also, OREO expenses increased $28,000 and various loan expenses, i.e. appraisals, credit reports, and fees related to collection of loans increased $35,000. These increases were partially offset by the $368,000 charge recorded in 2008 for closing the Wilkens drive-thru and decreases in various other expenses.

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.

Net interest income for the Company on a tax equivalent basis (a non-GAAP measure) was approximately the same at $3.5 million for the first three months of 2008 and 2009. Average interest earning assets increase $58.1 million while the net interest margin on average earning assets decreased from 4.18% for the first three months of 2008 to 3.63% for the first three months of 2009.

Interest income on loans on a tax equivalent basis (a non-GAAP measure) decreased 3.0% during the first three months of 2009 due to the decline in interest rates. The decrease in the yield on loans to 6.03% during the first three months of 2009 from 7.08% during the first three months of 2008 was offset by the $39.8 million increase in average loans, including loans held for sale. The Company continues to emphasize commercial real estate and small business loan production and a systematic program to restructure the balance sheet to reduce interest rate risk.

Interest income from investment securities and overnight investments on a tax equivalent basis was $955,000 for the first three months of 2009, compared to $890,000 for the first three months of 2008, representing a 7.4% increase. This increase was due to the average balance of the investment portfolio increasing 24.9%. This increase was partially offset by the overall yield on investments decreasing from 5.71% for the first three months of 2008 to 5.35% for the first three months of 2009. The yield on Federal Funds Sold, Federal Reserve Bank (FRB) and the FHLB deposit decreased to 0.10% for the first three months of 2009 compared to 3.55% for the same period in 2008. In 2008, the FRB did not pay interest on deposits. The decrease in yield was primarily due to the Federal Open Market Committee (FOMC) reducing rates due to the unprecedented state of the economy.

Interest expense decreased $107,000 to $2.1 million for the first three months of 2009 from $2.2 million for the first three months of 2008. The decrease in interest expense was due primarily to the cost of interest-bearing liabilities decreasing to 2.56% for the first three months of 2009 compared to 3.22% for the first three months of 2008. The decrease was due to the FOMC reducing the Federal Funds target rate.

The following tables, for the periods indicated, set forth 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.

                                                               Three Months Ended March 31, 2009
                                                            ----------------------------------------
                                                               Average
                                                               balance         Interest      Yield
                                                            --------------   -----------   ---------
. . .