Letter to Our Shareholders

 

Dear Shareholders:

 

                Carrollton Bancorp is pleased to provide you the 2001 Annual Report. The report summarizes the financial condition and operating results of your Company for the past three years. 2001 was a year that saw continued growth in those areas of the Company that we feel is our future, while at the same time saw shrinkage in those areas that we felt thwarted our growth in the past. The management team and employees are focused and have an unwavering commitment to make continual improvements to the Company and to excel at the options we provide to our customers. Carrollton Bancorp is poised for substantial growth in its commercial loan portfolio.

 

                In keeping with the Company's strategic plan, management took several steps to address the reshaping of our balance sheet. In order to move into a less sensitive interest rate position and reduce our volatility to rate changes, the Bank sold $37 million in residential fixed rate real estate loans in the 1^st quarter of 2001. This resulted in a net loss of $254,000. Additional reductions of the fixed rate residential real estate portfolio were accomplished through normal attrition. The total reduction to the residential mortgage portfolio was $48 million. Proceeds of the first quarter sale and the normal payoffs of mortgages was used to fund the growth in the Company's commercial loan and commercial real estate portfolio. We also allowed the runoff of high yielding certificates of deposit totaling $24 million by year end as another step in reducing our interest rate sensitivity.

 

                Company earnings for 2001 were $1.9 million, an 11% increase over 2000. Core earnings of the Company in 2001 continued to show improvement over the previous two years. In 1999, sale of the Merchant Services Division resulted in an $823,000 gain or $0.29 per share on an after tax basis, skewing the financial results for 1999. The mortgage loan sales and the 475 basis point downward rate change in the prime benchmark rate resulted in a $4 million reduction in loan income, this was offset by the balance sheet reformation which reduced the funding costs and yielded a 1% increase in Net Interest Income over 2000.

 

                As economic conditions and prevailing interest rates return to more traditional levels, Management's efforts to restructure the balance sheet will result in more favorable returns. As we await a return to more favorable economic conditions, we continue to address those issues that have hindered profitability. Beginning in 2001, the Company's lending focus switched from the traditional residential fixed rate assets to typical short-term adjustable rate commercial lending products. Growth of the commercial loan portfolio was 19% over 2000, although the overall loan portfolio was reduced. Our resources will continue to be focused on building a lending environment conducive to commercial lending growth.

 

                Net interest margins on loan products have been compressed because of the recent volatility in interest rates. The rate reductions resulted in significant payoffs in the loan portfolio most particularly in residential mortgages, home equity loans and lines of credit. The reduction of the fixed rate long-term assets is favorable in reducing our volatility to interest rate changes, however reinvestment of these funds has been in lower yielding assets.

 

                2001 also showed a reduction in our ATM locations. The Company elected to terminate its ATM agreement with Target Department Stores. Fifty-five ATM's were located in Maryland, Virginia, Pennsylvania and Delaware Target Stores. These ATM's did not add to the strategic initiatives of the Company. Eliminating the Target Store ATM's had an impact on "Other fees and Commissions" and "Other Operating Expenses". The net result is a slight reduction in operating expenses. The Company will continue its relationship with Wal-Mart/Sam's Clubs in Maryland, Virginia and West Virginia. Management also addressed concerns as to regulatory action regarding "ATM Convenience Fees", reassessing the depreciable life of the ATM network. The ATM business is highly susceptible to change and accelerating the depreciable life of the network, while it will add additional expense to the Company, is an appropriate action.

 

                Management will continue its strategy of assessing the profitability of operational components and take appropriate steps to eliminate non-profitable business units, at the same time maintaining safe operating standards that provide appropriate levels of return for risk. We are positioning ourselves for the future, looking for the long-term improved performance of your Company. We are mindful that the Company must remain progressive and attuned to our customers' needs in order to compete in the rapidly changing environment of financial services. We are energized and excited by the myriad of opportunities that lie ahead. We are committed to the positive changes that we have begun, capitalizing on the opportunities that arise with changes in our industry and community and building shareholder value for the future.

 

Selected Financial Highlights