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United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
----------------------
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from to
Commission file number 0-23090
CARROLLTON BANCORP
(Exact name of registrant as specified in its charter)
MARYLAND 52-1660951
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
344 NORTH CHARLES STREET, SUITE 300, BALTIMORE, MARYLAND 21201
(Address of principal executive offices)
(410) 536-4600
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act 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 |_|
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. (Check
one).
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
State the number shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
2,564,988 common shares outstanding at November 5, 2008
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CARROLLTON BANCORP
CONTENTS
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2008 (unaudited)
and December 31, 2007 3
Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 2008 and 2007 (unaudited) 4
Consolidated Statements of Shareholders' Equity for the Nine Months
Ended September 30, 2008 and 2007 (unaudited) 5
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2008 and 2007 (unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 22
PART II - OTHER INFORMATION 23
- ---------------------------
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits 24
2
- --------------------------------------------------------------------------------
PART I
ITEM 1. FINANCIAL STATEMENTS
CARROLLTON BANCORP
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2008 2007
--------------- ---------------
(unaudited)
ASSETS
Cash and due from banks $ 9,855,816 $ 9,382,800
Federal funds sold and Federal Home Loan Bank deposit 910,244 7,544,181
Federal Home Loan Bank stock, at cost 4,295,700 1,305,100
Investment securities:
Available for sale 62,303,467 34,788,932
Held to maturity (fair value of $11,601,875 and $18,890,268) 12,055,925 18,003,276
Loans held for sale 19,263,979 7,579,765
Loans, less allowance for loan losses of $3,682,756 in 2008 and
$3,270,425 in 2007 277,081,785 258,353,408
Premises and equipment 7,106,509 7,198,208
Accrued interest receivable 1,822,816 1,733,672
Bank owned life insurance 4,552,855 4,435,024
Deferred income taxes 1,708,155 762,606
Other real estate owned 1,432,343 --
Other assets 2,203,019 1,762,083
--------------- ---------------
$ 404,592,613 $ 352,849,055
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 45,281,562 $ 49,619,610
Interest-bearing 232,548,391 236,019,015
--------------- ---------------
Total deposits 277,829,953 285,638,625
Federal funds purchased and securities sold under agreement to
repurchase 12,166,657 14,589,152
Advances from the Federal Home Loan Bank 81,400,000 15,000,000
Accrued interest payable 382,735 221,285
Other liabilities 2,014,876 1,468,693
--------------- ---------------
373,794,221 316,917,755
--------------- ---------------
SHAREHOLDERS' EQUITY
Common stock, par $1.00 per share; authorized 10,000,000 shares;
issued and outstanding 2,564,988 in 2008 and 2,834,975 in 2007 2,564,988 2,834,975
Additional paid-in capital 15,254,143 18,781,650
Retained earnings 13,819,814 13,654,180
Accumulated other comprehensive income (840,553) 660,495
--------------- ---------------
30,798,392 35,931,300
--------------- ---------------
$ 404,592,613 $ 352,849,055
=============== ===============
See accompanying notes to consolidated financial statements.
3
CARROLLTON BANCORP
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
2008 2007 2008 2007
--------------- --------------- --------------- ---------------
(unaudited) (unaudited) (unaudited) (unaudited)
Interest income:
Loans $ 4,673,173 $ 5,279,934 $ 13,959,111 $ 15,669,536
Investment securities:
Taxable 868,309 576,290 2,293,207 1,717,868
Nontaxable 85,145 93,535 261,101 283,492
Dividends 48,709 47,558 149,623 120,375
Federal funds sold and interest-bearing
deposits with other banks 9,385 23,013 55,867 64,422
--------------- --------------- --------------- ---------------
Total interest income 5,684,721 6,020,330 16,718,909 17,885,693
--------------- --------------- --------------- ---------------
Interest expense:
Deposits 1,550,240 1,997,971 4,898,945 6,039,413
Borrowings 617,437 474,902 1,355,921 1,307,464
--------------- --------------- --------------- ---------------
Total interest expense 2,167,677 2,472,873 6,254,866 7,346,877
--------------- --------------- --------------- ---------------
Net interest income 3,517,044 3,547,457 10,464,043 10,538,816
Provision for loan losses 799,000 99,000 997,000 264,000
--------------- --------------- --------------- ---------------
Net interest income after provision for
loan losses 2,718,044 3,448,457 9,467,043 10,274,816
--------------- --------------- --------------- ---------------
Noninterest income:
Electronic Banking 450,560 518,680 1,380,388 1,433,403
Mortgage-banking fees and gains 652,099 610,424 1,933,762 1,755,170
Service charges on deposit accounts 215,645 182,721 627,136 747,586
Brokerage commissions 176,694 174,578 569,213 514,814
Other fees and commissions 146,054 76,643 355,779 326,673
Security gains, net 1,051 -- 81,715 --
--------------- --------------- --------------- ---------------
Total noninterest income 1,642,103 1,563,046 4,947,993 4,777,646
--------------- --------------- --------------- ---------------
Noninterest expenses:
Salaries 1,772,170 1,757,271 5,173,710 5,475,569
Employee benefits 415,779 226,955 1,369,384 961,939
Occupancy 596,717 558,642 1,768,821 1,526,992
Furniture and equipment 162,416 151,688 469,853 447,209
Professional services 201,503 243,598 647,740 874,116
Other operating expenses 1,216,390 925,891 3,516,341 3,052,260
---------------------------------------------------------------------------
Total noninterest expenses 4,364,975 3,864,045 12,945,849 12,338,085
--------------- --------------- --------------- ---------------
Income (loss) before income taxes (4,828) 1,147,458 1,469,187 2,714,377
Income tax provision (benefit) (55,557) 334,436 362,591 847,822
--------------- --------------- --------------- ---------------
Net income $ 50,729 $ 813,022 $ 1,106,596 $ 1,866,555
=============== =============== =============== ===============
Net income per common share - basic $ 0.02 $ 0.29 $ 0.42 $ 0.66
=============== =============== =============== ===============
Net income per common share - diluted $ 0.02 $ 0.29 $ 0.42 $ 0.66
=============== =============== =============== ===============
See accompanying notes to consolidated financial statements.
4
CARROLLTON BANCORP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 2008 and 2007 (unaudited)
Accumulated
Additional Other
Common Paid-In Retained Comprehensive Comprehensive
Stock Capital Earnings Income Income
Balances at December 31,
2006 $ 2,806,705 $ 18,372,351 $ 12,886,247 $ 646,075
Net income -- -- 1,866,555 -- $ 1,866,555
Changes in net
unrealized gains
(losses) on securities
available for sale, net
of tax -- -- -- 74,558 74,558
---------------
Comprehensive income $ 1,941,113
===============
Shares acquired and
cancelled (16,015) (248,256) -- --
Stock options exercised
including
tax benefit of $32,790 40,685 584,814 -- --
Issuance of stock under
2007 Equity Plan 3,600 54,900 -- --
Stock based compensation -- 13,381 -- --
Cash dividends, $0.36
per share -- -- (1,018,130) --
--------------- --------------- --------------- ---------------
Balances at September
30, 2007 $ 2,834,975 $ 18,777,190 $ 13,734,672 $ 720,633
=============== =============== =============== ===============
Balances at December 31,
2007 2,834,975 $ 18,781,651 $ 13,654,180 $ 660,495
Net income -- -- 1,106,596 -- $ 1,106,596
Changes in net
unrealized gains
(losses) on securities
available for sale, net
of tax -- -- -- (1,501,048) (1,501,048)
---------------
Comprehensive income $ (394,452)
===============
Shares acquired and
cancelled (276,137) (3,607,733) -- --
Stock options exercised
including
tax benefit of $1,883 2,550 27,939 -- --
Issuance of stock under
2007 Equity Plan 3,600 46,800 -- --
Stock based compensation -- 5,486 -- --
Cash dividends, $0.36
per share -- -- (940,962) --
--------------- --------------- --------------- ---------------
Balances at September
30, 2008 $ 2,564,988 $ 15,254,143 $ 13,819,814 $ (840,553)
=============== =============== =============== ===============
See accompanying notes to consolidated financial statements.
5
CARROLLTON BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2008 and 2007
Nine Months Ended September 30,
-----------------------------------
2008 2007
--------------- ---------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 1,106,596 $ 1,866,555
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 997,000 264,000
Depreciation and amortization 646,119 501,870
Deferred income taxes 224,777 (2,831)
Amortization of premiums and discounts (60,562) (46,008)
Gains on disposal of securities (81,715) --
Gains on sale of Other Real Estate Owned (18,981) --
Loans held for sale made, net of principal sold (11,684,214) (5,477,887)
Write down of foreclosed real estate 201,000 127,906
Gain on sale of premises and equipment -- (3,725)
Stock-based compensation expense 5,486 13,381
Issuance of stock under 2007 Equity Plan 50,400 58,500
(Increase) decrease in:
Accrued interest receivable (89,144) (186,185)
Prepaid income taxes (357,410) --
Cash surrender value for bank owned life insurance (117,831) (115,643)
Other assets (250,096) (194,435)
Increase (decrease) in:
Accrued interest payable 161,450 65,865
Deferred loan origination fees (55,907) (200,861)
Other liabilities 620,372 (119,559)
--------------- ---------------
Net cash (used in) provided by operating activities (8,702,660) (3,449,057)
Cash flows from investing activities:
Proceeds from sales of securities available for sale 495,514 --
Proceeds from maturities of securities available for sale 1,952,723 4,193,759
Proceeds of maturities of securities held to maturity 5,966,928 939,967
Redemption (purchase) of Federal Home Loan Bank stock (2,990,600) 175,500
Purchase of securities available for sale (32,511,446) (3,000,000)
Purchase of securities held to maturity -- --
Loans made, net of principal collected (21,283,831) 3,140,019
Purchase of premises and equipment (477,121) (1,455,882)
Proceeds from sale of premises and equipment 15,081 34,700
--------------- ---------------
Net cash provided by (used in) investing activities (48,832,752) 4,028,063
Cash flows from financing activities:
Net increase (decrease) in time deposits 10,347,121 (821,957)
Net decrease in other deposits (18,155,793) (624,051)
Advances (payment) of Federal Home Loan Bank Advances 66,400,000 (2,025,000)
Net increase (decrease) in other borrowed funds (2,422,495) (1,324,141)
Dividends paid (940,962) (1,018,130)
Stock options exercised 28,607 592,709
Income tax benefit from exercise of stock options 1,883 32,790
Common stock repurchase and retirement (3,883,870) (264,271)
--------------- ---------------
Net cash provided by (used in) financing activities 51,377,491 (5,452,051)
--------------- ---------------
Net decrease in cash and cash equivalents (6,160,921) (4,873,045)
Cash and cash equivalents at beginning of period 16,926,981 13,622,766
--------------- ---------------
Cash and cash equivalents at end of period $ 10,766,060 $ 8,749,721
=============== ===============
Supplemental information:
Interest paid on deposits and borrowings $ 6,093,416 $ 7,281,012
============== ==============
Income taxes paid $ 720,001 $ 921,559
============== ==============
Real estate acquired in settlement of loans $ 1,432,343 $ --
============== ==============
Loans made to facilitate sale of other real estate owned $ -- $ 1,327,175
============== ==============
See accompanying notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three and nine months ended
September 30, 2008 and 2007 is unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements prepared for the Company
have been prepared in accordance with the instructions for Form 10-Q and,
therefore, do not include all information and notes necessary for a full
presentation of financial condition, results of operations and cash flows in
conformity with accounting principles generally accepted in the United States of
America. The consolidated financial statements should be read in conjunction
with the audited financial statements included in the Company's 2007 Annual
Report on Form 10-K.
The consolidated financial statements include the accounts of the Company's
subsidiary, Carrollton Bank, Carrollton Bank's wholly-owned subsidiaries,
Carrollton Mortgage Services, Inc. ("CMSI"), Carrollton Financial Services, Inc.
("CFS"), Mulberry Street, LLC (MSLLC) and Carrollton Bank's 96.4% owned
subsidiary, Carrollton Community Development Corporation ("CCDC") (collectively,
the "Bank"). All significant intercompany balances and transactions have been
eliminated.
The consolidated financial statements as of September 30, 2008 and for the
three and nine months ended September 30, 2008 are unaudited but include all
adjustments, consisting only of normal recurring adjustments, which the Company
considers necessary for a fair presentation of financial position and results of
operations for those periods. The results of operations for the three and nine
months ended September 30, 2008 are not necessarily indicative of the results
that will be achieved for the entire year.
Certain amounts for 2007 have been reclassified to conform to the 2008
presentation.
NOTE 2 - 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:
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------- -----------------------------------
2008 2007 2008 2007
--------------- --------------- --------------- ---------------
Basic:
Net income $ 50,729 $ 813,022 $ 1,106,596 $ 1,866,555
Average common shares outstanding 2,567,284 2,835,099 2,639,061 2,827,490
Basic net income per common share $ 0.02 $ 0.29 $ 0.42 $ 0.66
=============== =============== =============== ===============
Diluted:
Net income $ 50,729 $ 813,022 $ 1,106,596 $ 1,866,555
Average common shares outstanding 2,567,284 2,835,099 2,639,061 2,827,490
Stock option adjustment -- 6,644 -- 12,851
--------------- --------------- --------------- ---------------
Average common shares outstanding -
diluted 2,567,284 2,841,743 2,639,061 2,840,341
Diluted net income per common share $ 0.02 $ 0.29 $ 0.42 $ 0.66
=============== =============== =============== ===============
7
NOTE 3 - STOCK BASED COMPENSATION
At the Company's annual shareholders meeting on May 15, 2007, the 2007
Equity Plan was approved. Under this plan, 500,000 shares of the Common Stock of
the Company were reserved for issuance. Also, in accordance with the 2007 Equity
Plan, 300 shares of unrestricted Company Stock were issued to each non-employee
director in May, 2008 and 2007. No new grants will be made under the 1998 Long
Term Incentive Plan. However, incentive stock options issued under this plan
will remain outstanding until exercised or until the tenth anniversary of the
grant date of such options.
Stock-based compensation expense recognized was $5,486 during the first
nine months of 2008 compared to $13,381 during the first nine months of 2007. As
of September 30, 2008, there was $4,000 of unrecognized compensation expense
related to nonvested stock options, which will be recognized over the remaining
vesting period.
Stock option compensation expense is the estimated fair value of options
granted amortized on a straight-line basis over the vesting period of the award
(3 years). Nonqualified stock options for 630 shares were granted to a new
director under the 1998 Long Term Incentive Plan in January, 2007. The fair
value of these options was determined assuming a weighted average dividend yield
of 3.3%, a weighted average expected volatility of 36.6%, a weighted average
risk-free interest rate of 4.9 percent, and a weighted average expected life of
6 years.
NOTE 4 - COMMITMENTS AND CONTINGENT LIABILITIES
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. The Company applies the same
credit policies to these off-balance sheet arrangements as it does for
on-balance-sheet instruments.
Additionally, the Company enters into commitments to originate residential
mortgage loans to be sold in the secondary market, where the interest rate is
determined prior to funding the loan. The commitments on mortgage loans to be
sold are considered to be derivatives. The intent is that the borrower has
assumed the interest rate risk on the loan. As a result, the Company is not
exposed to losses due to interest rate changes. As of September 30, 2008, the
difference between the market value and the carrying amount of these commitments
is immaterial and therefore, no gain or loss has been recognized in the
financial statements.
September 30, September 30, December 31,
2008 2007 2007
------------- ------------- ---------------
Loan commitments $ 32,278,000 $ 39,921,000 $ 43,339,000
Unused lines of credit 80,128,000 $ 86,381,000 $ 84,317,000
Letters of credit $ 2,708,000 $ 1,877,000 $ 2,546,000
8
NOTE 5 - FAIR VALUE
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement No. 157, "Fair Value Measurements." This statement defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. The statement establishes a fair value hierarchy about
the assumptions used to measure fair value and clarifies assumptions about risk
and the effect of a restriction on the sale or use of an asset. The standard is
effective for fiscal years beginning after November 2007. In February 2008, the
FASB issued FASB Staff Position (FSP) No. FAS 157-2, "Effective Date of FASB
Statement No. 157." This FSP delays the effective date of FAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 2008 and interim periods within those
fiscal years. The impact of adoption was not material.
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities." The standard provides companies
with an option to report selected financial assets and liabilities at fair value
and establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. The new standard is effective for the
Company on January 1, 2008. The Company did not elect the fair value option for
any financial assets or financial liabilities as of January 1, 2008.
Statement 157 defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. Statement 157
also establishes a fair value hierarchy which requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that may be
used to measure fair value:
Level 1: Quoted prices (unadjusted) or identical assets or liabilities in
active markets that the entity has the ability to access as of the measurement
date.
Level 2: Significant other observable inputs other than Level 1 prices,
such as quoted prices for similar assets or liabilities, quoted prices in
markets that are not active, and other inputs that are observable or can be
corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company's own
assumptions about the assumptions that market participants would use in pricing
an asset or liability.
The Company uses the following methods and significant assumptions to
estimate fair value:
Securities available for sale: The fair value of securities available for
sale are determined by obtaining quoted prices on nationally recognized
securities exchanges. If quoted market prices are not available, fair value is
determined using quoted market prices for similar securities.
Loans held for sale: The fair value of loans held for sale is determined,
when possible, using quoted secondary-market prices. If no such quoted pricing
exists, the fair value of a loan is determined using quoted prices for a similar
asset or assets, adjusted for the specific attributes of that loan.
Impaired loans and other real estate owned: Nonrecurring fair value
adjustments to loans and other real estate owned (OREO) reflect full or partial
write-downs that are based on the loans or OREO's observable market price or
current appraised value of the collateral in accordance with SFAS 114,
Accounting by Creditors for Impairment of a Loan. Since the market for impaired
loans and OREO is not active, loans or OREO subjected to nonrecurring fair value
adjustments based on the current appraised value of the collateral may be
classified as Level 2 or Level 3 depending on the type of asset and the inputs
to the valuation. When appraisals are used to determine impairment and these
appraisals are based on a market approach incorporating a dollar-per-square-foot
multiple, the related loans or OREO are classified as Level 2. If the appraisals
9
require significant adjustments to market-based valuation inputs or apply an
income approach based on unobservable cash flows to measure fair value, the
related loans or OREO subjected to nonrecurring fair value adjustments are
typically classified as Level 3 due to the fact that Level 3 inputs are
significant to the fair value measurement.
Fair Value Measurements at September 30, 2008 using:
Quoted prices in
active markets for Significant other Significant
identical assets observable inputs unobservable inputs
Total (Level 1) (Level 2) (Level 3)
---------------------------------------------------------------------------
Available for sale securities $ 62,303,467 $ 2,475,208 $ 53,662,077 $ 6,166,182
Certain other assets are measured at fair value on a nonrecurring basis.
These adjustments to fair value usually result from application of lower of cost
or fair value accounting or write-downs of individual assets due to impairment.
For assets measured at fair value on a nonrecurring basis in the first nine
months of 2008 that were still held in the balance sheet at quarter end, the
following table provides the level of valuation assumptions used to determine
each adjustment and the carrying value of the related individual assets at
quarter end.
Carrying value at September 30, 2008:
Quoted prices in
active markets for Significant other Significant
identical assets observable inputs unobservable inputs
Total (Level 1) (Level 2) (Level 3)
---------------------------------------------------------------------------
Loans held for sale $ 19,263,979 $ -- $ 19,263,979 $ --
Impaired loans 6,220,248 -- 6,220,248 --
Other real estate owned (OREO) 1,432,343 -- 1,432,343 --
During the first nine months of 2008, the Company recognized losses related
to certain assets that are measured at fair value on a nonrecurring basis (i.e.
loans and loans held for sale). Approximately $657,000 of losses related to
loans were recognized as chargeoffs for loan losses and a $201,000 write down of
an OREO property was recognized as other operating expenses. During the first
nine months, there were no losses related to loans held for sale accounted for
at the lower of cost or fair value.
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS 141 (R), Business Combinations,
which is a revision of SFAS 141, Business Combinations. SFAS 141(R) establishes
principles and requirements for how an acquirer in a business combination:
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any noncontrolling interest in the
acquiree; recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and discloses information to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. This Statement is effective for fiscal
years beginning after December 15, 2008, and is to be applied prospectively. The
Company is currently assessing the potential impact SFAS 141(R) will have on the
financial statements.
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements. SFAS 160 amends ARB 51, Consolidated
Financial Statements, to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. This Statement clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
clearly reported as equity in the consolidated financial statements.
Additionally, SFAS 160 requires that the amount of consolidated net income
attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statements of income.
The provisions of this Statement are effective for fiscal years beginning on or
after December 15, 2008, and earlier application is prohibited. Prospective
application of this Statement is required, except for the presentation and
disclosure requirements which must be applied retrospectively. The Company is
currently assessing the potential impact SFAS 160 will have on the financial
statements.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
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 and
its automated teller machines. Deposits in the Bank are insured by the Federal
Deposit Insurance Corporation. The Bank considers its core market area to be the
Baltimore 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 27 A 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, 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 this
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 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 general commercial and retail banking business with
ten branch locations. CMSI is in the business of originating residential
mortgage loans to be sold 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 decreased 41% or $760,000 for the nine months ended September
30, 2008 compared to the same period in 2007. The Company's earning performance
in the first nine months of 2008 was impacted by the $368,000 pretax charge to
close the Wilkens drive-thru effective April 30, 2008 and the $997,000 provision
for loan losses. The decrease was 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 4.07% for the nine months ended September 30, 2008
from 4.40% in the comparable quarter in 2007.
11
Based upon current earnings, the Company declared a dividend of $0.12 per
share to shareholders for the fourth quarter of 2008 and paid a dividend of
$0.12 per share during the first, second, and third quarters of 2008.
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
an investment. Management reviews other criteria such as 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 $51.7 million to $404.6 million at September 30,
2008 compared to $352.8 million at the end of 2007. Loans increased by $18.7
million to $277.1 million during the period and investment securities increased
$21.6 million to $74.4 million in order to partially offset the decrease in net
interest income from the decline in the net interest margin. FHLB advances
increased $66.4 million and were used to fund the $18.7 million increase in
loans, the $21.6 million increase in investment securities, the $11.7 million
increase in loans held for sale, the $7.8 million decrease in deposits, and the
repurchase of 276,137 shares of common stock for $3.9 million. Total average
interest-earning assets increased by $22.9 million during the period to $349.0
million and were 94% of total average assets at September 30, 2008.
12
Investment Securities
The investment portfolio consists primarily of securities available for
sale. 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 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 increased $21.6 million to $74.4 million at September
30, 2008 from $52.8 million at December 31, 2007. The Company continues to
restructure its investment portfolio to manage interest rate risk.
Loans Held for Sale
Loans held for sale increased $11.7 million from December 31, 2007 to
September 30, 2008 due to the increase in origination activity from the decline
in interest rates during the first nine months of 2008 compared to the same
period in 2007. 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 by $18.7 million to $277.1 million at September 30, 2008
from $258.4 million at December 31, 2007. The increase was due to originations
exceeding payoffs and was partially reduced by the reclassification of $1.4
million of loans to other real estate owned property.
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 loans'
effective interest rates for loans that are not collateral dependent.
At September 30, 2008, the Company had thirteen impaired loans totaling
approximately $6.2 million, all of which have been classified as nonaccrual. The
valuation allowance for impaired loans was $1.4 million as of September 30,
2008.
13
The following table provides information concerning non-performing assets
and past due loans:
September 30, December 31, September 30,
2008 2007 2007
------------------- ------------------- -----------------
Nonaccrual loans $ 9,619,194 $ 4,819,139 $ 3,220,797
Restructured loans 773,109 178,003 178,664
Foreclosed real estate 1,432,343 -- --
------------------- ------------------- -----------------
Total nonperforming assets $ 11,824,646 $ 4,997,142 $ 3,399,461
------------------- ------------------- -----------------
Accruing loans past-due 90 days or more$ 244,913 $ 918,986 $ 1,382,044
=================== =================== =================
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.
For the nine months ended September 30, 2008 and the year ended December
31, 2007, 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 $3.7 million at September 30, 2008, which
was 1.31% of loans compared to $3.3 million at December 31, 2007, which was
1.25% of loans. During the first nine months of 2008, the Company experienced
net charge-offs of $585,000. The ratio of net loan losses to average loans
outstanding increased to 0.21% for the nine months ended September 30, 2008 from
0.15% for the year ended December 31, 2007. The ratio of nonperforming assets as
a percent of period-end loans and foreclosed real estate increased to 4.28% as
of September 30, 2008 compared to 2.26% at December 31, 2007.
14
The following table shows the activity in the allowance for loan losses:
Year Ended
Nine months Ended September 30, December 31,
--------------------------------------------------------
2008 2007 2007
--------------- --------------- ----------------
Allowance for loan losses - beginning of
period $ 3,270,425 $ 3,131,021 $ 3,131,021
Provision for loan losses 997,000 264,000 536,000
Charge-offs (656,802) (364,234) (442,452)
Recoveries 72,133 42,253 45,856
--------------- --------------- ----------------
Allowance for loan losses - end of period $ 3,682,756 $ 3,073,040 $ 3,270,425
=============== =============== ================
Funding Sources
Deposits
Total deposits decreased by $7.8 million to $277.8 million as of September
30, 2008 from $285.6 million as of December 31, 2007. Noninterest-bearing
accounts decreased $4.3 million and money market accounts decreased $11.4
million and lower interest bearing checking and savings accounts decreased $1.4
million and $1.0 million respectively. Certificates of deposit accounts and IRA
accounts increased $10.3 million.
Borrowings
Advances from the Federal Home Loan Bank (FHLB) increased $66.4 million to
$81.4 million at September 30, 2008. Approximately $27.2 million was used to
fund the purchase of investment securities, $11.7 million was used to fund loans
held for sale, $7.8 million was used to fund deposit withdrawals and $3.9
million was used to repurchase 276,137 shares of common stock. Total borrowings
increased $64.0 million to $93.6 million at September 30, 2008 compared to $29.6
million at the end of 2007.
CAPITAL RESOURCES
Bank holding companies and banks are required by the Federal Reserve and
FDIC to maintain 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 September 30, 2008 and December 31, 2007, the Company
is considered well capitalized. Management knows of no conditions or events that
would change this classification.
15
The following table summarizes the Company's capital ratios:
Minimum
September 30, December 31, Regulatory To Be
2008 2007 Requirements Well Capitalized
-------------- --------------- -------------- -----------------
Risk-based capital ratios:
Tier 1 capital 10.19% 12.35% 4.00% 6.00%
Total capital 11.47 13.63 8.00 10.00
Tier 1 leverage ratio 8.49 10.03 4.00 5.00
RESULTS OF OPERATIONS
Summary
Carrollton Bancorp reported net income for the first nine months of 2008 of
$1.1 million, or $0.42 per share-diluted. For the same period of 2007, net
income amounted to $1.9 million, or $0.66 per share-diluted. The Company's
earning performance in the first nine months of 2008 was impacted by the
$368,000 pretax charge to close the Wilkens drive-thru effective April 30, 2008
and the $997,000 provision for loan losses compared to $264,000 in 2007. These
additional expenses were 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 4.07% for the nine months ended September 30, 2008 from
4.40% in the comparable period in 2007.
Return on average assets and return on average equity are key measures of a
Company'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
nine months ended September 30, 2008 was 0.40%, compared to 0.72% for the
corresponding period in 2007. Return on average equity, the product of net
income divided by average equity, measures how effectively the Company invests
its capital to produce income. Return on average equity for the nine months
ended September 30, 2008 was 4.51%, compared to 7.07% for the corresponding
period in 2007.
Interest and fee income on loans decreased 11.1% or $1.7 million as a
result of the yield on loans declining 99 basis points to 6.77% while average
loans increased 1.8% or $5.0 million. Total interest decreased 6.5% or $1.2
million. Partially offsetting the decline in interest and fee income on loans
was the 25.2% or $564,000 increase in investment securities income due to the
$15.6 million increase in average investment securities. Net interest income was
substantially the same at $10.7 million. The decrease in net interest income due
to the compression of the Company's net interest margin to 4.07% for the nine
months ended September 30, 2008 from 4.40% in the comparable period in 2007 was
offset by the $22.9 million or 7% increase in average interest earning assets.
Noninterest income increased 3.6% or $170,000 to $4.9 million in the first nine
months of 2008 compared to the same period in 2007. This increase was due a
$54,000 increase in brokerage commissions, $179,000 increase in mortgage banking
fees and gains and the $80,000 gain related to Visa, Inc. initial public
offering that occurred in March 2008. These increases were partially offset by
the $120,000 decrease in service charges and the $53,000 decrease in Electronic
Banking. The decrease in service charges was primarily due to the one time fee
for a commercial customer of approximately $132,000 in the first quarter of
2007.
Noninterest expenses were $12.9 million for the first nine months of 2008
compared to $12.3 million for the same period in 2007, a 4.9% increase. The
increase was due to a one-time pre-tax charge of $368,000 to close the Wilkens
Plaza branch, a $238,000 increase in OREO expenses, an increase in occupancy
expense of $242,000 caused by opening of our new Cockeysville branch, relocating
of our White Marsh branch to Perry Hall, and normal lease escalation charges,
and a $407,000 increase in employee benefits, in particular medical expenses.
These increases in expenses were offset by a $302,000 reduction in salary
expenses due to fewer employees, and a $226,000 decrease in professional
services relating to SOX in 2007.
16
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 $10.7 million for the first nine months of 2008 and
2007. This decrease in net interest income due to the compression of the net
interest margin from 4.40% for the first nine months of 2007 to 4.07% for the
first nine months of 2008 was offset by the $22.9 million increase in average
interest earning assets.
Interest income on loans on a tax equivalent basis (a non-GAAP measure)
decreased $1.7 million or 11.1% during the first nine months of 2008. The yield
on loans decreased to 6.77% during the first nine months of 2008 from 7.76%
during the first nine months of 2007. The Company continues to emphasize
commercial real estate and small business loan production.
Interest income from investment securities and overnight investments on a
tax equivalent basis (a non-GAAP measure) was $3.0 million for the first nine
months of 2008, compared to $2.4 million for the first nine months of 2007,
representing a 24.1% or $574,000 increase. The investment portfolio on average
increased 30.0% or $15.6 million, and the overall yield on investments decreased
slightly from 5.74% for the first nine months of 2007 to 5.53% for the first
nine months of 2008. The yield on Federal Funds Sold and the FHLB deposit
decreased to 2.71% for the first nine months of 2008 compared to 5.36% for the
same period in 2007 due to the Federal Open Market Committee (FOMC) reducing
rates by 3.25%.
Interest expense decreased $1.1 million to $6.3 million for the first nine
months of 2008 from $7.3 million for the first nine months of 2007. The decrease
in interest expense was due primarily to the cost of interest-bearing
liabilities decreasing to 2.91% for the first nine months of 2008 compared to
3.76% for the first nine months of 2007. The decrease was due to the FOMC
reducing rates by 3.25%. Interest-bearing deposits decreased on average $2.6
million or 1.1% to $225.5 million as of September 2008 from $228.1 million as of
September 30, 2007.
17
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.
Nine Months Ended September 30, 2008
------------------------------------------------------
Average balance Interest Yield
--------------- --------------- --------------
ASSETS
Interest-earning assets:
Federal funds sold and Federal Home Loan Bank
deposit $ 3,069,186 $ 62,239 2.71%
Federal Home Loan Bank stock 2,748,144 98,783 4.80
Investment securities (a) 67,663,238 2,799,224 5.53
Loans, net of unearned income: (a)
Demand and time 67,625,475 3,121,716 6.17
Residential mortgage (b) 87,938,146 4,340,002 6.59
Commercial mortgage and construction 118,564,401 6,422,483 7.24
Installment 1,228,334 68,584 7.46
Lease financing 173,442 5,602 4.31
--------------- ---------------
Total loans 275,529,798 13,958,387 6.77
--------------- --------------- --------------
Total interest-earning assets 349,010,366 16,918,633 6.48
Noninterest-earning assets:
Cash and due from banks 7,969,518
Premises and equipment 7,272,809
Other assets 10,007,991
Allowance for loan losses (3,064,450)
Unrealized gains on available for sale
securities (475,941)
---------------
Total assets $ 370,720,293
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings and NOW $ 53,194,763 93,469 0.24%
Money market 48,259,465 822,284 2.28
Other time 124,000,456 3,973,557 4.28
Borrowings 61,293,372 1,365,556 2.98
--------------- ---------------
286,748,056 6,254,866 2.91
---------------
Noninterest-bearing liabilities:
Noninterest-bearing deposits 49,674,341
Other liabilities 1,559,868
Shareholders' equity 32,738,028
---------------
Total liabilities and shareholders' equity $ 370,720,293
===============
Net interest income $ 10,663,767
===============
Net interest margin 4.07%
==============
(a) Interest on investments and loans is presented on a fully taxable
equivalent basis, using regular income tax rates, (a non-GAAP financial
measure).
(b) Includes loans held for sale
18
Nine Months Ended September 30, 2007
------------------------------------------------------
Average balance Interest Yield
--------------- --------------- --------------
ASSETS
Interest-earning assets:
Federal funds sold and Federal Home Loan Bank
deposit $ 1,834,462 $ 73,475 5.36%
Federal Home Loan Bank stock 1,618,567 77,684 6.42
Investment securities held to maturity and
investment securities available for sale (a) 52,085,549 2,235,130 5.74
Loans, net of unearned income: (a)
Demand and time 73,564,654 4,435,915 8.06
Residential mortgage (b) 76,463,879 4,310,963 7.54
Commercial mortgage and construction 118,667,555 6,862,831 7.73
Installment 1,182,366 57,128 6.46
Lease financing 668,489 33,228 6.65
--------------- ---------------
Total loans 270,546,943 15,700,065 7.76
--------------- ---------------
Total interest-earning assets 326,085,521 18,086,354 7.42
Noninterest-earning assets:
Cash and due from banks 8,658,433
Premises and equipment 6,288,808
Other assets 8,322,859
Allowance for loan losses (3,112,587)
Unrealized gains on available for sale
securities 1,111,190
---------------
Total assets $ 347,354,224
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings and NOW $ 56,862,167 100,784 0.24%
Money market 58,145,954 1,781,682 4.10
Other time 113,048,559 4,139,995 4.90
Borrowings 33,214,845 1,324,415 5.33
--------------- ---------------
261,271,525 7,346,876 3.76
---------------
Noninterest-bearing liabilities:
Noninterest-bearing deposits 49,676,306
Other liabilities 1,208,873
Shareholders' equity 35,197,520
---------------
Total liabilities and shareholders' equity $ 347,354,224
===============
Net interest income $ 10,739,478
===============
Net interest margin 4.40%
==============
(a) Interest on investments and loans is presented on a fully taxable
equivalent basis, using regular income tax rates, (a non-GAAP financial
measure).
(b) Includes loans held for sale
19
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 basis to
determine potential collection and repayment problems.
The Company recorded a provision for loan losses of $997,000 in the first
nine months of 2008 and $264,000 in the first nine months of 2007. Nonaccrual,
restructured, and delinquent loans over 90 days to total loans and OREO
increased to 4.28% at September 30, 2008 compared to 2.46% at September 30, 2007
and increased from 2.26% at December 31, 2007.
Noninterest Income
Noninterest income was $4.9 million for the nine months ended September 30,
2008, an increase of $170,000 or 3.6%, compared to the corresponding period in
2007. This increase was due to a $54,000 increase in brokerage commissions,
$179,000 increase in mortgage banking fees and gains and the $80,000 gain
related to Visa, Inc. initial public offering that occurred in March 2008. These
increases were partially offset by the $120,000 decrease in service charges and
a $53,000 decrease in Electronic Banking. The decrease in service charges was
primarily due to the one time fee for a commercial customer of approximately
$132,000 in the first quarter of 2007.
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. Brokerage commission increased $54,000, or 10.6%,
during the nine months ended September 30, 2008, compared to the same period in
2007.
Electronic banking fee income decreased by $53,000 for the nine months
ended September 30, 2008 compared to the corresponding period in 2007.
Electronic banking income is comprised of three sources: national point of sale,
("POS") sponsorships, ATM fees and check card fees. The Company sponsors
merchants who accept ATM cards for purchases within various networks (i.e. STAR,
PULSE, NYCE). This national POS sponsorship income represents approximately 78%
of total electronic banking revenue. Fees from ATMs represent approximately 4%
of total electronic banking revenue. Fees from check cards and other service
charges represent approximately 18% of electronic banking revenue.
Mortgage-banking revenue increased by $179,000 to $1.9 million in 2008 from
$1.8 million in 2007. 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
Administration ("FHA") and the federal Veterans Administration ("VA") loans,
conventional and nonconforming first and second mortgages, and construction and
permanent financing.
The Company realized gains on the sales of equity securities of $82,000 for
the nine months ended September 30, 2008, compared to none for the same period
in 2007. The gain related primarily to the cash received subsequent to the Visa,
Inc. initial public offering that occurred in March 2008.
Noninterest Expense
Noninterest expense was $12.9 million for the nine months ended September
30, 2008, compared to the $12.3 million for same period in 2007. The $608,000 or
4.9% increase was due to a one-time pre-tax charge of $368,000 to close the
Wilkens Plaza branch, an increase in occupancy expense of $242,000 caused by
opening of our new Cockeysville branch, relocating of our White Marsh branch to
Perry Hall, and normal lease escalation charges, and a $407,000 increase in
employee benefits, in particular medical expenses. These increases in expenses
were offset by a $302,000 reduction in salary expenses due to fewer employees,
and a $226,000 decrease in professional services relating to SOX in 2007.
Income Taxes
For the nine month period ended September 30, 2008, the Company's effective
tax rate was 24.7%, compared to 31.2% for the same period in 2007. The effective
tax rate may fluctuate from year to year due to changes in the mix of tax-exempt
loans and investments.
20
Results of Operations - Third Quarter 2008 and 2007
Net income for the third quarter of 2008 was $51,000 ($0.02 per
share-diluted) compared to $813,000 ($0.29 per share-diluted) for the third
quarter of 2007, a 93.8% decrease.
Third quarter net interest income remained relatively flat at $3.5 million.
The actions of the Federal Reserve reducing rates by 3.25% during this period of
time resulted in a reduction in the Company's net interest margin from 4.42% for
the quarter ended September 30, 2007 to 3.85% for the quarter ended September
30, 2008. The 57 basis points decrease in the net interest margin was
substantially offset by the $41.9 million increase in average interest earning
assets.
Non-interest income continues to be a large contributor to the Company's
profitability. The majority of the Company's non-interest income is derived from
two sources; the Bank's Electronic Banking Division and Carrollton Mortgage
Services, Inc., (CMSI) a subsidiary of Carrollton Bank. Non-interest income
increased 5% or $79,000 to $1.6 million in the third quarter of 2008 compared to
the third quarter of 2007. This increase was due to the 6.8% or $42,000 increase
in the mortgage banking fees and gains on loan sales, the 18.0% or $33,000
increase in service charges and a $50,000 easement fee partially offset by the
13.1% or $68,000 decrease in electronic banking fees.
Non-interest expenses were $4.4 million in the third quarter of 2008
compared to $3.9 million in 2007, an increase of $501,000 or 13.0%. The increase
was due to a $189,000 increase in medical expenses, a $38,000 increase in
occupancy costs due to normal escalation charges and an increase in the new
Perry Hall branch lease that relocated from White Marsh and a $290,000 increase
in other operating expenses which was due primarily to a $209,000 increase in
Other Real Estate Owned expenses and increases in various other expenses
partially offset by a decrease in consulting fees to assist in preparing the
documentation needed for compliance with The Sarbanes Oxley Act of 2002 (SOX) in
2007.
LIQUIDITY AND CAPITAL EXPENDITURES
Liquidity
Liquidity describes the ability of the Company to meet financial
obligations, including lending commitments and contingencies, which 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. Additionally, liquidity is provided through the Company's
portfolios of cash and interest-bearing deposits in other banks, federal funds
sold, loans held for sale, and securities available for sale. Liquid assets
totaled $50.2 million or 14% of total assets at September 30, 2008.
The borrowing requirements of customers include commitments to extend
credit and the unused portion of lines of credit, which totaled $112.4 million
at September 30, 2008. Of this total, management places a high probability of
required funding within one year on approximately $56.8 million. The amount
remaining is unused home equity lines and other consumer lines on which
management places a low probability of funding.
The Company also has external sources of funds through the Federal Reserve
Bank (FRB) and FHLB, which can be drawn upon when required. There is a line of
credit totaling $84.0 million with the Federal Home Loan Bank of Atlanta (the
"FHLB") of which $81.4 million was outstanding at September 30, 2008. Also, the
Company can pledge securities at the FRB and the FHLB and borrow approximately
97% of the fair market value of the securities. Additionally, the Company has
available unsecured federal funds lines of credit of $5.0 million and secured
federal funds lines of credit of $10.0 million with other institutions. There
was no balance outstanding under these lines at September 30, 2007. 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 periods of volatile as well as stable interest rates
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.
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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 September 30, 2008, 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.
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 the first nine months of 2008 or 2007.
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.
ITEM 3. 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.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures (as those terms
are defined in Exchange Act Rules 240-13-a-14(c) and 15d-14(c)) that are
designed to provide material information about the Company to the chief
executive officer, the chief financial officer, and others within the Company so
that information may be recorded, processed, summarized, and reported as
required under the Securities Exchange Act of 1934. The chief executive officer
and the chief financial officer have each reviewed and evaluated the
effectiveness of the Company's internal controls and procedures as of a date
within 90 days of the filing of this nine month report and have each concluded
that such disclosure controls and procedures are effective.
There have been no changes that have materially affected or are reasonably
likely to materially affect the Company's internal controls (as defined in Rule
13a-15 under the Securities Act of 1934) or in other factors that could
materially affect such controls subsequent to the date of the evaluations by the
chief executive officer and the chief financial officer. Neither the chief
executive officer nor the chief financial officer is aware of any significant
deficiencies or material weaknesses in the Company's internal controls.
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PART II
ITEM 1. 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On October 23, 2008, the Board of Directors of the Company declared a $0.12
per share cash dividend to common shareholders of record on November 14, 2008,
payable December 1, 2008.
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ITEM 6. EXHIBITS
(a) Exhibits
(31.1) Rule 13a-14(a) Certification by the Principal Executive Officer
(31.2) Rule 13a-14(a) Certification by the Principal Financial Officer
(32.1) Certification by the Principal Executive Officer of the periodic
financial reports, required by Section 906 of the Sarbanes-Oxley
Act of 2002
(32.2) Certification by the Principal Financial Officer of the periodic
financial reports, required by Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
On November 3, 2008, the Company announced third quarter net income and a
$0.12 quarterly dividend.
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SIGNATURES
Pursuant to the requirements 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
PRINCIPAL EXECUTIVE OFFICER:
Date November 10, 2008 /s/Robert A. Altieri
----------------- -------------------------------------
Robert A. Altieri
President and Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER:
Date November 10, 2008 /s/James M. Uveges
----------------- -------------------------------------
James M. Uveges
Senior Vice President and Chief
Financial Officer
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