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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 March 31, 2009
----------------
|_| 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.)
7151 COLUMBIA GATEWAY DRIVE, SUITE A, COLUMBIA, MARYLAND 21046
(Address of principal executive offices)
(410) 312-5400
(Issuer's telephone number)
344 N. Charles Street, Suite 300, Baltimore, Maryland 21201
(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 an accelerated filer.
Yes |_| No |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 May 1, 2009
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PART I
ITEM 1. FINANCIAL STATEMENTS
CARROLLTON BANCORP
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2009 2008
-------------- --------------
(unaudited)
ASSETS
Cash and due from banks $ 2,943,819 $ 6,110,122
Federal funds sold and other interest bearing deposits 6,076,881 4,052,166
Federal Home Loan Bank stock, at cost 3,723,100 3,575,700
Investment securities
Available for sale 57,013,038 56,393,865
Held to maturity 10,046,740 10,374,288
Loans held for sale 31,069,745 21,701,287
Loans, less allowance for loan losses of $3,345,228 in 2009 and $3,179,741
in 2008 282,201,989 280,513,415
Premises and equipment 7,168,158 7,012,193
Accrued interest receivable 1,680,096 1,797,241
Bank owned life insurance 4,632,606 4,593,182
Deferred income taxes 4,257,036 3,416,895
Other real estate owned 1,707,679 1,736,018
Other assets 2,631,962 2,904,812
-------------- --------------
$ 415,152,849 $ 404,181,184
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 46,838,751 $ 45,324,537
Interest-bearing 265,002,607 247,028,739
-------------- --------------
Total deposits 311,841,358 292,353,276
Federal funds purchased and securities sold under agreement to repurchase 11,487,275 14,210,755
Advances from the Federal Home Loan Bank 51,530,000 65,230,000
Accrued interest payable 258,109 288,410
Accrued pension plan 1,968,896 1,968,896
Other liabilities 2,492,389 2,739,154
-------------- --------------
379,578,027 376,790,491
-------------- --------------
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per share (liquidation preference of
$1,000 per share) authorized 9,201 shares; issued and outstanding
9,201 in 2009 and 0 in 2008 (discount of $399,193 in 2009 and 0 in 2008) 8,780,808 --
Common stock, par $1.00 per share; authorized 10,000,000 shares; issued
and outstanding 2,564,988 in 2009 and 2,564,988 in 2008 2,564,988 2,564,988
Additional paid-in capital 15,665,930 15,255,971
Retained earnings 13,535,398 13,252,272
Accumulated other comprehensive income (4,972,302) (3,682,538)
-------------- --------------
35,574,822 27,390,693
$ 415,152,849 $ 404,181,184
============== ==============
See accompanying notes to consolidated financial statements.
2
CARROLLTON BANCORP
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31,
------------------------------
2009 2008
-------------- ---------------
(unaudited) (unaudited)
Interest income:
Interest and fees on loans $ 4,592,369 $ 4,734,133
Interest and dividends on securities:
Taxable 764,195 664,777
Nontaxable 111,534 88,038
Dividends 10,245 42,096
Federal funds sold and interest-bearing deposits with other banks 1,284 30,915
-------------- ---------------
Total interest income 5,479,627 5,559,959
-------------- ---------------
Interest expense:
Deposits 1,680,082 1,794,979
Borrowings 370,579 362,205
-------------- ---------------
Total interest expense 2,050,661 2,157,184
-------------- ---------------
Net interest income 3,428,966 3,402,775
Provision for loan losses 165,000 99,000
-------------- ---------------
Net interest income after provision for loan losses 3,263,966 3,303,775
-------------- ---------------
Noninterest income:
Service charges on deposit accounts 188,680 198,898
Brokerage commissions 130,136 216,664
Electronic Banking fees 424,968 467,536
Mortgage banking fees and gains 970,981 589,807
Other fees and commissions 101,060 106,617
Security gains, net -- 80,664
-------------- ---------------
Total noninterest income 1,815,825 1,660,186
-------------- ---------------
Noninterest expenses:
Salaries 1,795,321 1,682,191
Employee benefits 507,299 503,701
Occupancy 587,454 587,753
Furniture and equipment 154,385 153,942
Professional fees 268,243 223,282
Lease buyout - branch -- 368,000
Other noninterest expenses 1,057,770 898,150
-------------- ---------------
Total noninterest expenses 4,370,472 4,417,019
-------------- ---------------
Income before income taxes 709,319 546,942
Income tax provision 220,994 117,993
-------------- ---------------
Net income 488,325 428,949
Preferred stock dividends and discount accretion 60,062 --
-------------- ---------------
Net income available to common shareholders $ 428,263 $ 428,949
============== ===============
Basic net income per common share $ 0.17 $ 0.16
============== ===============
Diluted net income per common share $ 0.17 $ 0.16
============== ===============
See accompanying notes to consolidated financial statements.
3
CARROLLTON BANCORP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 2009 and 2008 (unaudited)
Accumulated
Additional Other
Preferred Common Paid-on Retained Comprehensive Comprehensive
Stock Stock Capital Earnings Income Income
---------- ----------- ----------- ----------- ------------ --------------
Balance December 31,
2007 $ -- $ 2,834,975 $18,781,650 $13,654,180 $ 660,495
Net income -- -- 428,949 -- $ 428,949
Changes in unrealized
gains (losses) on
available for sale
securities, net of tax -- -- -- -- 2,567 2,567
--------------
Comprehensive income -- $ 431,516
==============
Shares acquired and
canceled -- (199,598) (2,719,726) -- --
Stock-based compensation -- -- 1,828 -- --
Cash dividends, $0.12
per share -- -- -- (316,627) --
---------- ----------- ----------- -----------
Balance March 31, 2008 $ -- $ 2,635,377 $16,063,752 $13,766,502 $ 663,062
========== =========== =========== =========== ============
Balance December 31,
2008 $ -- $ 2,564,988 $15,255,971 $13,252,272 $ (3,682,538)
Net income -- -- -- 488,325 -- $ 488,325
Changes in unrealized
gains (losses) on
available for sale
securities, net of tax -- -- -- -- (1,235,948) (1,235,948)
Cash flow hedging
derivatives -- -- -- -- (53,816) (53,816)
--------------
Comprehensive income
(loss) -- -- -- -- $ (801,439)
==============
Issuance of U.S.
Treasury preferred
stock 8,770,572 -- 409,428 -- --
Accretion of discount
associated with U.S.
Treasury preferred
stock 10,236 -- -- -- --
Stock-based compensation -- -- 531 -- --
Cash dividends, $0.08
per share -- -- -- (205,199) --
---------- ----------- ----------- ----------- ------------
Balance March 31, 2009 $8,780,808 $ 2,564,988 $15,665,930 $13,535,398 $ (4,972,302)
========== =========== =========== =========== ============
See accompanying notes to consolidated financial statements.
4
CARROLLTON BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2009 and 2008
Three Months Ended March 31,
----------------------------
2009 2008
------------ ------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 488,325 $ 428,949
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses 165,000 99,000
Depreciation and amortization 193,365 216,838
Deferred income taxes (88,872) 289,907
Amortization of premiums and discounts (37,766) (9,700)
Gains on disposal of securities -- (80,664)
Loans held for sale made, net of principal sold (9,368,458) (5,110,732)
Loss on sale of foreclosed real estate 7,883 --
Stock based compensation expense 531 1,828
(Increase) decrease in:
Accrued interest receivable 117,145 18,053
Prepaid income taxes 120,994 (150,407)
Cash surrender value of bank owned life insurance (39,424) (38,750)
Other assets 107,931 (194,594)
Increase (decrease) in:
Accrued interest payable (30,301) 32,045
Deferred loan origination fees 5,770 (19,498)
Other liabilities (236,529) 579,357
------------ ------------
Net cash used in operating activities (8,594,406) (3,938,368)
------------ ------------
Cash flows from investing activities:
Proceeds from sales of securities available for sale -- 82,963
Proceeds from maturities of securities available for sale 1,681,565 688,189
Proceeds from maturities of securities held to maturity 331,970 5,135,191
Purchase of Federal Home Loan Bank stock, net (147,400) (929,600)
Purchase of securities available for sale (4,308,427) (20,580,725)
Loans made, net of principal collected (1,919,343) 3,836,314
Purchase of premises and equipment (305,406) (321,680)
Proceeds from sale of foreclosed real estate 80,456 --
------------ ------------
Net cash used in investing activities (4,586,585) (12,089,348)
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in time deposits 14,318,688 (5,194,917)
Net increase (decrease) in other deposits 5,169,394 (2,672,066)
Advances (payment) of Federal Home Loan Bank advances (13,700,000) 20,600,000
Net increase (decrease) in other borrowed funds (2,723,480) 584,334
Common stock repurchase and retirement -- (2,919,324)
Net proceeds of issuance of preferred stock and warrants 9,180,000 --
Dividends paid (205,199) (316,627)
------------ ------------
Net cash provided by financing activities 12,039,403 10,081,400
------------ ------------
Net decrease in cash and cash equivalents (1,141,588) (5,946,316)
Cash and cash equivalents at beginning of period 10,162,288 16,926,981
------------ ------------
Cash and cash equivalents at end of period $ 9,020,700 $ 10,980,665
============ ============
Supplemental information:
Interest paid on deposits and borrowings $ 2,080,962 $ 2,125,139
============ ============
Income taxes paid $ 1,000 $ 268,400
============ ============
Transfer of loan to foreclosed real estate $ 60,000 $ --
============ ============
See accompanying notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three months ended
March 31, 2009 and 2008 is unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements prepared for Carrollton
Bancorp (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 2008
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
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 March 31, 200, and for the
three months ended March 31, 2009 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 months
ended March 31, 2009, are not necessarily indicative of the results that will be
achieved for the entire year.
Certain amounts for 2008 have been reclassified to conform to the 2009
presentation.
Derivative Instruments and Hedging Activities
The Company accounts for derivative instruments and hedging activities
utilizing guidelines established in the Financial Accounting Standards Board
("FASB") Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. The Company recognizes all derivatives as either assets
or liabilities on the balance sheet and measures those instruments at fair value
using Level 2 inputs as defined in Note 6. Changes in fair value of derivatives
designated and accounted for as cash flow hedges, to the extent they are
effective as hedges, are recorded in "Other Comprehensive Income," net of
deferred taxes. Any hedge ineffectiveness would be recognized in the income
statement line item pertaining to the hedged item.
Management periodically reviews contracts from various functional areas of
the Company to identify potential derivatives embedded within selected
contracts. Management has identified potential embedded derivatives in certain
loan commitments for residential mortgages where the Company has intent to sell
to an outside investor. Due to the short-term nature of these loan commitments
and the minimal historical dollar amount of commitments outstanding, the
corresponding impact on the Company's financial condition and results of
operation has not been material.
6
The Company entered into an interest rate Floor transaction on December 14,
2005. The Floor has a notional amount of $10.0 million with a minimum interest
rate of 7.00% based on U.S. prime rate and was initiated to hedge exposure to
the variability in the future cash flows derived from adjustable rate home
equity loans in a declining interest rate environment. The Floor has a term of
five years. This interest rate Floor is designated a cash flow hedge, as it is
designed to reduce variation in overall changes in cash flow below the above
designated strike level associated with the first Prime based interest payments
received each period on its then existing loans. The interest rate of these
loans will change whenever the repricing index changes, plus or minus a credit
spread (based on each loan's underlying credit characteristics), until the
maturity of the interest rate Floor. Should the Prime rate index fall below the
strike level of the Floor prior to maturity, the Floor's counterparty will pay
the Bank the difference between the strike rate and the rate index multiplied by
the notional value of the Floor multiplied by the number of days in the period
divided by 360 days. The fair value of the Floor will be recorded as "Other
Assets" and changes in the fair value will be recorded as "Other Comprehensive
Income" a component of shareholders' equity.
The bank counterparty to the interest rate floor exposes the Company to
credit-related losses in the event of its non-performance. The Company monitors
ratings, and potential downgrades of the counterparty on at least a quarterly
basis.
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 March 31,
-----------------------------
2009 2008
------------- -------------
Basic:
Net income $ 488,325 $ 428,949
Net income available to common shareholders 428,263 428,949
Average common shares outstanding 2,564,988 2,724,750
Basic net income per common share $ 0.17 $ 0.16
============= =============
Diluted:
Net income $ 488,325 $ 428,949
Net income available to common shareholders 428,263 428,949
Average common shares outstanding 2,564,988 2,724,750
Stock option adjustment -- 4,475
------------- -------------
Average common shares outstanding - diluted 2,564,988 2,729,225
Diluted net income per common share $ 0.17 $ 0.16
============= =============
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 Common Stock are issued to each non-employee
director in May of each year. 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 $531 during the first
quarter of 2009 compared to $1,828 during the first quarter of 2008. As of March
31, 2009, there was $1,593 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).
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 March 31, 2009, 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.
Outstanding loan commitments, unused lines of credit, and letters of credit
were as follows:
March 31, March 31,
2009 2008
----------- -----------
Loan commitments $28,206,581 $34,180,174
Unused lines of credit 79,719,181 83,171,091
Letters of credit 2,581,075 2,628,941
NOTE 5 - TARP CAPITAL PURCHASE PROGRAM
On February 13, 2009, as part of the TARP Capital Purchase Program, the
Company entered into a Letter Agreement, and the related Securities Purchase
Agreement - Standard Terms (collectively, the "Purchase Agreement"), with the
United States Department of the Treasury ("Treasury"), pursuant to which the
Company issued (i) 9,201 shares of Fixed Rate Cumulative Perpetual Preferred
Stock, Series A, liquidation preference $1,000 per share ("Series A Preferred
Stock"), and (ii) a warrant to purchase 205,379 shares of the Company's common
stock, par value $1.00 per share at $6.72 per share at any time on or before
February 13, 2019. Treasury has agreed not to exercise voting power with respect
to any shares of common stock issued upon exercise of the warrant. The Series A
Preferred Stock and the warrant were issued in a transaction exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
8
The Company raised $9,201,000 through the sale of the Series A Preferred
Stock which will qualify as Tier 1 capital. With the full amount of the
Treasury's investment, on a pro-forma basis, at December 31, 2008, the Company's
Tier I capital ratio would increase to approximately 12.78% and total risk-based
capital ratio would increase to approximately 13.84%. The Series A Preferred
Stock will pay cumulative dividends at a rate of 5% per annum until February 15,
2014. Beginning February 16, 2014, the dividend rate will increase to 9% per
annum. Dividends are payable quarterly.
The recently enacted American Recovery and Reinvestment Act of 2009 permits
the Company to redeem the Series A preferred stock without regard to the
limitations in the Articles Supplementary to the Company's Articles of
Incorporation. The Company may, at its option, with prior regulatory approval,
redeem shares of Series A Preferred Stock, in whole or in part, at any time and
from time to time, for cash at a per share amount equal to the sum of the
liquidation preference per share plus any accrued and unpaid dividends to but
excluding the redemption date.
The Purchase Agreement also subjects the Company to certain of the
executive compensation limitations included in the Emergency Economic
Stabilization Act of 2008 (the "EESA"). As a condition to the closing of the
transaction, Robert A. Altieri, James M. Uveges, Gary M. Jewell, William D.
Sherman, and Lola B. Stokes (the Company's Senior Executive Officers, as defined
in the Purchase Agreement) each: (i) voluntarily waived any claim against the
Treasury or the Company for any changes to such Senior Executive Officer's
compensation or benefits that are required to comply with the regulation issued
by the Treasury under the TARP Capital Purchase Program as published in the
Federal Register on October 20, 2008 and acknowledging that the regulation may
require modification of the compensation, bonus, incentive and other benefit
plans, arrangements and policies and agreements (including so-called "golden
parachute" agreements) as they relate to the period the Treasury holds any
equity or debt securities of the Company acquired through the TARP Capital
Purchase Program; and (ii) entered into an amendment to Messer's Altieri,
Uveges, Jewell and Mrs. Stokes employment agreements that provide that any
severance payments made to such officers will be reduced, as necessary, so as to
comply with the requirements of the TARP Capital Purchase Program.
The Treasury's current consent shall be required for any increase in the
common dividends per share until February 13, 2012 unless prior to such date,
the Series A preferred stock is redeemed in whole or the Treasury has
transferred all of the Series A Preferred Stock to third parties.
NOTE 6 - FAIR VALUE
SFAS 157 defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants. A fair value measurement assumes that the transaction to sell the
asset or transfer the liability occurs in the principal market for the asset or
liability or, in the absence of a principal market, the most advantageous market
for the asset or liability. The price in the principal (or most advantageous)
market used to measure the fair value of the asset or liability shall not be
adjusted for transaction costs. An orderly transaction is a transaction that
assumes exposure to the market for a period prior to the measurement date to
allow for marketing activities that are usual and customary for transactions
involving such assets and liabilities; it is not a forced transaction. Market
participants are buyers and sellers in the principal market that are (i)
independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to
transact.
SFAS 157 requires the use of valuation techniques that are consistent with
the market approach, the income approach and/or the cost approach. The market
approach uses prices and other relevant information generated by market
transactions involving identical or comparable assets and liabilities. The
income approach uses valuation techniques to convert future amounts, such as
cash flows or earnings, to a single present amount on a discounted basis. The
cost approach is based on the amount that currently would be required to replace
the service capacity of an asset (replacement cost). Valuation techniques should
be consistently applied. Inputs to valuation techniques refer to the assumptions
that market participants would use in pricing the asset or liability. Inputs may
be observable, meaning those that reflect the assumptions market participants
would use in pricing the asset or liability developed based on market data
obtained from independent sources, or unobservable, meaning those that reflect
the reporting entity's own assumptions about the assumptions market participants
would use in pricing the asset or liability developed based on the best
information available in the circumstances. In that regard, SFAS 157 establishes
a fair value hierarchy for valuation inputs that gives the highest priority to
quoted prices in active markets for identical assets or liabilities and the
lowest priority to unobservable inputs. The fair value hierarchy is as follows:
9
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 for financial assets and financial liabilities:
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. Equity securities
are reported at fair value using Level 1 inputs.
Derivatives: Derivatives are reported at fair value utilizing Level 2
inputs. The Company obtains dealer quotations to value its interest rate floor.
For purposes of potential valuation adjustments to its derivative position, the
Company evaluates the credit risk of its counterparty. Accordingly, the Company
has considered factors such as the likelihood of default by the counterparty and
the remaining contractual life, among other things, in determining if any fair
value adjustment related to credit risk is required.
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
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.
10
The following table represents the Company's financial assets measured at
fair value on a recurring basis as of March 31, 2009:
Carrying Value at March 31, 2009:
Total (Level 1) (Level 2) (Level 3)
----------- ----------- ----------- -----------
Available for sale securities $57,013,038 $ 1,465,495 $54,831,852 $ 715,691
Derivative asset 553,319 -- 553,319 --
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 during the first three
months of 2009 that were still held in the balance sheet at period 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
period end.
Carrying Value at March 31, 2009:
Total (Level 1) (Level 2) (Level 3)
----------- ---------- ----------- --------
Loans held for sale $31,069,745 $ -- $31,069,795 $ --
Impaired loans 3,740,502 -- 3,740,502 --
Other real estate owned (OREO) 1,707,769 -- 1,707,769 --
During the first three months of 2009, 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 $59,000 of losses
related to loans were recognized as chargeoffs for loan losses and there were no
write downs of OREO properties. During the first three months of 2009, there
were no losses related to loans held for sale accounted for at the lower of cost
or fair value.
The following table represents the Company's fair value hierarchy for its
financial assets measured at fair value on a recurring basis as of December 31,
2008:
Carrying Value at December 31, 2008:
Total (Level 1) (Level 2) (Level 3)
----------- ----------- ----------- -----------
Available for sale securities $56,393,865 $ 2,065,486 $50,194,738 $ 4,133,641
Derivative asset 649,792 -- 649,792 --
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 during 2008 that were
still held in the balance sheet at year 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 year end.
Carrying Value at December 31, 2008:
Total (Level 1) (Level 2) (Level 3)
---------- ---------- ------------ ----------
Loans held for sale $21,701,287 $ -- $21,701,287 $ --
Impaired loans 1,553,548 -- 1,553,548 --
Other real estate owned (OREO) 1,736,018 -- 1,736,018 --
11
NOTE 7 - INTEREST RATE FLOOR DERIVATIVE
The fair value of the derivative instruments in the unaudited condensed
consolidated balance sheet as of March 31, 2009, was approximately $553,000. The
effect of the derivative instrument designated as a cash flow hedge on the
Company's unaudited condensed consolidated statement of income for the three
months ended March 31, 2009, was approximately $95,000.
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2009, the Company adopted the Financial Accounting
Standards Board (FASB) issued FSP No. 142-3, "Determination of the Useful Life
of Intangible Assets" (FSP No. 142-3) that amends the factors considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142. FSP No. 142-3 requires a
consistent approach between the useful life of a recognized intangible asset
under SFAS No. 142 and the period of expected cash flows used to measure the
fair value of an asset under SFAS No. 141(R). The FSP also requires enhanced
disclosures when an intangible asset's expected future cash flows are affected
by an entity's intent and/or ability to renew or extend the arrangement. The
adoption did not have any impact on the Company's consolidated results of
operations or financial condition.
Effective January 1, 2009, the Company adopted the FASB issued SFAS No.
161, "Disclosures about Derivative Instruments and Hedging Activities--an
amendment of FASB Statement No. 133" (SFAS 161). The standard requires
additional quantitative disclosures (provided in tabular form) and qualitative
disclosures for derivative instruments. The required disclosures include how
derivative instruments and related hedged items affect an entity's financial
position, financial performance, and cash flows; the relative volume of
derivative activity; the objectives and strategies for using derivative
instruments; the accounting treatment for those derivative instruments formally
designated as the hedging instrument in a hedge relationship; and the existence
and nature of credit-risk-related contingent features for derivatives. SFAS 161
does not change the accounting treatment for derivative instruments. The Company
adopted the disclosures required by SFAS 161 in the first quarter of fiscal
2009. Since SFAS 161 only required additional disclosure, the adoption did not
impact the Company's consolidated results of operations, financial condition or
cash flows.
Effective January 1, 2009, the Company adopted FSP 157-2, "Effective Date
of FASB Statement No. 157" (FSP 157-2). FSP 157-2 delayed the effective date of
SFAS 157 for all non-financial assets and non-financial liabilities, except for
items that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually), until the beginning of the first
quarter of fiscal 2009. These include goodwill and other non-amortizable
intangible assets. The adoption of SFAS 157 to non-financial assets and
liabilities did not have a significant impact on the Company's consolidated
financial statements.
Effective January 1, 2009, the Company adopted SFAS No. 141 (revised 2007),
"Business Combinations" (SFAS 141(R)). Under SFAS 141(R), an entity is required
to recognize the assets acquired, liabilities assumed, contractual
contingencies, and contingent consideration at their fair value on the
acquisition date. It further requires that acquisition-related costs be
recognized separately from the acquisition and expensed as incurred; that
restructuring costs generally be expensed in periods subsequent to the
acquisition date; and that changes in accounting for deferred tax asset
valuation allowances and acquired income tax uncertainties after the measurement
period be recognized as a component of provision for taxes. In addition,
acquired in-process research and development is capitalized as an intangible
asset and amortized over its estimated useful life. The adoption of SFAS 14 (R)
did not have any impact on the Company's consolidated financial statements.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
13
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.
14
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.
15
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.
16
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.
17
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.
18
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.
19
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.
20
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
-------------- ----------- ---------
ASSETS
Interest-earning assets:
Federal funds sold, Federal Reserve Bank and Federal
Home Loan Bank deposit $ 5,443,577 $ 1,297 0.10%
Federal Home Loan Bank stock 3,598,779 (9,087) (1.02)
Investment securities (a) 73,050,901 963,090 5.35
Loans, net of unearned income: (a)
Demand and time 61,331,159 774,127 5.12
Residential mortgage (b) 111,326,051 1,607,441 5.87
Commercial mortgage and construction 134,641,653 2,189,603 6.60
Installment 1,394,831 20,408 5.95
Lease financing 20,578 1,060 20.94
-------------- -----------
Total loans 308,714,272 4,592,639 6.03
-------------- -----------
Total interest-earning assets 390,807,529 5,547,939 5.76
-----------
Noninterest-earning assets:
Cash and due from banks 2,375,688
Premises and equipment 7,037,506
Other assets 13,918,398
Allowance for loan losses (3,269,712)
Unrealized (losses) on available for sale securities (5,513,780)
--------------
Total assets $ 405,355,629
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings and NOW $ 51,486,831 28,959 0.23
Money market 42,462,070 178,860 1.71
Certificates of deposit 158,150,716 1,469,854 3.78
-------------- -----------
252,099,617 1,677,673 2.70
Borrowed funds 72,830,885 372,988 2.08
-------------- -----------
Total interest-bearing liabilities 324,930,502 2,050,661 2.56
-----------
Noninterest-bearing liabilities:
Noninterest-bearing deposits 45,235,537
Other liabilities 3,475,281
Shareholders' equity 31,714,309
--------------
Total liabilities and shareholders' equity $ 405,355,629
==============
Net interest margin (c) $ 390,807,529 $ 3,497,278 3.63%
============== =========== ====
____________
(a) Interest on investments and loans is presented on a fully taxable
equivalent basis, using regular income tax rates (a non-GAAP measure).
(b) Includes loans held for sale
(c) Net interest margin is the ratio of net interest income, determined on a
fully taxable-equivalent basis, to total average interest earning assets.
21
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, 2008
----------------------------------------
Average
balance Interest Yield
-------------- ----------- ---------
ASSETS
Interest-earning assets:
Federal funds sold and Federal Home Loan Bank deposit $ 3,520,595 $ 31,114 3.55%
Federal Home Loan Bank stock 1,773,568 28,449 6.45
Investment securities (a) 58,484,820 830,173 5.71
Loans, net of unearned income: (a)
Demand and time 68,893,555 1,152,864 6.73
Residential mortgage (b) 84,022,987 1,417,539 6.79
Commercial mortgage and construction 114,361,814 2,136,064 7.51
Installment 1,394,859 25,420 7.33
Lease financing 242,127 1,385 2.30
-------------- -----------
Total loans 268,915,342 4,733,272 7.08
-------------- -----------
Total interest-earning assets 332,694,325 5,623,008 6.80
-----------
Noninterest-earning assets:
Cash and due from banks 7,667,881
Premises and equipment 7,332,458
Other assets 8,799,811
Allowance for loan losses (3,248,179)
Unrealized gains on available for sale securities 1,103,389
Total assets $ 354,349,685
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings and NOW $ 52,925,296 30,972 0.24%
Money market 51,110,531 338,604 2.66
Certificate of Deposit 126,167,221 1,421,656 4.53
230,203,048 1,791,232 3.13
Borrowed funds 39,344,690 365,952 3.74
-----------
Total interest-bearing liabilities 269,547,738 2,157,184 3.22
-----------
Noninterest-bearing liabilities:
Noninterest-bearing deposits 48,784,896
Other liabilities 1,328,031
Shareholders' equity 34,689,020
Total liabilities and shareholders' equity $ 354,349,685
==============
Net interest margin (c) $ 332,694,325 $ 3,465,824 4.18%
============== =========== =======
____________
(a) Interest on investments and loans is presented on a fully taxable
equivalent basis, using regular income tax rates (a non-GAAP measure).
(b) Includes loans held for sale
(c) Net interest margin is the ratio of net interest income, determined on a
fully taxable-equivalent basis, to total average interest earning assets.
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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 $165,000 in the first
quarter of 2009 and $99,000 in the first quarter of 2008. Nonaccrual,
restructured, and delinquent loans over 90 days to period end gross loans and
foreclosed real estate increased to 3.83% at March 31, 2009 compared to 2.42%
March 31, 2008 and increased from 3.42% at December 31, 2008.
Noninterest Income
Noninterest income was $1.8 million for the three months ended March 31,
2009, an increase of $156,000 or 9.4%, compared to the corresponding period in
2008. This increase was due to the $381,000 increase in mortgage banking fees
and gains and was partially offset by the $10,000 decrease in service charges,
$87,000 decrease in brokerage commissions, $43,000 decrease in Electronic
Banking and the $80,000 gain related to the Visa, Inc. initial public offering
that occurred in March 2008.
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 decreased $87,000, or 40.0%,
during the three months ended March 31, 2009, compared to the same period in
2008 due to the unprecedented state of the economy.
Electronic banking fee income decreased by $43,000 for the three months
ended March 31, 2009 compared to the corresponding period in 2008. 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 84% of total
electronic banking revenue. Fees from ATMs represent approximately 4% of total
electronic banking revenue. Fees from check cards represent approximately 12% of
electronic banking revenue.
Mortgage-banking revenue increased by $381,000 to $971,000 in 2009 from
$590,000 in 2008. 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. 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.
There was no gain on the sales of equity securities for the three months
ended March 31, 2009, compared to $81,000 for the same period in 2008. The gain
in 2008 related primarily to the cash received subsequent to the Visa, Inc.
initial public offering that occurred in March 2008.
Noninterest Expense
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 assessment credit 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.
23
Income Taxes
For the three month period ended March 31, 2009, the Company's effective
tax rate was 31.16%, compared to 21.57% for the same period in 2008. The
effective tax rate may fluctuate from year to year due to changes in the mix of
tax exempt loans and investments.
LIQUIDITY
Liquidity
Liquidity describes the ability of the Company to meet financial
obligations, including lending commitments and contingencies that arise during
the normal course of business. Liquidity is primarily needed to meet the
borrowing and deposit withdrawal requirements of the customers of the Company,
as well as to meet current and planned expenditures.
The Company's liquidity is derived primarily from its deposit base and
equity capital. 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 unpledged securities available for sale. Such
assets totaled $51.1 million or 12.30% of total assets at March 31, 2009.
The borrowing requirements of customers include commitments to extend
credit and the unused portion of lines of credit, which totaled $135.5 million
at March 31, 2009. Of this total, management places a high probability of
required funding within one year on approximately $70.5 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 FRB and FHLB,
which can be drawn upon when required. There is a line of credit totaling
approximately $64 million with the FHLB based on qualifying loans pledged as
collateral. Also the Company can pledge securities at the FRB and FHLB and
borrow approximately 97% of the fair market value of the securities. In
addition, the Company had $32.7 million of securities pledged at the FHLB under
which the Company's subsidiary, Carrollton Bank, could have borrowed
approximately $31.7 million. Also, Carrollton Bank has $8.0 million of
securities pledged at FRB under which it could have borrowed approximately $7.7
million. Outstanding borrowings at the FHLB were $51.5 million at March 31,
2009. Additionally, the Company has an unsecured federal funds line of credit of
$5.0 million and a $10.0 secured federal funds line of credit with other
institutions. The secured federal funds line of credit with another institution
would require Carrollton Bank to transfer securities pledged at the FHLB or FRB
to this institution before Carrollton Bank could borrow against this line. There
was no balance outstanding under these lines at March 31, 2009. These 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.
24
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 March 31, 2009, 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 three months of 2009 or 2008.
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.
25
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 three month report and have each concluded
that such disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly 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, so no corrective actions have been taken with
respect to such internal controls.
26
PART II OTHER INFORMATION
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 April 23, 2009, the Board of Directors of the Company declared an $0.08
per share cash dividend to common shareholders of record on May 15, 2009,
payable June 1, 2009.
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 April 29, 2009, the Company announced first quarter net income and an
$0.08 quarterly dividend.
27
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 May 8, 2009 /s/ Robert A. Altieri
------------------------- -----------------------------------------
Robert A. Altieri
President and Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER:
Date May 8, 2009 /s/ James M. Uveges
------------------------- -----------------------------------------
James M. Uveges
Senior Vice President and Chief Financial
Officer
28