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| CRRB > SEC Filings for CRRB > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
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.
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.
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.
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
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Accruing loans past-due 90 days or more$ 244,913 $ 918,986 $ 1,382,044
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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.
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
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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.
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
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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.
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.
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
. . .
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