merger may be lower than expected; (vi) customer and employee relationships and business operations may be disrupted by the merger; (vii) the ability to complete the merger may be more difficult, time-consuming or costly than expected, or the merger may not be completed at all; (viii) unexpected changes or further deterioration in the housing market or in general economic conditions in our market area and Jefferson Bancorp's market area, or a slowing economic recovery; (ix) unexpected changes in market interest rates or monetary policy;
(x) the impact of new governmental regulations that might require changes in our and Jefferson Bancorp's business model; (xi) changes in laws, regulations, policies and guidelines impacting our ability to collect on outstanding loans or otherwise negatively impacting our and Jefferson Bancorp's business; (xiii) higher than anticipated loan losses or the insufficiency of the allowance for loan losses; (xiv) changes in competitive, governmental, regulatory, accounting, technological and other factors that may affect us or Jefferson Bancorp specifically or the banking industry generally, including as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the 'Dodd-Frank Act'); and (xv) other risks described in this report, in the Company's 2011 Form 10-K and in our other filings with the SEC. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. We undertake 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 that we file from time to time with the SEC.
BUSINESS AND OVERVIEW
The Company is a bank holding company headquartered in Columbia, Maryland, with one wholly-owned subsidiary, Carrollton Bank. The Bank has six subsidiaries, CMSI, CFS, and three limited liability companies that are wholly owned, as well as CCDC, which is 96.4% owned.
The Bank is engaged in a general commercial and retail banking business, with ten branch locations. The Bank attracts deposit customers from the general public and uses such funds, together with other borrowed funds, to make loans. Our results of operations are primarily determined by the difference between interest income earned on our interest-earning assets, primarily interest and fee income on loans, and interest paid on our interest-bearing liabilities, including deposits and borrowings.
During 2004, the Bank opened a mortgage subsidiary, Carrollton Mortgage Services, Inc. ('CMSI'). CMSI became inactive in January 2012 and its operations are now conducted as a division of the Bank. The Bank's mortgage division is in the business of originating residential mortgage loans to be sold. The 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 and Federal Veterans Administration loans, conventional and nonconforming first and second mortgages, and construction and permanent financing. Loans originated by the mortgage division are generally sold into the secondary market but may be considered for retention by the Bank as part of our balance sheet strategy. CFS provides brokerage services and a variety of financial planning and investment options to customers through INVEST Financial Corp. pursuant to a service agreement with INVEST and recognizes commission income as these services are provided. The investment options CFS offers through this arrangement include mutual funds, U.S. government bonds, tax-free municipals, individual retirement account rollovers, long-term care, and health care insurance services. INVEST is a full-service broker/dealer, registered with the Financial Industry Regulatory Authority ('FINRA') and the SEC, a member of Securities Investor Protection Corporation ('SIPC'), and licensed with state insurance agencies in all 50 states. CFS refers clients to an INVEST representative for investment counseling prior to purchase of securities.
The three limited liability companies manage and dispose of real estate acquired through foreclosure.
CCDC promotes, develops, and improves the housing and economic conditions of people in Maryland. We coordinate our efforts to identify opportunities with a local non-profit ministry whose mission and vision is to eliminate poverty housing in the region by building decent houses for affordable homeownership throughout Anne Arundel County and the Baltimore metropolitan region. CCDC generates revenue through the origination of loans for the purchase of these homes.

We reported net losses of $164,804 and $417,268 for the three and six month periods ended June 30, 2012, compared to net losses of $697,358 and $526,063 for the comparable periods in 2011. Net losses attributable to common stockholders was $301,883 ($0.12 loss per diluted share) and $691,426 ($0.27 loss per diluted share) for the three and six month periods ended June 30, 2012, compared to net losses attributable to common stockholders of $834,437 ($0.32 loss per diluted share) and $800,220 ($0.31 loss per diluted share) for the prior year periods. Return on average assets and return on average equity are key measures of our performance. Return on average assets, the quotient of net (loss) income divided by total average assets, measures how effectively the Company utilizes its assets to produce income. The Company's loss on average assets for the three and six month periods ended June 30, 2012 was 0.18% and 0.23% compared to loss on average assets of 0.75% and 0.28% for the three and six month periods ended June 30, 2011. Loss on average equity, the quotient of net (loss) income divided by average equity, measures how effectively the Company invests its capital to produce income. Loss on average equity for the three and six month periods ended June 30, 2012 was 2.05% and 2.59% compared to loss on average equity of 8.27% and 3.16% for the three and six month periods ended June 30, 2011.
Net interest income decreased $344,673, or 9.53%, for the three month period ended June 30, 2012, compared to the same period in 2011, while our net interest margin declined to 3.85% for the three month period from 4.09% for the three months ended June 30, 2011. For the six month period ended June 30, 2012, net interest income decreased $410,058, or 5.82%, compared to the same period in 2011, while our net interest margin declined to 3.89% for the six month period from 4.01% for the six months ended June 30, 2011. Net interest margin, a profitability measure, is the dollar difference between interest income from earning assets, including loans and investments, and interest expense paid on deposits and other borrowings, expressed as a percentage of average earning assets. The decline in net interest income for the three and six month periods is a result of the decline in average interest earning assets. The decline in net interest margin for the three and six month periods is a result of a shift in the mix of earning assets towards a heavier weighting in lower yielding more liquid assets. This trend is consistent with the overall market in which loan yields are very low and liquidity is in excess supply. Management is trying to mitigate this negative trend by reducing excess liquidity and higher cost deposits while also seeking lending opportunities with strong credit profiles and higher yields.
The improvement in operating results for the three month period, as compared to the same period in 2011, is primarily a result of a $1.0 million decrease in the provision for loan losses, a reduction in securities write downs of $414,000 and a $298,000 improvement in mortgage fee income. These improvements are partially offset by a $345,000 decrease in net interest income a $305,000 increase in professional fees and a $108,000 increase in costs and write downs associated with foreclosed real estate. The increases in professional fees are associated with legal and consulting costs incurred in connection with the planned merger with Jefferson Bancorp, Inc. announced on April 9, 2012.
The improvement in operating results for the six month period, as compared to the same period in 2011, is a result of the same factors as the quarter other than securities write downs which increased by $237,000 for the six month period instead of the $414,000 reduction for the three month period.
No dividends were declared or paid to common stockholders during the first six months of 2012 or 2011 as we continue the suspension of dividends in recognition of our limited earnings during recent periods.
CURRENT STRATEGY
Our Board of Directors and senior management continue to employ a strategy designed to strengthen the balance sheet and improve operating results by improving asset quality, reducing higher cost funding sources, and pursuing operating efficiencies through the use of technology and strategic partners. The objective is to strengthen our overall foundation during these difficult and uncertain economic times in order to take advantage of opportunities that we expect will emerge as the business environment clarifies and improves. The financial regulatory reform measures enacted and to be enacted pursuant to the Dodd-Frank Act, along with the ongoing instability in the residential and commercial real estate markets, have created a great deal of uncertainty within the community banking industry. In addition, uncertainty about future tax policy and the cost of employment associated with healthcare reform add uncertainty to planning for operational costs. We have chosen to carefully evaluate all growth opportunities with this uncertainty in mind, carefully limiting decisions that could be impacted by circumstances beyond our control.

We have narrowed our focus for targeted growth on the following customer groups:
? Small and mid-sized businesses, including service firms, manufacturing companies and distributors;

? Executives and professionals, including attorneys, accountants, medical professionals, consultants, corporate executives and their firms;

? Non-profit associations, including charities, foundations, professional/trade associations, homeowner/condo associations, and faith based organizations; and

? High net worth individuals and affluent families.

The Bank will continue to serve its customers by utilizing its existing branch network as well as by providing internet based services, remote deposit capture, courier service, and loan production business offices. Going forward, our business strategy will include:
? Increasing awareness and consideration in the business marketplace through directed marketing and direct sales efforts;

? Leading with deposit and cash management products;

? Retaining and growing existing customer relationships; and

? Increasing adoption and usage of online products.

Note, however, that this is our business strategy as it stands today, and our strategy may change after closing of the merger.
Our effort to improve net interest margin by reducing balance sheet liquidity and high cost funding sources has run its course with a net interest margin dropping to 3.89% for the six months ended June 30, 2012 compared to 4.01% for the six months ended June 30, 2011.
Our efforts to reduce non-performing assets appear to be taking hold, while our goal of improving operating efficiencies will take longer to appear in operating results. The reduction of non-performing assets is subject to the market conditions associated with the commercial real estate market, while operating efficiencies will be geared towards prudently reducing operating expenses while growing the business within the constraints of our capital base. As we indicated in previous reports, we believed that we would need to raise additional capital to redeem our outstanding preferred stock issued to the Treasury under the TARP Capital Purchase Program and support balance sheet growth. We have remained 'well capitalized' for regulatory purposes, which allowed us to carefully assess various capital alternatives and determine which alternative was best for the Company and our stockholders. These considerations ultimately resulted in the execution of a definitive agreement to merge with Jefferson Bancorp, Inc. on April 8, 2012. Under the terms of this agreement, the Company will remain the holding company upon completion of the merger, and the preferred stock issued to Treasury under the TARP Capital Purchase Program will be redeemed. This merger will result in a larger and better capitalized institution that we believe will be better equipped to compete in a changing environment.
The proposed merger continues to move through the shareholder and regulatory approval process. The Carrollton shareholders' meeting to vote on the terms of the merger has been scheduled for August 23, 2012. Proxy statements were mailed to stockholders of record on July 10, 2012.
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 that we make. 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 affect a borrower's ability to pay, legislation influencing 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 the securities we own. 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
Investment Securities
The investment portfolio consists primarily of securities available for sale. Securities available for sale are those securities that we intend 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 we anticipate holding until the investment's maturity date 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. We use the investment portfolio as a source of both liquidity and earnings.
Investment securities decreased $2.7 million, or 9.5%, to $25.6 million at June 30, 2012, from $28.3 million at December 31, 2011. The decrease is primarily the result of principal paydowns on debt securities. Management continues to look for opportunities to use liquidity from maturing investments to reduce our use of high cost certificates of deposit and borrowed funds. Management continues to evaluate investment options that will produce income without assuming significant credit or interest rate risk. Loans Held for Sale
Loans held for sale increased by $9.9 million, or 34.9%, from $28.4 million at December 31, 2011, to $38.3 million at June 30, 2012. Generally, loans originated with the intention of being sold to a third party remain on our balance sheet for approximately 45 days, meaning that this figure is impacted by the number of loans originated in such period. In this regard, during June 2012, loans originated with the intention of being sold totaled $32.7 million compared to $23.3 million during December 2011. Loans held for sale are carried at the lower of cost or the committed sale price, determined on an individual loan basis.
Loans
Gross loans, excluding loans held for sale, decreased 5.4% to $254.4 million at June 30, 2012 compared to $269.0 million at December 31, 2011, resulting from weak loan demand as businesses continue to limit borrowing to expand their operations during the continued sluggish and uncertain economy. 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. Placing a loan on nonaccrual status means that we no longer accrue interest on such loan and reverse any interest previously accrued but not collected. 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 we 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 June 30, 2012, we had 10 impaired loans totaling approximately $3.5 million, four of which have been classified as nonaccrual. The valuation allowance for impaired loans was $1.1 million as of June 30, 2012.

The following table provides information concerning non-performing assets and past due loans at the dates indicated:

                           June 30,     December 31,     June 30,
                             2012           2011           2011





       Nonaccrual loans             $  2,228,593    $  3,960,496    $  4,623,624
       Restructured loans              8,300,235       8,460,654       8,450,292
       Foreclosed real estate          4,455,584       4,822,417       5,298,523

Accruing loans past-due 90 days or more $ 116,076 $ - $ -

As of June 30, 2012, nine restructured notes totaling $1.5 million are more than 90 days past due and are included in nonaccrual loans. All other restructured notes are paying in accordance with the terms of the agreement, and remain on accrual status.
The level of non-performing assets continues to have a negative impact on earnings as the economy is showing little improvement and real estate values continue to decline. Management has worked diligently to identify borrowers that may be facing difficulties in order to restructure terms where appropriate, secure additional collateral or pursue foreclosure and other secondary sources of repayment. The successful reduction of non-performing assets will ultimately be dependent on continued management diligence and improvement in the economy and the real estate market.
Allowance for Loan Losses
The allowance for loan losses represents management's best estimate of probable losses in the existing loan portfolio. We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of the consolidated financial statements. The allowance for loan losses is a material estimate that is particularly susceptible to significant changes in the near term and is established through a provision for loan losses.
We base the evaluation of the adequacy of the allowance for loan losses upon loan categories. We categorize loans as commercial loans or consumer loans. We further divide commercial and consumer loans by collateral type and whether the loan is an installment loan or a revolving credit facility. We apply historic loss ratios to each subcategory of loans within the commercial and consumer loan categories. Loss ratios are determined based upon the most recent three years of history for each loan subcategory.
We further divide commercial loans by risk rating and apply loss ratios by risk rating to determine estimated loss amounts. We evaluate delinquent loans and loans for which management has knowledge about possible credit problems of the borrower or knowledge of problems with loan collateral separately and assign loss amounts based upon the evaluation.
With respect to commercial loans, management assigns a risk rating of one through nine to each loan at inception, with a risk rating of one having the least amount of risk and a risk rating of nine having the greatest amount of risk. The risk rating is reviewed at least annually based on, among other things, the borrower's financial condition, cash flow and ongoing financial viability; the collateral securing the loan; the borrower's industry; and payment history. We evaluate loans with a risk rating of five or greater separately and allocate a portion of the allowance for loan losses based upon the evaluation, if necessary.
We consider delinquency rates and other qualitative or environmental factors that may cause estimated credit losses associated with our existing portfolio to differ from historical loss experience. These factors include, but are not limited to, changes in lending policies and procedures, changes in the nature and volume of the loan portfolio, changes in the experience, ability and depth of lending management and the effect of other external factors such as

economic factors, competition and legal and regulatory requirements on the level of estimated credit losses in our existing portfolio.
Our policies require an independent review of assets on a regular basis and we believe that we appropriately reclassify loans as warranted. We believe that we use the best information available to make a determination with respect to the allowance for loan losses, recognizing that the determination is inherently subjective and that future adjustments may be necessary depending upon, among other factors, a change in economic conditions of specific borrowers or generally in the economy and new information that becomes available to us. However, there are no assurances that the allowance for loan losses will be sufficient to absorb losses on non-performing assets, or that the allowance will be sufficient to cover losses on non-performing assets in the future. The allowance for loan losses was $4.7 million at June 30, 2012, which was 1.86% . . .