Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

 

ý QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2003

 

o 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)

 

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ý No o

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

 

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by court. Yes o  No o

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 2,826,687 common shares outstanding at August 7, 2003

 

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

Carrollton Bancorp and Subsidiary

 

		June 30 2003			December 31 2002
ASSETS
Cash and due from banks		$	22,852,538		$	20,332,373
Federal funds sold and Federal Home Loan Bank deposit		23,601,237			11,067,383
Cash and cash equivalents		46,453,775			31,399,756
Federal Home Loan Bank stock, at cost		2,250,000			2,500,000
Investment securities:
Available for sale		81,901,654			78,786,147
Held to maturity		25,000			25,000
(approximate market value of $25,000 and $25,000)
Loans held for sale		3,239,178			0
Loans, less allowance for loan losses of $3,749,411 and $3,578,762		192,562,677			201,641,364
Premises and equipment		5,106,959			5,610,715
Accrued interest receivable		1,542,393			1,747,994
Foreclosed real estate		156,709			218,654
Prepaid income taxes		0			152,591
Other assets		5,719,040			2,139,394
		$	338,957,385		$	324,221,615
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing		$	44,499,954		$	41,259,140
Interest-bearing		197,255,842			189,004,968
Total deposits		241,755,796			230,264,108
Federal funds purchased and securities sold under agreement to repurchase		13,326,247			11,535,372
Notes payable - U.S. Treasury		1,987,928			2,045,237
Advances from the Federal Home Loan Bank		45,000,000			45,000,000
Accrued interest payable		517,504			513,358
Accrued income taxes		186,453			0
Deferred income taxes		495,195			257,680
Other liabilities		1,459,822			914,781
		304,728,945			290,530,536
SHAREHOLDERS’ EQUITY
Common stock, par $1.00 per share; authorized 10,000,000 shares; issued and outstanding 2,826,687 and 2,821,757 shares		2,826,687			2,821,757
Surplus		18,666,540			18,617,608
Retained earnings		10,619,882			10,513,874
Accumulated other comprehensive income		2,115,331			1,737,840
		34,228,440			33,691,079
		$	338,957,385		$	324,221,615

 

Note:  Balances at December 31, 2002 are derived from audited financial statements.

 

2

 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Carrollton Bancorp and Subsidiary

 

		Quarter Ended June 30						Six Months Ended June 30
		2003			2002			2003			2002
INTEREST INCOME
Interest and fees on loans		$	3,240,758		$	3,763,612		$	6,623,845		$	7,497,885
Interest and dividends on securities:
Taxable interest income		605,917			870,622			1,297,944			1,864,163
Nontaxable interest income		56,020			61,007			110,834			123,921
Dividends		27,796			30,680			56,988			63,275
Interest on federal funds sold and other interest income		129,786			98,596			212,536			188,446
Total interest income		4,060,277			4,824,517			8,302,147			9,737,690
INTEREST EXPENSE
Deposits		1,130,689			1,381,784			2,290,530			2,939,995
Borrowings		795,835			793,777			1,579,868			1,580,707
Total interest expense		1,926,524			2,175,561			3,870,398			4,520,702
Net interest income		2,133,753			2,648,956			4,431,749			5,216,988
Provision for loan losses		121,500			131,500			243,000			263,000
Net interest income after provision for loan losses		2,012,253			2,517,456			4,188,749			4,953,988
NONINTEREST INCOME
Service charges on deposit accounts		245,250			303,229			511,140			565,453
Brokerage commissions		124,508			227,150			240,872			412,145
Other fees and commissions		1,414,179			1,286,318			2,791,103			2,363,290
Gain on branch divestiture		0			687,883			0			687,883
Gain on loan sales		198,322			0			198,322			0
Security gains, net		192,879			0			346,997			103,005
Total noninterest income		2,175,138			2,504,580			4,088,434			4,131,776
NONINTEREST EXPENSES
Salaries		1,440,615			1,303,091			2,687,726			2,604,710
Employee benefits		308,207			270,312			617,319			567,188
Occupancy		355,458			377,044			686,673			731,526
Furniture and equipment		453,402			496,144			923,914			1,035,534
Other operating expenses		1,275,374			1,250,023			2,450,413			2,363,399
Total noninterest expenses		3,833,056			3,696,614			7,366,045			7,302,357
Income before income taxes		354,335			1,325,422			911,138			1,783,407
Income taxes		89,574			439,327			297,133			571,789
Net income		$	264,761		$	886,095		$	614,005		$	1,211,618
EARNINGS PER COMMON SHARE
Net income - basic and diluted		$	0.09		$	0.31		$	0.22		$	0.43

 

3

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Carrollton Bancorp and Subsidiary

 

		Six Months Ended June 30
		2003			2002
Cash flows from operating activities
Interest received		$	8,713,439		$	9,826,321
Fees and commissions received		3,759,927			3,208,535
Interest paid		(3,866,252		)	(4,529,951		)
Cash paid to suppliers and employees		(5,162,840		)	(6,208,098		)
Proceeds from sale of loans held for sale		8,204,981			0
Origination of loans held for sale		(11,245,837		)	0
Income taxes paid		(181,852		)	(777,939		)
		221,566			1,518,868
Cash flows from investing activities
Proceeds from sales of securities available for sale		551,156			244,346
Proceeds from maturities of securities available for sale		66,388,389			82,582,145
Proceeds from redemption of Federal Home Loan bank stock		250,000			0
Purchase of securites available for sale		(69,645,739		)	(54,294,962		)
Purchase of bank owned life insurance		(4,000,000		)	0
Loans made, net of principal collected		3,853,730			(3,624,907		)
Puchase of loans, net of principal collected		4,579,584			5,959,850
Purchase of premises and equipment		(180,852		)	(57,733		)
Proceeds from sale of premises and equipment		75,000			212,984
Purchase of other real estate owned		0			(193,467		)
Net proceeds from branch divestiture		0			687,883
Proceeds from sale of foreclosed real estate		190,101			0
		2,061,369			31,516,139
Cash flows from financing activities
Net increase (decrease) in time deposits		(247,761		)	(10,610,616		)
Net increase (decrease) in other deposits		11,739,449			(18,955,577		)
Net increase (decrease) in other borrowed funds		1,733,566			(224,707		)
Dividends paid		(508,032		)	(486,061		)
Proceeds from issuance of shares		53,862			0
Common stock repurchase and retirement		0			(12,150		)
		12,771,084			(30,289,111		)
Net increase (decrease) in cash and cash equivalents		15,054,019			2,745,896
Cash and cash equivalents at beginning of year		31,399,756			20,369,707
Cash and cash equivalents at June 30		$	46,453,775		$	23,115,603
Reconciliation of net income to net cash provided by operating activites
Net income		$	614,005		$	1,211,618
Adjustments to reconcile net income to net cash provided by operating activites
Provision for loan losses		243,000			263,000
Deprecation and amortization		730,934			847,394
Amortization of premiums and discounts		205,692			88,077
Loans held for sale, net of principal sold		(3,040,856		)	0
(Gains) losses on disposal of securities		(346,997		)	(103,005		)
(Gains) losses on sale of loans		(198,322		)	0
Gain on branch divestiture		0			(687,883		)
(Gains) losses on sale of premises and equipment		(33,024		)	(72,984		)
(Gains) losses on sale of foreclosed real estate		(16,087		)	0
(Increase) decrease in:
Accrued interest receivable		205,601			554
Prepaid income taxes		152,591			0
Other assets		969,389			38,000
Increase (decrease) in:
Accrued interest payable		4,146			(9,249		)
Income taxes payable		186,453			(206,150		)
Other liabilities		545,041			149,496
		$	221,566		$	1,518,868
NONCASH INVESTING ACTIVITY
Transfer of loan to forclosed real estate		112,069			0
		$	112,069		$	0

 

4

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

CARROLLTON BANCORP

 

Quarter ended June 30, 2003

 

The accompanying unaudited consolidated financial statements prepared as of and for the quarter ended June 30, 2003 reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim period presented. All such adjustments are of a normal recurring nature, but are necessary for a fair presentation. The results reflected by these statements may not be indicative, however, of the results for the year ending December 31, 2003.

 

Note A – Comprehensive Income

 

Statement of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (“SFAS NO. 130”). SFAS No. 130 establishes requirements for the disclosure of comprehensive income in interim financial statements. Comprehensive income is defined as net income plus transactions and other occurrences which are the result of nonowner changes in equity. For the Company, nonowner equity changes are comprised of unrealized gains or losses on debt securities that will be accumulated with net income in determining comprehensive income. Presented below is a reconcilement of net income to comprehensive income indicating the components of other comprehensive income.

 

For the Three Month Periods Ended:		6/30/2003			6/30/2002
Net Income		$	614,005		$	1,211,618
Other comprehensive income:
Unrealized gains (losses) during the period		268,008			1,050,928
Adjustment for security gains (losses)		346,997			103,055
Other comprehensive income, before taxes		615,005			1,153,983
Income taxes on comprehensive income		237,514			445,668
Other comprehensive income, after tax		377,491			708,315
Comprehensive income		$	991,496		$	1,919,933

 

Note B – Average Balances, Interest and Yields

 

The following chart contains average balance sheet information for 2003 and 2002, and indicates the related interest income or expense and calculated yield.  Nonaccruing loans are included in the average balance amounts of the applicable portfolio, but only the amount of interest actually recorded as income on nonaccrual loans is included in the interest income column.

 

5

 

2003 AVERAGE BALANCES, INTEREST, AND YIELDS

 

		Six Months Ended June 30, 2003
		Average balance			Interest			Yield
ASSETS
Federal funds sold and Federal Home Loan Bank deposits		$	23,001,367		$	130,687		1.14	%
Federal Home Loan Bank stock		2,455,751			54,832			4.47
Investment securities
U.S. government agency		42,354,859			720,643			3.40
State and municipal		5,015,348			163,387			6.52
Mortgage-backed securities		14,445,191			378,253			5.24
Corporate		7,646,561			231,541			6.06
Other		3,840,211			121,363			6.32
		73,302,170			1,615,187			4.41
Loans
Loans held for sale		532,359			11,569			4.35
Demand and time		37,080,831			1,177,203			6.35
Residential mortgage		71,603,729			2,326,578			6.50
Commercial mortgage and construction		82,094,123			2,807,101			6.84
Installment and credit card		2,750,876			134,336			9.77
Lease financing		4,163,335			175,219			8.42
		198,225,253			6,632,006			6.69
Total interest-earning assets		296,984,541			8,432,712			5.68
Noninterest-bearing cash		18,327,083
Premises and equipment		5,336,213
Other assets		5,582,813
Allowance for loan losses		(3,668,782		)
Unrealized gains on available for sale securities		3,213,732
Total assets		$	325,775,600		$	8,432,712
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits
Savings and NOW		$	72,878,860		$	137,881		0.38	%
Money market		28,184,082			150,528			1.07
Other time		89,240,250			2,002,121			4.49
		190,303,192			2,290,530			2.41
Borrowed funds		58,615,801			1,579,868			5.39
		248,918,993			3,870,398			3.11
Noninterest bearing deposits		40,811,640
Other liabilities		1,961,168
Shareholders’ equity		34,083,799
Total liabilities and equity		$	325,775,600		$	3,870,398
NET YIELD ON INTEREST-EARNING ASSETS		$	296,984,541		$	4,562,314		3.07	%

 

Interest on investments and loans is presented on a fully taxable equivalent basis, using regular income tax rates.

 

6

 

2002 AVERAGE BALANCES, INTEREST, AND YIELDS

 

		Six Months Ended June 30, 2002
		Average balance			Interest			Yield
ASSETS
Federal funds sold and Federal Home Loan Bank deposits		$	12,073,470		$	99,026		1.64	%
Federal Home Loan Bank stock		3,250,000			88,618			5.45
Investment securities
U.S. Treasury		1,413,061			11,876			1.68
U.S. government agency		48,139,993			1,120,434			4.65
State and municipal		5,669,701			181,912			6.42
Mortgage-backed securities		19,152,312			540,718			5.65
Corporate		7,723,473			234,077			6.06
Other		4,250,313			151,611			7.13
		86,348,853			2,240,628			5.19
Loans
Loans held for sale		0			0			0.00
Demand and time		36,501,196			1,191,803			6.53
Residential mortgage		106,362,891			3,519,197			6.62
Commercial mortgage and construction		70,715,524			2,508,911			7.10
Installment and credit card		3,974,379			196,014			9.86
Lease financing		2,067,578			92,486			8.95
		219,621,568			7,508,411			6.84
Total interest-earning assets		321,293,891			9,936,683			6.19
Noninterest-bearing cash		16,286,493
Premises and equipment		6,802,436
Other assets		4,001,829
Allowance for loan losses		(3,423,893		)
Unrealized gains on available for sale securities		2,202,456
Total assets		$	347,163,212		$	9,936,683
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits
Savings and NOW		$	80,110,216		$	249,696		0.62	%
Money market		34,313,781			264,066			1.54
Other time		97,595,994			2,426,233			4.97
		212,019,991			2,939,995			2.77
Borrowed funds		57,294,711			1,580,707			5.52
		269,314,702			4,520,702			3.36
Noninterest bearing deposits		42,894,754
Other liabilities		1,678,871
Shareholders’ equity		33,274,939
Total liabilities and equity		$	347,163,266		$	4,520,702
NET YIELD ON INTEREST-EARNING ASSETS		$	321,293,891		$	5,415,981		3.37	%

 

Interest on investments and loans is presented on a fully taxable equivalent basis, using regular income tax rates.

 

7

 

ITEM 2.                        MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION

 

Earnings Summary

 

Carrollton Bancorp reported net income for the first half of 2003 of $614,000, or $.22 on a per share basis. For the same period of 2002, net income amounted to $1,212,000, or $.43 per share. Net income for the second quarter was $265,000, or $.09 per share, compared to $886,000, or $.31 per share for the same period in 2002.  Interest and fee income on loans decreased 14% and 12% respectively from the comparable quarter and six month periods of 2002 as a result of reduction in the loan portfolio from loan runoff.  Total interest income decreased 16% and 15% respectively for the comparable quarter and six month periods of 2002, with net interest income decreasing 19% and 15% respectively.  Noninterest income, excluding gains (losses) on loan, security and branch deposit sales, decreased 2% compared to the second quarter while increasing 6% compared to the first six months of 2002.

 

Net Interest Income

 

Net interest income for the Company on a tax equivalent basis decreased $0.5 and $0.8 million to $2.2 and $4.6 million respectively for the quarter and first half of 2003 compared to 2002.  The net yield on average earning assets on a tax equivalent basis decreased from 3.37% in the first half of 2002 to 3.07% in 2003. The decrease in the net yield came principally from the reduction in the loan portfolio with the funds being maintained in short-term investments to cover the repricing of long-term certficates of deposit that mature during the third quarter of 2003.  During the period of June through August, 2003 long-term certficates of deposit totalling in excess of $29 million will reprice from rates in excess of 7%.

 

Interest income on loans decreased 14% in the quarter and 12% for the first half of 2003 compared to 2002, due to the redcutions in the loan portfolio and the continuing decline in prevailing interest rates.  Interest income from investment securities decreased as a result of both a shrinking portfolio on average and declining yields.  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 expense decreased $0.25 million  to $1.9 million in 2003.  Interest expense on deposits decreased primarily because of a branch deposit sale in 2002 and a decrease in deposits levels, primarily in higher costing deposits.  The Company has prepared for a significant opportinuity to reprice 36 month certificates of deposit, originated in 2000 as they mature in the third quarter of 2003. Deposits declined on average about 9% since the second quarter of 2002, while only down 0.8% since December 31, 2002. As yields on loans and securities decreased in the quarter, market pressure controlled deposit rates in 2003. Due to the restructuring of the balance sheet and current liquidity position we have been able to reduce the rates on deposits as they reprice.

 

Provision for Loan Losses

 

The provision for loan losses during the first half of 2003 was $243,000 compared to $263,000 in 2002. The provision was determined based on management’s review and analysis of the allowance for loan losses. Nonperforming assets as a percent of period end loans and other real estate owned decreased to 1.24% in the first half of 2003 from 1.32% in the same period of 2002. Net loan losses to average loans for the six months decreased from .05% in 2002 to .04% in 2003, while the loan portfolio decreased 10% as a result of the loan runoff.

 

Noninterest Income

 

Noninterest income increased 8% in the first six months of 2003 compared to 2002.  The increase was largely due to the expansion of ATM services with the WalMart and Sam’s Club stores and the related convenience fee income.  The components of noninterest income saw a 10% decrease in service charges on deposits, a 42% decrease in brokerage commissions, and an 18% increase in other fee income.  Brokerage commissions decreased due to continued weakness in the equities market.  ATM fee revenue increased as a result of continued redeployment of ATMs into service, with 152 in service as of June 30, 2003.  Included in noninterest income is commission income recognized by the Brokerage subsidary of the Bank on the purchase of Bank Owned Life Insurance on a group of its key employees.  The transaction, in which the Company owns life insurance on various officers of the Company, allows for the favorable tax-exempt treatment of increases in cash surrender value to better offset rising benefit cost to the Company.

 

During the second quarter of 2002, the Company realized a net pre-tax gain of $688,000 on the sale of branch deposits at its Liberty Road office.

 

8

 

The sales of equity securities classified as available for sale resulted in a gain of $347,000 in the first six months of 2003, compared to $103,000 in 2002. The transactions in both periods were undertaken to reduce the concentration of one stock in the Company’s portfolio.  The stock involved has experienced a significant increase in market price as a result of an announced acquisition by another company, and would be subject to market price reversal if the acquisition would not occur.

 

Gains on loan sales amounted to $198,000 in the first six months of 2003 compared to no gains or losses for the same period in 2002.

 

Noninterest Expenses

 

In the first six months of 2003, noninterest expenses increased 1% compared to the same period in 2002.  Typical increases in expenses were tempered by cost savings from the April 2002 divesture of the Company’s Liberty Road Branch

 

Income Tax Provision

 

The effective tax rate for the Company increased to 32.6% for the first half of 2003 compared to 32.1% for the first half of 2002.

 

Financial Condition

 

Summary

 

Total assets increased $14.8 million to $339.0 million at June 30, 2003 compared to $324.2 million at the end of 2002. Gross loans decreased by $5.7 million or 2.8% during the period as a result of the continued runoff of residential mortgages and home equity loans as customers refinance existing debt. Cash also decreased as the ATM network reduced cash levels after the holiday shopping period in December.

 

Most other asset categories besides short-term investments and other assets, which includes the acquisition of Bank Owned Life Insurance, changed only marginally. Deposits increased by 5% to $241.8 million and borrowed funds increased $1.7 million to $60.3 million.

 

Investment Securities

 

Investment securities increased $3.1 million from December 31, 2002 to June 30, 2003. The Company continues to restructure its investment portfolio to reduce further potential for interest rate risk, while improving liquidity.

 

Loans

 

Total gross loans decreased $5.7 million or 2.8% to $199.6 million at June 30, 2003 from the end of 2002. The decrease was due to the runoff in residential mortgages and equity loans exceeding the growth in commercial real estate and small business lending. The commercial market remains very competitive, and the Company has experienced certain payoffs as a result of the customer refinancing elsewhere at a lower rate.

 

Allowance for Loan Losses

 

The allowance for loan losses increased slightly from the end of 2002.  The allowance was $3.6 million at December 31, 2002 and $3.7 million at June 30, 2003. The ratio of the allowance to total loans was 1.74% at year end 2002 and 1.88% at the end of the first six months of 2003. The ratio of net loan losses to average loans outstanding decreased to 0.04% for the first six months of 2003 from 0.13% for the year ended December 31, 2002. The ratio of nonperforming assets as a percent of period-end loans and other real estate decreased to 1.24% as of June 30, 2003 compared to 1.67% at year end 2002.

 

Funding Sources

 

Total deposits increased by $11.5 million to $241.8 million at June 30, 2003 from December 31, 2002. Interest-bearing accounts increased by $8.3 million while non-interest bearing accounts increased by $3.2 million.

 

The advances from the Federal Home Loan Bank remain at $45 million, subject to the first call of $40 million in 2005. Total borrowings  increased to $60.3 million at June 30, 2003 compared to $58.6 million at the end of 2002.

 

9

 

Capital

 

For the first six months of 2003, shareholders’ equity increased by $537,000 compared to December 31, 2002. While earnings for the six months were in excess of dividends, the company was positively impacted by an increase in unrealized gains, net of tax, on securities classified as available for sale.  The company paid shareholders a dividend totaling $508,000 for the first six months of 2003. Net income for the six months of 2003 was $614,000. Shareholders’ equity to total assets remained strong at 10.10% at June 30, 2003. Tier 1 (Core) and Tier 2 (Total) capital to risk-adjusted assets ratios increased from December 31, as a result of changes in the asset mix and the net increase in unrealized gains net of tax, on securities classified as available for sale, to 13.62% and 15.26%, respectively, at June 30, 2003. The Company’s leverage ratio for the first six months of 2003 was 9.53%. These ratios exceed regulatory minimums.

 

Liquidity

 

At June 30, 2003, outstanding loan commitments and unused lines of credit for the Company totaled $79 million. Of this total, management places a high probability of required funding within one year on approximately $20 million. The amount remaining is unused home equity lines and other consumer lines on which management places a low probability of funding.  At June 30, 2003 the Company’s liquidity has significantly increased, as a result of the Company’s efforts to restructure its investment portfolio. The Company has restructured its investment portfolio so as to provide for funding loan growth, as well as for elimination of higher cost certificates of deposits during the third quarter of 2003.

 

Interest Rate Risk

 

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 June 30, 2003, the Company is in an asset sensitive position.  Management has, and continues to take 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.

 

The net yield on interest earning assets declined in the first six months of 2003 to 3.07% from 3.47% for the year ended December 31, 2002. Due to the Company’s asset sensitive position, the recent rate declines have caused the repricing of earning assets to exceed the repricing of liabilities.  These changes have also resulted in a significant restructuring of earning assets as part of the Company’s program to reduce interest rate risk as well as to improve liquidity and net interest margins.  Certificates of deposit totalling $28.5 million, originated in 2000 will reprice during the third quarter of 2003.  To provide liquidity to fund the potential runoff of these certificates, the Company has maintained appropriate balances in short-term investments and federal funds, which has had a negative effect on the net interest margin.  The Company constantly works to manage its exposure to interest rate shifts, and minimize the effect on earnings.

 

ITEM 3 - CONTROLS AND PROCEDURES

 

Evaluation of Disclosure 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 quarterly report and have each concluded that such disclosure controls and procedures are effective.

 

Changes in Internal Controls

 

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.

 

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PART II—OTHER INFORMATION

 

Item 1.                                Legal Proceedings

 

A proper person plaintiff, Charles A. Allen, filed a negligence lawsuit against Carrollton Bank on October 24, 2002 in the Circuit Court of Baltimore City.  The case was also filed against an employee of the bank, the FDIC, and an employee of the FDIC.  Counsel for the Bank, filed an answer to Mr. Allen’s complaint on December 20, 2002 to protect the Bank’s interest.

 

The FDIC removed the case to the federal court in Baltimore on December 20, 2002.  Counsel for the Bank tendered the defense of this case to the Bank’s insurance carrier on January 31, 2003.  While Mr. Allen seeks damages in excess of $50,000,000, counsel’s evaluation of the case is that it is a frivolous suit and will likely be dismissed on motion as to the Bank and its employee.

 

Counsel feels that Mr. Allen’s claim is a “covered claim” under the Bank’s Errors and Omissions insurance policy which should cover the defense and indeminification of the bank for said claim.

 

A motions hearing was scheduled for May 16, 2003 before the Federal court upon Carrollton Bank’s motion for summary judgment.  Hopefully, this motion will be granted and the case terminated as to the Bank and its employee.

 

The hearing date of May 16, 2003 was continued by the court because the plaintiff was ill.  No new hearing date has been scheduled by the court as of this date.  Counsel has twice contacted the judge’s chambers and requested a new hearing date be scheduled.  Counsel feels the Bank will prevail on summary judgement, nevertheless in this case.

 

The Carrollton Bank has been sued along with the personal representative of a deceased customer, for damages in the Circuit Court for Anne Arundel County, Maryland.  The complaint alleges causes of action against the Bank for negilence, breach of contract, and breach of fiduciary duty and seeks damages of $132,000.  Counsel for the Bank has filed an Answer and Cross/Claim in the case to protect the Bank’s interest.  The case is presently in the discovery stage.  Counsel for the Bank will likely file a motion for summary judgment in the case to attempt to obtain an early dismissal of the case as to the Bank.  It does not appear to counsel that the Bank has any material liabilty exposure in this case.  Counsel has advised the Bank’s insurance carrier of the lawsuit.  Counsel feels the claims made in the lawsuit are “covered claims”, under the Bank’s insurance policy, for which defense costs and indemnity are available to the Bank.

 

This case is presently in the discovery process.  Following completion of discovery, counsel for the Bank will be filing a motion for summary judgement.  Counsel feels the Bank will likely prevail on some if not all of the issues in the case under such motion.

 

There is further information to be reported under this item for the quarter ended June 30, 2003

 

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Item 2.                                Changes in Securities

 

There is no information to be reported under this item for the quarter ended June 30, 2003

 

Item 3.                                Defaults Upon Senior Securities

 

There is no information to be reported under this item for the quarter ended June 30, 2003

 

Item 4.                                Submission of Matters to a Vote of Security Holders

 

There is no information to be reported under this item for the quarter ended

 

Item 5.                                Other Information

 

There is no information to be reported under this item for the quarter ended June 30, 2003

 

Item 6.                                Exhibits and Reports on Form 8-K

 

(a)               Exhibit 11 - Statement re: Computation of per share earnings

 

(b)              Exhibit 31.1 - CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

(c)               Exhibit 31.2 - CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

(d)              Exhibit 32.1 - CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(e)               Exhibit 32.2 - CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(f)                 There have been no Reports on Form 8-K filed by the Company during the quarter for which this report is filed

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

			Carrollton Bancorp
			(Registrant)
Date	August 7, 2003		/s/		Robert A. Altieri
			Robert A. Altieri
			President and Chief Executive Officer
Date	August 7, 2003		/s/	Randall M. Robey
			Randall M. Robey
			Treasurer, Executive Vice President & CFO

 

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EXHIBIT INDEX

 

Exhibit Number		Description
11		Statement Re:  Computation of Per Share Earnings
31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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