Carroll Bancorp (CROL) 10-Q 2012 Q3 Quarterly report

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from         to         

Commission File Number 000-54422

CARROLL BANCORP, INC.

(Exact name of registrant as specified in its charter)

MARYLAND	27-5463184
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

1321 Liberty Road, Sykesville, Maryland 21784

(Address of principal executive offices) (Zip Code)

(410) 795-1900

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§223.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	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

Indicate the number shares outstanding of each of the issuer’s classes of

common stock, as of the latest practical date:

359,456 shares of common stock, par value $0.01 per share, were issued and outstanding at November 9, 2012.

CARROLL BANCORP, INC.

Form 10-Q

Table of Contents

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Statements of Financial Condition as of September 30, 2012 (unaudited) and December 31, 2011		3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited)		4
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited)		5
	Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2012 and 2011 (unaudited)		6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (unaudited)		7
	Notes to Consolidated Financial Statements (unaudited)		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		42
Item 4.	Controls and Procedures		42
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings		43
Item 1A.	Risk Factors		43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 3.	Defaults Upon Senior Securities		43
Item 4.	Mine Safety Disclosures		43
Item 5.	Other Information		43
Item 6.	Exhibits		44
SIGNATURES			45

2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Carroll Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

	September 30, 2012			December 31, 2011
	(unaudited)
Assets:
Cash and due from banks	$	1,349,150		$	1,679,478
Interest-bearing deposits with depository institutions		3,942,912			7,505,005
Cash and cash equivalents		5,292,062			9,184,483
Certificates of deposit with depository institutions		2,851,667			1,998,186
Securities available for sale, at fair value		12,608,885			13,722,119
Securities held to maturity (fair value September 30, 2012 $1,791,720 and December 31, 2011 $1,485,718)		1,739,679			1,458,396
Loans, net of allowance for loan losses - September 30, 2012 $700,000 and December 31, 2011 $594,000		71,183,746			63,586,917
Accrued interest receivable		309,743			283,337
Other equity securities, at cost		517,996			526,396
Bank-owned life insurance		1,912,419			1,466,368
Premises and equipment, net		1,357,459			1,442,044
Foreclosed assets		976,935			1,773,200
Other assets		717,603			821,011
Total Assets	$	99,468,194		$	96,262,457
Liabilities:
Deposits
Noninterest-bearing	$	2,796,158		$	2,522,601
Interest-bearing		82,974,811			80,128,258
Total deposits		85,770,969			82,650,859
Advances from the Federal Home Loan Bank		5,000,000			5,000,000
Other liabilities		143,505			112,818
Total liabilities		90,914,474			87,763,677
Stockholders’ Equity:
Preferred Stock (par value $0.01); authorized 1,000,000 shares; no shares issued and outstanding		—			—
Common Stock (par value $0.01); authorized 9,000,000 shares; issued and outstanding 359,456 shares at September 30, 2012 and December 31, 2011, respectively		3,595			3,595
Additional paid-in capital		2,884,016			2,883,833
Unearned ESOP shares		(204,887	)		(204,887	)
Retained earnings		5,770,473			5,768,122
Accumulated other comprehensive income		100,523			48,117
Total stockholders’ equity		8,553,720			8,498,780
Total liabilities and stockholders’ equity	$	99,468,194		$	96,262,457

The notes to the consolidated financial statements are an integral part of these statements.

3

Carroll Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

(Unaudited)

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2012		2011		2012			2011
Interest income:
Loans	$	956,141	$	855,513	$	2,714,533		$	2,552,809
Securities available for sale		46,942		104,324		177,094			304,709
Securities held to maturity		9,013		4,810		25,700			14,426
Certificates of deposit		9,379		4,138		24,311			14,630
Interest-bearing deposits		3,242		2,965		12,689			13,023
Federal funds sold		—		376		—			1,818
Total interest income		1,024,717		972,126		2,954,327			2,901,415
Interest expense:
Interest on deposits		218,387		265,284		677,829			848,626
Interest on borrowings		29,261		29,261		87,147			86,829
Total interest expense		247,648		294,545		764,976			935,455
Net interest income		777,069		677,581		2,189,351			1,965,960
Provision for loan losses		8,000		38,864		180,196			42,117
Net interest income after provision for loan losses		769,069		638,717		2,009,155			1,923,843
Non-interest income:
Gain on sale of securities available for sale		13,122		98,292		97,936			166,318
Gain on loans held for sale		—		1,044		1,612			3,133
Increase in cash surrender value - life insurance		16,899		13,448		46,051			39,954
Customer service fees		19,137		19,506		54,417			49,614
Loan fee income		8,875		9,721		29,868			24,946
Other income		7,316		2,030		25,988			6,955
Total non-interest income		65,349		144,041		255,872			290,920
Non-interest expense:
Salaries and employee benefits		357,087		339,515		1,058,812			986,997
Premises and equipment		75,522		70,120		225,771			226,612
Data processing		88,762		78,484		253,971			228,997
Professional fees		74,805		56,328		238,577			163,795
FDIC insurance		21,577		22,472		65,657			78,983
Directors’ fees		32,225		27,376		94,450			82,028
Corporate insurance		11,784		12,549		35,352			37,603
Printing and office supplies		7,876		13,066		29,860			39,322
Provision for losses and costs on real estate acquired through foreclosure		27,194		75,523		84,686			101,157
Other operating expenses		74,627		50,552		184,189			174,971
Total non-interest expenses		771,459		745,985		2,271,325			2,120,465
Income (loss) before income tax expense (benefit)		62,959		36,773		(6,298	)		94,298
Income tax expense (benefit)		24,169		9,201		(8,649	)		21,436
Net income	$	38,790	$	27,572	$	2,351		$	72,862
Basic/diluted earnings per share	$	0.11		N/A	$	0.01			N/A
Basic/diluted weighted average shares outstanding		338,967		N/A		338,967			N/A

The notes to the consolidated financial statements are an integral part of these statements.

4

Carroll Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2012		2011			2012		2011
Net income	$	38,790	$	27,572		$	2,351	$	72,862
Other comprehensive income (loss), before income tax:
Securities available for sale:
Net unrealized holding gains arising during the period		103,305		51,183			185,280		282,199
Less reclassification adjustment for gains included in net income		13,122		98,292			97,936		166,318
Other comprehensive income (loss), before income tax		90,183		(47,109	)		87,344		115,881
Income tax effect		36,074		(18,843	)		34,938		46,353
Other comprehensive income (loss), net of tax		54,109		(28,266	)		52,406		69,528
Total comprehensive income (loss)	$	92,899	$	(694	)	$	54,757	$	142,390

The notes to the consolidated financial statements are an integral part of these statements.

5

Carroll Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

For the Nine Months Ended September 30, 2012 and 2011

(unaudited)

	Common Stock		Additional Paid-in Capital		Unearned ESOP Shares			Retained Earnings		Accumulated Other Comprehensive Income		Total
Balances at January 1, 2012	$	3,595	$	2,883,833	$	(204,887	)	$	5,768,122	$	48,117	$	8,498,780
Net income									2,351				2,351
Other comprehensive income											52,406		52,406
ESOP allocated shares FMV adjustment				183									183
Balances at September 30, 2012	$	3,595	$	2,884,016	$	(204,887	)	$	5,770,473	$	100,523	$	8,553,720
Balances at January 1, 2011	$	—	$	—	$	—		$	5,747,842	$	29,299	$	5,777,141
Net income									72,862				72,862
Other comprehensive income											69,528		69,528
Balances at September 30, 2011	$	—	$	—	$	—		$	5,820,704	$	98,827	$	5,919,531

The notes to the consolidated financial statements are an integral part of these statements.

6

Carroll Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

(unaudited)

	For the Nine Months Ended September 30,
	2012			2011
Cash flows from operating activities:
Net income	$	2,351		$	72,862
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of securities available for sale		(97,936	)		(166,318	)
Gain on sale of loans held for sale		(1,612	)		(3,133	)
Origination of loans held for sale		(487,800	)		(294,000	)
Proceeds from sale of loans held for sale		268,612			297,133
Amortization and accretion of securities		199,383			233,285
Amortization of deferred loan origination fees, net of costs		12,874			6,252
Provision for loan losses		180,196			42,117
Provision for loss on real estate acquired through foreclosure		4,965			69,900
Loss on sale of real estate acquired through foreclosure		22,031			—
Depreciation of premises and equipment		101,367			103,444
Increase in cash surrender value of bank-owned life insurance		(46,051	)		(39,954	)
ESOP compensation expense		8,283			—
(Increase) decrease in deferred tax assets		(34,147	)		8,968
Increase in accrued interest receivable		(26,407	)		(37,796	)
Decrease (increase) in other assets		102,617			(557	)
Increase in other liabilities		22,587			67,781
Net cash provided by operating activities		231,313			359,984
Cash flows from investing activities:
Purchase of securities available for sale		(13,631,105	)		(16,465,574	)
Purchase of securities held to maturity		(289,767	)		—
Proceeds from sales and redemptions of securities available for sale		11,940,584			13,282,170
Principal collected on securities available for sale		2,794,655			4,024,716
Purchase of certificates of deposit		(1,350,000	)		(947,452	)
Redemption of certificates of deposit		500,000			1,650,000
Increase in loans		(7,780,598	)		(2,967,521	)
Purchase of bank-owned life insurance		(400,000	)		—
Purchase of premises and equipment		(16,782	)		(59,151	)
Redemption of other equity securities		8,400			15,600
Purchase of other equity securities		—			(83,596	)
Capitalized costs on real estate acquired through foreclosure		(42,756	)		—
Proceeds from the sale of real estate acquired through foreclosure		1,023,525			—
Net cash used by investing activities		(7,243,844	)		(1,550,808	)
Cash flows from financing activities:
Increase in deposits		3,120,110			114,292
Net cash provided by financing activities		3,120,110			114,292
Net decrease in cash and cash equivalents		(3,892,421	)		(1,076,532	)
Cash and cash equivalents, beginning balance		9,184,483			9,153,843
Cash and cash equivalents, ending balance	$	5,292,062		$	8,077,311
Supplemental disclosure of cash flow information:
Interest paid	$	767,742		$	938,867
Income taxes paid (refund)	$	—		$	(100,422	)
Supplemental schedule of noncash investing and financing activities:
Foreclosed real estate acquired in settlement of loans	$	211,500		$	1,501,600

The notes to the consolidated financial statements are an integral part of these statements.

7

CARROLL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Summary of Significant Accounting Policies

Nature of Operations

Carroll Bancorp, Inc. (the “Company”), a Maryland corporation, is the holding company for Carroll Community Bank (the “Bank”), a state chartered commercial bank. The Company mainly operates in Carroll and Howard counties in the state of Maryland. The Company’s common stock trades on the Over the Counter Bulletin Board under the symbol “CROL”.

The Bank (formerly Sykesville Federal Savings Association) is headquartered in Sykesville, Maryland. The Bank is a community-oriented financial institution providing financial services to individuals, families and businesses through two banking offices located in Sykesville and Westminster, Maryland. The Bank is subject to the regulation, examination and supervision by the State of Maryland Department of Licensing and Regulation and the Federal Deposit Insurance Corporation (“FDIC”), our deposit insurer. Its primary deposits are certificates of deposit, savings and checking accounts and its primary lending products are residential and commercial real estate loans.

Basis of Financial Statement Presentation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank. All significant intercompany balances and transactions between the Company and the Bank have been eliminated.

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions for Form 10-Q and Article 8 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United Sates for complete financial statements and prevailing practices within the banking industry. In the opinion of management, all adjustments considered necessary for fair presentation of the financial position and results of operations for the interim periods presented have been included.

The operating results for the three and nine months ended September 30, 2012, are not necessarily indicative of the results that may be expected for the entire year or any other interim period. The consolidated financial statements presented in this report should be read in conjunction with the audited consolidated financial statements and the accompanying notes included in the Company’s 2011 Annual Report on Form 10-K as filed with the SEC on March 9, 2012. There have been no significant changes to the Company’s accounting policies as disclosed in the 2011 Annual Report on Form 10-K.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosure or in satisfaction of loans. In the determination of the allowance for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties.

In preparing the accompanying consolidated financial statements, the Company has evaluated subsequent events through the financial statement issue date. There were no subsequent events identified by the Company as a result of the evaluation that require recognition or disclosure in the consolidated financial statements.

8

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year method of presentation. Such reclassifications, if any, have no impact on consolidated net income or stockholders’ equity.

Recent Accounting Pronouncements

There are no recent accounting pronouncements that pertain to the Company’s consolidated financial statements.

Note 2. Securities

The amortized cost and estimated market value of securities available for sale and held to maturity at September 30, 2012 and December 31, 2011 are as follows:

	At September 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available for sale:
U.S Government agency	$	—	$	—	$	—	$	—
Residential mortgage-backed securities		11,420,945		159,618		—		11,580,563
Asset-backed securities (SLMA)		1,020,401		7,921		—		1,028,322
	$	12,441,346	$	167,539	$	—	$	12,608,885
Securities held to maturity:
Municipal bonds	$	1,493,343	$	47,289	$	—	$	1,540,632
Corporate bonds		246,336		4,752		—		251,088
	$	1,739,679	$	52,041	$	—	$	1,791,720
	At December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available for sale:
U.S Government agency	$	—	$	—	$	—	$	—
Residential mortgage-backed securities		13,641,923		84,325		4,129		13,722,119
	$	13,641,923	$	84,325	$	4,129	$	13,722,119
Securities held to maturity:
Municipal bonds	$	1,213,829	$	27,550	$	—	$	1,241,379
Corporate bonds		244,567		—		228		244,339
	$	1,458,396	$	27,550	$	228	$	1,485,718

The Company had no private label residential mortgage-backed securities at September 30, 2012 and December 31, 2011 or during the nine months or year then ended, respectively.

9

The amortized cost and estimated market value of securities at September 30, 2012 and December 31, 2011, by contractual maturity, are shown below. Expected maturities for residential mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	At September 30, 2012
	Securities available for sale				Securities held to maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Under 1 year	$	—	$	—	$	—	$	—
Over 1 year through 5 years		—		—		865,336		892,482
After 5 years through 10 years		6,827,048		6,920,645		874,343		899,238
Over 10 years		5,614,298		5,688,240		—		—
	$	12,441,346	$	12,608,885	$	1,739,679	$	1,791,720
	At December 31, 2011
	Securities available for sale				Securities held to maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Under 1 year	$	—	$	—	$	—	$	—
Over 1 year through 5 years		—		—		864,476		878,437
After 5 years through 10 years		7,136,358		7,192,751		481,728		493,076
Over 10 years		6,505,565		6,529,368		112,192		114,205
	$	13,641,923	$	13,722,119	$	1,458,396	$	1,485,718

The Company recognized gross realized gains on securities available for sale of $97,936 and $166,318 for the nine months ended September 30, 2012 and 2011 respectively and $218,158 for the year ended December 31, 2011.

10

Securities with gross unrealized losses at September 30, 2012 and December 31, 2011, aggregated by investment category and length of time individual securities have been in a continual loss position, are as follows:

	At September 30, 2012
	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
Securities available for sale:
U.S. Government agency	$	—	$	—	$	—	$	—	$	—	$	—
Residential mortgage-backed securities		—		—		—		—		—		—
Asset-backed securities (SLMA)		—		—						—		—
	$	—	$	—	$	—	$	—	$	—	$	—
Securities held to maturity:
Municipal bonds	$	—	$	—	$	—	$	—	$	—	$	—
Corporate bonds		—		—		—		—		—		—
	$	—	$	—	$	—	$	—	$	—	$	—
	At December 31, 2011
	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
Securities available for sale:
U.S. Government agency	$	—	$	—	$	—	$	—	$	—	$	—
Residential mortgage-backed securities		3,290,877		4,129		—		—		3,290,877		4,129
	$	3,290,877	$	4,129	$	—	$	—	$	3,290,877	$	4,129
Securities held to maturity:
Municipal bonds	$	—	$	—	$	—	$	—	$	—	$	—
Corporate bonds		244,340		228						244,340		228
	$	244,340	$	228	$	—	$	—	$	244,340	$	228

Note 3. Loans

Loans at September 30, 2012 and December 31, 2011 are summarized as follows:

	At September 30, 2012						At December 31, 2011
	Balance			Percent of Total			Balance			Percent of Total
Residential owner occupied - first lien	$	37,408,287			52.0	%	$	38,586,665			60.1	%
Residential owner occupied - junior lien		3,377,718			4.7	%		3,828,870			6.0	%
Residential non-owner occupied (investor)		8,531,096			11.9	%		7,898,684			12.3	%
Commercial owner occupied		6,119,291			8.5	%		3,334,885			5.2	%
Other commercial loans		16,224,023			22.6	%		10,348,940			16.1	%
Consumer loans		233,736			0.3	%		192,716			0.3	%
Total loans		71,894,151			100.0	%		64,190,760			100.0	%
Net deferred fees, costs and purchase premiums		(10,405	)					(9,843	)
Allowance for loan losses		(700,000	)					(594,000	)
Total loans, net	$	71,183,746					$	63,586,917

Our residential one- to four- family first mortgage loan portfolio is pledged as collateral for our advance with Federal Home Loan Bank of Atlanta (“FHLB”).

11

Note 4. Credit Quality of Loans and Allowance for Loan Losses

Company policies, consistent with regulatory guidelines, provide for the classification of loans that are considered to be of lesser quality as substandard, doubtful, or loss. A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those loans characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans (or portions of loans) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Loans that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are required to be designated as special mention.

The Company maintains an allowance for loan losses at an amount estimated to equal all credit losses incurred in our loan portfolio that are both probable and reasonable to estimate at a balance sheet date. Our determination as to the classification of our assets is subject to review by the Maryland Commissioner of Financial Regulation and the FDIC. We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations.

The Company provides for loan losses based upon the consistent application of our documented allowance for loan loss methodology. All loan losses are charged to the allowance for loan losses and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses. We regularly review the loan portfolio and make provisions for loan losses in order to maintain the allowance for loan losses in accordance with GAAP. The allowance for loan losses consists primarily of two components:

1) specific allowances are established for loans classified as substandard or doubtful. For loans classified as impaired, the allowance is established when the net realizable value (collateral value less costs to sell) of the loan is lower than the carrying amount of the loan. The amount of impairment provided for as a specific allowance is represented by the deficiency, if any, between the underlying collateral value and the carrying value of the loan. Impaired loans for which the estimated fair value of the loan, or the loan’s observable market price or the fair value of the underlying collateral, if the loan is collateral dependent, exceeds the carrying value of the loan are not considered in establishing specific allowances for loan losses; and

2) general allowances are established for loan losses on a portfolio basis for loans that do not meet the definition of impaired loans. The portfolio is grouped into similar risk characteristics, primarily loan type and regulatory classification. We apply an estimated loss rate to each loan group. The loss rates applied are based upon our loss experience adjusted, as appropriate, for the qualitative factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions.

The allowance for loan losses is maintained at a level to provide for losses that are probable and can be reasonably estimated. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, known and inherent losses in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.

The adjustments to historical loss experience are based on our evaluation of several qualitative factors, including:

• changes in the types of loans in the loan portfolio and the size of the overall portfolio;

• changes in the levels of concentration of credit;

• changes in the number and amount of non-accrual loans, classified loans, past due loans and troubled debt restructurings and other loan modifications;

• changes in the experience, ability and depth of lending personnel;

12

• changes in the quality of the loan review system and the degree of Board oversight;

• changes in lending policies and procedures;

• changes in national, state and local economic trends and business conditions; and

• changes in external factors such as competition and legal and regulatory oversight.

A loan is considered past due or delinquent when a contractual payment is not paid on the day it is due. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for all loans secured by real estate by the fair value of the collateral if the loan is collateral dependent.

The Company’s charge-off policy states after all collection efforts have been exhausted, the loan is deemed to be a loss and the loss amount has been determined, the loss amount will be charged to the established allowance for loan losses. Loans secured by real estate, either residential or commercial, are evaluated for loss potential at the 60 days past due threshold. At no later than 90 days past due the loan is placed on nonaccrual status and a specific reserve is established if the net realizable value in less than the principal value of the loan balance(s). Once the actual loss value has been determined, a charge-off to the allowance for loan losses for the amount of the loss is taken. Each loss is evaluated on its specific facts regarding the appropriate timing to recognize the loss. Unsecured loans are charged-off to the allowance for loan losses at the 90 day past due threshold or when an actual loss has been determined whichever is earlier.

We evaluate the allowance for loan losses based upon the combined total of the specific and general components. Generally when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.

Commercial real estate loans generally have greater credit risks compared to one- to four-family residential mortgage loans we originate, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related business and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy. Therefore, we expect that the percentage of the allowance for loan losses as a percentage of the loan portfolio will increase going forward as we increase our focus on the origination of commercial real estate loans.

13

The following tables summarize the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2012 and 2011.

	For the Three Months Ended September 30, 2012
	Residential owner occupied - first lien			Residential owner occupied - junior lien			Residential non-owner occupied (investor)			Commercial owner occupied			Other commercial loans		Consumer loans		Unallocated			Total
Allowance for loan losses:
Beginning balance	$	374,966		$	19,477		$	64,453		$	62,632		$	170,472	$	—	$	—		$	692,000
Charge-offs		—			—			—			—			—		—		—			—
Recoveries		—			—			—			—			—		—		—			—
Provision		(9,032	)		(866	)		499			(2,072	)		19,471		—		—			8,000
Ending Balance	$	365,934		$	18,611		$	64,952		$	60,560		$	189,943	$	—	$	—		$	700,000
	For the Nine Months Ended September 30, 2012
	Residential owner occupied - first lien			Residential owner occupied - junior lien			Residential non-owner occupied (investor)			Commercial owner occupied			Other commercial loans		Consumer loans		Unallocated			Total
Allowance for loan losses:
Beginning balance	$	334,087		$	32,180		$	69,025		$	33,076		$	125,632	$	—	$	—		$	594,000
Charge-offs		54,204			19,992			—			—			—		—		—			74,196
Recoveries		—			—			—			—			—		—		—			—
Provision		86,051			6,423			(4,073	)		27,484			64,311		—		—			180,196
Ending Balance	$	365,934		$	18,611		$	64,952		$	60,560		$	189,943	$	—	$	—		$	700,000
	For the Three Months Ended September 30, 2011
	Residential owner occupied - first lien			Residential owner occupied - junior lien			Residential non-owner occupied (investor)			Commercial owner occupied			Other commercial loans		Consumer loans		Unallocated			Total
Allowance for loan losses:
Beginning balance	$	236,270		$	15,078		$	76,302		$	32,381		$	188,969	$	—	$	30,000		$	579,000
Charge-offs		—			—			—			—			52,864		—		—			52,864
Recoveries		—			—			—			—			—		—		—			—
Provision		3,289			(528	)		(5,144	)		(1,785	)		51,032		—		(8,000	)		38,864
Ending Balance	$	239,559		$	14,550		$	71,158		$	30,596		$	187,137	$	—	$	22,000		$	565,000
	For the Nine Months Ended September 30, 2011
	Residential owner occupied - first lien			Residential owner occupied - junior lien			Residential non-owner occupied (investor)			Commercial owner occupied			Other commercial loans		Consumer loans		Unallocated			Total
Allowance for loan losses:
Beginning balance	$	347,647		$	25,711		$	102,990		$	24,247		$	174,405	$	—	$	—		$	675,000
Charge-offs		57,000			—			42,253			—			52,864		—		—			152,117
Recoveries		—			—			—			—			—		—		—			—
Provision		(51,088	)		(11,161	)		10,421			6,349			65,596		—		22,000			42,117
Ending Balance	$	239,559		$	14,550		$	71,158		$	30,596		$	187,137	$	—	$	22,000		$	565,000

14

The following tables set forth the balance of the allowance for loan losses by portfolio segment, disaggregated by impairment methodology, which is then further segregated by amounts evaluated for impairment collectively and individually at September 30, 2012 and 2011.

	At September 30, 2012
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Unallocated		Total
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	136,717	$	—	$	—	$	—	$	—	$	—	$	—	$	136,717
Ending balance: collectively evaluated for impairment		229,217		18,611		64,952		60,560		189,943		—				563,283
Ending balance	$	365,934	$	18,611	$	64,952	$	60,560	$	189,943	$	—	$	—	$	700,000
Loans:
Ending balance: individually evaluated for impairment	$	463,911	$	—	$	—	$	—	$	—	$	—			$	463,911
Ending balance: collectively evaluated for impairment		36,944,376		3,377,718		8,531,096		6,119,291		16,224,023		233,736				71,430,240
Ending balance	$	37,408,287	$	3,377,718	$	8,531,096	$	6,119,291	$	16,224,023	$	233,736			$	71,894,151
	At December 31, 2011
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Unallocated		Total
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	103,980	$	19,992	$	—	$	—	$	—	$	—	$	—	$	123,972
Ending balance: collectively evaluated for impairment		230,107		12,188		69,025		33,076		125,632		—		—		470,028
Ending balance	$	334,087	$	32,180	$	69,025	$	33,076	$	125,632	$	—	$	—	$	594,000
Loans:
Ending balance: individually evaluated for impairment	$	618,953	$	19,992	$	—	$	—	$	—	$	—			$	638,945
Ending balance: collectively evaluated for impairment		37,967,712		3,808,878		7,898,684		3,334,885		10,348,940		192,716				63,551,815
Ending balance	$	38,586,665	$	3,828,870	$	7,898,684	$	3,334,885	$	10,348,940	$	192,716			$	64,190,760

The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.

15

The following tables are a summary of the loan portfolio quality indicators by portfolio segment as of September 30, 2012 and December 31, 2011:

	At September 30, 2012
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
Pass	$	36,944,376	$	3,377,718	$	8,295,685	$	6,119,291	$	16,224,023	$	233,736	$	71,194,829
Special Mention		—		—		235,411		—		—		—		235,411
Substandard		463,911		—		—		—		—		—		463,911
Doubtful		—		—		—		—		—		—		—
Total	$	37,408,287	$	3,377,718	$	8,531,096	$	6,119,291	$	16,224,023	$	233,736	$	71,894,151
	At December 31, 2011
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
Pass	$	37,501,735	$	3,808,878	$	7,898,684	$	3,334,885	$	10,348,940	$	192,716	$	63,085,838
Special Mention		465,977		—		—		—		—		—		465,977
Substandard		618,953		19,992		—		—		—		—		638,945
Doubtful		—		—		—		—		—		—		—
Total	$	38,586,665	$	3,828,870	$	7,898,684	$	3,334,885	$	10,348,940	$	192,716	$	64,190,760

Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized and are aggregated as a “Pass” rating.

• Pass (risk ratings 1-6)– risk ratings one to four are deemed “acceptable”. Risk rating five is “acceptable with care” and risk rating six is a “watch credit”.

• Special mention (risk rating 7) - a special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

• Substandard (risk rating 8) - substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

• Doubtful (risk rating 9) - loans classified as doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

• Loss (risk rating 10) - loans classified as loss are considered uncollectible and of such little value that their continuance as assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may occur in the future.

Loans classified special mention, substandard, doubtful or loss are reviewed at least quarterly to determine their appropriate classification. Non-classified commercial loan relationships greater than $50,000 are reviewed annually. Non-classified residential mortgage loans and consumer loans are not evaluated unless a specific event occurs to raise the awareness of possible credit deterioration.

16

The following tables set forth certain information with respect to our loan delinquencies by portfolio segment as of September 30, 2012 and December 31, 2011:

	At September 30, 2012
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
Current	$	36,185,042	$	3,215,632	$	8,531,096	$	6,119,291	$	16,224,023	$	233,736	$	70,508,820
30-59 days past due		130,887		69,783		—		—		—		—		200,670
60-89 days past due		991,546		92,303		—		—		—		—		1,083,849
Greater than 90 days past due		100,812		—		—		—		—		—		100,812
Total past due		1,223,245		162,086		—		—		—		—		1,385,331
Total	$	37,408,287	$	3,377,718	$	8,531,096	$	6,119,291	$	16,224,023	$	233,736	$	71,894,151
	At December 31, 2011
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
Current	$	37,716,785	$	3,742,357	$	7,898,684	$	3,334,885	$	10,348,940	$	192,716	$	63,234,367
30-59 days past due		241,078		66,521		—		—		—		—		307,599
60-89 days past due		9,849		—		—		—		—		—		9,849
Greater than 90 days past due		618,953		19,992		—		—		—		—		638,945
Total past due		869,880		86,513		—		—		—		—		956,393
Total	$	38,586,665	$	3,828,870	$	7,898,684	$	3,334,885	$	10,348,940	$	192,716	$	64,190,760

17

The following tables are a summary of impaired loans by portfolio segment as of September 30, 2012 and December 31, 2011:

	At September 30, 2012
Impaired Loans:	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
With no related allowance recorded:
Recorded Investment	$	57,194	$	—	$	—	$	—	$	—	$	—	$	57,194
Unpaid Principal Balance		57,194		—		—		—		—		—		57,194
With an allowance recorded:
Recorded Investment	$	406,717	$	—	$	—	$	—	$	—	$	—	$	406,717
Unpaid Principal Balance		406,717		—		—		—		—		—		406,717
Related Allowance		136,717		—		—		—		—		—		136,717
Total impaired loans:
Recorded Investment	$	463,911	$	—	$	—	$	—	$	—	$	—	$	463,911
Unpaid Principal Balance		463,911		—		—		—		—		—		463,911
Related Allowance		136,717		—		—		—		—		—		136,717
	At December 31, 2011
Impaired Loans:	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
With no related allowance recorded:
Recorded Investment	$	46,973	$	—	$	—	$	—	$	—	$	—	$	46,973
Unpaid Principal Balance		46,973		—		—		—		—		—		46,973
With an allowance recorded:
Recorded Investment	$	571,980	$	19,992	$	—	$	—	$	—	$	—	$	591,972
Unpaid Principal Balance		571,980		19,992		—		—		—		—		591,972
Related Allowance		103,980		19,992		—		—		—		—		123,972
Total impaired loans:
Recorded Investment	$	618,953	$	19,992	$	—	$	—	$	—	$	—	$	638,945
Unpaid Principal Balance		618,953		19,992		—		—		—		—		638,945
Related Allowance		103,980		19,992		—		—		—		—		123,972

18

The following tables present by portfolio segment, information related to the average recorded investment and the interest income foregone and recognized on impaired loans for the three and nine months ended September 30, 2012 and 2011:

	For the Three Months Ended September 30, 2012
Impaired loans:	Residential owner occupied - first lien			Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
With no related allowance recorded:
Average recorded investment	$	138,186		$	—	$	—	$	—	$	—	$	—	$	138,186
Interest income that would have been recognized		6,321			—		—		—		—		—		6,321
Interest income recognized (cash basis)		2,258			—		—		—		—		—		2,258
Interest income foregone		4,063			—		—		—		—		—		4,063
With an allowance recorded:
Average recorded investment	$	514,372		$	—	$	—	$	—	$	—	$	—	$	514,372
Interest income that would have been recognized		12,222			—		—		—		—		—		12,222
Interest income recognized (cash basis)		23,783			—		—		—		—		—		23,783
Interest income foregone		(11,561	)		—		—		—		—		—		(11,561	)
Total impaired loans:
Average recorded investment	$	652,558		$	—	$	—	$	—	$	—	$	—	$	652,558
Interest income that would have been recognized		18,543			—		—		—		—		—		18,543
Interest income recognized (cash basis)		26,041			—		—		—		—		—		26,041
Interest income foregone		(7,498	)		—		—		—		—		—		(7,498	)
	For the Nine Months Ended September 30, 2012
Impaired loans:	Residential owner occupied - first lien			Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
With no related allowance recorded:
Average recorded investment	$	146,554		$	—	$	—	$	—	$	—	$	—	$	146,554
Interest income that would have been recognized		9,759			—		—		—		—		—		9,759
Interest income recognized (cash basis)		2,445			—		—		—		—		—		2,445
Interest income foregone		7,314			—		—		—		—		—		7,314
With an allowance recorded:
Average recorded investment	$	497,000		$	6,664	$	—	$	—	$	—	$	—	$	503,664
Interest income that would have been recognized		30,623			311		—		—		—		—		30,934
Interest income recognized (cash basis)		31,058			—		—		—		—		—		31,058
Interest income foregone		(435	)		311		—		—		—		—		(124	)
Total impaired loans:
Average recorded investment	$	643,554		$	6,664	$	—	$	—	$	—	$	—	$	650,218
Interest income that would have been recognized		40,382			311		—		—		—		—		40,693
Interest income recognized (cash basis)		33,503			—		—		—		—		—		33,503
Interest income foregone		6,879			311		—		—		—		—		7,190

19

	For the Three Months Ended September 30, 2011
Impaired loans:	Residential owner occupied - first lien			Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
With no related allowance recorded:
Average recorded investment	$	492,025		$	—	$	—	$	—	$	—	$	—	$	492,025
Interest income that would have been recognized		2,804			—		—		—		—		—		2,804
Interest income recognized (cash basis)		(1	)		—		—		—		—		—		(1	)
Interest income foregone		2,805			—		—		—		—		—		2,805
With an allowance recorded:
Average recorded investment	$	—		$	—	$	—	$	—	$	458,485	$	—	$	458,485
Interest income that would have been recognized		—			—		—		—		13,283		—		13,283
Interest income recognized (cash basis)		—			—		—		—		—		—		—
Interest income foregone		—			—		—		—		13,283		—		13,283
Total impaired loans:
Average recorded investment	$	492,025		$	—	$	—	$	—	$	458,485	$	—	$	950,510
Interest income that would have been recognized		2,804			—		—		—		13,283		—		16,087
Interest income recognized (cash basis)		(1	)		—		—		—		—		—		(1	)
Interest income foregone		2,805			—		—		—		13,283		—		16,088
	For the Nine Months Ended September 30, 2011
Impaired loans:	Residential owner occupied - first lien			Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
With no related allowance recorded:
Average recorded investment	$	582,295		$	—	$	—	$	—	$	—	$	—	$	582,295
Interest income that would have been recognized		24,347			—		—		—		—		—		24,347
Interest income recognized (cash basis)		6,249			—		—		—		—		—		6,249
Interest income foregone		18,098			—		—		—		—		—		18,098
With an allowance recorded:
Average recorded investment	$	370,408		$	—	$	169,638	$	—	$	545,708	$	—	$	1,085,754
Interest income that would have been recognized		16,091			—		4,389		—		39,639		—		60,119
Interest income recognized (cash basis)		18,898			—		—		—		—		—		18,898
Interest income foregone		(2,807	)		—		4,389		—		39,639		—		41,221
Total impaired loans:
Average recorded investment	$	952,703		$	—	$	169,638	$	—	$	545,708	$	—	$	1,668,049
Interest income that would have been recognized		40,438			—		4,389		—		39,639		—		84,466
Interest income recognized (cash basis)		25,147			—		—		—		—		—		25,147
Interest income foregone		15,291			—		4,389		—		39,639		—		59,319

20

The following table is a summary of performing and nonperforming impaired loans by portfolio segment as of September 30, 2012 and December 31, 2011:

	At September 30, 2012		At December 31, 2011
Performing loans:
Impaired performing loans:
Residential owner occupied - first lien	$	—	$	—
Residential owner occupied - junior lien		—		—
Residential non-owner occupied (investor)		—		—
Commercial owner occupied		—		—
Other commercial loans		—		—
Consumer loans		—		—
Troubled debt restructurings:
Residential owner occupied - first lien		294,374		327,000
Residential owner occupied - junior lien		—		—
Residential non-owner occupied (investor)		—		—
Commercial owner occupied		—		—
Other commercial loans		—		—
Consumer loans		—		—
Total impaired performing loans		294,374		327,000
Nonperforming loans:
Impaired nonperforming loans (nonaccrual):
Residential owner occupied - first lien		463,911		618,953
Residential owner occupied - junior lien		—		19,992
Residential non-owner occupied (investor)		—		—
Commercial owner occupied		—		—
Other commercial loans		—		—
Consumer loans		—		—
Troubled debt restructurings:
Residential owner occupied - first lien		—		—
Residential owner occupied - junior lien		—		—
Residential non-owner occupied (investor)		—		—
Commercial owner occupied		—		—
Other commercial loans		—		—
Consumer loans		—		—
Total impaired nonperforming loans (nonaccrual):		463,911		638,945
Total impaired loans	$	758,285	$	965,945

Troubled debt restructurings. Loans may be periodically modified in a troubled debt restructuring (“TDR”) to make concessions to help a borrower remain current on the loan and/or to avoid foreclosure. Generally we do not forgive principal or interest on a loan or modify the interest rate to below market rates. When we modify loans in a TDR, we evaluate any possible impairment similar to any other impaired loans. If we determine that the value of the restructured loan is less than the recorded investment in the loan, impairment is recognized through a specific allowance estimate or a charge-off to the allowance.

If a restructured loan was nonperforming prior to the restructuring, the restructured loan will remain a nonperforming loan. After a period of six months and if the restructured loan is in compliance with its modified terms, the loan will become a performing loan. If a restructured loan was performing prior to the restructuring, the restructured loan will remain a performing loan. A performing TDR will no longer be reported as a TDR in calendar years after the year of the restructuring if the effective interest rate is equal or greater than the market rate for credits with comparable risk.

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The Company has no commitments to loan additional funds to borrowers whose loans have been restructured.

The following table is a summary of impaired loans that were modified pursuant to a TDR during the three and nine months ended September 30, 2012:

	During the Three Months Ended September 30, 2012						During the Nine Months Ended September 30, 2012
Loan Type	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Residential owner occupied - first lien		—	$	—	$	—		1	$	296,992	$	296,992

During the nine months ended September 30, 2012, a customer whose loan was in nonaccrual status filed bankruptcy. Since the bankruptcy petition restructured the loan, the Company is treating the loan as a TDR. During the first six months following the restructuring the loan was treated as a nonaccrual loan. The borrower has demonstrated the ability to make the payments by the restructured contractual due dates and has been reclassified to a performing loan.

There were no defaults on any TDRs that were restructured in 2012. In addition, there were no loans modified pursuant to a TDR during the three and nine months ended September 30, 2011.

Note 5. Deposits

Deposit product segment balances are as follows:

	At September 30, 2012					At December 31, 2011
	Balance		Percent of Total			Balance		Percent of Total
Non-interest bearing checking accounts	$	2,796,158		3.3	%	$	2,522,601		3.1	%
Interest-bearing checking accounts		4,019,575		4.7	%		3,012,298		3.6	%
Savings accounts		1,821,220		2.1	%		1,824,591		2.2	%
Premium savings accounts		21,950,387		25.6	%		22,605,550		27.4	%
Money market accounts		6,791,348		7.9	%		4,497,140		5.4	%
IRA accounts, non-certificate		10,409,467		12.1	%		12,132,835		14.7	%
Certificates of deposit		37,982,814		44.3	%		36,055,844		43.6	%
Total deposits	$	85,770,969		100.0	%	$	82,650,859		100.0	%

Certificates of deposit scheduled maturities are as follows:

	At September 30, 2012		At December 31, 2011
Period to Maturity:
Less than or equal to one year	$	20,464,065	$	16,636,626
More than one to two years		3,978,586		12,432,852
More than two to three years		3,532,754		1,980,292
More than three to four years		1,318,331		1,781,697
More than four to five years		8,689,078		3,224,377
Total certificates of deposit	$	37,982,814	$	36,055,844

Note 6. Fair Value Measurements

The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 825 “Financial Instruments” which provides guidance on the fair value option for financial assets and liabilities. This guidance permits entities to measure many financial instruments and certain other items at fair value. The objective is to improve

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financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a commitment. Subsequent changes must be recorded in earnings.

Simultaneously with the adoption of ASC 825, the Company adopted ASC 820,Fair Value Measurements. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Under ASC 820, fair value measurements are not adjusted for transaction costs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below.

Level 1	Valuations for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2	Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy. As required by ASC 820, the Company does not adjust the quoted price for such instruments.

The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most investment-grade and high-yield corporate bonds, less liquid mortgage products, less liquid equities, state, municipal and provincial obligations, and certain physical commodities. Such instruments are generally classified within Level 2 of the fair value hierarchy.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.

Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or market value. Market value is measured based on the value of the collateral securing these loans and is classified within Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. The value of real estate collateral is determined based on an appraisal by qualified licensed appraisers hired by the Company. The value of business equipment, inventory and accounts receivable collateral is based on the net book value on the business’ financial statements and, if necessary, discounted based on management’s review and analysis. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

Foreclosed assets are adjusted for fair value upon transfer of loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value and fair value. Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an

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observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market prices, the Company records the foreclosed asset as nonrecurring Level 3.

The following table presents a summary of financial assets measured at fair value on a recurring basis at September 30, 2012 and December 31, 2011:

	At September 30, 2012
	Carrying Value		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
U.S. Government agency	$	—	$	—	$	—	$	—
Residential mortgage-backed securities		11,580,563		—		11,580,563		—
Asset-backed securities (SLMA)		1,028,322		—		1,028,322		—
Total securities available for sale	$	12,608,885	$	—	$	12,608,885	$	—
	At December 31, 2011
	Carrying Value		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
U.S. Government agency	$	—	$	—	$	—	$	—
Residential mortgage-backed securities		13,722,119		—		13,722,119		—
Total securities available for sale	$	13,722,119	$	—	$	13,722,119	$	—

The following table presents a summary of financial assets measured at fair value on a non-recurring basis at September 30, 2012 and December 31, 2011:

	At September 30, 2012
	Carrying Value		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Residential owner occupied - first lien	$	463,911	$	—	$	—	$	463,911
Residential owner occupied - junior lien		—		—		—		—
Total nonperforming impaired loans	$	463,911	$	—	$	—	$	463,911
Foreclosed real estate	$	976,935	$	—	$	—	$	976,935
	At December 31, 2011
	Carrying Value		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Residential owner occupied - first lien	$	618,953	$	—	$	—	$	618,953
Residential owner occupied - junior lien		19,992		—		—		19,992
Total nonperforming impaired loans	$	638,945	$	—	$	—	$	638,945
Foreclosed real estate	$	1,773,200	$	—	$	—	$	1,773,200

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The following table shows a reconciliation of the beginning and ending balances for Level 3 assets measured on a non-recurring basis:

	Impaired Loans			Foreclosed Real Estate
Balance, January 1, 2011	$	2,915,981		$	190,000
Total realized and unrealized gains (losses):
Included in net income		(233,831	)		(107,400	)
Included in other comprehensive income		—			—
Purchases, issuances and settlements		(622,365	)		—
Transfers in and/or out of Level 3		(1,420,840	)		1,690,600
Balance, December 31, 2011	$	638,945		$	1,773,200
Total realized and unrealized gains (losses):
Included in net income		(74,196	)		(26,996	)
Included in other comprehensive income		—			—
Purchases, issuances and settlements		(46,973	)		(1,023,825	)
Transfers in and/or out of Level 3		(53,865	)		254,556
Balance, September 30, 2012	$	463,911		$	976,935

The methods and assumptions used to estimate the fair values, including items in the above tables, are included in the disclosures that follow:

Certificates of Deposit with Depository Institutions (Carried at Cost).The carrying amount approximates fair value.

Securities Available for Sale (Carried at Fair Value) and Securities Held to Maturity (Carried at Cost).Where quoted prices are available in an active market, securities available for sale are classified within Level 1 of the valuation hierarchy. Level 1 would include highly liquid government bonds, mortgage products and exchange-traded equities. If quoted market prices are not available, securities available for sale are classified within level 2 and fair value values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 would include U.S. agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Loans, Net of Allowance for Loan Losses (Carried at Cost).The fair values of loans are estimated using discounted cash flow analyses, using market rates at the statement of condition date that reflect the credit and interest rate risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values. Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. Impaired loans are measured at an observable market price (if available), or at fair value of the loan’s collateral (if the loan is collateral dependent). When the loan is dependent on collateral, fair value of collateral is determined by appraisal or independent valuation, which is then adjusted for the related cost to sell. Impaired loans allocated to the allowance for loan losses are measured at the lower of cost or fair value on a nonrecurring basis.

Foreclosed Assets (Carried at Lower of Cost or Fair Value Less Estimated Selling Costs).Fair values of foreclosed assets are measured at fair value less cost to sell. The valuation of the fair value measurement follows GAAP. Foreclosed assets are measured on a nonrecurring basis.

Bank-Owned Life Insurance (Carried at Fair Value).The carrying amount approximates fair value based on the cash surrender value life insurance contracts as determined by each insurance carrier.

Other Equity Securities (Carried at Cost).The carrying amount of Federal Home Loan Bank and correspondent bank stock approximates fair value, and considers the limited marketability of such securities.

Deposit Liabilities (Carried at Cost).The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at

25

the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities.

Federal Home Loan Bank Advances (Carried at Cost).Fair values of FHLB advances are estimated using discounted cash flows analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Off- Balance Sheet Credit-Related Instruments (Disclosures at Cost).Fair values for off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of these instruments is not material.

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The estimated fair values of the Company’s financial instruments were as follows at September 30, 2012 and December 31, 2011:

	At September 30, 2012
	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Financial instruments - assets:
Certificates of deposit with depository institutions	$	2,851,667	$	2,851,667	$	—	$	2,851,667	$	—
Securities available for sale		12,608,885		12,608,885		—		12,608,885		—
Securities held to maturity		1,739,679		1,791,720		—		1,791,720		—
Loans, net of allowance for loan losses		71,183,746		73,996,000		—		—		73,996,000
Foreclosed assets		976,935		976,935		—		—		976,935
Bank-owned life insurance		1,912,419		1,912,419		—		1,912,419		—
Other equity securities		517,996		517,996		—		—		517,996
Financial instruments - liabilities:
Deposits	$	85,770,969	$	83,854,000	$	—	$	83,854,000	$	—
Federal Home Loan Bank advances		5,000,000		5,401,000		—		5,401,000		—
Financial instruments - off-balance sheet	$	—	$	—	$	—	$	—	$	—
	At December 31, 2011
	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Financial instruments - assets:
Certificates of deposit with depository institutions	$	1,998,186	$	1,998,186	$	—	$	1,998,186	$	—
Securities available for sale		13,722,119		13,722,119		—		13,722,119		—
Securities held to maturity		1,458,396		1,485,718		—		1,485,718		—
Loans, net of allowance for loan losses		63,586,917		65,416,000		—		—		65,416,000
Foreclosed assets		1,773,200		1,773,200		—		—		1,773,200
Bank-owned life insurance		1,466,368		1,466,368		—		1,466,368		—
Other equity securities		526,396		526,396		—		—		526,396
Financial instruments - liabilities:
Deposits	$	82,650,859	$	79,586,000	$	—	$	79,586,000	$	—
Federal Home Loan Bank advances		5,000,000		5,339,000		—		5,339,000		—
Financial instruments - off-balance sheet	$	—	$	—	$	—	$	—	$	—

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Note 7. Regulatory Capital Requirements

At September 30, 2012 and December 31, 2011, the Bank met all of the capital adequacy requirements to which it is subject. The following table summarizes the Bank’s capital position.

	At September 30, 2012
	Actual					For Capital Adequacy Purposes					To be well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Tangible capital (to tangible assets)	$	8,116		8.2	%	$	1,492		1.5	%		N/A		N/A
Tier 1 capital (to average assets)		7,811		8.0	%		3,932		4.0	%		4,915		5.0	%
Tier 1 capital (to risk-weighted assets)		7,811		13.6	%		2,297		4.0	%		3,445		6.0	%
Total risk-based capital (to risk-weighted assets)		8,511		14.8	%		4,594		8.0	%		5,742		10.0	%
	At December 31, 2011
	Actual					For Capital Adequacy Purposes					To be well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Tangible capital (to tangible assets)	$	8,066		8.4	%	$	1,444		1.5	%		N/A		N/A
Tier 1 capital (to average assets)		7,891		8.2	%		3,856		4.0	%		4,820		5.0	%
Tier 1 capital (to risk-weighted assets)		7,891		15.5	%		2,036		4.0	%		3,054		6.0	%
Total risk-based capital (to risk-weighted assets)		8,485		16.7	%		4,071		8.0	%		5,089		10.0	%

Note 8. Employee Stock Ownership Plan.

Effective January 1, 2011, the Company adopted an employee stock ownership plan (“ESOP”) for eligible employees. The ESOP borrowed $215,670 from the Company and used those funds to acquire 21,567 shares or 6% of the total number of shares issued by the Company in its initial public offering. The shares were acquired at a price of $10.00 per share.

The loan is secured by the shares purchased with the loan proceeds and will be repaid by the ESOP over the 20-year term of the loan with funds from the Bank’s contributions to the ESOP and dividends payable on the stock, if any. The interest rate on the ESOP loan is an adjustable rate equal to the lowest Prime rate, as published in The Wall Street Journal. The interest rate will adjust monthly and will be the Prime rate on the first business day of the calendar month.

Shares purchased by the ESOP are held by a trustee in an unallocated suspense account. Shares will be released annually from the suspense account on a pro-rata basis as principal and interest payments are made by the ESOP to the Company. The trustee will allocate the shares released among participants on the basis of each participant’s proportional share of compensation relative to all participants. As shares are committed to be released from the suspense account, the Bank reports compensation expense based on the average fair value of shares committed to be released with a corresponding credit to stockholders’ equity. Compensation expense for the nine months ended September 30, 2012 and 2011 was $8,283 and zero, respectively. Compensation expense for the year ended December 31, 2011 totaled $10,784.

Participants will vest in their accounts 20% after each year of service and become 100% vested upon the completion of five years of service. Participants who were employed by the Bank immediately prior to the offering will receive credit for vesting purposes for years of service prior to adoption of the ESOP. Participants also will become fully vested automatically upon normal retirement, death or disability, a change in control, or termination of the ESOP. Generally, participants will receive distributions from the ESOP upon separation from service.

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Shares held by the ESOP trust at September 30, 2012 and December 31, 2011 are as follows:

	At September 30, 2012		At December 31, 2011
Allocated shares		1,078		1,078
Unallocated shares		20,489		20,489
Total ESOP shares		21,567		21,567
Fair value of unallocated shares	$	223,330	$	210,012

Note 9. Earnings per Share

Basic earnings per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. As of September 30, 2012, no stocks options or restricted shares have been granted to trigger potential diluted earnings per share. Unallocated ESOP shares are excluded from the weighted average common shares outstanding of this calculation. Because the conversion to stock form was not completed until October 12, 2011, per share earnings information is not presented for the prior year periods.

	For The Three Months Ended September 30, 2012		For The Nine Months Ended September 30, 2012
Net income	$	38,790	$	2,351
Weighted average common shares outstanding		338,967		338,967
Earnings per common share, basic	$	0.11	$	0.01

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section is intended to help readers understand our financial performance through a discussion of the factors affecting our financial condition at September 30, 2012 and December 31, 2011. This section should be read in conjunction with the consolidated financial statements and accompanying notes that appear elsewhere in this Form 10-Q.

Some of the matters discussed below include forward-looking statements within the meaning of the federal securities laws. Forward-looking statements often use words such as “may,” “will,” “believe,” “expect,” “estimate,” “anticipate”, “continue” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. Our actual results and the actual outcome of our expectations and strategies could be materially different from those anticipated or estimated for the reasons discussed under the heading “Forward-Looking Statements.”

The Company

Carroll Bancorp, Inc. (“Carroll Bancorp” or the “Company”) is a Maryland corporation that owns 100% of the outstanding common stock of Carroll Community Bank (which we sometimes refer to as the “Bank”). The Company is registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended. As such, the Company is subject to supervision and regulation by the Board of Governors of the Federal Reserve System. The Company began operating in 2011 while the Bank was organized in 1870. The Bank is a state chartered bank subject to supervision and regulation by the Federal Deposit Insurance Corporation (“FDIC”) and the State of Maryland. The Bank’s deposit accounts are insured by the Deposit Insurance Fund administered by the FDIC to the maximum permitted by law. The Bank is an Equal Housing Lender and an Affirmative Action/Equal Opportunity Employer.

On October 12, 2011, we completed our initial public offering of common stock in connection with the Bank’s conversion from a state-chartered mutual savings bank to a state-chartered commercial bank, a stock form of organization. We sold 359,456 shares of common stock at $10.00 per share and raised $3.6 million of gross proceeds. Since the completion of the initial public offering, Carroll Bancorp has not engaged in any significant business activity other than owning the common stock of and having deposits in the Bank.

Overview

Historically, we have operated as a traditional community savings association. As such, our business consisted primarily of originating one-to four-family real estate loans secured by property in our market area and investing in mortgage-backed and U.S. Agency securities. Our loans and investment securities were primarily funded by savings accounts and certificates of deposit. This resulted in our being particularly vulnerable to increases in interest rates, as our interest-bearing liabilities would mature or reprice more quickly than our interest-earning assets. Although we plan to continue to originate one- to four-family residential mortgage loans going forward, we have been and intend to continue to increase our focus on the origination of commercial real estate loans, which generally provide higher returns and have shorter durations than one- to four-family residential mortgage loans. In addition, while our funding is still primarily savings accounts and certificates of deposits, we have been and intend to continue our focus on the growth of noninterest and interest bearing checking accounts and balances, which provide a lower funding cost and stronger customer relationships.

The results of our operations depend mainly on our net interest income, which is the difference between the interest income we earn on our loan and investment portfolios and the interest expense we pay on deposits and borrowings. Results of operations are also affected by provisions for loan losses, non-interest income and non-interest expense. Our non-interest expense consists primarily of compensation and employee benefits, as well as office occupancy, deposit insurance and general administrative and data processing expenses.

Our operations are significantly affected by general economic and competitive conditions, particularly with respect to changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially affect our financial condition and results of operations.

The 2009 recession and the ongoing economic crisis has negatively affected the real estate market in our primary market areas. Due to the economic recession, the number of housing units sold in Carroll and Howard Counties has declined. These declines have in turn negatively affected our ability to make loans in the residential real estate markets, both with respect to the number of loans and the amount of such loans. Similar declines in the commercial real estate market have also affected our ability to make loans in the commercial real estate market, although to a lesser extent. We have begun to see signs of market stability and we anticipate that as market conditions return to a more normal level, there will be increased loan opportunities.

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The following table summarizes the highlights of our financial performance for the three and nine month periods ended September 30, 2012 compared to the three and nine month periods ended September 30, 2011 (amounts in the table may not match those discussed in the balance of this section due to rounding):

	For the Three Months Ended September 30,
(Dollars in thousands, except per share data)	2012			2011			$ Change			% Change
Net income	$	39		$	28		$	11			39.3	%
Interest income		1,025			972			53			5.5	%
Interest expense		248			294			(46	)		-15.6	%
Net interest income		777			678			99			14.6	%
Noninterest income		65			144			(79	)		-54.9	%
Noninterest expense		771			746			25			3.4	%
Average Loans		70,360			62,214			8,146			13.1	%
Average Earning Assets		91,269			87,758			3,511			4.0	%
Average Interest-Bearing Liabilities		86,965			86,470			495			0.6	%
Return on average assets		0.16	%		0.12	%
Return on average equity		1.81	%		1.83	%
Net interest margin		3.39	%		3.06	%
Earnings per share	$	0.11			N/A
	For the Nine Months Ended September 30,
(Dollars in thousands, except per share data)	2012			2011			$ Change			% Change
Net income	$	2		$	73		$	(71	)		-97.3	%
Interest income		2,954			2,901			53			1.8	%
Interest expense		765			935			(170	)		-18.2	%
Net interest income		2,189			1,966			223			11.3	%
Noninterest income		256			291			(35	)		-12.0	%
Noninterest expense		2,271			2,121			150			7.1	%
Average Loans		66,525			61,630			4,895			7.9	%
Average Earning Assets		89,619			88,956			663			0.7	%
Average Interest-Bearing Liabilities		86,153			87,357			(1,204	)		-1.4	%
Return on average assets		0.00	%		0.10	%
Return on average equity		0.04	%		1.65	%
Net interest margin		3.26	%		2.95	%
Earnings per share	$	0.01			N/A

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Average Balances, Interest and Yields

The following tables set forth average balances, average yields, interest income and expense, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, and have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

	For the Three Months Ended September 30,
	2012								2011
(Dollars in thousands)	Average Outstanding Balance			Interest		Yield / Rate			Average Outstanding Balance			Interest		Yield / Rate
Interest-earning assets:
Loans	$	70,360		$	957		5.41	%	$	62,214		$	856		5.46	%
Investment securities		15,227			56		1.46	%		19,685			109		2.20	%
Certificates of deposit		2,550			9		1.40	%		1,308			4		1.21	%
Interest earning deposits		3,132			3		0.38	%		3,829			3		0.31	%
Federal funds sold		—			—		—			722			—		0.00	%
Total interest-earning assets		91,269			1,025		4.47	%		87,758			972		4.39	%
Noninterest-earning assets		7,225								6,929
Total assets	$	98,494							$	94,687
Interest-bearing liabilities:
Savings accounts	$	34,508			39		0.45	%	$	39,017			61		0.62	%
Certificates of deposit		37,549			169		1.79	%		36,239			196		2.15	%
Money market accounts		6,135			10		0.65	%		3,514			7		0.79	%
Now accounts		3,773			1		0.11	%		2,700			1		0.15	%
Total interest-bearing deposits		81,965			219		1.06	%		81,470			265		1.29	%
Federal Home Loan Bank advances		5,000			29		2.31	%		5,000			29		2.30	%
Total interest-bearing liabilities		86,965			248		1.13	%		86,470			294		1.35	%
Noninterest-bearing deposits		2,848								2,121
Noninterest-bearing liabilities		136								114
Total liabilities		89,949								88,705
Equity		8,545								5,982
Total liabilities and capital	$	98,494							$	94,687
Net interest income				$	777							$	678
Net interest rate spread (1)							3.34	%							3.04	%
Net interest-earning assets (2)	$	4,304							$	1,288
Net interest margin (3)							3.39	%							3.06	%
Average interest-earning assets to interest-bearing liabilities		104.95	%							101.49	%

⁽¹⁾  Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

⁽²⁾  Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

⁽³⁾  Net interest margin represents net interest income divided by average total interest-earning assets.

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	For the Nine Months Ended September 30,
	2012								2011
(Dollars in thousands)	Average Outstanding Balance			Interest		Yield / Rate			Average Outstanding Balance			Interest		Yield / Rate
Interest-earning assets:
Loans	$	66,525		$	2,714		5.45	%	$	61,630		$	2,553		5.54	%
Investment securities		16,346			203		1.66	%		19,429			319		2.20	%
Certificates of deposit		2,152			24		1.49	%		1,605			14		1.17	%
Interest earning deposits		4,596			13		0.38	%		5,214			13		0.33	%
Federal funds sold		—			—		—			1,078			2		0.25	%
Total interest-earning assets		89,619			2,954		4.40	%		88,956			2,901		4.36	%
Noninterest-earning assets		7,841								6,166
Total assets	$	97,460							$	95,122
Interest-bearing liabilities:
Savings accounts	$	34,900			121		0.46	%	$	39,113			211		0.72	%
Certificates of deposit		37,338			527		1.89	%		37,513			614		2.19	%
Money market accounts		5,493			27		0.66	%		2,954			19		0.86	%
Now accounts		3,422			3		0.12	%		2,777			4		0.19	%
Total interest-bearing deposits		81,153			678		1.12	%		82,357			848		1.38	%
Federal Home Loan Bank advances		5,000			87		2.32	%		5,000			87		2.33	%
Total interest-bearing liabilities		86,153			765		1.19	%		87,357			935		1.43	%
Noninterest-bearing deposits		2,625								1,772
Noninterest-bearing liabilities		114								103
Total liabilities		88,892								89,232
Equity		8,568								5,890
Total liabilities and capital	$	97,460							$	95,122
Net interest income				$	2,189							$	1,966
Net interest rate spread (1)							3.21	%							2.93	%
Net interest-earning assets (2)	$	3,466							$	1,599
Net interest margin (3)							3.26	%							2.95	%
Average interest-earning assets to interest-bearing liabilities		104.02	%							101.83	%

⁽¹⁾  Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

⁽²⁾  Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

⁽³⁾  Net interest margin represents net interest income divided by average total interest-earning assets.

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Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The volume column shows the effects attributable to changes in volume (change in volume multiplied by old rate), the rate column shows the effects attributable to changes in rate (change in rate multiplied by old volume) and the rate/volume column shows the effects attributable to changes in rate and volume (change in rate multiplied by change in volume).

	For the Three Months Ended September 30, 2012 vs 2011
	Increase (Decrease) Due to
(in thousands)	Volume			Rate			Rate/ Volume			Total Increase (Decrease)
Interest income from:
Loans	$	110		$	(8	)	$	(1	)	$	101
Investment securities		(24	)		(37	)		8			(53	)
Certificates of deposit		4			—			1			5
Interest earning deposits		(1	)		1			—			—
Federal funds sold		—			—			—			—
Total interest income (1)		38			15			—			53
Interest expense on:
Savings accounts		(7	)		(17	)		2			(22	)
Certificates of deposit		7			(33	)		(1	)		(27	)
Money market accounts		5			(1	)		(1	)		3
Now accounts		—			—			—			—
Total interest-bearing deposits		2			(48	)		—			(46	)
Federal Home Loan Bank advances		—			—			—			—
Total interest expense (1)		2			(48	)		—			(46	)
Change in net interest income	$	36		$	63		$	—		$	99

(1) The volume, rate and rate/volume variances presented for each component will not add to the variances presented on totals of interest income and interest expense due to shifts from period-to-period in the relative mix of interest-earning assets and interest-bearing liabilities.

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	For the Nine Months Ended September 30, 2012 vs 2011
	Increase (Decrease) Due to
(in thousands)	Volume			Rate			Rate/ Volume			Total Increase (Decrease)
Interest income from:
Loans	$	203		$	(39	)	$	(3	)	$	161
Investment securities		(51	)		(77	)		12			(116	)
Certificates of deposit		5			4			1			10
Interest earning deposits		(2	)		2			—			—
Federal funds sold		(2	)		(1	)		1			(2	)
Total interest income (1)		31			22			—			53
Interest expense on:
Savings accounts		(23	)		(75	)		8			(90	)
Certificates of deposit		(3	)		(84	)		—			(87	)
Money market accounts		16			(4	)		(4	)		8
Now accounts		1			(2	)		—			(1	)
Total interest-bearing deposits		(12	)		(158	)		—			(170	)
Federal Home Loan Bank advances		—			—			—			—
Total interest expense (1)		(13	)		(157	)		—			(170	)
Change in net interest income	$	44		$	179		$	—		$	223

(1) The volume, rate and rate/volume variances presented for each component will not add to the variances presented on totals of interest income and interest expense due to shifts from period-to-period in the relative mix of interest-earning assets and interest-bearing liabilities.

Comparison of Results of Operations for the Three Months Ended September 30, 2012 and September 30, 2011

General. Net income increased by $11,000 to $39,000 for the three months ended September 30, 2012 compared to net income of $28,000 for the same period in 2011. The increase in net income is primarily the result of an increase in net interest income of $99,000 and a decrease in the provision for loan losses of $31,000 for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. These items were partially offset by an increase in non-interest expenses of $25,000 and a significantly lower level of security gains realized during the 2012 period.

Net Interest Income. Net interest income is determined by the interest rate spread (i.e., the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income increased by $99,000, or 14.7%, during the three months ended September 30, 2012 compared to the same period in 2011, as a result of the growth in loan balances and the continued decline in the Bank’s cost of funds. Our net interest rate spread increased to 3.34% for the three months ended September 30, 2012 compared to 3.04% for the three months ended September 30, 2011.

Interest Income. Interest income increased by $53,000, or 5.4%, to $1.0 million for the three months ended September 30, 2012 from $972,000 for the three months ended September 30, 2011. This increase was primarily the result of the change in the mix of our earning assets towards higher yielding loans versus investment securities and interest-bearing deposits with depository institutions. Interest income on loans increased by $101,000, or 11.8%, due to the growth in average loans balances of $8.1 million partially offset by a decrease in the average yield of 5 basis points compared to the same period last year. Interest income on investment securities decreased by $57,000, or 55.0%, as the result of a 74 basis point decline in the overall portfolio yield and a $4.4 million, or 22.6%, decrease in the average balance of investment securities for the 2012 period.

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Interest Expense.Interest expense decreased by $47,000, or 15.9%, to $248,000 for the three months ended September 30, 2012 compared to $295,000 for the three months ended September 30, 2011. This decrease was attributable to a decline in interest expense on interest-bearing deposits as the average rate paid on interest-bearing deposits dropped by 23 basis points, or 17.8%. The decline in the average rates paid on deposits is the result of the low interest rate environment and the repricing of time deposits to significantly lower rates, and to a lesser extent, the shift of maturing time deposits into lower cost of funds products such as money market and savings accounts.

Provision for Loan Losses. We establish a provision for loan losses, which is charged to operations, in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loan losses we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonperforming loans. The amount of the allowance is based on estimates and actual losses may vary from such estimates as more information becomes available or economic conditions change. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as circumstances change as more information becomes available. The allowance for loan losses is assessed on a quarterly basis and provisions are made for loan losses as required in order to maintain the allowance.

Based on management’s evaluation of the above factors, the provision for loan losses was $8,000 for the three months ended September 30, 2012 compared to $39,000 for the three months ended September 30, 2011.The decrease in the provision for loan losses was primarily due to the lower level of loan growth during the 2012 period versus the 2011 period. Based on our analysis and the historical performance of the loan portfolio, management believes to the best of their knowledge, that all known losses as of September 30, 2012 have been recorded and the allowance appropriately reflects the inherit risk of loss in our loan portfolio.

Non-Interest Income. Non-interest income was $65,000 for the three months ended September 30, 2012 compared to $144,000 for the three months ended September 30, 2011. The $79,000, or 54.6%, decrease in non-interest income is primarily attributable to the lower level of gains on sales of securities available for sale by $85,000. Slightly offsetting this decrease were nominal increases in bank owned life insurance cash surrender value income and rental income on OREO property compared to the same period last year.

Non-Interest Expenses. Non-interest expenses increased $25,000, or 3.4%, to $771,000 for the three months ended September 30, 2012 compared to $746,000 for the same period in 2011. The increase was primarily due to a $18,000, or 32.8%, increase in professional fees due to the legal, regulatory and accounting costs resulting from our status as a public company and the increased reporting and other provisions attendant to being a public company; a $18,000, or 5.2%, increase in salaries and employee benefits due to merit, promotion and position salary increases, a $12,000 increase in losses due mainly to a $10,000 insurance deductible in connection with a branch robbery, a $10,000, or 13.1%, increase in data processing costs and a $7,000 increase in loan expenses . These increases were partially offset by $48,000 decrease in OREO workout costs and write downs.

Income Tax Expense. Income tax expense increased by $15,000 for the three months ended September 30, 2012 compared to the same period last year resulting in effective tax rates of 38.4% and 25.0%, respectively. The increase in income tax expense was due to the increase in the income before income tax expense for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Our effective tax rate is influenced by the relation of tax exempt income from bank owned life insurance relative to pre-tax income.

Total Comprehensive Income (Loss). Total comprehensive income for the periods presented consisted of net income and the change in unrealized gains (losses) on securities available for sale, net of income tax. Total comprehensive income was $93,000 for the three months ended September 30, 2012 compared to total comprehensive loss of $1,000 for the three months ended September 30, 2011. The increase of $94,000 in total comprehensive income resulted from an increase of $83,000 from the change in unrealized gains (losses) on securities available for sale and an increase of $11,000 in net income.

Comparison of Results of Operations for the Nine Months Ended September 30, 2012 and September 30, 2011

General. Net income was $2,000 for the nine months ended September 30, 2012 compared to net income of $73,000 for the three months ended September 30, 2011 for a decrease of $71,000. The decline in net income was the result of a $151,000 increase in non-interest expenses, a $138,000 increase in the provision for loan losses and a $35,000 decrease in noninterest income partially offset by a $223,000 increase in net interest income for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.

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Net Interest Income. Net interest income increased by $223,000, or 11.4%, during the nine months ended September 30, 2012 compared to the same period in 2011, as a result of growth in loan balances and the decrease in the Bank’s cost of funds. Our net interest rate spread increased to 3.21% for the nine months ended September 30, 2012 compared to 2.93% for the nine months ended September 30, 2011.

Interest Income. Interest income increased by $53,000, or 1.8% during the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. Loan interest income increased by $162,000 or 6.3% due to the increase in the average loan balances of $4.9 million, partially offset by a decrease in the average yield of 9 basis points compared to the same period last year. This was offset by a decrease in interest income on investment securities of $116,000, or 36.4%, as the result of a 54 basis point decline in the overall portfolio yield and a $3.1 million, or 15.9%, decrease in the average balance of investment securities compared to the nine months ended September 30, 2011.

Interest Expense.Interest expense decreased $170,000, or 18.2%, to $765,000 for the nine months ended September 30, 2012 compared to $935,000 for the nine months ended September 30, 2011. This decrease was primarily attributable to a decline in interest expense on interest-bearing deposits as the average rate paid on interest-bearing deposits dropped by 26 basis points to 1.12%. This decline is the result of the low interest rate environment and the repricing of time deposits to significantly lower rates, and to a lesser extent, the shift of maturing time deposits into lower cost of funds products such as money market and savings accounts.

Provision for Loan Losses. The provision for loan losses was $180,000 for the nine months ended September 30, 2012 compared to $42,000 for the nine months ended September 30, 2011.The increase of $138,000 in the provision for loan losses was due to the provision required for the growth in loan balances of $7.7 million during the nine months ended September 30, 2012 compared to $1.3 million during the nine months ended September 30, 2011. In addition, we took a specific reserve loan loss provision of $87,000 in 2012 for a first lien residential real estate loan that was reclassified a substandard loan.

Non-Interest Income. Non-interest income was $256,000 for the nine months ended September 30, 2012 compared to $291,000 for the nine months ended September 30, 2011. The $35,000, or 12.0%, decrease in non-interest income is primarily attributable to the $68,000 decrease in gains on sales of securities available for sale partially offset by a $20,000 increase in rental income on a OREO property compared to the same period last year. In addition, bank owned life insurance cash surrender value income, customer service fees and loan fee income experienced nominal increases compared to the same period last year.

Non-Interest Expenses. Non-interest expenses increased $151,000, or 7.1%, to $2.3 million for the nine months ended September 30, 2012 compared to $2.1 million for the same period in 2011. The increase was primarily due to a $75,000, or 45.7%, increase in professional fees due to the legal, regulatory and accounting costs resulting from our status as a public company and the increased reporting and other provisions attendant to being a public company and a $72,000, or 7.3%, increase in salaries and employee benefits due to the addition of a commercial loan officer along with merit, promotion and position salary increases for the nine months ending September 30, 2012 compared to the nine months ending September 30, 2011. In addition, data processing costs increased by $25,000, or 10.9%, due to a rise in core processing costs. These increases were partially offset by declines in FDIC insurance costs and OREO workout costs and losses.

Income Tax (Benefit) Expense. Income tax (benefit) expense amounted to a benefit of $9,000 and an expense of $21,000 for the nine months ended September 30, 2012 and 2011, respectively, resulting in effective tax rates of 137.3% and 22.7% for the respective periods. The decrease in income tax expense was primarily due to the loss before income tax benefit for the nine months ended September 30, 2012 compared to the income before income tax expense during the nine months ended September 30, 2011. Our effective tax rate is influenced by the relation of tax exempt income from bank owned life insurance relative to pre-tax income.

Total Comprehensive Income. Total comprehensive income was $54,000 for the nine months ended September 30, 2012 compared to total comprehensive income of $142,000 for the nine months ended September 30, 2011. The decrease of $88,000 in total comprehensive income resulted from a decrease of $71,000 in net income and a decrease of $17,000 from the change in unrealized gains (losses) on securities available for sale.

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Comparison of Financial Condition at September 30, 2012 and December 31, 2011.

Assets. Total assets increased by $3.2 million, or 3.3%, to $99.5 million at September 30, 2012 compared to $96.3 million at December 31, 2011. In addition, the mix of the balance sheet changed as we used excess cash and cash equivalents to fund loan originations. As a result, net loans increased by $7.6 million and interest-bearing deposits with depository institutions decreased by $3.6 million. This loan growth leverages our balance sheet to produce higher yields and increase our net interest margin.

Loans. Net loans increased by $7.6 million, or 11.9%, to $71.2 million at September 30, 2012 from $63.6 million at December 31, 2011. For the nine months ended September 30, 2012, new loan originations totaled $16.0 million which were partially offset by loan payoffs of $5.3 million and principal repayments of $2.7 million. Consistent with our business strategy, we increased the balance of the commercial real estate loan portfolio by $8.7 million, or 63%, during the nine months ended September 30, 2012, while residential-based real estate loans decreased slightly by $997,000, or 2%, during the same period.

Nonperforming Loans and Assets.Nonperforming loans and assets were $464,000 and $1.4 million at September 30, 2012 compared to $639,000 and $2.4 million at December 31, 2011. During 2012 we sold three OREO properties and transferred one property to OREO for a net decrease in balances of $800,000. The ratio of nonperforming loans to total loans was 0.65% at September 30, 2012 compared to 1.00% at December 31, 2011 and our ratio of nonperforming assets dropped to 1.45% as of September 30, 2012 compared to 2.51% at December 31, 2011.

Deposits. Deposits increased by $3.1 million, or 3.8%, to $85.8 million at September 30, 2012 from $82.7 million at December 31, 2011. Certificates of deposit increased by $1.9 million, or 5.3%, money market accounts increased by $2.3 million, or 51.0% and non-interest and interest bearing checking deposits increased by $1.3 million, or 23.1%. IRA accounts decreased by $1.7 million, or 14.2%, and savings accounts remained flat. The increase in certificates of deposit was due to a premium rate being offered on our longer term 60 month product. In order to receive the premium rate the customer also had to have or open a checking account with us. We continue to focus our efforts to improve our funding mix and increase core deposits especially non-interest bearing checking deposits.

Stockholders’ Equity. Stockholders’ equity increased slightly by $55,000, or 0.6%, to $8.6 million at September 30, 2012 from $8.5 million at December 31, 2011. This increase was the result of the rise in accumulated other comprehensive income.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, loan repayments, the sale of securities available for sale, short-term lines of credit with correspondent banks and advances from the Federal Home Loan Bank of Atlanta. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of September 30, 2012.

We regularly monitor and adjust our investments in liquid assets based upon our assessment of:

(i) expected loan demand;

(ii) expected deposit flows and borrowing maturities;

(iii) yields available on interest-earning deposits and securities; and

(iv) the objectives of our asset and liability management program.

Excess liquid assets are invested generally in interest-earning deposits and short-term securities.

Our most liquid assets are cash and cash equivalents. The level of these assets is dependent on our operating, financing, lending and investing activities during any given period as reported in our statement of cash flows included in our financial statements. At September 30, 2012, cash and cash equivalents totaled $5.3 million.

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At September 30, 2012, we had $2.1 million in loan origination commitments outstanding and $3.1 million in unused available lines of credit. Certificates of deposit due within one year of September 30, 2012 totaled $20.5 million, or 23.9% of total deposits. If these deposits do not remain with us, we may be required to seek other sources of funds, including loan and securities sales, draws on our short-term lines of credit with correspondent banks and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on our deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2013. We believe, however, based on historical experience and current market interest rates that we will retain upon maturity a large portion of our certificates of deposit with maturities of one year or less as of September 30, 2012.

Our investing activities primarily include loan and investment securities activity. During the nine months ended September 30, 2012 and the year ended December 31, 2011, we originated $16.0 million and $13.5 million in loans, respectively. During these same time periods, we purchased $13.9 million and $22.2 million and sold $11.9 million and $20.2 million of investment securities, respectively.

Financing activities consist primarily of deposit account activity. We experienced a net increase in deposits during the nine months ended September 30, 2012 of $3.1 million. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Atlanta and certain correspondent banks, which provide an additional source of funds. Federal Home Loan Bank advances remained steady at $5.0 million during the nine months ended September 30, 2012 and the year ended December 31, 2011. At September 30, 2012, we had the ability to borrow up to an additional $4.8 million from the Federal Home Loan Bank of Atlanta and $6.0 million from correspondent banks under short-term line of credit agreements.

Carroll Community Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2012, Carroll Community Bank exceeded all regulatory capital requirements. Carroll Community Bank is considered “well capitalized” under regulatory guidelines. See Note 7 of the accompanying consolidated financial statements for additional information.

The net proceeds from our 2011 stock offering significantly increased our liquidity and capital resources for the period immediately following the offering. Since the completion of the offering, our liquidity has been reduced as net proceeds from the offering were used to fund loans. Our financial condition and results of operations have been enhanced by the net proceeds from the offering as a result of the increase in interest-earning assets and net interest income. However, due to the increase in equity resulting from the net proceeds raised in the offering, our return on equity has been and will continue in the near term to be adversely affected.

Carroll Bancorp is a separate legal entity from the Bank and has to provide for its own liquidity to pay its operating expenses and other financial obligations. Virtually all of the Company’s revenue will be stock dividends received from the Bank and interest earned on the loan to the Carroll Community Bank Employee Stock Ownership Plan. Under Maryland law, the Bank will be permitted to declare a cash dividend, after providing for due or accrued expenses, losses, interest, and taxes, from its undivided profits or, with the prior approval of the Maryland Commissioner of Financial Regulation, from its surplus in excess of 100% of its required capital stock. Also, if the Bank’s surplus is less than 100% of its required capital stock, cash dividends may not be paid in excess of 90% of net earnings. In addition to these specific restrictions, the bank regulatory agencies have the ability to prohibit or limit proposed dividends if such regulatory agencies determine the payment of such dividends would result in the Bank being in an unsafe and unsound condition.

Off-Balance Sheet Arrangements, Commitments and Aggregate Contractual Obligations

We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our customers. These financial instruments include commitments to extend credit, lines of credit and standby letters of credit. Each of these involves to varying degrees, elements of credit, interest rate, and liquidity risk. These do not represent unusual risks and management does not anticipate any losses which would have a material effect on us.

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Outstanding loan commitments and available lines and letters of credit at September 30, 2012 and December 31, 2011 are as follows:

(in thousands)	At September 30, 2012		At December 31, 2011
Commitments to extend credit:
Consumer loans	$	839	$	13
Commercial loans		835		1,075
		1,674		1,088
Commitments under available lines of credit:
Consumer loans		1,428		1,204
Commercial loans		1,703		1,245
		3,131		2,449
Standby letters of credit		—		—
Total Commitments	$	4,805	$	3,537

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. We generally require collateral to support financial instruments with credit risk on the same basis as we do for loan instruments. Management generally bases the collateral required on the credit evaluation of the counterparty. Commitments generally have interest rates fixed at current market rates, expiration dates or other termination clauses and may require payment of a fee.

Available lines of credit represent the unused portion of lines of credit previously extended and available to the customer so long as there is no violation of any contractual condition. These lines generally have variable interest rates. Since we expect many of the commitments to expire without being drawn upon, and since it is unlikely that customers will draw upon their lines of credit in full at any time, the total commitment amount or line of credit amount does not necessarily represent future cash requirements. We evaluate each customer’s credit-worthiness on a case-by-case basis. Because we conservatively underwrite these facilities at inception, we have not had to withdraw any commitments. We are not aware of any loss that we would incur by funding our commitments or lines of credit.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Our exposure to credit loss in the event of nonperformance by the customer is the contract amount of the commitment. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

In general, the credit risks involved in these financial instruments are essentially the same as that involved in extending loan facilities to customers. We evaluate each customer’s credit worthiness and required collateral on a case by case basis. No amount has been recognized in the statement of financial condition at September 30, 2012 or December 31, 2011 as a liability for credit loss related to these commitments.

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Impact of Inflation and Changing Prices

Our financial statements and related notes have been prepared in accordance with U.S. GAAP. U.S. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

Critical Accounting Policies

During the three and nine months ended September 30, 2012, there was no significant change in our critical accounting policies or the application of critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

Our accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the financial statements require management to exercise significant judgment or discretion or make significant assumptions based on the information available that have, or could have, a material impact on the amounts reported in the financial statements and accompanying notes. We base these estimates, assumptions, and judgments on the information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. These estimates, assumptions and judgments are necessary when financial instruments are required to be recorded at fair value or when the decline in the value of an asset carried on the statement of financial condition at historic cost requires an impairment write-down or a valuation reserve to be established. In reviewing and understanding financial information for us, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the provision for loan losses as the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for loan losses, including in connection with the valuation of collateral and the financial condition of the borrower, and in establishing loss ratios and risk ratings. The establishment of allowance factors is a continuing exercise and allowance factors may change over time, resulting in an increase or decrease in the amount of the provision or allowance based upon the same volume and classification of loans.

Changes in allowance factors or in management’s interpretation of those factors will have a direct impact on the amount of the provision, and a corresponding effect on income and assets. Also, errors in management’s perception and assessment of the allowance factors could result in the allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or charge-offs, which would adversely affect income and capital. For additional information regarding the allowance for loan losses, see Note 4 of the accompanying consolidated financial statements.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”), which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:

• statements regarding our business plans, prospects and operating strategies; particularly with respect to (i) increasing our focus on commercial real estate lending, (ii) increasing core deposits, particularly non-interest bearing deposits and improving our funding mix, and (iii) retention of maturing certificates of deposit;

• statements regarding increased loan opportunities as market conditions return to normal levels;

• statements with respect to the impact of off-balance sheet arrangements;

• statements regarding adequate liquidity and the adequacy of liquidity levels for our short- and long-term needs;

• statements with respect to our allowance for loan losses, and the adequacy thereof; and

• statements regarding the impact of pending legal proceedings.

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These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this filing.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

• general economic conditions, either nationally or in our market area, that are worse than expected;

• competition among depository and other financial institutions;

• inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

• changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

• changes in consumer spending, borrowing and savings habits;

• changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the SEC and the Public Company Accounting Oversight Board; and

• changes in competitive, governmental, regulatory, technological and other factors which may affect us specifically or the banking industry and other risk and uncertainties discussed in this report and in other SEC filings we may make. For a more complete discussion of some of these risks and uncertainties see “Risk Factors” in our Annual Report on Form 10-K on file with the SEC.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. You should not put undue reliance on any forward-looking statements. All forward-looking statements speak only as of the date of this report on Form 10-Q, and we undertake no obligation to update the forward-looking statements to reflect factual assumptions, circumstances or events that have changed after we have made the forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures (as that term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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 SEC’s rules and forms. The Company’s chief executive officer and chief financial officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report and, based on that evaluation, have each concluded that such disclosure controls and procedures are effective as of September 30, 2012.

There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15 under the Exchange Act) during the quarter ended September 30, 2012, that have materially affected or are reasonably likely to materially affect, the internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are not involved in any legal proceedings the outcome of which we believe would be material to our financial condition or results of operations.

Item 1A. Risk Factors

There have been no material changes in the risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. 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
(101.INS)	XBRL Instance Document
(101.SCH)	XBRL Taxonomy Extension Schema Document
(101.CAL)	XBRL Taxonomy Extension Calculation Linkbase Document
(101.LAB)	XBRL Taxonomy Extension Label Linkbase Document
(101.PRE)	XBRL Taxonomy Extension Presentation Linkbase Document
(101.DEF)	XBRL Taxonomy Extension Definition Linkbase Document

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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.

	CARROLL BANCORP, INC.
	PRINCIPAL EXECUTIVE OFFICER:
Date November 9, 2012	/s/ Russell J. Grimes
	Russell J. Grimes
	President and Chief Executive Officer
	PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
Date November 9, 2012	/s/ Michael J. Gallina
	Michael J. Gallina
	Chief Financial Officer

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