Carroll Bancorp (CROL) 10-Q 2013 Q1 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 March 31, 2013

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 jurisdictionof 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 practicable date: 359,456 shares of common stock outstanding at May 10, 2013.

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 March 31, 2013 (unaudited) and December  31, 2012		3
	Consolidated Statements of Operations for the Three Months Ended March 31, 2013 and 2012 (unaudited)		4
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2013 and 2012 (unaudited)		5
	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2013 and 2012 (unaudited)		6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (unaudited)		7
	Notes to Consolidated Financial Statements (unaudited)		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		36
Item 4.	Controls and Procedures		36
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings		37
Item 1A.	Risk Factors		37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 3.	Defaults Upon Senior Securities		37
Item 4.	Mine Safety Disclosures		37
Item 5.	Other Information		37
Item 6.	Exhibits		38
SIGNATURES			39

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Carroll Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

	March 31,			December 31,
	2013			2012
	(unaudited)
Assets:
Cash and due from banks	$	1,432,970		$	1,402,533
Interest-bearing deposits with depository institutions		4,743,655			3,468,641
Cash and cash equivalents		6,176,625			4,871,174
Certificates of deposit with depository institutions		2,600,185			2,600,130
Securities available for sale, at fair value		10,196,268			11,396,429
Loans, net of allowance for loan losses - March 31, 2013 $813,000 and December 31, 2012 $859,000		81,697,406			77,882,905
Accrued interest receivable		318,247			296,949
Other equity securities, at cost		564,196			585,496
Bank-owned life insurance		1,944,634			1,929,045
Premises and equipment, net		1,390,629			1,345,409
Foreclosed assets		567,119			788,619
Other assets		751,299			835,792
Total Assets	$	106,206,608		$	102,531,948
Liabilities:
Deposits
Noninterest-bearing	$	4,421,846		$	3,491,050
Interest-bearing		86,703,940			83,962,016
Total deposits		91,125,786			87,453,066
Advances from the Federal Home Loan Bank		6,500,000			6,500,000
Other liabilities		108,128			111,051
Total liabilities		97,733,914			94,064,117
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 March 31, 2013 and December 31, 2012, respectively		3,595			3,595
Additional paid-in capital		2,884,039			2,884,039
Unallocated ESOP shares		(194,103	)		(194,103	)
Unallocated RSP shares		(34,875	)		—
Retained earnings		5,755,985			5,705,419
Accumulated other comprehensive income		58,053			68,881
Total stockholders’ equity		8,472,694			8,467,831
Total liabilities and stockholders’ equity	$	106,206,608		$	102,531,948

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 March 31,
	2013		2012
Interest income:
Loans	$	1,041,156	$	879,407
Securities available for sale		19,898		70,124
Securities held to maturity		—		8,007
Certificates of deposit		9,486		6,960
Interest-bearing deposits		5,063		5,506
Total interest income		1,075,603		970,004
Interest expense:
Interest on deposits		205,160		230,106
Interest on borrowings		29,431		28,943
Total interest expense		234,591		259,049
Net interest income		841,012		710,955
Provision for loan losses		28,303		5,196
Net interest income after provision for loan losses		812,709		705,759
Non-interest income:
Gain on sale of securities		9,550		25,246
Gain on loans held for sale		6,535		1,450
Increase in cash surrender value - life insurance		15,589		12,544
Customer service fees		17,943		16,456
Loan fee income		12,224		9,776
Other income		2,528		11,929
Total non-interest income		64,369		77,401
Non-interest expense:
Salaries and employee benefits		389,907		357,805
Premises and equipment		75,160		73,986
Data processing		93,995		84,583
Professional fees		73,195		81,065
FDIC insurance		22,363		22,878
Directors’ fees		35,175		30,850
Corporate insurance		9,243		11,667
Printing and office supplies		10,011		9,631
Provision for losses and costs on real estate acquired through foreclosure		12,356		35,316
Other operating expenses		94,884		39,144
Total non-interest expenses		816,289		746,925
Income before income tax expense		60,789		36,235
Income tax expense		10,223		9,345
Net income	$	50,566	$	26,890
Basic/diluted earnings per share	$	0.15	$	0.08
Basic/diluted weighted average shares outstanding		340,046		338,967

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

(unaudited)

	For the Three Months  Ended March 31,
	2013			2012
Net income	$	50,566		$	26,890
Other comprehensive income, before income tax:
Securities available for sale:
Net unrealized holding (losses) gains arising during the period		(8,497	)		65,742
Less reclassification adjustment for gains included in net income		9,550			25,246
Other comprehensive (loss) income, before income tax		(18,047	)		40,496
Income tax effect		(7,219	)		16,198
Other comprehensive (loss) income, net of tax		(10,828	)		24,298
Total comprehensive income	$	39,738		$	51,188

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 Three Months Ended March 31, 2013 and 2012

(unaudited)

													Accumulated
			Additional		Unallocated			Unallocated					Other
	Common		Paid-in		ESOP			RSP			Retained		Comprehensive
	Stock		Capital		Shares			Shares			Earnings		Income			Total
Balances at January 1, 2013	$	3,595	$	2,884,039	$	(194,103	)	$	—		$	5,705,419	$	68,881		$	8,467,831
Net income												50,566					50,566
Other comprehensive income														(10,828	)		(10,828	)
Common stock acquired by RSP									(34,875	)							(34,875	)
Balances at March 31, 2013	$	3,595	$	2,884,039	$	(194,103	)	$	(34,875	)	$	5,755,985	$	58,053		$	8,472,694
Balances at January 1, 2012	$	3,595	$	2,883,833	$	(204,887	)	$	—		$	5,768,122	$	48,117		$	8,498,780
Net income												26,890					26,890
Other comprehensive income														24,298			24,298
ESOP allocated shares FMV adjustment				183													183
Balances at March 31, 2012	$	3,595	$	2,884,016	$	(204,887	)	$	—		$	5,795,012	$	72,415		$	8,550,151

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 Three Months Ended March 31,
	2013			2012
Cash flows from operating activities:
Net income	$	50,566		$	26,890
Adjustments to reconcile net income to net cash provided (used by) by operating activities:
Gain on sale of securities available for sale		(9,550	)		(25,246	)
Gain on sale of loans held for sale		(6,535	)		(1,450	)
Origination of loans held for sale		(367,000	)		(128,000	)
Proceeds from sale of loans held for sale		373,535			129,450
Amortization and accretion of securities		66,024			58,634
Amortization of deferred loan origination fees, net of costs		14,529			703
Provision for loan losses		28,303			5,196
Provision for loss on real estate acquired through foreclosure		10,000			4,965
(Gain) loss on sale of real estate acquired through foreclosure		(1,888	)		10,525
Depreciation of premises and equipment		32,887			33,618
Increase in cash surrender value of bank-owned life insurance		(15,589	)		(12,544	)
Decrease in deferred tax assets		17,567			10,067
Increase in accrued interest receivable		(21,298	)		(17,246	)
Decrease (increase) in other assets		74,144			(1,086,813	)
(Decrease) increase in other liabilities		(2,923	)		415
Net cash provided (used by) operating activities		242,772			(990,836	)
Cash flows from investing activities:
Purchase of securities available for sale		(1,293,480	)		(7,295,618	)
Proceeds from sales and redemptions of securities available for sale		1,380,858			2,562,826
Principal collected on securities available for sale		1,038,209			794,021
Redemption of certificates of deposit		—			250,000
Increase in loans		(3,857,334	)		(100,696	)
Purchase of common stock for RSP		(34,875	)		—
Purchase of bank-owned life insurance		—			(400,000	)
Purchase of premises and equipment		(78,107	)		(7,914	)
Redemption of other equity securities		21,300			—
Capitalized costs on real estate acquired through foreclosure		—			(42,756	)
Proceeds from the sale of real estate aquired through foreclosure		213,388			429,425
Net cash used by investing activities		(2,610,041	)		(3,810,712	)
Cash flows from financing activities:
Increase in deposits		3,672,720			546,198
Net cash provided by financing activities		3,672,720			546,198
Net increase (decrease) in cash and cash equivalents		1,305,451			(4,255,350	)
Cash and cash equivalents, beginning balance		4,871,174			9,184,483
Cash and cash equivalents, ending balance	$	6,176,625		$	4,929,133
Supplemental disclosure of cash flow information:
Interest paid	$	234,385		$	259,242
Income taxes (refund) paid	$	(30,859	)	$	—
Supplemental schedule of noncash investing and financing activities:
Foreclosed real estate acquired in settlement of loans	$	—		$	—

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

7

CARROLL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Organization and Nature of Operations

Carroll Bancorp, Inc. a Maryland corporation (the “Company”) was incorporated on February 18, 2011, to serve as the holding company for Carroll Community Bank (the “Bank”), a state chartered commercial bank. On October 12, 2011, in accordance with a Plan of Conversion adopted by its Board of Directors and approved by its members, the Bank converted from a Maryland chartered mutual savings bank to a state chartered commercial bank. The conversion was accomplished through formation of the Company to serve as the holding company of the Bank, the sale and issuance of 359,456 shares of common stock at a price of $10.00 per share, through which the Company received proceeds of $2,671,758, net of offering expenses and share purchase by the employee stock ownership plan (“ESOP”) totaling an aggregate of $922,803, and the issuance of shares of common stock of the Bank to the Company. Approximately 85% of the net proceeds of the offering, or $2,456,000, were contributed by the Company to the Bank in return for 100% of the issued and outstanding shares of common stock of the Bank. In connection with the conversion, the Bank’s Board of Directors adopted an ESOP which subscribed for 6% of the number of shares, or 21,567 shares, of common stock sold in the offering. The Company’s common stock began trading on the Over the Counter Bulletin Board under the symbol “CROL” on October 12, 2011.

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 certificate of deposit, savings and demand accounts and its primary lending products are residential and commercial real estate loans.

Principles of Consolidation

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.

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 foreclosure or in satisfaction of loans. In connection with the determination of the allowance for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year method of presentation. Such reclassifications have no effect on net income.

Recent Accounting Pronouncements

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

8

Note 2. Securities

The amortized cost and fair value of securities available for sale at March 31, 2013 and December 31, 2012 are as follows:

	At March 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available for sale:
Residential mortgage-backed securities	$	9,017,817	$	95,441	$	—	$	9,113,258
Asset-backed securities (SLMA)		908,359		4,759		—		913,118
Municipal bonds		173,337		—		3,445		169,892
	$	10,099,513	$	100,200	$	3,445	$	10,196,268

	At December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available for sale:
Residential mortgage-backed securities	$	10,330,920	$	109,344	$	77	$	10,440,187
Asset-backed securities (SLMA)		950,707		5,535		—		956,242
	$	11,281,627	$	114,879	$	77	$	11,396,429

The Bank had no private label residential mortgage-backed securities at March 31, 2013 and December 31, 2012 or during the three months or year then ended, respectively.

The amortized cost and fair value of securities available for sale at March 31, 2013 and December 31, 2012, 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 March 31, 2013				At December 31, 2012
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Under 1 year	$	—	$	—	$	—	$	—
Over 1 year through 5 years		748,947		753,545		—		—
After 5 years through 10 years		4,172,236		4,216,447		6,132,380		6,196,969
Over 10 years		5,178,330		5,226,276		5,149,247		5,199,460
	$	10,099,513	$	10,196,268	$	11,281,627	$	11,396,429

The Bank sold $1.4 million and $2.6 million, respectively, in securities available for sale during the three months ended March 31, 2013 and 2012. From those sale transactions, the Bank recognized gross realized gains of $9,550 and $25,246, respectively, for the same periods.

9

Securities with gross unrealized losses at March 31, 2013 and December 31, 2012, aggregated by investment category and length of time individual securities have been in a continual loss position, are as follows:

	At March 31, 2013
	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:
Residential mortgage-backed securities	$	—	$	—	$	—	$	—	$	—	$	—
Asset-backed securities (SLMA)		—		—		—		—		—		—
Municipal bonds		169,892		3,445		—		—		169,892		3,445
	$	169,892	$	3,445	$	—	$	—	$	169,892	$	3,445

	At December 31, 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:
Residential mortgage-backed securities	$	861,385	$	77	$	—	$	—	$	861,385	$	77
Asset-backed securities (SLMA)		—		—						—		—
	$	861,385	$	77	$	—	$	—	$	861,385	$	77

At March 31, 2013 and December 31, 2012, respectively, the carrying amount of securities pledged as collateral for uninsured public fund deposits was $550,000.

Note 3. Loans

Loans at March 31, 2013 and December 31, 2012 are summarized as follows:

	At March 31, 2013						At December 31, 2012
	Balance			Percent of Total			Balance			Percent of Total
Residential owner occupied - first lien	$	38,856,243			47.2	%	$	38,896,089			49.4	%
Residential owner occupied - junior lien		6,042,005			7.3	%		5,251,002			6.7	%
Residential non-owner occupied (investor)		9,346,737			11.4	%		8,276,068			10.5	%
Commercial owner occupied		7,526,107			9.1	%		7,143,738			9.1	%
Other commercial loans		20,446,228			24.8	%		18,935,142			24.1	%
Consumer loans		194,493			0.2	%		151,427			0.2	%
Total loans		82,411,813			100.0	%		78,653,466			100.0	%
Net deferred fees, costs and purchase premiums		98,593						88,439
Allowance for loan losses		(813,000	)					(859,000	)
Total loans, net	$	81,697,406					$	77,882,905

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

10

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, if impaired, or doubtful. For impaired loans, an 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 segment. 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;

• 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.

11

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 Bank 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 determined on a loan by loan basis for all loans secured by real estate.

The Bank’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 day 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, 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.

12

The following tables summarize the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2013 and 2012.

	For the Three Months Ended March 31, 2013
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
Allowance for loan losses:
Beginning balance	$	310,865	$	25,152	$	235,381	$	69,436	$	218,166	$	—	$	859,000
Charge-offs		74,303		—		—		—		—		—		74,303
Recoveries		—		—		—		—		—		—		—
Provision		5,720		2,762		3,739		3,090		12,992		—		28,303
Ending Balance	$	242,282	$	27,914	$	239,120	$	72,526	$	231,158	$	—	$	813,000

	For the Three Months Ended March 31, 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
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		(16,651	)		6,896		(2,849	)		(1,733	)		19,533		—		5,196
Ending Balance	$	263,232		$	19,084	$	66,176		$	31,343		$	145,165	$	—	$	525,000

13

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 March 31, 2013 and December 31, 2012:

	At March 31, 2013
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	—	$	—	$	173,501	$	—	$	—	$	—	$	173,501
Ending balance: collectively evaluated for impairment	$	242,282	$	27,914	$	65,619	$	72,526	$	231,158	$	—	$	639,499
Loans:
Ending balance	$	38,856,243	$	6,042,005	$	9,346,737	$	7,526,107	$	20,446,228	$	194,493	$	82,411,813
Ending balance: individually evaluated for impairment	$	329,258	$	—	$	1,250,539	$	—	$	—	$	—	$	1,579,797
Ending balance: collectively evaluated for impairment	$	38,526,985	$	6,042,005	$	8,096,198	$	7,526,107	$	20,446,228	$	194,493	$	80,832,016

	At December 31, 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
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	84,303	$	—	$	173,501	$	—	$	—	$	—	$	257,804
Ending balance: collectively evaluated for impairment	$	226,562	$	25,152	$	61,880	$	69,436	$	218,166	$	—	$	601,196
Loans:
Ending balance	$	38,793,089	$	5,251,002	$	8,276,068	$	7,143,738	$	18,935,142	$	254,427	$	78,653,466
Ending balance: individually evaluated for impairment	$	405,147	$	—	$	272,501	$	—	$	—	$	—	$	677,648
Ending balance: collectively evaluated for impairment	$	38,387,942	$	5,251,002	$	8,003,567	$	7,143,738	$	18,935,142	$	254,427	$	77,975,818

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.

14

The following tables are a summary of the loan portfolio quality indicators by portfolio segment as of March 31, 2013 and December 31, 2012:

	At March 31, 2013
	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	$	38,526,985	$	6,042,005	$	8,096,198	$	7,282,008	$	20,446,228	$	194,493	$	80,587,917
Special Mention		—		—		—		244,099		—		—		244,099
Substandard		329,258		—		1,250,539		—		—		—		1,579,797
Doubtful		—		—		—		—		—		—		—
Total	$	38,856,243	$	6,042,005	$	9,346,737	$	7,526,107	$	20,446,228	$	194,493	$	82,411,813

	At December 31, 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	$	38,387,942	$	5,251,002	$	7,768,867	$	6,897,295	$	18,935,142	$	254,427	$	77,494,675
Special Mention		—		—		234,700		246,443		—		—		481,143
Substandard		405,147		—		272,501		—		—		—		677,648
Doubtful		—		—		—		—		—		—		—
Total	$	38,793,089	$	5,251,002	$	8,276,068	$	7,143,738	$	18,935,142	$	254,427	$	78,653,466

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 Bank 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 Bank 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.

15

The following tables set forth certain information with respect to our loan delinquencies by portfolio segment as of March 31, 2013 and December 31, 2012:

	At March 31, 2013
	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	$	38,427,296	$	5,819,141	$	8,718,784	$	7,526,107	$	20,446,228	$	194,493	$	81,132,049
30-59 days past due		99,689		167,371		—		—		—		—		267,060
60-89 days past due		—		55,493		272,501		—		—		—		327,994
Greater than 90 days past due		329,258		—		355,452		—		—		—		684,710
Total past due		428,947		222,864		627,953		—		—		—		1,279,764
Total	$	38,856,243	$	6,042,005	$	9,346,737	$	7,526,107	$	20,446,228	$	194,493	$	82,411,813

	At December 31, 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	$	38,033,114	$	5,122,006	$	8,276,068	$	7,143,738	$	18,935,142	$	254,427	$	77,764,495
30-59 days past due		—		128,996		—		—		—		—		128,996
60-89 days past due		354,828		—		—		—		—		—		354,828
Greater than 90 days past due		405,147		—		—		—		—		—		405,147
Total past due		759,975		128,996		—		—		—		—		888,971
Total	$	38,793,089	$	5,251,002	$	8,276,068	$	7,143,738	$	18,935,142	$	254,427	$	78,653,466

16

The following tables are a summary of impaired loans by portfolio segment as of March 31, 2013 and December 31, 2012:

	At March 31, 2013
	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 Loans:
With no related allowance recorded:
Recorded Investment	$	245,000	$	—	$	130,664	$	—	$	—	$	—	$	375,664
Unpaid Principal Balance		406,717		—		130,664		—		—		—		537,381
With an allowance recorded:
Recorded Investment	$	—	$	—	$	272,501	$	—	$	—	$	—	$	272,501
Unpaid Principal Balance		—		—		272,501		—		—		—		272,501
Related Allowance		—		—		173,501		—		—		—		173,501
Total impaired loans:
Recorded Investment	$	245,000	$	—	$	403,165	$	—	$	—	$	—	$	648,165
Unpaid Principal Balance		406,717		—		403,165		—		—		—		809,882
Related Allowance		—		—		173,501		—		—		—		173,501

	At December 31, 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
Impaired Loans:
With no related allowance recorded:
Recorded Investment	$	310,844	$	—	$	—	$	—	$	—	$	—	$	310,844
Unpaid Principal Balance		398,257		—		—		—		—		—		398,257
With an allowance recorded:
Recorded Investment	$	94,303	$	—	$	272,501	$	—	$	—	$	—	$	366,804
Unpaid Principal Balance		94,303		—		272,501		—		—		—		366,804
Related Allowance		84,303		—		173,501		—		—		—		257,804
Total impaired loans:
Recorded Investment	$	405,147	$	—	$	272,501	$	—	$	—	$	—	$	677,648
Unpaid Principal Balance		492,560		—		272,501		—		—		—		765,061
Related Allowance		84,303		—		173,501		—		—		—		257,804

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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 months ended March 31, 2013 and 2012:

	For the Three Months Ended March 31, 2013
	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 loans:
With no related allowance recorded:
Average recorded investment	$	267,922	$	—	$	—	$	—	$	—	$	—	$	267,922
Interest income that would have been recognized		4,002		—		—		—		—		—		4,002
Interest income recognized (cash basis)		—		—		—		—		—		—		—
Interest income foregone		4,002		—		—		—		—		—		4,002
With an allowance recorded:
Average recorded investment	$	94,303	$	—	$	272,501	$	—	$	—	$	—	$	366,804
Interest income that would have been recognized		1,485		—		3,905		—		—		—		5,390
Interest income recognized (cash basis)		—		—		—		—		—		—		—
Interest income foregone		1,485		—		3,905		—		—		—		5,390
Total impaired loans:
Average recorded investment	$	362,225	$	—	$	272,501	$	—	$	—	$	—	$	634,726
Interest income that would have been recognized		5,487		—		3,905		—		—		—		9,392
Interest income recognized (cash basis)		—		—		—		—		—		—		—
Interest income foregone		5,487		—		3,905		—		—		—		9,392

	For the Three Months Ended March 31, 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
Impaired loans:
With no related allowance recorded:
Average recorded investment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Interest income that would have been recognized		—		—		—		—		—		—		—
Interest income recognized (cash basis)		—		—		—		—		—		—		—
Interest income foregone		—		—		—		—		—		—		—
With an allowance recorded:
Average recorded investment	$	544,729	$	19,992	$	—	$	—	$	—	$	—	$	564,721
Interest income that would have been recognized		6,908		311		—		—		—		—		7,219
Interest income recognized (cash basis)		2,451		—		—		—		—		—		2,451
Interest income foregone		4,457		311		—		—		—		—		4,768
Total impaired loans:
Average recorded investment	$	544,729	$	19,992	$	—	$	—	$	—	$	—	$	564,721
Interest income that would have been recognized		6,908		311		—		—		—		—		7,219
Interest income recognized (cash basis)		2,451		—		—		—		—		—		2,451
Interest income foregone		4,457		311		—		—		—		—		4,768

18

The following table is a summary of performing and nonperforming impaired loans by portfolio segment as of March 31, 2013 and December 31, 2012:

	At March 31,		At December 31,
	2013		2012
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		—		799,374
Residential owner occupied - junior lien		—		—
Residential non-owner occupied (investor)		—		—
Commercial owner occupied		—		—
Other commercial loans		—		—
Consumer loans		—		—
Total impaired performing loans		—		799,374
Nonperforming loans:
Impaired nonperforming loans (nonaccrual):
Residential owner occupied - first lien		245,000		405,147
Residential owner occupied - junior lien		—		—
Residential non-owner occupied (investor)		272,501		272,501
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)		130,664		—
Commercial owner occupied		—		—
Other commercial loans		—		—
Consumer loans		—		—
Total impaired nonperforming loans (nonaccrual):		648,165		677,648
Total impaired loans	$	648,165	$	1,477,022

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.

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

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The following table is a summary of impaired loans that were modified pursuant to a TDR during the three months ended March 31, 2013 and 2012:

Loan Type	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	During the Three Months Ended March 31, 2013
Residential non-owner occupied (investor)		1	$	127,675	$	130,664
	During the Three Months Ended March 31, 2012
Residential real estate mortgage		1	$	296,992	$	296,992

There were no defaults on any TDRs, which were restructured within the previous twelve months, during the three months ending March 31, 2013 or March 31, 2012.

Note 5. Deposits

Deposits were comprised of the following at March 31, 2013 and December 31, 2012:

	At March 31, 2013					At December 31, 2012
	Balance		Percent of Total			Balance		Percent of Total
Non-interest bearing checking accounts	$	4,421,846		4.9	%	$	3,491,050		4.0	%
Interest-bearing checking accounts		4,023,062		4.4	%		3,931,363		4.5	%
Savings accounts		2,751,385		3.0	%		1,942,516		2.2	%
Premium savings accounts		23,858,557		26.2	%		22,942,268		26.2	%
Money market accounts		9,629,459		10.6	%		7,925,721		9.1	%
IRA accounts, non-certificate		9,652,466		10.6	%		10,217,317		11.7	%
Certificates of deposit		36,789,011		40.3	%		37,002,831		42.3	%
Total deposits	$	91,125,786		100.0	%	$	87,453,066		100.0	%

Certificates of deposit scheduled maturities are as follows:

	At March 31, 2013		At December 31, 2012
Period to Maturity:
Less than or equal to one year	$	15,652,145	$	18,013,517
More than one to two years		4,952,500		3,377,826
More than two to three years		5,515,462		5,396,236
More than three to four years		5,124,999		3,037,702
More than four to five years		5,543,905		7,177,550
Total certificates of deposit	$	36,789,011	$	37,002,831

Deposit accounts in the Bank are insured by the FDIC, generally up to a maximum of $250,000 per separately insured depositor.

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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 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 Bank adopted ASC 820,Fair Value Measurement. 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 1Valuations 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 2Valuations 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 3Unobservable 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 Bank 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 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 or 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

21

observable market price or a current appraised value, the Bank 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 Bank 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 March 31, 2013 and December 31, 2012:

	At March 31, 2013
	Carrying Value		Quoted Prices in Active  Markets for Identical Assets Level 1		Significant Other Observable  Inputs Level 2		Significant Unobservable Inputs Level 3
Residential mortgage-backed securities	$	9,113,258	$	—	$	9,113,258	$	—
Asset-backed securities (SLMA)		913,118		—		913,118		—
Municipal bonds		169,892		—		169,892		—
Total securities available for sale	$	10,196,268	$	—	$	10,196,268	$	—

	At December 31, 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 mortgage-backed securities	$	10,440,187	$	—	$	10,440,187	$	—
Asset-backed securities (SLMA)		956,242		—		956,242		—
Total securities available for sale	$	11,396,429	$	—	$	11,396,429	$	—

The following table presents a summary of financial assets measured at fair value on a non-recurring basis at March 31, 2013 and December 31, 2012:

	At March 31, 2013
	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	$	245,000	$	—	$	—	$	245,000
Residential non-owner occupied (investor)		403,165		—		—		403,165
Total nonperforming impaired loans	$	648,165	$	—	$	—	$	648,165
Foreclosed real estate	$	567,119	$	—	$	—	$	567,119

	At December 31, 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	$	405,147	$	—	$	—	$	405,147
Residential non-owner occupied (investor)		272,501		—		—		272,501
Total nonperforming impaired loans	$	677,648	$	—	$	—	$	677,648
Foreclosed real estate	$	788,619	$	—	$	—	$	788,619

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The following table shows a reconciliation of the beginning and ending balances for Level 3 assets:

	Impaired Loans			Foreclosed Real Estate
Balance, January 1, 2012	$	638,945		$	1,773,200
Total realized and unrealized gains (losses):
Included in net income		(161,610	)		(79,756	)
Included in other comprehensive income		—			—
Purchases, issuances and settlements		(47,667	)		(1,210,065	)
Transfers in and/or out of Level 3		247,980			305,240
Balance, December 31, 2012	$	677,648		$	788,619
Total realized and unrealized gains (losses):
Included in net income		(74,303	)		(10,000	)
Included in other comprehensive income		—			—
Purchases, issuances and settlements		(1,585	)		(211,500	)
Transfers in and/or out of Level 3		46,405			—
Balance, March 31, 2013	$	648,165		$	567,119

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 amounts of the certificates of deposit approximate fair value.

Securities Available for Sale (Carried at Fair Value).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 available for sale are classified within Level 3 of the valuation hierarchy.

Securities Held to Maturity (Carried at Amortized Cost).Where quoted prices are available in an active market, securities held to maturity 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 held to maturity 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 held to maturity 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. 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 Surrender Value). The carrying amount of the life insurance policies is based on the accumulated cash surrender value of each policy.

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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 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.

24

The estimated fair values of the Company’s financial instruments were as follows:

	At March 31, 2013
	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	$	2,600,185	$	2,600,185	$	—	$	2,600,185	$	—
Securities available for sale		10,196,268		10,196,268		—		10,196,268		—
Loans, net of allowance for loan losses		81,697,406		84,730,000		—		—		84,730,000
Foreclosed assets		567,119		567,119		—		—		567,119
Bank-owned life insurance		1,944,634		1,944,634		—		1,944,634		—
Other equity securities		564,196		564,196		—		—		564,196
Financial instruments - liabilities:
Deposits	$	91,125,786	$	87,540,000	$	—	$	87,540,000	$	—
Federal Home Loan Bank advances		6,500,000		6,858,000		—		6,858,000		—
Financial instruments - off-balance sheet	$	—	$	—	$	—	$	—	$	—

	At December 31, 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	$	2,600,130	$	2,600,130	$	—	$	2,600,130	$	—
Securities available for sale		11,396,429		11,396,429		—		11,396,429		—
Loans, net of allowance for loan losses		77,882,905		80,821,000		—		—		80,821,000
Foreclosed assets		788,619		788,619		—		—		788,619
Bank-owned life insurance		1,929,045		1,929,045		—		1,929,045		—
Other equity securities		585,496		585,496		—		—		585,496
Financial instruments - liabilities:
Deposits	$	87,453,066	$	84,987,000	$	—	$	84,987,000	$	—
Federal Home Loan Bank advances		6,500,000		6,879,000		—		6,879,000		—
Financial instruments - off-balance sheet	$	—	$	—	$	—	$	—	$	—

Note 7. Stockholders’ Equity

Federal and state banking regulations place certain restrictions on dividends paid to the Company by the Bank, and loans or advances made by the Bank to the Company. For a Maryland chartered bank, dividends may be paid out of undivided profits or, with the prior approval of the Maryland Commissioner of Financial Regulation, from surplus in excess of 100% of required capital stock. If, however, the surplus of a Maryland bank is less than 100% of its required capital stock, cash dividends may not be paid in excess of 90% of net earnings. Loans and advances are limited to 10% of the Bank’s capital and surplus on a secured basis. In addition, the payment of dividends by the Bank would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below minimum capital requirements.

The Company’s ability to pay dividends is dependent on the Bank’s ability to pay dividends to the Company.

On February 20, 2013, the Board of Directors authorized the Company to repurchase of up to 10,783 shares of common stock, for an aggregate expenditure of not more than $162,000, through August 31, 2013, or earlier termination of the program by the Board. The shares are being repurchased for the 2011 Employee Recognition and Retention Plan and Trust. The shares will be held in trust for the allocation to employees and non-employee directors as directed by the Compensation Committee of the Board. As of March 31, 2013, the Company repurchased 3,000 shares, for an aggregate price of $35,000, or an average price of $11.63 per share.

25

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk weighted assets, core capital to adjusted tangible assets and tangible capital to tangible assets. Management believes, as of March 31, 2013, the Bank met all capital adequacy requirements to which it is subject.

As of March 31, 2013, the most recent notification from the Bank’s regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed the Bank’s category.

The Bank’s actual capital amounts and ratios as of March 31, 2013 and December 31, 2012 are presented in the table below:

	At March 31, 2013
	Actual					For Capital Adequacy Purposes					To be well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets)	$	8,590		13.0	%	$	5,279		8.0	%	$	6,599		10.0	%
Tier 1 capital (to risk-weighted assets)		7,777		11.8	%		2,639		4.0	%		3,959		6.0	%
Tier 1 capital (to average assets)		7,777		7.5	%		4,151		4.0	%		5,188		5.0	%
Tangible capital (to tangible assets)		8,070		7.6	%		1,593		1.5	%		N/A		N/A

	At December 31, 2012
	Actual					For Capital Adequacy Purposes					To be well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets)	$	8,464		13.4	%	$	5,047		8.0	%	$	6,309		10.0	%
Tier 1 capital (to risk-weighted assets)		7,675		12.2	%		2,523		4.0	%		3,785		6.0	%
Tier 1 capital (to average assets)		7,675		7.6	%		4,064		4.0	%		5,080		5.0	%
Tangible capital (to tangible assets)		8,028		7.8	%		1,538		1.5	%		N/A		N/A

The following table presents a reconciliation of the Company’s consolidated equity as determined using U.S. GAAP and the Bank’s regulatory capital amounts:

	At March 31,			At December 31,
	2013			2012
Consolidated GAAP equity	$	8,473		$	8,468
Consolidated equity in excess of Bank equity		(403	)		(440	)
Bank GAAP equity - Tangible capital		8,070			8,028
Accumulated other comprehensive (income) loss, net of tax		(58	)		(69	)
Disallowed deferred tax assets		(235	)		(284	)
Tier 1 capital		7,777			7,675
Allowance for loan losses (1.25% of risk-weighted assets)		813			789
Total risk-based capital	$	8,590		$	8,464

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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 March 31, 2013 and December 31, 2012. 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.”

Carroll Bancorp, Inc.

Carroll Bancorp, Inc., which we sometimes refer to as 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”. 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 raising $3.6 million of gross proceeds. Since the completion of the initial public offering, Carroll Bancorp, Inc. has not engaged in any significant business activity other than owning the common stock of and maintaining deposits in the Bank; and lending funds to the employee stock ownership plan (“ESOP”) trust.

Carroll Community Bank

Carroll Community Bank is a state-chartered commercial bank headquartered in Sykesville, Maryland. The Bank was organized in 1870 as Sykesville Perpetual Building Association. The Association was chartered in 1887 and re-chartered and reorganized in 1907 when it became Sykesville Building Association of Carroll County. In October 1985 the Association was chartered as a federal mutual savings association. On September 12, 1988 the business name changed from Sykesville Building Association of Carroll County to Sykesville Federal Savings Association. In July 2010, Sykesville Federal Savings Association converted from a federal savings association to a Maryland-chartered mutual savings bank and changed its name to Carroll Community Bank. On October 12, 2011, the Bank converted from a state-chartered mutual savings bank to a state-chartered commercial bank, a stock form of organization, pursuant to its plan of conversion of which the formation of Carroll Bancorp, Inc. and the completion of its initial public offering of common stock was a part.

Overview

Our business has consisted primarily of attracting and accepting deposits from the general public in the areas surrounding our offices and investing those deposits, together with funds generated from operations, primarily in residential mortgage and commercial real estate loans. We intend to continue to increase our focus on commercial real estate loans and related products, including demand deposit accounts, remote deposit capture and business internet banking to support the business community. We are committed to meeting the credit needs of our community, consistent with safe and sound operations.

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 compared to pre-recession levels. 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 lending opportunities.

27

The following table summarizes the highlights of our financial performance for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012 (amounts in the table may not match those discussed in the balance of this section due to rounding):

(unaudited)	For the Three Months Ended March 31,
(Dollars in thousands, except per share data)	2013			2012			$ Change			% Change
Net income	$	51		$	27		$	24			88.9	%
Interest income		1,076			970			106			10.9	%
Interest expense		235			259			(24	)		-9.3	%
Net interest income		841			711			130			18.3	%
Noninterest income		64			77			(13	)		-16.9	%
Noninterest expense		816			747			69			9.2	%
Average Loans		80,658			63,708			16,950			26.6	%
Average Earning Assets		97,637			88,067			9,570			10.9	%
Average Interest-Bearing Liabilities		91,550			84,949			6,601			7.8	%
Return on average assets		0.20	%		0.11	%
Return on average equity		2.40	%		1.26	%
Net interest margin		3.49	%		3.25	%
Earnings per share (basic and diluted)	$	0.15		$	0.08

28

Average Balances and Yields

The following tables set forth average balance sheets, average yields and rates, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as we held insignificant balances of tax-advantaged interest-earning assets during the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of net deferred costs, discounts and premiums that are amortized or accreted to interest income.

	For the Three Months Ended March 31,
	2013								2012
(Dollars in thousands)	Average Outstanding Balance			Interest		Yield / Rate			Average Outstanding Balance			Interest		Yield / Rate
Interest-earning assets:
Loans	$	80,658		$	1,041		5.23	%	$	63,708		$	879		5.55	%
Investment securities		10,546			20		0.77	%		16,344			78		1.92	%
Certificates of deposit		2,600			10		1.56	%		1,840			7		1.53	%
Interest earning deposits		3,833			5		0.53	%		6,175			6		0.39	%
Total interest-earning assets		97,637			1,076		4.47	%		88,067			970		4.43	%
Noninterest-earning assets		6,364								8,093
Total assets	$	104,001							$	96,160
Interest-bearing liabilities:
Savings accounts	$	35,339			39		0.45	%	$	35,395			41		0.47	%
Certificates of deposit		37,083			150		1.64	%		36,671			180		1.97	%
Money market accounts		8,661			15		0.70	%		4,806			8		0.67	%
Now accounts		3,967			1		0.10	%		3,077			1		0.13	%
Total interest-bearing deposits		85,050			205		0.98	%		79,949			230		1.16	%
Federal Home Loan Bank advances		6,500			30		1.87	%		5,000			29		2.33	%
Total interest-bearing liabilities		91,550			235		1.04	%		84,949			259		1.23	%
Noninterest-bearing deposits		3,797								2,507
Noninterest-bearing liabilities		125								136
Total liabilities		95,472								87,592
Equity		8,529								8,568
Total liabilities and capital	$	104,001							$	96,160
Net interest income				$	841							$	711
Net interest rate spread (1)							3.43	%							3.20	%
Net interest-earning assets (2)	$	6,087							$	3,118
Net interest margin (3)							3.49	%							3.26	%
Average interest-earning assets to interest-bearing liabilities		106.65	%							103.67	%

⁽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.

29

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 Years Ended March 31, 2013 vs 2012
	Increase (Decrease) Due to
(in thousands)	Volume			Rate			Rate/ Volume			Total Increase (Decrease)
Interest income from:
Loans	$	232		$	(57	)	$	(13	)	$	162
Investment securities		(27	)		(47	)		16			(58	)
Certificates of deposit		3			—			—			3
Interest earning deposits		(2	)		2			(1	)		(1	)
Total interest income (1)		105			—			1			106
Interest expense on:
Savings accounts		—			(2	)		—			(2	)
Certificates of deposit		2			(32	)		—			(30	)
Money market accounts		7			—			—			7
Now accounts		—			—			—			—
Total interest-bearing deposits		15			(39	)		(1	)		(25	)
Federal Home Loan Bank advances		9			(8	)		—			1
Total interest expense (1)		20			(42	)		(2	)		(24	)
Change in net interest income	$	85		$	42		$	3		$	130

(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 March 31, 2013 and March 31, 2012

General. Net income increased by $24,000, or 88.0%, to $51,000 for the three months ended March 31, 2013 compared to net income of $27,000 for the same period in 2012. The increase in net income for the three month period is primarily attributable to higher net interest income, partially offset by increased expenses related to higher salary and benefit, advertising, data processing and regulatory expenses.

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 $130,000, or 18.3%, during the three months ended March 31, 2013 compared to the same period in 2012, mainly as a result of the increase in interest income. Due to the items discussed in Interest Income and Interest Expense sections below, our net interest rate spread increased to 3.43% for the three months ended March 31, 2013 compared to 3.20% for the three months ended March 31, 2012.

Interest Income. Interest income increased by $106,000, or 10.9%, to $1.1 million during the three months ended March 31, 2013 from $970,000 during the three months ended March 31, 2012. This increase was primarily the result of growth in loan interest income of $162,000, partially offset by a decline in investment securities interest income of $58,000. The increase in interest income on loans was due to the increase in average loan balances of $16.9 million, or 26.6%, partially offset by a decline in the average yield of 32 basis points compared to the same period last year. The decrease in interest income on investment securities was the result of a $5.8 million, or 35.5% decrease in the average balance of investment securities for the 2013 period.

30

Interest Expense. Interest expense decreased by $24,000, or 9.3%, to $235,000 for the three months ended March 31, 2013 compared to $259,000 for the three months ended March 31, 2012. 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 18 basis points, or 15.5%, partially offset by an increase in the average balance of interest-bearing deposits of $5.1 million, or 6.4%. The decline in average rates was primarily attributable to the decline of interest rates on certificates of deposit. The average rate on certificates of deposit dropped to 1.64% during the three months ended March 31, 2013 from 1.97% during the three months ended March 31, 2012. The continued historically low level of market interest rates enabled us to renew maturing certificates of deposits at significantly lower interest rates. The impact of the certificates of deposit was partially offset by the increase in the balances of the tiered priced interest-bearing money market 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 $28,000 for the three months ended March 31, 2013 compared to $5,000 for the three months ended March 31, 2012.The increase in the provision for loan losses was mainly due to the impact of loan growth during the three months ended March 31, 2013. The provision during the three months ended March 31, 2012 was lower because loan balances at March 31, 2012 remained level with loan balances at December 31, 2011, although we did take a provision to account for the continuing impact of increasing our commercial loan mix within the loan portfolio during the three months ending March 31, 2012. Management believes, to the best of their knowledge, that all known losses as of March 31, 2013 have been recorded.

The allowance for loan losses represented 0.99% of gross loans at March 31, 2013 and 1.09% of gross loans as of December 31, 2012. The decline was attributable to the reduction of specific allowance reserves as the result of charge-offs taken during the three months ended March 31, 2013. Based on our analysis and the historical performance of the loan portfolio, we believe the allowance appropriately reflects the inherit risk of loss in our loan portfolio.

Non-Interest Income. Non-interest income was $64,000 for the three months ended March 31, 2013 compared to $77,000 for the same period in 2012. The $13,000, or 16.8%, decrease in non-interest income is primarily attributable to the $16,000 decrease in gains on sales of securities available for sale and the decrease in other income of $9,000 due to the collection of rental income on an OREO property during the three months ended March 31, 2012. We terminated the renting out of the one OREO property during the fourth quarter of 2012. These items were partially offset by the increase in gains recognized on loans held for sale of $5,000 for the three months ended March 31, 2013.

Non-Interest Expenses. Non-interest expenses increased $69,000, or 9.3%, to $816,000 for the three months ended March 31, 2013 compared to the same period in 2012. The increase was due to a $32,000, or 9.0%, increase in salaries and employee benefits due to higher staffing levels and merit salary increases, a $17,000 increase in the Maryland Department of Financial Regulation assessment expense due to 2012 including an adjustment from 2011, an $11,000 increase in advertising expenditures due to our increased marketing effort, a $7,000 increase in loan workout expenditures; and $7,000 in post robbery security expenditures and $7,000 in fraudulent check losses for the 2013 period. These items were partially offset by a $23,000 decrease on the loss on sale and repair expenditures on OREO properties due to the number of OREO properties decreasing significantly during 2012.

Income Tax Expense. Income tax expense amounted to $10,000 and $9,000, respectively, for the three months ended March 31, 2013 and 2012 resulting in effective tax rates of 16.8% and 25.8%, respectively. 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 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 $40,000 and $51,000 for the three months ended March 31, 2013 and 2012, respectively. The decrease of $11,000, or 22.4%, in total comprehensive income resulted from a decrease of $35,000 from the change in unrealized gains (losses) on securities available for sale offset by an increase of $24,000 in net income.

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Comparison of Financial Condition at March 31, 2013 and December 31, 2012.

Assets. Total assets increased by $3.7 million, or 3.6%, to $106.2 million at March 31, 2013 compared to $102.5 million at December 31, 2012.

Loans. Net loans increased by $3.8 million, or 4.9%, to $81.7 million at March 31, 2013 from $77.9 million at December 31, 2012. New loan originations of $7.6 million during the three month period ending March 31, 2013 were offset by loan payoffs of $2.6 million and scheduled principal repayments of $1.1 million. Consistent with our business strategy, we increased the amount of commercial real estate loans in our portfolio by $1.9 million, or 7.3% during the three months ended March 31, 2013. In addition, our residential junior lien and investor loans increased by $1.8 million due to the purchase of whole loans from a local bank.

Nonperforming Loans and Assets.Our nonperforming loans and assets were $1.1 million and $1.7 million, respectively, at March 31, 2013 compared to $678,000 and $1.5 million, respectively, at December 31, 2012. The ratio of nonperforming loans to total loans was 1.32% at March 31, 2013 compared to 0.86% at December 31, 2012. In addition, our ratio of nonperforming assets was 1.56% as of March 31, 2013 compared to 1.43% as of December 31, 2012.

Deposits. Deposits increased by $3.7million, or 4.2%, to $91.1 million at March 31, 2013 from $87.5 million at December 31, 2012. Money market accounts increased by $1.7 million, or 21.5%, non-interest and interest bearing checking deposits increased by $1.0 million, or 13.8%, and savings accounts increased by $1.7 million, or 6.9%. IRA accounts decreased by $564,000, or 5.5%, and certificates of deposit decreased by $214,000, or 0.6%. We will continue to focus our efforts to improve our funding mix and increase core deposits.

Stockholders’ Equity. Stockholders’ equity increased by $5,000, remaining at $8.5 million at March 31, 2013 and December 31, 2012. The increase was due to an increase of $51,000 in net income offset by the purchase of common stock for the 2011 Employee Recognition and Retention Plan and Trust of $35,000 and a decline in accumulated other comprehensive income of $11,000. The change in accumulated other comprehensive income is due to the effects of interest rate fluctuations on our securities available for sale portfolio.

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 March 31, 2013.

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 March 31, 2013, cash and cash equivalents totaled $6.2 million.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our statements of cash flows included in our financial statements.

At March 31, 2013, we had $3.5 million in loan origination commitments outstanding and $4.8 million in unused available lines of credit. Certificates of deposit due within one year of March 31, 2013 totaled $15.7 million, or 17.2% 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

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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 March 31, 2014. 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 March 31, 2013.

Our primary investing activity is originating loans. During the three months ended March 31, 2013 and the year ended December 31, 2012, we originated $7.6 million and $27.5 million in loans, respectively.

Financing activities consist primarily of activity in deposit accounts. We experienced a net increase in deposits during the three months ended March 31, 2013 of $3.7 million, or 4.2%. 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, which provide an additional source of funds. Federal Home Loan Bank advances remained at $6.5 million at March 31, 2013 and at December 31, 2012. At March 31, 2013, we had the ability to borrow up to an additional $3.7 million from the Federal Home Loan Bank of Atlanta and $6.0 million from correspondent banks under short-term line of credit agreements.

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 interest earned on the loan to the Carroll Community Bank Employee Stock Ownership Plan and stock dividends received from the Bank when the Bank begins paying dividends.

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.

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 March 31, 2013, 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.

Off-Balance Sheet Arrangements, Commitments and Aggregate Contractual Obligations

Commitments. 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 are limited to commitments to originate loans and involve, 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 of credit at March 31, 2013 and December 31, 2012 are as follows:

(in thousands)	At March 31, 2013			At December 31, 2012
Commitments to extend credit:
Consumer loans	$	12		$	315
Commercial loans		3,527			935
		3,539			1,250
Commitments under available lines of credit:
Consumer loans		3,213			3,355
Commercial loans		1,549			2,045
		4,762			5,400
Total Commitments	$	8,301		$	6,650
			��

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 balance sheet 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 credit lines 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.

The credit risks involved in these financial instruments are essentially the same as that involved in extending loan facilities to customers. No amount has been recognized in the statement of financial condition at March 31, 2013 or December 31, 2012 as a liability for credit loss related to these commitments.

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 months ended March 31, 2013, 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, 2012.

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.

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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 and related products, (ii) increasing certain deposit products and products aimed at the business community, (iii) increasing core deposits and improving our funding mix, and (iv) 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 for our short- and long-term needs;

• statements with respect to our allowance for loan losses, the adequacy thereof and that all known loan losses have been recored; and

• statements regarding the impact of pending legal proceedings.

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 Securities and Exchange Commission (“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 for the year ended December 31, 2012 on file with the SEC.

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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 March 31, 2013.

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 March 31, 2013, 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, 2012.

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

The Company repurchased shares of its common stock during the three months ended March 31, 2013 as follows:

Issuer Purchases of Equity Securities (1)

Period	Total number of shares purchased		Average price per share		Total number of shares purchased as part of publicly announced plans or programs		Maximun number of shares that may yet be purchased under  the plans or programs
January 2013		—	$	—		—		10,783
February 2013		—		—		—		10,783
March 2013		3,000		11.63		3,000		7,783
Total		3,000	$	11.63		3,000

(1) On February 20, 2013, our Board of Directors authorized the Company to repurchase up to 10,783 shares of our common stock, for an aggregate expenditure of not more than $162,000, through August 31, 2013, or earlier termination of the program by the Board, to fund the 2011 Employee Recognition and Retention Plan and Trust.

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

		CARROLL BANCORP, INC.
Date: May 13, 2013	By:	/s/ Russell J. Grimes
		Russell J. Grimes
	President, Chief Executive Officer and Director
	(Principal Executive Officer)
Date: May 13, 2013	By:	/s/ Michael J. Gallina
		Michael J. Gallina
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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