Carroll Bancorp (CROL) 10-Q 2015 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, 2015

or

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

For the transition period from                      to                    

Commission File Number 000-54422

CARROLL BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

1321 Liberty Road, Sykesville, Maryland 21784

(Address of principal executive offices) (Zip Code)

(410) 795-1900

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 959,155 shares of common stock outstanding at May 8, 2015.

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, 2015 (unaudited) and December 31, 2014 (audited)		3
	Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014 (unaudited)		4
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2015 and 2014 (unaudited)		5
	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2015 and 2014 (unaudited)		6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (unaudited)		7
	Notes to Consolidated Financial Statements (unaudited)		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		36
Item 4.	Controls and Procedures		37
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		37
SIGNATURES			38

2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Carroll Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

	March 31, 2015			December 31, 2014
	(unaudited)			(audited)
Assets:
Cash and due from banks	$	1,341,968		$	1,181,951
Interest-bearing deposits with depository institutions		4,875,305			5,727,440
Cash and cash equivalents		6,217,273			6,909,391
Certificates of deposit with depository institutions		3,102,112			3,102,936
Securities available for sale, at fair value		6,786,628			9,874,706
Securities held to maturity (fair value March 31, 2015 $1,282,115 and December 31, 2014 $1,272,835)		1,256,195			1,256,280
Loans, net of allowance for loan losses - March 31, 2015 $761,000 and December 31, 2014 $722,000		97,905,539			89,984,513
Accrued interest receivable		295,079			295,916
Other equity securities, at cost		656,796			605,596
Bank-owned life insurance		2,065,535			2,051,646
Premises and equipment, net		1,229,945			1,260,966
Foreclosed assets		52,964			52,964
Other assets		668,304			511,079
Total assets	$	120,236,370		$	115,905,993
Liabilities:
Deposits
Noninterest-bearing	$	7,145,818		$	9,744,047
Interest-bearing		87,531,711			87,160,840
Total deposits		94,677,529			96,904,887
Federal Home Loan Bank Advances		9,500,000			8,000,000
Other liabilities		256,830			250,609
Total liabilities		104,434,359			105,155,496
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 799,257 shares at March 31, 2015 and 488,409 shares at December 31, 2014		7,992			4,884
Additional paid-in capital		12,544,684			4,873,447
Unallocated ESOP shares		(285,447	)		(285,447	)
Unearned RSP shares		(167,224	)		(170,217	)
Retained earnings		3,671,587			6,317,654
Accumulated other comprehensive income		30,419			10,176
Total stockholders’ equity		15,802,011			10,750,497
Total liabilities and stockholders’ equity	$	120,236,370		$	115,905,993

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,
	2015			2014
Interest income:
Loans	$	1,110,820		$	1,011,199
Securities available for sale		36,145			55,079
Securities held to maturity		13,228			—
Certificates of deposit		10,525			4,241
Interest-earning deposits		9,665			6,188
Total interest income		1,180,383			1,076,707
Interest expense:
Deposits		125,763			136,868
Borrowings		30,516			29,332
Total interest expense		156,279			166,200
Net interest income		1,024,104			910,507
Provision for (recovery of) loan losses		28,658			(1,613	)
Net interest income after provision for loan losses		995,446			912,120
Non-interest income:
(Loss) gain on sale of securities		(100	)		11,262
Gain on loans held for sale		2,187			—
Loss on sale of OREO		—			(14,105	)
Increase in cash surrender value - life insurance		13,890			14,819
Customer service fees		17,360			21,316
Loan fee income		6,392			8,890
Other income		4,396			5,603
Total non-interest income		44,125			47,785
Non-interest expense:
Salaries and employee benefits		547,846			446,831
Premises and equipment		85,590			81,830
Data processing		105,267			106,963
Professional fees		65,383			72,084
FDIC insurance		17,505			21,518
Directors’ fees		53,800			39,725
Corporate insurance		10,068			10,034
Printing and office supplies		9,172			5,498
Other operating expenses		61,828			79,518
Total non-interest expenses		956,459			864,001
Income before income tax expense		83,112			95,904
Income tax expense		27,697			22,719
Net income	$	55,415		$	73,185
Basic earnings per share	$	0.10		$	0.18
Diluted earnings per share	$	0.10		$	0.17
Basic weighted average shares outstanding		541,794			405,509
Diluted weighted average shares outstanding		556,722			418,601

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,
	2015			2014
Net income	$	55,415		$	73,185
Other comprehensive income, before income tax:
Securities available for sale:
Net unrealized holding gains arising during the period		33,638			58,042
Less reclassification adjustment for (loss) gain on the sale of securities available for sale included in net income		(100	)		11,262
Other comprehensive income, before income tax		33,738			46,780
Income tax effect		13,495			18,713
Other comprehensive income, net of tax		20,243			28,067
Total comprehensive income	$	75,658		$	101,252

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, 2015 and 2014

(unaudited)

	Common Stock		Additional Paid-in Capital			Unallocated ESOP Shares			Unallocated RSP Shares			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balances at January 1, 2015	$	4,884	$	4,873,447		$	(285,447	)	$	(170,217	)	$	6,317,654		$	10,176		$	10,750,497
Net income													55,415						55,415
Other comprehensive income																20,243			20,243
RSP compensation				10,027															10,027
Private placement offering:
Issuance of 310,848 shares of common stock net of offering costs		3,108		4,962,721															4,965,829
Restricted stock vesting				(2,993	)					2,993									—
Stock dividend declared				2,701,482									(2,701,482	)					—
Balances at March 31, 2015	$	7,992	$	12,544,684		$	(285,447	)	$	(167,224	)	$	3,671,587		$	30,419		$	15,802,011
Balances at January 1, 2014	$	3,595	$	2,897,054		$	(183,319	)	$	(133,947	)	$	5,927,209		$	(94,894	)	$	8,415,698
Net income													73,185						73,185
Other comprehensive income																28,067			28,067
RSP compensation				8,788															8,788
Rights offering:
Issuance of 124,982 shares of common stock net of offering costs		1,249		1,903,463															1,904,712
ESOP purchase of 7,498 shares							(119,968	)											(119,968	)
RSP purchase of 3,749 shares										(59,984	)								(59,984	)
Balances at March 31, 2014	$	4,844	$	4,809,305		$	(303,287	)	$	(193,931	)	$	6,000,394		$	(66,827	)	$	10,250,498

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,
	2015			2014
Cash flows from operating activities:
Net income	$	55,415		$	73,185
Adjustments to reconcile net income to net cash provided by operating activities:
Loss (gain) on sale of securities available for sale		100			(11,262	)
Gain on sale of loans held for sale		(2,187	)		—
Origination of loans held for sale		(175,000	)		(76,000	)
Proceeds from sale of loans held for sale		177,187			—
Amortization and accretion of securities		31,558			31,982
Amortization of deferred loan costs, net of origination fees		7,126			15,856
Provision for (recovery of) loan losses		28,658			(1,613	)
Loan loss recoveries		10,342			1,613
Loss on sale of real estate acquired through foreclosure		—			14,105
Depreciation of premises and equipment		39,190			39,201
Increase in cash surrender value of bank-owned life insurance		(13,890	)		(14,819	)
ESOP compensation expense		6,200			4,500
RSP compensation expense		10,027			8,788
(Increase) decrease in deferred tax assets		(20,134	)		22,719
Decrease in accrued interest receivable		837			28,826
(Increase) decrease in other assets		(150,584	)		251,594
Increase in other liabilities		20			76,604
Net cash provided by operating activities		4,865			465,279
Cash flows from investing activities:
Purchase of securities available for sale		—			(1,611,136	)
Proceeds from sales and redemption of securities available for sale		2,689,379			3,127,323
Principal collected on securities available for sale		401,687			385,362
Increase in loans		(7,967,152	)		(81,690	)
Purchase of premises and equipment		(8,168	)		(8,069	)
Redemption of other equity securities		—			26,100
Purchase of other equity securities		(51,200	)		(45,000	)
Proceeds from the sale of real estate acquired through foreclosure		—			151,001
Net cash used by investing activities		(4,935,454	)		1,943,891
Cash flows from financing activities:
(Decrease) increase in deposits		(2,227,358	)		2,227,197
Proceeds from FHLB advances		3,000,000			1,000,000
Repayment of FHLB advances		(1,500,000	)		(2,365,350	)
Proceeds from private placement offering		4,965,829			1,904,712
Loan to purchase common stock for the ESOP		—			(119,968	)
Purchase common stock for RSP		—			(59,984	)
Net cash provided by financing activities		4,238,471			2,586,607
Net (decrease) increase in cash and cash equivalents		(692,118	)		4,995,777
Cash and cash equivalents, beginning balance		6,909,391			5,029,314
Cash and cash equivalents, ending balance	$	6,217,273		$	10,025,091
Supplemental disclosure of cash flow information:
Interest paid	$	157,501		$	166,629
Income tax paid	$	44,000		$	—

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

7

CARROLL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Summary of Significant Accounting Policies

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 Company’s common stock began trading on the Over the Counter Bulletin Board under the symbol “CROL” on October 12, 2011.

In accordance with applicable regulations at the time of the conversion from a mutual holding company to a stock holding company, the Bank substantially restricted its retained earnings by establishing a liquidation account. The liquidation account is maintained for the benefit of eligible account holders who keep their accounts at the Bank after conversion. The liquidation account is reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

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 commercial and residential 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 connection with 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.

8

Accounting Standards Adopted in 2015

In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings By Creditors (Subtopic 310-40) – Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. This amendment clarifies the circumstances under which an in substance repossession or foreclosure is deemed to occur determining when all or a portion of the loan should be derecognized and the real estate property received should be recognized. As such, the adoption of ASU 2014-04 did not have a material impact on the Company’s consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-14,Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. The objective of this guidance is to reduce diversity in practice related to how creditors classify government-guaranteed mortgage loans, including FHA and VA guaranteed loans, upon foreclosure. Some creditors reclassify those loans to real estate consistent with other foreclosed loans that do not have guarantees; others reclassify the loans to other receivables. The amendments in this guidance require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the real property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measure based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. As such, the adoption of ASU 2014-04 did not have a material impact on the Company’s consolidated financial statements.

Accounting Standards Pending Adoption

In May 2014, the FASB and the international Accounting Standards Board (the “IASB”) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP and International Financial Reporting Standards (“IFRS”). Previous revenue recognition guidance in GAAP comprised broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would : (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets: (4) provide more useful information to users of financial statements through improved disclosure requirements; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB issued ASU No. 2014-09Revenue from Contracts with Customers. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard is effective for public entities for interim and annual periods beginning after December 15, 2016; early adoption is not permitted. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company is currently evaluating the provisions of ASU No. 2014-09 and will be closely monitoring developments and additional guidance to determine the potential impact the new standard will have on the Company’s financial statements.

Other than the disclosures contained within these statements, the Company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial statements or do not apply to its operations.

9

Note 2. Securities

The amortized cost and fair value of securities available for sale and held to maturity at March 31, 2015 and December 31, 2014 are as follows:

	At March 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available for sale:
Residential mortgage-backed securities	$	6,489,567	$	50,632	$	671	$	6,539,528
Municipal bonds		246,363		2,486		1,749		247,100
	$	6,735,930	$	53,118	$	2,420	$	6,786,628
Securities held to maturity:
Municipal bonds	$	500,000	$	8,478	$	—	$	508,478
Corporate bonds		756,195		17,442		—		773,637
	$	1,256,195	$	25,920	$	—	$	1,282,115

	At December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available for sale:
Residential mortgage-backed securities	$	9,582,443	$	44,803	$	28,014	$	9,599,232
Municipal bonds		275,303		2,641		2,470		275,474
	$	9,857,746	$	47,444	$	30,484	$	9,874,706
Securities held to maturity:
Municipal bonds	$	500,000	$	7,460	$	—	$	507,460
Corporate bonds		756,280		9,095		—		765,375
	$	1,256,280	$	16,555	$	—	$	1,272,835

The Bank had no private label residential mortgage-backed securities at March 31, 2015 and December 31, 2014 or during the three months or year then ended, respectively.

10

The amortized cost and fair value of securities available for sale and held to maturity at March 31, 2015 and December 31, 2014, 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, 2015
	Securities available for sale				Securities held to maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Under 1 year	$	—	$	—	$	—	$	—
Over 1 year through 5 years		272,907		274,783		—		—
After 5 years through 10 years		1,510,562		1,519,926		756,195		773,638
Over 10 years		4,952,461		4,991,919		500,000		508,477
	$	6,735,930	$	6,786,628	$	1,256,195	$	1,282,115

	At December 31, 2014
	Securities available for sale				Securities held to maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Under 1 year	$	—	$	—	$	—	$	—
Over 1 year through 5 years		319,751		321,553		—		—
After 5 years through 10 years		1,592,829		1,605,510		756,280		765,375
Over 10 years		7,945,166		7,947,643		500,000		507,460
	$	9,857,746	$	9,874,706	$	1,256,280	$	1,272,835

The Bank sold or had called $2.7 million and $3.1 million, respectively, in securities available for sale during the three months ended March 31, 2015 and 2014. From those sale transactions, the Bank realized (loss) gain of $(100) and $11,262, respectively, for the same periods.

Securities with gross unrealized losses at March 31, 2015 and December 31, 2014, aggregated by investment category and length of time individual securities have been in a continual loss position, are as follows:

	At March 31, 2015
	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
Residential mortgage-backed securities	$	810,267	$	671	$	—	$	—		$	810,267	$	671
Municipal bonds		—		—		80,084		1,749			80,084		1,749
	$	810,267	$	671	$	80,084	$	1,749		$	890,351	$	2,420
	At December 31, 2014
	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
Residential mortgage-backed securities	$	—	$	—	$	2,643,582	$	28,014	��	$	2,643,582	$	28,014
Municipal bonds		—		—		107,186		2,470			107,186		2,470
	$	—	$	—	$	2,750,768	$	30,484		$	2,750,768	$	30,484

The carrying amount of securities pledged as collateral for uninsured public fund deposits was $1.9 million and $1.4 million at March 31, 2015 and December 31, 2014, respectively.

11

Note 3. Loans

Loans at March 31, 2015 and December 31, 2014 are summarized as follows:

	At March 31, 2015						At December 31, 2014
	Balance			Percent of Total			Balance			Percent of Total
Residential owner occupied - first lien	$	34,112,772			34.6	%	$	35,065,264			38.8	%
Residential owner occupied - junior lien		5,191,038			5.3	%		5,239,183			5.8	%
Residential non-owner occupied (investor)		8,979,359			9.1	%		9,065,983			10.0	%
Commercial owner occupied		12,477,543			12.7	%		11,226,313			12.4	%
Other commercial loans		37,352,006			37.9	%		29,550,727			32.6	%
Consumer loans		433,873			0.4	%		391,945			0.4	%
Total loans		98,546,591			100.0	%		90,539,415			100.0	%
Net deferred fees, costs and purchase premiums		119,948						167,098
Allowance for loan losses		(761,000	)					(722,000	)
Total loans, net	$	97,905,539					$	89,984,513

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”).

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 impaired. 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 segment basis for loans that do not meet the definition of impaired loans. The segments are 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.

12

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 segment to the entire loan 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.

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 continue our focus on the origination of commercial real estate loans.

13

The following tables summarize the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2015 and 2014.

	For the Three Months Ended March 31, 2015
	Residential owner occupied - first lien			Residential owner occupied - junior lien			Residential non-owner occupied (investor)			Commercial owner occupied		Other commercial loans		Consumer loans		Total
Beginning balance	$	228,461		$	25,051		$	46,047		$	89,811	$	332,630	$	—	$	722,000
Charge-offs		—			—			—			—		—		—		—
Recoveries		10,342			—			—			—		—		—		10,342
Provision		(43,218	)		(2,885	)		(282	)		10,009		65,034		—		28,658
Ending Balance	$	195,585		$	22,166		$	45,765		$	99,820	$	397,664	$	—	$	761,000

	For the Three Months Ended March 31, 2014
	Residential owner occupied - first lien			Residential owner occupied - junior lien		Residential non-owner occupied (investor)			Commercial owner occupied		Other commercial loans			Consumer loans		Total
Beginning balance	$	244,288		$	26,704	$	70,334		$	72,751	$	267,923		$	—	$	682,000
Charge-offs		—			—		—			—		—			—		—
Recoveries		1,613			—		—			—		—			—		1,613
Provision		(3,879	)		587		(201	)		5,988		(4,108	)		—		(1,613	)
Ending Balance	$	242,022		$	27,291	$	70,133		$	78,739	$	263,815		$	—	$	682,000

14

The following tables set forth the balance of the allowance for loan losses by portfolio segment, disaggregated by impairment methodology, which is then further segregated by amounts evaluated for impairment collectively and individually at March 31, 2015 and December 31, 2014:

	At March 31, 2015
	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	$	195,585	$	22,166	$	45,765	$	99,820	$	397,664	$	—	$	761,000
Ending balance: individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Ending balance: collectively evaluated for impairment	$	195,585	$	22,166	$	45,765	$	99,820	$	397,664	$	—	$	761,000
Loans:
Ending balance	$	34,112,772	$	5,191,038	$	8,979,359	$	12,477,543	$	37,352,006	$	433,873	$	98,546,591
Ending balance: individually evaluated for impairment	$	146,410	$	—	$	113,909	$	—	$	—	$	—	$	260,319
Ending balance: collectively evaluated for impairment	$	33,966,362	$	5,191,038	$	8,865,450	$	12,477,543	$	37,352,006	$	433,873	$	98,286,272

	At December 31, 2014
	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	$	228,461	$	25,051	$	46,047	$	89,811	$	332,630	$	—	$	722,000
Ending balance: individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Ending balance: collectively evaluated for impairment	$	228,461	$	25,051	$	46,047	$	89,811	$	332,630	$	—	$	722,000
Loans:
Ending balance	$	35,065,264	$	5,239,183	$	9,065,983	$	11,226,313	$	29,550,727	$	391,945	$	90,539,415
Ending balance: individually evaluated for impairment	$	469,610	$	9,417	$	116,043	$	—	$	—	$	—	$	595,070
Ending balance: collectively evaluated for impairment	$	34,595,654	$	5,229,766	$	8,949,940	$	11,226,313	$	29,550,727	$	391,945	$	89,944,345

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

15

The following tables are a summary of the loan portfolio quality indicators by portfolio segment at March 31, 2015 and December 31, 2014:

	At March 31, 2015
	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	$	33,966,362	$	5,191,038	$	8,370,192	$	12,477,543	$	36,987,512	$	433,873	$	97,426,520
Special Mention		—		—		—		—		—		—		—
Substandard		146,410		—		609,167		—		364,494		—		1,120,071
Doubtful		—		—		—		—		—		—		—
Total	$	34,112,772	$	5,191,038	$	8,979,359	$	12,477,543	$	37,352,006	$	433,873	$	98,546,591

	At December 31, 2014
	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	$	34,595,654	$	5,229,766	$	8,452,784	$	11,226,313	$	29,184,051	$	391,945	$	89,080,513
Special Mention		—		—		—		—		—		—		—
Substandard		469,610		9,417		613,199		—		366,676		—		1,458,902
Doubtful		—		—		—		—		—		—		—
Total	$	35,065,264	$	5,239,183	$	9,065,983	$	11,226,313	$	29,550,727	$	391,945	$	90,539,415

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 as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

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

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

16

The following tables set forth certain information with respect to our loan delinquencies by portfolio segment at March 31, 2015 and December 31, 2014:

	At March 31, 2015
	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	$	33,775,108	$	5,191,038	$	8,979,359	$	12,477,543	$	37,352,006	$	433,873	$	98,208,927
30-59 days past due		191,254		—		—		—		—		—		191,254
60-89 days past due		—		—		—		—		—		—		—
Greater than 90 days past due		146,410		—		—		—		—		—		146,410
Total past due		337,664		—		—		—		—		—		337,664
Total	$	34,112,772	$	5,191,038	$	8,979,359	$	12,477,543	$	37,352,006	$	433,873	$	98,546,591

	At December 31, 2014
	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	$	34,467,787	$	5,229,766	$	9,065,983	$	11,226,313	$	29,550,727	$	391,945	$	89,932,521
30-59 days past due		127,867		—		—		—		—		—		127,867
60-89 days past due		—		—		—		—		—		—		—
Greater than 90 days past due		469,610		9,417		—		—		—		—		479,027
Total past due		597,477		9,417		—		—		—		—		606,894
Total	$	35,065,264	$	5,239,183	$	9,065,983	$	11,226,313	$	29,550,727	$	391,945	$	90,539,415

17

The following tables are a summary of impaired loans by portfolio segment at March 31, 2015 and December 31, 2014:

	At March 31, 2015
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
With no related allowance recorded:
Recorded Investment	$	146,410	$	—	$	113,909	$	—	$	—	$	—	$	260,319
Unpaid Principal Balance		146,410		—		113,909		—		—		—		260,319
With an allowance recorded:
Recorded Investment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Unpaid Principal Balance		—		—		—		—		—		—		—
Related Allowance		—		—		—		—		—		—		—
Total impaired loans:
Recorded Investment	$	146,410	$	—	$	113,909	$	—	$	—	$	—	$	260,319
Unpaid Principal Balance		146,410		—		113,909		—		—		—		260,319
Related Allowance		—		—		—		—		—		—		—

	At December 31, 2014
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
With no related allowance recorded:
Recorded Investment	$	469,610	$	9,417	$	116,043	$	—	$	—	$	—	$	595,070
Unpaid Principal Balance		469,610		9,417		116,043		—		—		—		595,070
With an allowance recorded:
Recorded Investment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Unpaid Principal Balance		—		—		—		—		—		—		—
Related Allowance		—		—		—		—		—		—		—
Total impaired loans:
Recorded Investment	$	469,610	$	9,417	$	116,043	$	—	$	—	$	—	$	595,070
Unpaid Principal Balance		469,610		9,417		116,043		—		—		—		595,070
Related Allowance		—		—		—		—		—		—		—

18

The following tables present by portfolio segment, information related to the average recorded investment and the interest income foregone and recognized on impaired loans for the three months ended March 31, 2015 and 2014:

	For the Three Months Ended March 31, 2015
	Residential owner occupied - first lien			Residential owner occupied - junior lien			Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
With no related allowance recorded:
Average recorded investment	$	308,010		$	4,709		$	114,976	$	—	$	—	$	—	$	427,695
Interest income that would have been recognized		5,612			98			—		—		—		—		5,710
Interest income recognized (cash basis)		18,898			611			—		—		—		—		19,509
Interest income foregone (recovered)		(13,286	)		(513	)		—		—		—		—		(13,799	)
With an allowance recorded:
Average recorded investment	$	—		$	—		$	—	$	—	$	—	$	—	$	—
Interest income that would have been recognized		—			—			—		—		—		—		—
Interest income recognized (cash basis)		—			—			—		—		—		—		—
Interest income foregone (recovered)		—			—			—		—		—		—		—
Total impaired loans:
Average recorded investment	$	308,010		$	4,709		$	114,976	$	—	$	—	$	—	$	427,695
Interest income that would have been recognized		5,612			98			—		—		—		—		5,710
Interest income recognized (cash basis)		18,898			611			—		—		—		—		19,509
Interest income foregone (recovered)		(13,286	)		(513	)		—		—		—		—		(13,799	)

	For the Three Months Ended March 31, 2014
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans			Consumer loans		Total
With no related allowance recorded:
Average recorded investment	$	180,821	$	9,417	$	123,828	$	—	$	366,615		$	—	$	680,681
Interest income that would have been recognized		1,771		98		—		—		4,934			—		6,803
Interest income recognized (cash basis)		—		—		—		—		7,805			—		7,805
Interest income foregone (recovered)		1,771		98		—		—		(2,871	)		—		(1,002	)
With an allowance recorded:
Average recorded investment	$	—	$	—	$	—	$	—	$	—		$	—	$	—
Interest income that would have been recognized		—		—		—		—		—			—		—
Interest income recognized (cash basis)		—		—		—		—		—			—		—
Interest income foregone (recovered)		—		—		—		—		—			—		—
Total impaired loans:
Average recorded investment	$	180,821	$	9,417	$	123,828	$	—	$	366,615		$	—	$	680,681
Interest income that would have been recognized		1,771		98		—		—		4,934			—		6,803
Interest income recognized (cash basis)		—		—		—		—		7,805			—		7,805
Interest income foregone (recovered)		1,771		98		—		—		(2,871	)		—		(1,002	)

19

The following table is a summary of performing and nonperforming impaired loans by portfolio segment at March 31, 2015 and December 31, 2014:

	At March 31,		At December 31,
	2015		2014
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		113,909		116,043
Residential owner occupied - junior lien		—		—
Residential non-owner occupied (investor)		—		—
Commercial owner occupied		—		—
Other commercial loans		—		—
Consumer loans		—		—
Total impaired performing loans		113,909		116,043
Nonperforming loans:
Impaired nonperforming loans (nonaccrual):
Residential owner occupied - first lien		146,410		469,610
Residential owner occupied - junior lien		—		9,417
Residential non-owner occupied (investor)		—		—
Commercial owner occupied		—		—
Other commercial loans		—		—
Consumer loans		—		—
Troubled debt restructurings:
Residential owner occupied - first lien		—		—
Residential owner occupied - junior lien		—		—
Residential non-owner occupied (investor)		—		—
Commercial owner occupied		—		—
Other commercial loans		—		—
Consumer loans		—		—
Total impaired nonperforming loans (nonaccrual):		146,410		479,027
Total impaired loans	$	260,319	$	595,070

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.

There were no TDRs modified during the three months ended March 31, 2015 and 2014. In addition, the Company has no commitments to loan additional funds to borrowers whose loans have been restructured.

20

Note 5. Deposits

Deposits were comprised of the following at March 31, 2015 and December 31, 2014:

	At March 31, 2015					At December 31, 2014
	Balance		Percent of Total			Balance		Percent of Total
Non-interest bearing checking	$	7,145,818		7.5	%	$	9,744,047		10.1	%
Interest-bearing checking		5,660,322		6.0	%		5,148,677		5.3	%
Savings		2,690,376		2.9	%		2,286,801		2.4	%
Premium savings		22,015,854		23.3	%		21,618,919		22.3	%
IRA savings		7,116,437		7.5	%		7,304,321		7.5	%
Money market		11,204,610		11.8	%		10,587,572		10.9	%
Certificates of deposit		38,844,112		41.0	%		40,214,550		41.5	%
Total deposits	$	94,677,529		100.0	%	$	96,904,887		100.0	%

Certificates of deposit scheduled maturities are as follows:

	At March 31, 2015		At December 31, 2014
Period to Maturity:
Less than or equal to one year	$	16,574,452	$	18,314,343
More than one to two years		7,580,178		6,043,772
More than two to three years		6,234,186		6,696,340
More than three to four years		7,326,521		7,280,817
More than four to five years		1,128,775		1,879,278
Total certificates of deposit	$	38,844,112	$	40,214,550

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

21

Note 6. Fair Value Measurements

The 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 an appraisal by qualified licensed appraisers hired by the Company. The value of business equipment, inventory and accounts receivable collateral is based on the net book value on the business’ financial statements and, if necessary, discounted based on management’s review and analysis. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and are 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 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.

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The following table presents a summary of financial assets measured at fair value on a recurring basis at March 31, 2015 and December 31, 2014:

	At March 31, 2015
	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	$	6,539,528	$	—	$	6,539,528	$	—
Municipal bonds		247,100		—		247,100		—
Total securities available for sale	$	6,786,628	$	—	$	6,786,628	$	—

	At December 31, 2014
	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	$	9,599,232	$	—	$	9,599,232	$	—
Municipal bonds		275,474		—		275,474		—
Total securities available for sale	$	9,874,706	$	—	$	9,874,706	$	—

The following table presents a summary of financial assets measured at fair value on a non-recurring basis at March 31, 2015 and December 31, 2014:

	At March 31, 2015
	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	$	146,410	$	—	$	—	$	146,410
Residential owner occupied - junior lien		—		—		—		—
Residential non-owner occupied (investor)		113,909		—		—		113,909
Total nonperforming impaired loans	$	260,319	$	—	$	—	$	260,319
Foreclosed real estate	$	52,964	$	—	$	—	$	52,964

	At December 31, 2014
	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	$	469,610	$	—	$	—	$	469,610
Residential owner occupied - junior lien		9,417		—		—		9,417
Residential non-owner occupied (investor)		116,043		—		—		116,043
Total nonperforming impaired loans	$	595,070	$	—	$	—	$	595,070
Foreclosed real estate	$	52,964	$	—	$	—	$	52,964

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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, 2014	$	1,049,038		$	462,005
Total realized and unrealized gains (losses):
Included in net income		—			(2,632	)
Settlements		(749,397	)		(406,409	)
Transfers in and/or out of Level 3		295,429			—
Balance, December 31, 2014	$	595,070		$	52,964
Total realized and unrealized gains (losses):
Included in net income		—			—
Settlements		(193,081	)		—
Transfers in and/or out of Level 3		(141,670	)		—
Balance, March 31, 2015	$	260,319		$	52,964

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.

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 an appraisal or independent valuation, which is then adjusted for the estimated 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.

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.

Deposits (Carried at Cost). The fair values disclosed for demand deposits (e.g., interest and noninterest 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.

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Off-Balance Sheet Financial 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.

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

	At March 31, 2015
	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	$	3,102,112	$	3,102,112	$	—	$	3,102,112	$	—
Securities available for sale		6,786,628		6,786,628		—		6,786,628		—
Securities held to maturity		1,256,195		1,282,115		—		1,282,115		—
Loans, net of allowance for loan losses		97,905,539		99,737,000		—		—		99,737,000
Foreclosed assets		52,964		52,964		—		—		52,964
Bank-owned life insurance		2,065,535		2,065,535		—		2,065,535		—
Other equity securities		656,796		656,796		—		—		656,796
Financial instruments - liabilities:
Deposits	$	94,677,529	$	94,754,000	$	—	$	94,754,000	$	—
Federal Home Loan Bank advances		9,500,000		9,693,000		—		9,693,000		—
Financial instruments - off-balance sheet	$	—	$	—	$	—	$	—	$	—

	At December 31, 2014
	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	$	3,102,936	$	3,102,936	$	—	$	3,102,936	$	—
Securities available for sale		9,874,706		9,874,706		—		9,874,706		—
Securities held for sale		1,256,280		1,272,835		—		1,272,835		—
Loans, net of allowance for loan losses		89,984,513		91,718,000		—		—		91,718,000
Foreclosed assets		52,964		52,964		—		—		52,964
Bank-owned life insurance		2,051,646		2,051,646		—		2,051,646		—
Other equity securities		605,596		605,596		—		—		605,596
Financial instruments - liabilities:
Deposits	$	96,904,887	$	96,864,887	$	—	$	96,864,887	$	—
Federal Home Loan Bank advances		8,000,000		8,179,000		—		8,179,000		—
Financial instruments - off-balance sheet	$	—	$	—	$	—	$	—	$	—

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Note 7. Capital Requirements and Regulatory Matters

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.

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, tier I and common equity tier 1 capital to risk weighted assets, tier 1 leverage to average assets and tangible capital to tangible assets. Management believes, as of March 31, 2015, the Bank met all capital adequacy requirements to which it is subject.

As of October 2012, the most recent notification from the Bank’s regulators, the Bank was categorized 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 at March 31, 2015 and December 31, 2014 are presented in the table below:

	At March 31, 2015
	Actual					For Capital Adequacy Purposes					To be well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets	$	16,152,696		19.6	%	$	6,605,206		8.0	%	$	8,256,508		10.0	%
Tier 1 capital to risk-weighted assets		15,391,696		18.6	%		4,953,905		6.0	%		6,605,206		8.0	%
Common equity tier 1 capital to risk-weighted assets		15,391,696		18.6	%		3,715,428		4.5	%		5,366,730		6.5	%
Tier 1 leverage to average assets		15,391,696		13.0	%		4,735,037		4.0	%		5,918,796		5.0	%
Tangible capital to tangible assets		15,422,115		12.8	%		N/A		N/A			N/A		N/A

	At December 31, 2014
	Actual					For Capital Adequacy Purposes					To be well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets	$	11,049,639		14.8	%	$	5,968,618		8.0	%	$	7,460,773		10.0	%
Tier 1 capital to risk-weighted assets		10,327,639		13.8	%		2,984,309		4.0	%		4,476,464		6.0	%
Common equity tier 1 capital to risk-weighted assets		N/A		N/A			N/A		N/A			N/A		N/A
Tier 1 leverage to average assets		10,327,639		9.2	%		4,515,721		4.0	%		5,644,651		5.0	%
Tangible capital to tangible assets		10,337,815		8.9	%		1,738,590		1.5	%		N/A		N/A

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

	At March 31, 2015			At December 31, 2014
Consolidated GAAP equity	$	15,802,011		$	10,750,497
Consolidated equity in excess of Bank equity		(379,896	)		(412,682	)
Bank GAAP equity - Tangible capital		15,422,115			10,337,815
Less:
Accumulated other comprehensive income, net of tax		30,419			10,176
Disallowed deferred tax assets		—			—
Common equity tier 1 capital		15,391,696			10,327,639
Plus:
Additional tier 1 capital		—			—
Tier 1 capital		15,391,696			10,327,639
Plus:
Allowance for loan losses (1.25% of risk-weighted assets)		761,000			722,000
Total risk-based capital	$	16,152,696		$	11,049,639

Note 8. Earnings Per Share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period exclusive of unallocated employee stock ownership plan shares. Granted unvested restricted stock and stock options are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent they would have a dilutive effect if converted to common stock, computed by using the Treasury Stock method.

The calculation of net income per common share for the three months ended March 31, 2015 and 2014 are as follows:

	For the Three Months Ended March 31, 2015		For the Three Months Ended March 31, 2014
Net Income available to common shareholders	$	55,415	$	73,185
Weighted average number of shares used in:
Basic earnings per share		541,794		405,509
Adjustment for common share equivalents		14,928		13,092
Diluted earnings per share		556,722		418,601
Basic net income per common share	$	0.10	$	0.18
Diluted net income per common share	$	0.10	$	0.17

On March 26, 2015, the Company declared a 20% stock dividend payable on May 1, 2015 to stockholders of record on April 10, 2015. As a result, the earnings per share calculations for the periods presented have been revised to reflect the impact of the stock dividend.

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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, 2015 and December 31, 2014. 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. is a one-bank holding company for Carroll Community Bank. The Company is registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended. As such, the Company is subject to supervision and regulation by the Board of Governors of the Federal Reserve System. The Company began operating in 2011.

Our executive offices are located at 1321 Liberty Road, Sykesville, Maryland 21784. Our telephone number at this address is (410) 795-1900. Our website address iswww.carrollcobank.com. Information on this website should not be considered a part of this quarterly report.

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 1985 the Association was chartered as a federal mutual savings association and in 1988 the business name changed from Sykesville Building Association of Carroll County to Sykesville Federal Savings Association. In 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. Lastly, in 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. was a part.

Overview

Our business consists 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 our focus on commercial real estate loans and related products. In this regard we offer 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.

We offer a variety of deposit products, including savings accounts, certificates of deposit, money market accounts, business and retail noninterest and interest bearing checking accounts and individual retirement accounts. We have two full service branches with each providing a drive-through facility and automated teller machine, or ATM, for our customers’ convenience. In addition, we recently opened a loan production office in Bethesda, Maryland.

We have based our strategic plan on the foundation of enhancing stockholder value, growth in market share and operating profitability. Our goals include maintaining credit quality, using technology to expand market share and implementing extensions of core banking services.

Our results of our operation 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, noninterest income and noninterest expense. Our noninterest expense consists primarily of compensation and employee benefits, as well as data processing costs, office occupancy, deposit insurance and general administrative 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.

Although the U.S. economy has emerged from the severe recession that occurred in 2008 and 2009, economic growth has been slow and uneven and unemployment levels remain elevated. Recovery by many businesses has been impaired by lower consumer spending. A return to prolonged deteriorating economic conditions could significantly affect the markets in which

28

we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Further declines in sales volumes and increases in unemployment levels may result in higher than expected loan delinquencies, increases in our nonperforming and criticized classified assets and a decline in demand for our products and services. These events may cause us to incur losses and may adversely affect our financial condition and results of operations.

The following table summarizes the highlights of our financial performance for the three month period ended March 31, 2015 compared to the three month period ended March 31, 2014 (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)	2015			2014			$ Change			% Change
Net income	$	55		$	73		$	(18	)		-24.7	%
Basic earnings per share		0.10			0.18			(0.08	)		-44.4	%
Diluted earnings per share		0.10			0.17			(0.07	)		-41.2	%
Interest income		1,180			1,077			103			9.6	%
Interest expense		156			166			(10	)		-6.0	%
Net interest income		1,024			911			113			12.4	%
Noninterest income		44			48			(4	)		-8.3	%
Noninterest expense		956			864			92			10.6	%
Average Loans		92,301			84,473			7,828			9.3	%
Average Earning Assets		112,541			100,721			11,820			11.7	%
Average Interest-Bearing Liabilities		95,767			92,953			2,814			3.0	%
Return on average assets		0.19	%		0.28	%
Return on average equity		1.53	%		3.43	%
Net interest margin		3.69	%		3.67	%

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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,
	2015								2014
(Dollars in thousands)	Average Outstanding Balance			Interest		Yield / Rate			Average Outstanding Balance			Interest		Yield / Rate
Interest-earning assets:
Loans	$	92,301		$	1,111		4.88	%	$	84,473		$	1,011		4.85	%
Investment securities		9,166			49		2.17	%		11,644			55		1.92	%
Certificates of deposit		3,103			10		1.31	%		1,856			5		1.09	%
Interest-earning deposits		7,971			10		0.51	%		2,748			6		0.89	%
Total interest-earning assets		112,541			1,180		4.25	%		100,721			1,077		4.34	%
Noninterest-earning assets		5,835								6,281
Total assets	$	118,376							$	107,002
Interest-bearing liabilities:
Savings	$	31,362			16		0.21	%	$	32,930			22		0.27	%
Certificates of deposit		39,798			98		1.00	%		38,006			102		1.09	%
Money market		11,021			10		0.37	%		10,981			12		0.44	%
Interest-bearing checking		5,569			1		0.07	%		5,254			1		0.08	%
Total interest-bearing deposits		87,750			125		0.58	%		87,171			137		0.64	%
Federal Home Loan Bank advances		8,017			31		1.57	%		5,782			29		2.03	%
Total interest-bearing liabilities		95,767			156		0.66	%		92,953			166		0.73	%
Noninterest-bearing deposits		7,625								5,203
Noninterest-bearing liabilities		297								195
Total liabilities		103,689								98,351
Equity		14,687								8,651
Total liabilities and capital	$	118,376							$	107,002
Net interest income				$	1,024							$	911
Net interest rate spread (1)							3.59	%							3.61	%
Net interest-earning assets (2)	$	16,774							$	7,768
Net interest margin (3)							3.69	%							3.67	%
Average interest-earning assets to interest-bearing liabilities		117.51	%							108.36	%

⁽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 represent total interest-earning assets less total interest-bearing liabilities.

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

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Rate/Volume Analysis

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

	For the Three Months Ended March 31, 2015 vs 2014
	Increase (Decrease) Due to
(in thousands)	Volume			Rate			Rate/ Volume			Total Increase (Decrease)
Interest income from:
Loans	$	94		$	6		$	—		$	100
Investment securities		(12	)		8			(2	)		(6	)
Certificates of deposit		3			1			1			5
Interest-earning deposits		11			(2	)		(5	)		4
Total interest income (1)		126			(22	)		(1	)		103
Interest expense on:
Savings		(1	)		(5	)		—			(6	)
Certificates of deposit		5			(9	)		—			(4	)
Money market		—			(2	)		—			(2	)
Interest-bearing checking		—			—			—			—
Total interest-bearing deposits		1			(13	)		—			(12	)
Federal Home Loan Bank advances		11			(9	)		—			2
Total interest expense (1)		5			(15	)		—			(10	)
Change in net interest income	$	121		$	(7	)	$	(1	)	$	113

(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, 2015 and March 31, 2014

General. Net income decreased by $18,000 to $55,000 for the three months ended March 31, 2015 compared to $73,000 for the same period in 2014. The decrease in net income for the three month period is primarily attributable to the employee costs to expand our lending footprint into the Washington Metropolitan area and Howard County and the impact of loan loss provisions recorded for $11.1 million in loan originations during the three months ended March 31, 2015.

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 $114,000, or 12.5%, during the three months ended March 31, 2015 compared to the same period in 2014, as a result of an increase in average earning assets of $11.8 million, or 11.7%, and the decline in interest expense. Our net interest rate spread decreased slightly to 3.59% for the three months ended March 31, 2015 compared to 3.61% for the three months ended March 31, 2014.

Interest Income. Interest income increased slightly to $1.2 million for the three months ended March 31, 2015 compared to $1.1 million for the three months ended March 31, 2014. Almost all of the increase was attributable to loan interest income resulting from the $7.8 million, or 9.3%, increase in average loan balances during the three months ended March 31, 2015 compared to the same period last year.

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Interest Expense. Interest expense decreased by $10,000, or 6.0%, to $156,000 for the three months ended March 31, 2015 compared to $166,000 for the three months ended March 31, 2014. This decrease was almost entirely attributable to a decline in interest expense on interest-bearing deposits as the average rate paid on interest-bearing deposits dropped by 6 basis points, or 9.4%. The drop in average rates was attributable to the decline of interest rates on certificates of deposit, money market deposits and savings deposits. The continued historically low level of market interest rates enabled us to renew maturing certificates of deposits at significantly lower interest rates and to lower the rates on our non-maturing interest bearing deposits over the last 12 months.

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 increased to $29,000 for the three months ended March 31, 2015 compared to a negative loan loss provision of $2,000 for the three months ended March 31, 2014. The increase in the provision for loan losses was due to an increase in loan balances of $7.9 million during the three months ended March 31, 2015 compared to loan balances remaining flat during the three months ended March 31, 2014. In addition, we collected $10,000 in loan loss recoveries during the three months ended March 31, 2015 compared to $2,000 for the same period last year.

The allowance for loan losses represented 0.77% of gross loans at March 31, 2015, 0.80% at December 31, 2014 and 0.81% of gross loans at March 31, 2014.

Management believes, to the best of their knowledge, that all known losses as of March 31, 2015 have been recorded and 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.

Noninterest Income. Noninterest income was $44,000 for the three months ended March 31, 2015 compared to $48,000 for the same period in 2014. The $4,000 decrease in noninterest income was attributable to various items. During the three months ended March 31, 2014, a $14,000 loss was recognized on the sale of OREO properties of which there were none during the three months ended March 31, 2015. This item was mostly offset by a decline in securities gains of $11,000, a decline in overdraft fees of $4,000 and a decline in loan fees of $2,000, primarily loan processing fees, for the three months ended March 31, 2015 compared to the three months ended March 31, 2014.

Noninterest Expenses. Noninterest expenses increased by $92,000, or 10.7%, to $956,000 for the three months ended March 31, 2015 compared to $864,000 during the same period in 2014. The increase was primarily due to a $101,000, or 22.6%, increase in salaries and employee benefits due to higher staffing levels relating to the expansion of our lending area and merit salary increases along with the increase in the 401K employer match resulting from the increase in the match percentage with the conversion of our 401K plan to a safe harbor plan starting in 2015. In addition, directors fees increased by $14,000, or 35.4%, due primarily to the increase in the number of directors. These items were partially offset by a decrease of $18,000, or 22.2%, in other operating expenses due to a decline in advertising expenditures and personnel costs along with a decrease in professional fees of $7,000, or 9.3%, due to the collection of legal fees incurred on loan workouts in 2015 partially offset by the increase in consulting fees relating to compliance projects.

Income Tax Expense. Income tax expense amounted to $28,000 and $23,000, respectively, for the three months ended March 31, 2015 and 2014, resulting in effective tax rates of 33.3% and 23.7%, respectively. Our effective tax rate is influenced by the relation of tax exempt income from bank owned life insurance relative to pre-tax income.

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Comparison of Financial Condition at March 31, 2015 and December 31, 2014.

Assets. Total assets increased by $4.3 million, or 3.7%, to $120.2 million at March 31, 2015 compared to $115.9 million at December 31, 2014, primarily due to the increase in capital resulting from the private placement offering of our common stock that closed in January 2015. These funds were temporarily placed in interest-bearing deposits with depository institutions until needed for loan originations of which we originated $11.1 million during the three months ended March 31, 2015.

Loans. Net loans increased by $7.9 million to $97.9 million at March 31, 2015 compared to $90.0 million at December 31, 2014. New loan originations of $11.1 million during the three month period ending March 31, 2015 were offset by loan payoffs of $1.5 million and scheduled principal repayments of $1.7 million.

Nonperforming Loans and Assets. Our nonperforming loans and assets were $146,000 and $199,000, respectively, at March 31, 2015 compared to $479,000 and $532,000, respectively, at December 31, 2014. The ratio of nonperforming loans to total loans was 0.15% at March 31, 2015 compared to 0.53% at December 31, 2014. In addition, our ratio of nonperforming assets to total assets was 0.17% at March 31, 2015 compared to 0.46% at December 31, 2014.

Deposits. Deposits decreased by $2.2 million, or 2.3%, to $94.7 million at March 31, 2015 from $96.9 million at December 31, 2014. The decrease is due to $2.9 million in funds being held in escrow for the private placement offering at December 31, 2014. Those funds were transferred to capital in January 2015 along with additional funds collected in January as part of the closing of the offering. We continue to focus our efforts on improving our funding mix and increasing core deposits. Ignoring the impact of the offering escrow, noninterest and interest bearing checking deposits would have increased by $773,000, or 6.4%, compared to December 31, 2014.

Stockholders’ Equity. Stockholders’ equity increased by $5.1 million, or 47.0%, to $15.8 million at March 31, 2015 from $10.8 million at December 31, 2014. The increase was a result of our private placement offering that closed on January 23, 2015. Gross proceeds from the offering were approximately $5.1 million before expenses.

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, 2015.

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, 2015, 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, 2015, we had $6.7 million in loan origination commitments outstanding and $8.2 million in unused available lines of credit. Certificates of deposit due within one year of March 31, 2015 totaled $16.6 million, or 17.5% 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, acquiring brokered deposits, Federal Home Loan Bank advances and draws on our short-term lines of credit with correspondent banks. Depending on market conditions, we may be required to pay higher rates on our deposits or other borrowings than we currently pay on the certificates of deposit due on or before March 31, 2015. 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, 2015.

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Our primary investing activity is originating loans. During the three months ended March 31, 2015, we originated $11.1 million in loans.

Financing activities consist primarily of activity in deposit accounts. We experienced a net decrease in deposits during the three months ended March 31, 2015 of $2.2 million, or 2.3%. The decrease is due to $2.9 million in funds being held in escrow for the private placement offering at December 31, 2014. Those funds were transferred to capital in January 2015 along with additional funds collected in January as part of the closing of the offering. 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 totaled $9.5 million at March 31, 2015 and we had the ability to borrow up to an additional $13.7 million from the Federal Home Loan Bank of Atlanta and $10.5 million from correspondent banks under short-term line of credit agreements. In addition, our Board of Directors has approved the use of brokered deposits, up to 15% of total deposits, as a funding source. At March 31, 2015, we had $4.9 million in brokered CDs and the ability to acquire up to $9.1 million in additional brokered deposits.

Carroll Bancorp, Inc. 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 ESOP 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, 2015, 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 our consolidated financial statements.

Outstanding loan commitments and available lines of credit at March 31, 2015 and December 31, 2014 are as follows:

(in thousands)	At March 31, 2015		At December 31, 2014
Commitments to extend credit:
Consumer loans	$	—	$	450
Commercial loans		6,680		4,806
		6,680		5,256
Commitments under available lines of credit:
Consumer loans		4,129		4,308
Commercial loans		4,134		1,883
		8,263		6,191
Total Commitments	$	14,943	$	11,447

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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, 2015 or December 31, 2014 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 GAAP. 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, 2015, 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, 2014.

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

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

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

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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 about our business plans, prospects, goals and operating strategies; particularly with respect to (i) continuing our focus on commercial real estate lending and related products, (ii) increasing core deposits and improving our funding mix, and (iii) retention of maturing certificates of deposit;

• 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 recorded and expected changes in the allowance; and

• statement regarding the impact of any 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.

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.

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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, 2015.

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, 2015, that have materially affected or are reasonably likely to materially affect, the internal control over financial reporting.

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, 2014.

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

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

31.1	Rule 13a-14(a) Certification by the Principal Executive Officer
31.2	Rule 13a-14(a) Certification by the Principal Financial Officer
32.1	Certification by the Principal Executive Officer of the periodic financial reports, required by Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification by the Principal Financial Officer of the periodic financial reports, required by Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

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SIGNATURES

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

		CARROLL BANCORP, INC.
Date: May 11, 2015	By:	/s/ Russell J. Grimes
		Russell J. Grimes
	President, Chief Executive Officer and Director
	(Principal Executive Officer)
Date: May 11, 2015	By:	/s/ Michael J. Gallina
		Michael J. Gallina
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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