Bay Bancorp 10Q 2015 Q1 Quarterly report

United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2015

☐ 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 0-23090

BAY BANCORP, INC.

(Exact name of registrant as specified in its charter)


MARYLAND		52-1660951
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

2328 West Joppa Road, Suite 325, Lutherville, Maryland 21093

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (410) 494-2580

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Name of Each Exchange on Which Registered:
Common Stock, par value $1.00 per shareNASDAQ	NASDAQ Capital Market

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 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 ☑ 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 (§232.405 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 ☑ 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 definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (check one): Large accelerated filer ☐Accelerated filer ☐ Non-accelerated filer ☐Smaller reporting company ☑

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: At May 14, 2015, the number of shares outstanding of the registrant’s common stock was 11,014,517.

BAY BANCORP, INC.

TABLE OF CONTENTS



PART I.	FINANCIAL INFORMATION	PAGE

Item 1.	Financial Statements
	Consolidated Balance Sheets at March 31, 2015 (unaudited) and December 31, 2014	3
	Consolidated Statements of Income for the Three Months Ended March 31, 2015 and 2014 (unaudited)	4
	Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2015 and 2014 (unaudited)	5
	Consolidated Statements of 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) (unaudited)	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	52
Item 4.	Controls and Procedures	52

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults Upon Senior Securities	52
Item 4.	Mine Safety Disclosures	52
Item 5.	Other Information	52
Item 6.	Exhibits	53

BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS



	March 31,
	2015		December 31,
	(unaudited)			2014

ASSETS

Cash and due from banks	$	6,335,049	$	7,062,943
Interest bearing deposits with banks and federal funds sold		17,250,151		9,794,382
Total Cash and Cash Equivalents		23,585,200		16,857,325

Time deposits with banks		-		34,849
Investment securities available for sale, at fair value		32,890,719		35,349,889
Investment securities held to maturity, at amortized cost		1,296,793		1,315,718
Restricted equity securities, at cost		1,291,095		1,862,995
Loans held for sale		12,494,787		7,233,306

Loans, net of deferred fees and costs		391,537,271		393,051,192
Less: Allowance for loan losses		(1,353,849)		(1,294,976)
Loans, net		390,183,422		391,756,216

Real estate acquired through foreclosure		1,501,135		1,480,472
Premises and equipment, net		5,398,901		5,553,957
Bank owned life insurance		5,516,549		5,485,377
Core deposit intangible		3,223,737		3,478,282
Deferred tax assets, net		4,117,563		3,214,100
Accrued interest receivable		1,300,297		1,306,111
Prepaid expenses		996,363		925,288
Accrued taxes receivable		2,819,468		3,122,885
Defined benefit pension asset		-		680,668
Other assets		414,631		285,547
Total Assets	$	487,030,660	$	479,942,985

LIABILITIES

Noninterest-bearing deposits	$	101,629,926	$	91,676,534
Interest-bearing deposits		302,674,673		296,153,598
Total Deposits		404,304,599		387,830,132

Short-term borrowings		12,150,000		22,150,000
Defined benefit pension liability		1,731,102		-
Accrued expenses and other liabilities		3,194,319		3,319,568
Total Liabilities		421,380,020		413,299,700

STOCKHOLDERS’ EQUITY
Common stock - par $1.00 per share, authorized 20,000,000 shares, issued and outstanding 11,014,517 shares as of March 31, 2015 and December 31, 2014		11,014,517		11,014,517
Additional paid-in capital		43,274,558		43,228,950
Retained earnings		11,079,558		10,736,305
Accumulated other comprehensive income		282,007		1,663,514
Total Stockholders' Equity		65,650,640		66,643,286
Total Liabilities and Stockholders' Equity	$	487,030,660	$	479,942,986

See accompanying notes to unaudited consolidated financial statements

BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)



	Three Months Ended March 31,
		2015		2014

Interest income:
Interest and fees on loans	$	5,507,767	$	5,140,386
Interest on loans held for sale		61,511		85,801
Interest and dividends on securities		257,436		247,349
Interest on deposits with banks and federal funds sold		10,612		13,368
Total Interest Income		5,837,326		5,486,904

Interest expense:
Interest on deposits		484,401		309,059
Interest on short-term borrowings		13,776		-
Total Interest Expense		498,177		309,059
Net Interest Income		5,339,149		5,177,845

Provision for loan losses		275,109		219,165
Net interest income after provision for loan losses		5,064,040		4,958,680

Noninterest income:
Electronic banking fees		576,190		639,994
Mortgage banking fees and gains		393,642		312,675
(Loss) gain on sale of real estate acquired through foreclosure		(628)		1,829
Service charges on deposit accounts		79,017		92,513
Gain on redemption of securities		77,490		-
Other income		111,509		206,361
Total Noninterest Income		1,237,220		1,253,372

Noninterest Expenses:
Salary and employee benefits		2,919,119		3,365,432
Occupancy expenses		719,832		749,279
Furniture and equipment expenses		275,401		312,129
Legal, accounting and other professional fees		368,028		394,120
Data processing and item processing services		342,673		275,150
FDIC insurance costs		106,311		67,709
Advertising and marketing related expenses		28,749		39,405
Foreclosed property expenses		60,363		199,363
Loan collection costs		87,510		47,179
Core deposit intangible amortization		254,545		274,295
Merger and acquisition related expenses		-		111,323
Other expenses		537,353		504,289
Total Noninterest Expenses		5,699,884		6,339,673
Income (loss) income before income taxes		601,376		(127,621)

Income tax expense (benefit)		258,123		(209,356)
Net income	$	343,253	$	81,735

Basic net income per common share	$	0.03	$	0.01

Diluted net income per common share	$	0.03	$	0.01

See accompanying notes to unaudited consolidated financial statements

BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(unaudited)



	Three Months Ended March 31,
		2015		2014

Net income	$	343,253	$	81,735

Other comprehensive income (loss) items:
		-
Unrealized gain on investment securities available for sale		153,982		171,843
Unrealized loss on defined benefit pension plan		(1,535,489)		-
Other comprehensive (loss) income		(1,381,507)		171,843
Comprehensive (loss) income	$	(1,038,254)	$	253,578

See accompanying notes to unaudited consolidated financial statements

BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2015 and 2014 (unaudited)



								Accumulated
				Additional				Other
		Common		Paid-in		Retained		Comprehensive
		Stock		Capital		Earnings		Income		Total
Balance December 31, 2013	$	9,379,753	$	36,357,001	$	7,703,597	$	1,113,917	$	54,554,268

Net income		-		-		81,735		-		81,735
Other comprehensive income		-		-		-		171,843		171,843
Stock-based compensation		-		140,448		-		-		140,448
Balance March 31, 2014	$	9,379,753	$	36,497,449	$	7,785,332	$	1,285,760	$	54,948,294


								Accumulated
				Additional				Other
		Common		Paid-in		Retained		Comprehensive
		Stock		Capital		Earnings		Income		Total

Balance December 31, 2014	$	11,014,517	$	43,228,950	$	10,736,305	$	1,663,514	$	66,643,286

Net income		-		-		343,253		-		343,253
Other comprehensive loss		-		-		-		(1,381,507)		(1,381,507)
Stock-based compensation		-		45,608		-		-		45,608
Balance March 31, 2015	$	11,014,517	$	43,274,558	$	11,079,558	$	282,007	$	65,650,640

See accompanying notes to unaudited consolidated financial statements

BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



	Three Months Ended March 31,
		2015		2014

Cash flows from operating activities:
Net income	$	343,253	$	81,735
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization of premises and equipment		177,415		263,497
Stock-based compensation		45,608		140,448
Amortization of investment premiums and discounts, net		50,085		61,180
Accretion of net discounts on loans		(959,917)		(1,368,717)
Amortization of core deposit intangibles		254,545		274,295
Amortization of deposit premiums		14,811		(336,255)
Provision for loan losses		275,109		219,165
Increase in cash surrender value of bank owned life insurance		(31,172)		(32,323)
Gain on redemption of securities		(77,490)		-
Loss on sale of premises and equipment		-		4,431
Write down of real estate acquired through foreclosure		20,247		151,450
Net loss (gain) on sale of real estate acquired through foreclosure		628		(1,829)
Origination of loans held for sale		(27,217,821)		(19,281,168)
Proceeds from sales of loans held for sale		22,756,607		26,344,739
Gains on sales of loans held for sale		(800,267)		(312,675)
Deferred income taxes		-		1,087,720
Net decrease in accrued interest receivable		5,814		-
Net decrease in accrued taxes receivable		303,417		-
Net decrease in defined benefit pension plan liability		(123,924)		(42,361)
Net increase in prepaid expenses and other assets		(200,159)		(1,546,733)
Net decrease in accrued expenses and other liabilities		(119,620)		(791,923)
Net cash (used in) provided by operating activities		(5,282,831)		4,914,676

Cash flows from investing activities:
Net decrease in time deposits with banks		34,849		-
Redemptions and maturities of investment securities available for sale securities		2,729,999		768,965
Redemptions and maturities of investment securities held to maturity		20,597		-
Redemption of restricted equity securities		571,900		218,500
Net decrease in loans		2,126,692		10,626,895
Proceeds from sale of real estate acquired through foreclosure		89,372		36,929
Purchases of premises and equipment		(22,359)		(79,812)
Proceeds from sale of premises and equipment		-		38,749
Net cash provided by investing activities		5,551,050		11,610,226

Cash flows from financing activities:
Net increase in deposits		16,459,656		11,280,207
Net decrease in short-term borrowings		(10,000,000)		-
Net cash provided by financing activities		6,459,656		11,280,207

Net increase in cash and cash equivalents		6,727,875		27,805,109
Cash and cash equivalents at beginning of period		16,857,325		23,273,060
Cash and cash equivalents at end of period	$	23,585,200	$	51,078,169


Supplemental Disclosures of Cash Flow information:
Interest paid on deposits and borrowings	$	498,363	$	645,222
Income taxes paid		-		833,943

Non Cash activities:
Transfer of loans to real estate acquired through foreclosure	$	130,910	$	425,764
Transfer of loans held for sale to loan portfolio		-		1,101,700

See accompanying notes to unaudited consolidated financial statements

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATIONAL

Nature of Business

Bay Bancorp, Inc. is a savings and loan holding company. Through its subsidiary, Bay Bank, FSB, (the “Bank”), a federal savings bank (an “FSB”), Bay Bancorp, Inc. serves the community with a network of 11 branches strategically located throughout the Baltimore Metropolitan Statistical Area, particularly Baltimore City and the Maryland counties of Baltimore, Anne Arundel, Howard, and Harford. The Bank serves local consumers, small and medium size businesses, professionals and other valued customers by offering a broad suite of financial products and services, including on-line and mobile banking, commercial banking, cash management, mortgage lending and retail banking. The Bank funds a variety of loan types including commercial and residential real estate loans, commercial term loans and lines of credit, consumer loans and letters of credit. The Bank’s subsidiary, Bay Financial Services, Inc., provides investment advisory and brokerage services.

As used in these notes, the term “the Company” refers to Bay Bancorp, Inc. and, unless the context clearly requires otherwise, its consolidated subsidiaries.

In April 2014, the Bank announced its exit from the Individual Retirement Account (“IRA”) product line. At that time, as a result of the announcement, the Bank stopped offering IRAs to new customers and resigned as custodian for its existing IRAs. IRA deposit balances of $24 million or 6% of total deposits were either transferred to new IRA custodians or disbursed to customers by May 23, 2014.

NOTE 2 – BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Bay Bancorp, Inc., the Bank and the Bank’s consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The investment in subsidiary is recorded on Bay’s books on the basis of its equity in the net assets.

In management’s opinion, the accompanying unaudited consolidated financial statements, which have been prepared in conformity with U.S. GAAP for interim period reporting, reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial positions at March 31, 2015 and December 31, 2014, the results of operations for the three months ended March 31, 2015 and 2014, and the statements of cash flows for the three months ended March 31, 2015 and 2014. The results of the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2015 or any future interim period. The unaudited consolidated financial statements and accompanying notes should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in the Company’s Annual Report on 10-K for the year ended December 31, 2014.

Use of Estimates

The preparation of financial statements 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses (the “allowance”); the fair value of financial instruments, such as loans, investment securities, and derivatives; measurement and assessment of intangible assets and other purchase accounting related adjustments; benefit plan obligations and expenses; the valuation of deferred tax assets; real estate acquired through foreclosure; and the estimate of expected cash flows for loans acquired with deteriorated credit quality.

Recent Accounting Pronouncements and Developments

In January 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-04, Receivables-Troubled Debt Restructuring by Creditors (Subtopic 310-40), clarifying that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the guidance requires interim and annual disclosure of the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amended guidance is effective for fiscal years, and interim periods within those years,

beginning after December 15, 2014. The amendments in this update became effective for interim and annual periods beginning after December 15, 2014 and did not have an impact on the consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the ASC. The amendments in this update affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts, including leases and insurance contracts, are within the scope of other standards. The amendments establish a core principle requiring the recognition of revenue to depict the transfer of goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services. The amendments also require expanded disclosures concerning the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. For public entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and must be applied retrospectively. Early application is not permitted. Management is currently evaluating the impact of adoption.

In June 2014, the FASB issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The new guidance aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. The guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting. The amendments in the ASU require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. The amendments in the ASU also require expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The amendments in this ASU are effective for public companies for the first interim or annual period beginning after December 15, 2014. In addition, for public companies, the disclosure for certain transactions accounted for as a sale is effective for the first interim or annual reporting periods beginning on or after December 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required to be presented for annual reporting periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. As of December 31, 2014 and March 31, 2015, all of the Company's repurchase agreements were typical in nature (i.e., not repurchase-to-maturity transactions or repurchase agreements executed as a repurchase financing) and are accounted for as secured borrowings. As such, the amendments in this update did not have an impact on the consolidated financial statements and no change to the current disclosure was required.

In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in ASC Topic 718, Compensation - Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. However, compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The amendments in this ASU are effective for interim or annual reporting periods beginning after December 15, 2015; early adoption is permitted. Entities may apply the amendments in this ASU either: (1) prospectively to all awards granted or modified after the effective date; or (2) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. As of March 31, 2015, the Company did not have any share-based payment awards that included performance targets that could be achieved after the requisite service period. As such, the adoption of ASU No. 2014-12 is not expected to 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 or 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 estate 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 measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. ASU No. 2014-14 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-14 did not have an impact on the Company's consolidated financial statements.

NOTE 3 – BUSINESS COMBINATIONS

The Company has accounted for the Slavie Acquisition under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations, whereby the acquired net assets and assumed liabilities were recorded by the Company at their estimated fair values as of their acquisition dates. Fair value estimates were based on management’s assessment of the best information available as of the acquisition dates.

In accordance with the framework established by ASC Topic 820,” Fair Value Measurements and Disclosure,” the Company used a fair value hierarchy to prioritize the information used to develop assumptions to calculate estimates in determining fair values. These fair value hierarchies are discussed in Note 15.

Slavie Acquisition

On May 30, 2014, the Bank acquired certain assets and assumed substantially all deposits and certain other liabilities (the “Slavie Acquisition”) of Slavie Federal Savings Bank (“Slavie”), which was closed on May 30, 2014 by the Office of the Comptroller of the Currency (the “OCC”). The Slavie Acquisition was completed in accordance with the terms of the Purchase and Assumption Agreement All Deposits, with the Federal Deposit Insurance Corporation (the “FDIC”). The Bank did not acquire any of Slavie’s other real estate owned. Additionally, the Bank did not at closing commit to purchase any owned or leased bank premises of Slavie; however, the Bank was granted an option to elect following closing to purchase any or all of the banking premises owned by Slavie, or, in the case of leased banking premises, to assume the lease. The Bank terminated the lease for Slavie’s Bel Air location in October 2014 and extended its current lease at the Overlea branch.

The following table presents the allocation of the consideration received to the acquired assets and assumed liabilities in the Slavie Acquisition as of the acquisition date. The allocation resulted in an after-tax bargain purchase gain of $317,544 recorded in 2014.



Assets acquired at fair value:

	Cash and Cash Equivalents		$ 30,341,150
	Time deposits with banks		1,546,718
	Investment securities available for sale, at fair value		197,311
	Restricted equity securities, at cost		1,253,600
	Loans, net of deferred fees and costs		82,914,607
	Accrued interest receivable		347,772
	Core deposit intangible		477,563
		Total assets acquired	$ 117,078,721

Liabilities assumed at fair value:
	Deposits		$ 110,833,046
	Accrued expenses and other liabilities		3,266
		Total liabilities assumed	$ 110,836,312

Net assets acquired at fair value:				$ 6,242,409

Transaction cash consideration paid				(5,717,977)

Total estimated bargain purchase gain, before tax				524,432
Tax expense				(206,888)
Total estimated bargain purchase gain, after tax				$ 317,544

In many cases, determining the fair value of the acquired assets and assumed liabilities requires the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of these determinations related to the valuation of acquired loans.

The following is a summary of the loans acquired in the Slavie Acquisition:

		Purchased Credit Impaired Loans		Purchased Non-Impaired Loans		Total Purchased Loans
Contractually required principal and interest at acquisition	$	26,970,809	$	68,701,805	$	95,672,614
Contractual cash flows not expected to be collected		(7,018,601)		(3,983,263)		(11,001,864)
Expected cash flows at acquisition		19,952,208		64,718,542		84,670,750
Interest component of expected cash flows		(1,114,951)		(641,192)		(1,756,143)
Basis in purchased loans at acquisition - estimated fair value	$	18,837,257	$	64,077,350	$	82,914,607

In connection with the Slavie Acquisition, the Company incurred acquisition and merger related expenses. These expenses were primarily related to professional services, system conversions and integration of operations, termination of existing contractual arrangements to purchase various services, initial marketing and promotion expenses designed to introduce the Bank to the former Slavie Bank customers, and other costs of completing the transaction. For the three months ended March 31, 2015 and 2014, there were $0 and $111,323, respectively, merger and acquisition related costs incurred. These expenses were primarily related to professional services, and system conversions and integration of operations.

Pro Forma Condensed Combined Financial Information

The following pro forma information combines the historical results of Slavie and pre-Slavie Acquisition Bay Bancorp, Inc. The pro forma financial information does not include the potential impacts of possible business model changes, current market conditions, revenue enhancements, expense efficiencies, or other factors. The pro forma results exclude the impact of the bargain purchase gain of $524,432 and Slavie Acquisition-related expenses of $909,471. While adjustments were made for the estimated impact of certain fair value adjustments, the following results are not indicative of what would have occurred had the Slavie Acquisition taken place on indicated dates.

If the Slavie Acquisition had been completed on January 1, 2014, total revenue would have been approximately $7.6 million for the three month period ended March 31, 2014. Net loss would have been approximately $0.1 million for the same period. Basic and diluted earnings per share would have been ($0.01) for the period ended March 31, 2014.

The disclosure of Slavie’s post-Slavie Acquisition total revenue, net of interest expense, and net income is not practicable due to the integration of operations shortly after the Slavie Acquisition.

NOTE 4 – INVESTMENT SECURITIES

Investment securities are accounted for according to their purpose and holding period. Trading securities are those that are bought and held principally for the purpose of selling them in the near term. The Company held no trading securities as of March 31, 2015 or December 31, 2014. Available-for-sale investment securities, comprised of debt and mortgage-backed securities, are those that may be sold before maturity due to changes in the Company's interest rate risk profile or funding needs, and are reported at fair value with unrealized gains and losses, net of taxes, reported as a component of other comprehensive income. Held-to-maturity investment securities, comprised of debt and mortgage-backed securities, are those that management has the positive intent and ability to hold to maturity and are reported at amortized cost.

Realized gains and losses are recorded in noninterest income and are determined on a trade date basis using the specific identification method. Interest and dividends on investment securities are recognized in interest income on an accrual basis. Premiums and discounts are amortized or accreted into interest income using the interest method over the expected lives of the individual securities.

At March 31, 2015 and December 31, 2014, the amortized cost and estimated fair value of the Company’s investment securities portfolio are summarized as follows:


		Amortized		Gross Unrealized				Estimated
Available for Sale		cost		Gains		Losses		Fair Value
March 31, 2015

U.S. government agency	$	5,631,873	$	254,425	$	(67,357)	$	5,818,941
Residential mortgage-backed securities		19,940,775		474,965		(41,926)		20,373,814
State and municipal		4,607,804		31,685		(193)		4,639,296
Corporate bonds		2,037,573		-		(1,373)		2,036,200
Total debt securities		32,218,025		761,075		(110,849)		32,868,251
Equity securities		78,752		-		(56,284)		22,468
Totals	$	32,296,777	$	761,075	$	(167,133)	$	32,890,719

		Amortized		Gross Unrealized				Estimated
Held-to-Maturity		cost		Gains		Losses		Fair Value
March 31, 2015

Residential mortgage-backed securities	$	1,296,793	$	30,034	$	-	$	1,326,827

		Amortized		Gross Unrealized				Estimated
Available for Sale		cost		Gains		Losses		Fair Value
December 31, 2014

U.S. government agency	$	7,561,238	$	217,033	$	-	$	7,778,271
Residential mortgage-backed securities		20,679,345		399,198		(207,616)		20,870,927
State and municipal		4,639,988		17,779		(3,621)		4,654,146
Corporate bonds		2,041,718		-		(11,718)		2,030,000
Total debt securities		34,922,289		634,010		(222,955)		35,333,344
Equity securities		78,754		-		(62,209)		16,545
Totals	$	35,001,043	$	634,010	$	(285,164)	$	35,349,889

		Amortized		Gross Unrealized				Estimated
Held-to-Maturity		cost		Gains		Losses		Fair Value
December 31, 2014

Residential mortgage-backed securities	$	1,315,718	$	9,079	$	-	$	1,324,797

As of March 31, 2015 securities with unrealized losses segregated by length of impairment were as follows:



		Less than 12 months				12 months or longer				Total
Available for Sale		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
March 31, 2015		Value		Losses		Value		Losses		Value		Losses
U.S. government agency	$	824,529	$	(3,286)	$	1,953,418	$	(64,071)	$	2,777,947	$	(67,357)
Residential mortgage-backed securities		71,589		(58)		2,989,226		(41,868)		3,060,815		(41,926)
State and municipals		274,258		(193)		-		-		274,258		(193)
Corporate		2,036,200		(1,373)		-		-		2,036,200		(1,373)
Total debt securities		3,206,576		(4,910)		4,942,644		(105,939)		8,149,220		(110,849)
Equity securities		-		-		22,468		(56,284)		22,468		(56,284)
Totals	$	3,206,576	$	(4,910)	$	4,965,112	$	(162,223)	$	8,171,688	$	(167,133)

As of December 31, 2014, securities with unrealized losses segregated by length of impairment were as follows:


		Less than 12 months				12 months or longer				Total
Available for Sale		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2014		Value		Losses		Value		Losses		Value		Losses
U.S. government agency	$	-	$	-	$	-	$	-	$	-	$	-
Residential mortgage-backed securities		791		(3)		6,901,324		(207,613)		6,902,115		(207,616)
State and municipals		757,939		(3,621)						757,939		(3,621)
Corporate		2,030,000		(11,718)		-		-		2,030,000		(11,718)

Total debt securities		2,788,730		(15,342)		6,901,324		(207,613)		9,690,054		(222,955)
Equity securities		-		-		16,545		(62,209)		16,545		(62,209)
Totals	$	2,788,730	$	(15,342)	$	6,917,869	$	(269,822)	$	9,706,599	$	(285,164)

At March 31, 2015, unrealized losses in the Company’s portfolio of debt securities of $110,849 in the aggregate were related to 10 securities and caused by increases in market interest rates, spread volatility, or other factors that management deems to be temporary. Since management believes that it is more likely than not that the Company will not be required to sell these securities prior to maturity or a full recovery of the amortized cost, the Company does not consider these securities to be other-than-temporarily impaired.

At March 31, 2015, unrealized losses in the Company’s portfolio of equity securities of $56,284 were related to one security and considered temporary. Since management believes that it is more likely than not the Company will not be required to sell these equity positions for a reasonable period of time sufficient for recovery of fair value, the Company does not consider these equity securities to be other-than-temporarily impaired.

At December 31, 2014, unrealized losses in the Company’s portfolio of debt securities of $222,955 in the aggregate were related to 11 securities and caused by increases in market interest rates, spread volatility, or other factors that management deems to be temporary. Since management believes that it is more likely than not that the Company will not be required to sell these securities prior to maturity or a full recovery of the amortized cost, the Company does not consider these securities to be other-than-temporarily impaired.

At December 31, 2014, unrealized losses in the Company’s portfolio of equity securities of $62,209 were related to one security and considered temporary. Since management believes that it is more likely than not the Company will not be required to sell these equity positions for a reasonable period of time sufficient for recovery of fair value, the Company does not consider these equity securities to be other-than-temporarily impaired.

The outstanding balance of no single issuer, except for U.S. Agency securities, exceeded 10% of stockholders’ equity at March 31, 2015 or December 31, 2014.

No investment securities held by the Company as of March 31, 2015 or December 31, 2014 were subject to a write-down due to credit related other-than-temporary impairment.

Contractual maturities of debt securities at March 31, 2015 are shown below. Actual maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.



	Available for Sale				Held-to-Maturity
		Amortized		Fair		Amortized		Fair
		Cost		Value		Cost		Value
Within one year	$	642,004	$	645,929	$	-	$	-
Over one to five years		7,056,493		7,177,711		-		-
Over five to ten years		4,578,753		4,670,797		-		-
Over ten years		-		-		-		-
Residential mortgage-backed securities		19,940,775		20,373,814		1,296,793		1,326,827
Totals	$	32,218,025	$	32,868,251	$	1,296,793	$	1,326,827

The Company’s residential mortgage-backed securities portfolio is presented as a separate line within the maturity table, since borrowers have the right to prepay obligations without prepayment penalties.

At March 31, 2015, securities with an amortized cost of $17,852,948 (fair value of $18,346,909) were pledged as collateral for potential borrowings from the Federal Home Loan Bank of Atlanta (the “FHLB”) and the Federal Reserve Bank. At December 31, 2014, securities with an amortized cost of $20,035,812 (fair value of $20,358,237) were pledged as collateral for potential borrowings from the FHLB of Atlanta and the Federal Reserve Bank.

NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES

The fundamental lending business of the Company is based on understanding, measuring, and controlling the credit risk inherent in the loan portfolio. The Company's loan portfolio is subject to varying degrees of credit risk. These risks entail both general risks, which are inherent in the lending process, and risks specific to individual borrowers. The Company's credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry or collateral type. The loan portfolio segment balances are presented in the following table:



		March 31,		December 31,
		2015		2014
Commercial & Industrial	$	34,344,251	$	33,454,280
Commercial Real Estate		161,297,228		158,714,554
Residential Real Estate		137,425,527		140,374,035
Home Equity Line of Credit		34,131,499		35,717,982
Land		4,926,857		5,856,875
Construction		18,334,435		18,052,287
Consumer & Other		1,077,474		881,179
Total Loans		391,537,271		393,051,192
Less: Allowance for Loan Losses		(1,353,849)		(1,294,976)
Net Loans	$	390,183,422	$	391,756,216

At March 31, 2015 and December 31, 2014, loans not considered to have deteriorated credit quality at acquisition had a total remaining unamortized discount of $5,344,505 and $5,281,192, respectively.

Portfolio Segments:

The Company currently manages its credit products and the respective exposure to loan losses by the following specific portfolio segments, which are levels at which the Company develops and documents its systematic methodology to determine the allowance for loan losses. The Company considers each loan type to be a portfolio segment having unique risk characteristics.

Commercial & Industrial

Commercial & Industrial (“C&I”) loans are made to provide funds for equipment and general corporate needs. Repayment of these loans primarily uses the funds obtained from the operation of the borrower's business. C&I loans also include lines of credit that are utilized to finance a borrower's short-term credit needs and/or to finance a percentage of eligible receivables or inventory. Of primary concern in C&I lending is the borrower's creditworthiness and ability to successfully generate sufficient cash flow from their business to service the debt.

Commercial Real Estate

Commercial Real Estate loans are bifurcated into Investor and Owner Occupied types (classes). Commercial Real Estate - Investor loans consist of loans secured by non-owner occupied properties and involve investment properties for warehouse, retail, apartment, and office space with a history of occupancy and cash flow. This commercial real estate class includes mortgage loans to the developers and owners of commercial real estate where the borrower intends to operate or sell the property at a profit and use the income stream or proceeds from the sale(s) to repay the loan. Commercial Real Estate - Owner Occupied loans consist of commercial mortgage loans secured by owner occupied properties and involves a variety of property types to conduct the borrower's operations. The primary source of repayment for this type of loan is the cash flow from the business and is based upon the borrower's financial health and the ability of the borrower and the business to repay. At March 31, 2015 and December 31, 2014, Commercial Real Estate – Investor loans had a total balance of $104,579,126 and $101,947,596, respectively. At March 31, 2015 and December 31, 2014, Commercial Real Estate – Owner Occupied loans had a total balance of $56,718,102 and $56,766,958, respectively.

Residential Real Estate

Residential Real Estate loans are bifurcated into Investor and Owner Occupied types (classes). Residential Real Estate - Investor loans consist of loans secured by non-owner occupied residential properties and usually carry higher credit risk than Residential Real Estate – Owner Occupied loans due to their reliance on stable rental income and due to lower incentive for the borrower to avoid foreclosure. Payments on loans secured by rental properties often depend on the successful operation and management of the properties and the payment of rent by tenants. At March 31, 2015 and December 31, 2014, Residential Real Estate – Investor loans had a total balance of $46,766,249 and $50,708,153, respectively. At March 31, 2015 and December 31, 2014, Residential Real Estate – Owner Occupied loans had a total balance of $90,659,278 and $89,665,882, respectively.

Home Equity Line of Credit

Home Equity Lines of Credit (“HELOCs”) are a form of revolving credit in which a borrower's primary residence serves as collateral. Borrowers use HELOCs primarily for education, home improvements, and other significant personal expenditures. The borrower will be approved for a specific credit limit set at a percentage of the home's appraised value less the balance owed on the existing first mortgage. Major risks in HELOC lending include the borrower's ability to service the existing first mortgage plus proposed HELOC, the Company's ability to pursue collection in a second lien position upon default, and overall risks in fluctuation in the value of the underlying collateral property.

Land

Land loans are secured by underlying properties that usually consist of tracts of undeveloped land that do not produce income. These loans carry the risk that there will be inadequate demand to ensure the sale of the property within an acceptable time. As a result, land loans carry the risk that the builder will have to pay the property taxes and other carrying costs of the property until an end buyer is found.

Construction

Construction loans, which include land development loans, are generally considered to involve a higher degree of credit risk than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property's value at completion of construction and estimated costs of construction, as well as the property’s ability to attract and retain tenants. Loan funds are disbursed periodically as pre-specified stages of completion are attained based upon site inspections. If the Company is forced to foreclose on a building before or at completion due to a default, it may be unable to recover all of the unpaid balance of and accrued interest on the loan as well as related foreclosure and holding costs.

Consumer & Other

Consumer & Other loans include installment loans, personal lines of credit, and automobile loans. Payment on these loans often depends on the borrower's creditworthiness and ability to generate sufficient cash flow to service the debt.

Allowance for Loan Losses

To control and monitor credit risk, management has an internal credit process in place to determine whether credit standards are maintained along with in-house loan administration accompanied by oversight and review procedures. The primary purpose of loan underwriting is the evaluation of specific lending risks that involves the analysis of the borrower's ability to service the debt as well as the assessment of the underlying collateral. Oversight and review procedures include the monitoring of the portfolio credit quality, early identification of potential problem credits and the management of the problem credits. As part of the oversight and review process, the Company maintains an allowance for loan losses to absorb estimated and probable losses inherent in the loan portfolio.

For purposes of calculating the allowance, the Company segregates its loan portfolio into segments based primarily on the type of supporting collateral. The Commercial Real Estate and Residential Real Estate segments, which both exclude any collateral property currently under construction, are further disaggregated into Owner Occupied and Investor classes for each. Further, all segments are also segregated as either purchased credit impaired loans, purchased loans not deemed impaired, troubled debt restructurings, or new originations.

The analysis for determining the allowance is consistent with guidance set forth in U.S. GAAP and the Interagency Policy Statement on the Allowance for Loan and Lease Losses. Pursuant to Bank policy, the allowance is evaluated quarterly by management and is based upon management's review of the collectability of loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers' ability to repay, estimated value of any underlying collateral and prevailing economic conditions. The allowance consists of specific and general reserves. The specific reserves relate to loans classified as impaired primarily including nonaccrual loans, troubled debt restructurings, and purchased credit impaired loans where cash flows have deteriorated from those forecasted as of the acquisition date. The reserve for these loans is established when the discounted cash flows, collateral value, or observable market price, whichever is appropriate, of the impaired loan is lower than the carrying value. For impaired loans, any measured impairment is charged-off against the loan and allowance for those loans that are collateral dependent in the applicable reporting period.

The general reserve covers loans that are not classified as impaired and primarily includes purchased loans not deemed impaired and new loan originations. The general reserve requirement is based on historical loss experience and several qualitative factors derived from economic and market conditions that have been determined to have an effect on the probability and magnitude of a loss. Since the Bank does not have its own sufficient loss experience, management also references the historical net charge-off experience of peer groups to determine a reasonable range of reserve values, which is permissible per Bank policy. The peer groups consist of competing Maryland-based financial institutions with established ranges in total asset size. Management will continue to evaluate the appropriateness of the peer group data used with each quarterly allowance analysis until such time that the Bank has sufficient loss experience to provide a foundation for the general reserve requirement. The qualitative analysis incorporates global environmental factors in the following trends: national and local economic metrics; portfolio risk ratings and composition; and concentrations in credit.

The following table provides information on the activity in the allowance for loan losses by the respective loan portfolio segment for the three months ended March 31, 2015:




		Commercial		Commercial		Residential		Home Equity						Consumer
		& Industrial		Real Estate		Real Estate		Line of Credit		Land		Construction		& Other		Total
Allowance for loan losses:
Beginning balance	$	200,510	$	554,585	$	203,413	$	166,733	$	8,687	$	153,089	$	7,959	$	1,294,976
Charge-offs		-		-		(215,236)		-		-		-		(1,000)		(216,236)
Recoveries (1)		-		-		-		-		-		-		-		-
Provision		20,593		138,190		80,090		21,924		1,903		11,699		710		275,109
Ending balance	$	221,103	$	692,775	$	68,267	$	188,657	$	10,590	$	164,788	$	7,669	$	1,353,849

The following table presents loans and the related allowance for loan losses, by loan portfolio segment, at March 31, 2015:



		Commercial		Commercial		Residential		Home Equity						Consumer
		& Industrial		Real Estate		Real Estate		Line of Credit		Land		Construction		& Other		Total
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	-	$	45,000	$	-	$	-	$	-	$	-	$	-	$	45,000

Ending balance: collectively evaluated for impairment		221,103		647,775		68,267		188,657		10,590		164,788		7,669		1,308,849
Totals	$	221,103	$	692,775	$	68,267	$	188,657	$	10,590	$	164,788	$	7,669	$	1,353,849

Loans:
Ending balance: individually evaluated for impairment	$	1,362,259	$	1,600,953	$	4,679,855	$	230,260	$	-	$	-	$	2,029	$	7,875,356

Ending balance: collectively evaluated for impairment		31,177,816		141,087,435		121,254,771		33,192,688		2,880,906		17,712,237		1,075,445		348,381,298
														��
Ending balance: loans acquired with deteriorated credit quality		1,804,176		18,608,840		11,490,901		708,551		2,045,951		622,198		-		35,280,617
Totals	$	34,344,251	$	161,297,228	$	137,425,527	$	34,131,499	$	4,926,857	$	18,334,435	$	1,077,474	$	391,537,271

(1)

Excludes cash payments received on loans acquired with deteriorated credit quality with a carrying value of $0.

The following table provides information on the activity in the allowance for loan losses by the respective loan portfolio segment for the three months ended March 31, 2014:




		Commercial		Commercial		Residential		Home Equity						Consumer
		& Industrial		Real Estate		Real Estate		Line of Credit		Land		Construction		& Other		Total
Allowance for loan losses:
Beginning balance	$	167,400	$	324,080	$	80,239	$	129,203	$	6,918	$	135,416	$	7,744	$	851,000
Charge-offs		-		(47,791)		(37,478)		(63,984)		-		-		-		(149,253)
Recoveries (1)		-		-		1,859		8,844		-		-		10,100		20,803
Provision		-		47,791		126,334		55,140		-		-		(10,100)		219,165
Ending balance	$	167,400	$	324,080	$	170,954	$	129,203	$	6,918	$	135,416	$	7,744	$	941,715

The following table presents loans and the related allowance for loan losses, by loan portfolio segment, at December 31, 2014:



		Commercial		Commercial		Residential		Home Equity						Consumer
		& Industrial		Real Estate		Real Estate		Line of Credit		Land		Construction		& Other		Total
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-


Ending balance: collectively evaluated for impairment		200,510		554,585		203,413		166,733		8,687		153,089		7,959		1,294,976
Totals	$	200,510	$	554,585	$	203,413	$	166,733	$	8,687	$	153,089	$	7,959	$	1,294,976

Loans:
Ending balance: individually evaluated for impairment	$	957,080	$	828,264	$	4,314,191	$	320,329	$	-	$	-	$	-	$	6,419,864

Ending balance: collectively evaluated for impairment		30,474,533		137,781,830		124,042,412		34,686,415		2,448,388		17,380,581		881,179		347,695,338

Ending balance: loans acquired with deteriorated credit quality(2)		2,022,667		20,104,460		12,017,432		711,238		3,408,487		671,706		-		38,935,990
Totals	$	33,454,280	$	158,714,554	$	140,374,035	$	35,717,982	$	5,856,875	$	18,052,287	$	881,179	$	393,051,192

(1)

Excludes cash payments received on loans acquired with deteriorated credit quality with a carrying value of $0.

(2)

Includes loans acquired with deteriorated credit quality of $104,460 that have current period charge-offs.

The following table presents information with respect to impaired loans, which include loans acquired with deteriorated credit quality that have current period charge-offs, as of March 31, 2015 and for the three months ended March 31, 2015:


		At March 31, 2015						For the Three Months Ended March 31, 2015
				Unpaid				Average		Interest
		Recorded		Principal		Related		Recorded		Income
		Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial & Industrial	$	1,362,259	$	1,552,735	$	-	$	1,608,430	$	22,971
Commercial Real Estate - Investor		818,330		816,308		-		107,852		565
Commercial Real Estate - Owner Occupied		596,779		1,241,535		-		2,839,837		48,467
Residential Real Estate - Investor		1,263,669		1,848,628		-		-		-
Residential Real Estate - Owner Occupied		3,416,186		3,989,052		-		2,788,962		40,539
Home Equity Line of Credit		230,260		308,766		-		-		-
Land		-		-		-		-		-
Construction		-		-		-		-		-
Consumer & Other		2,029		20,798		-		37,802		-

With an allowance recorded:
Commercial & Industrial		-		-		-		-		-
Commercial Real Estate - Investor		-		-		-		-		-
Commercial Real Estate - Owner Occupied		185,844		218,496		45,000		188,554		-
Residential Real Estate - Investor		-		-		-		-		-
Residential Real Estate - Owner Occupied		-		-		-		-		-
Home Equity Line of Credit		-		-		-		-		-
Land		-		-		-		-		-
Construction		-		-		-		-		-
Consumer & Other		-		-		-		-		-
Total:		7,875,356		9,996,318		45,000		7,571,437		112,542

Commercial & Industrial	$	1,362,259	$	1,552,735	$	-	$	1,608,430	$	22,971
Commercial Real Estate		1,600,953		2,276,339		45,000		3,136,243		49,032	-
Residential Real Estate		4,679,855		5,837,680		-		2,788,962		40,539
Home Equity Line of Credit		230,260		308,766		-		-		-
Land		-		-		-		-		-
Construction		-		-		-		-		-
Consumer & Other		2,029		20,798		-		37,802		-
	$	7,875,356	$	9,996,318	$	45,000	$	7,571,437	$	112,542

The following table presents information with respect to impaired loans, which include loans acquired with deteriorated credit quality that have current period charge-offs, as of December 31, 2014 and for the three months ended March 31, 2014:


		At December 31, 2014						For the Three Months Ended March 31, 2014
				Unpaid				Average		Interest
		Recorded		Principal		Related		Recorded		Income
		Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial & Industrial	$	957,080	$	1,155,553	$	-	$	1,039,956	$	25,588
Commercial Real Estate - Investor		662,280		668,287		-		143,908		597
Commercial Real Estate - Owner Occupied		165,984		165,984		-		509,245		-
Residential Real Estate - Investor		1,063,643		1,658,389		-		720,349		3,332
Residential Real Estate - Owner Occupied		3,250,548		3,853,959		-		2,747,600		38,906
Home Equity Line of Credit		320,329		404,347		-		319,497		-
Land		-		-		-		-		-
Construction		-		-		-		497,986		45,595
Consumer & Other		-		19,034		-		10,246		-

With an allowance recorded:
Commercial & Industrial		-		-		-		-		-
Commercial Real Estate - Investor		-		-		-		-		-
Commercial Real Estate - Owner Occupied		-		-		-		-		-
Residential Real Estate - Investor		-		-		-		-		-
Residential Real Estate - Owner Occupied		-		-		-		462,850		-
Home Equity Line of Credit		-		-		-		-		-
Land		-		-		-		-		-
Construction		-		-		-		-		-
Consumer & Other		-		-		-		-		-
Total:		6,419,864		7,925,553		-		6,451,637		114,018

Commercial & Industrial	$	957,080	$	1,155,553	$	-	$	1,039,956	$	25,588
Commercial Real Estate		828,264		834,271		-		653,153		597
Residential Real Estate		4,314,191		5,512,348		-		3,930,799		42,238
Home Equity Line of Credit		320,329		404,347		-		319,497		-
Land		-		-		-		-		-
Construction		-		-		-		497,986		45,595
Consumer & Other		-		19,034		-		10,246		-
	$	6,419,864	$	7,925,553	$	-	$	6,451,637	$	114,018

In addition to monitoring the performance status of the loan portfolio, the Company utilizes a risk rating scale (1-8) to evaluate loan asset quality for all loans. Loans that are rated 1-4 are classified as pass credits. Loans rated a 5 (Watch) are pass credits, but are loans that have been identified as warranting additional attention and monitoring. Loans that are risk rated 5 or higher are placed on the Company's monthly watch list. For the pass rated loans, management believes there is a low risk of loss related to these loans and, as necessary, credit may be strengthened through improved borrower performance and/or additional collateral. Loans rated a 6 (Special Mention) or higher are considered criticized loans and represent an increased level of credit risk and are placed into these three categories:

6 (Special Mention) - Borrowers exhibit potential credit weaknesses or downward trends that may weaken the credit position if uncorrected. The borrowers are considered marginally acceptable without potential for loss of principal or interest.

7 (Substandard) - Borrowers have well defined weaknesses or characteristics that present the possibility that the Company will sustain some loss if the deficiencies are not corrected.

8 (Doubtful) - Borrowers classified as doubtful have the same weaknesses found in substandard borrowers; however, these weaknesses indicate that the collection of debt in full (principal and interest), based on current conditions, is highly questionable and improbable.

In the normal course of loan portfolio management, relationship managers are responsible for continuous assessment of credit risk arising from the individual borrowers within their portfolio and assigning appropriate risk ratings. Credit Administration is responsible for ensuring the integrity and operation of the risk rating system and maintenance of the watch list. The Officer's Loan Committee meets monthly to discuss and monitor problem credits and internal risk rating downgrades that result in updates to the watch list.

The following table provides information with respect to the Company's credit quality indicators by class of the loan portfolio as of March 31, 2015:



		Risk Rating
		Pass		Special Mention		Substandard		Doubtful		Total
Commercial & Industrial	$	30,807,330	$	1,717,947	$	1,818,974	$	-	$	34,344,251
Commercial Real Estate - Investor		96,553,847		4,040,675		3,984,604		-		104,579,126
Commercial Real Estate - Owner Occupied		43,675,258		7,609,864		5,432,980		-		56,718,102
Residential Real Estate - Investor		35,843,623		2,511,971		8,410,655		-		46,766,249
Residential Real Estate - Owner Occupied		85,603,224		-		5,056,054		-		90,659,278
Home Equity Line of Credit		33,590,467		-		541,032		-		34,131,499
Land		2,637,964		242,942		2,045,951		-		4,926,857
Construction		18,160,806		79,389		94,240		-		18,334,435
Consumer & Other		1,075,445		-		2,029		-		1,077,474
Total	$	347,947,964	$	16,202,788	$	27,386,519	$	-	$	391,537,271

The following table provides information with respect to the Company's credit quality indicators by class of the loan portfolio as of December 31, 2014:



		Risk Rating
		Pass		Special Mention		Substandard		Doubtful		Total
Commercial & Industrial	$	30,150,745	$	1,530,547	$	1,772,988	$	-	$	33,454,280
Commercial Real Estate - Investor		93,113,185		5,837,107		2,997,304		-		101,947,596
Commercial Real Estate - Owner Occupied		42,898,246		6,864,098		7,004,614		-		56,766,958
Residential Real Estate - Investor		39,109,937		2,804,857		8,793,359		-		50,708,153
Residential Real Estate - Owner Occupied		84,796,122		-		4,869,760		-		89,665,882
Home Equity Line of Credit		35,088,028		-		629,954		-		35,717,982
Land		3,850,748		-		2,006,127		-		5,856,875
Construction		17,848,675		81,234		122,378		-		18,052,287
Consumer & Other		881,179		-		-		-		881,179
Total	$	347,736,865	$	17,117,843	$	28,196,484	$	-	$	393,051,192

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due.

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of March 31, 2015. Purchased credit impaired (“PCI”) loans are excluded from this aging and nonaccrual loans schedule.



		Accrual Loans
		30-59		60-89		90 or More
		Days		Days		Days		Total				Nonaccrual		Total
		Past Due		Past Due		Past Due		Past Due		Current		Loans		Loans
Commercial & Industrial	$	80,870	$	-	$	-	$	80,870	$	31,919,874	$	539,331	$	32,540,075
Commercial Real Estate - Investor		841,223		-		-		841,223		90,025,805		764,675		91,631,703
Commercial Real Estate - Owner Occupied		-		-		-		-		51,056,685		-		51,056,685
Residential Real Estate - Investor		-		-		-		-		36,232,747		1,263,669		37,496,416
Residential Real Estate - Owner Occupied		929,776		-		-		929,776		84,552,063		2,956,371		88,438,210
Home Equity Line of Credit		251,877		-		-		251,877		32,940,811		230,260		33,422,948
Land		-		-		-		-		2,880,906		-		2,880,906
Construction		-		-		-		-		17,712,237		-		17,712,237
Consumer & Other		334		-		-		334		1,075,111		2,029		1,077,474
Total	$	2,104,080	$	-	$	-	$	2,104,080	$	348,396,239	$	5,756,335	$	356,256,654

PCI loans														35,280,617
Total Loans													$	391,537,271

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of December 31, 2014. PCI loans are excluded from this aging and nonaccrual loans schedule.



		Accrual Loans
		30-59		60-89		90 or More
		Days		Days		Days		Total				Nonaccrual		Total
		Past Due		Past Due		Past Due		Past Due		Current		Loans		Loans
Commercial & Industrial	$	-	$	-	$	-	$	-	$	31,093,411	$	338,202	$	31,431,613
Commercial Real Estate - Investor		159,786		-		-		159,786		88,920,589		608,084		89,688,459
Commercial Real Estate - Owner Occupied		-		-		-		-		48,755,651		165,984		48,921,635
Residential Real Estate - Investor		312,422		-		-		312,422		39,508,857		1,063,643		40,884,922
Residential Real Estate - Owner Occupied		924,608		550,604		-		1,475,212		83,255,355		2,741,114		87,471,681
Home Equity Line of Credit		456,248		24,199		-		480,447		34,205,968		320,329		35,006,744
Land		-		-		-		-		2,448,388		-		2,448,388
Construction		-		-		-		-		17,380,581		-		17,380,581
Consumer & Other		-		500		-		500		880,679		-		881,179
Total	$	1,853,064	$	575,303	$	-	$	2,428,367	$	346,449,479	$	5,237,356	$	354,115,202

PCI loans														38,935,990
Total Loans													$	393,051,192

Troubled Debt Restructurings

The restructuring of a loan constitutes a troubled debt restructuring, or TDR, if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider in the normal course of business. A concession may include an extension of repayment terms which would not normally be granted, a reduction of interest rate or the forgiveness of principal and/or accrued interest. If the debtor is experiencing financial difficulty and the creditor has granted a concession, the Company will make the necessary disclosures related to the TDR. In certain cases, a modification may be made in an effort to retain a customer who is not experiencing financial difficulty. This type of modification is not considered to be a TDR. Once a loan has been modified and is considered a TDR, it is reported as an impaired loan. All TDRs are evaluated individually for impairment on a quarterly basis as part of the allowance for credit losses calculation. A specific allowance for TDR loans is established when the discounted cash flows, collateral value or observable market price, whichever is appropriate, of the TDR is lower than the carrying value. If a loan deemed a TDR has performed for at least six months at the level prescribed by the modification, it is not considered to be non-performing; however, it will generally continue to be reported as impaired, but may be returned to accrual status. A TDR is deemed in default on its modified terms once a contractual payment is 30 or more days past due.

The following table presents a breakdown of loans that Company modified during the three months ended March 31, 2015 and 2014:




	Three Months Ended March 31, 2015					Three Months Ended March 31, 2014
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Commercial & Industrial	-		-		-	1	$	85,397	$	85,397
Commercial Real Estate - Investor	-		-		-	-		-		-
Commercial Real Estate - Owner Occupied	-		-		-	-		-		-
Residential Real Estate - Investor	-		-		-	-		-		-
Residential Real Estate - Owner Occupied	-		-		-	-		-		-
Home Equity Line of Credit	-		-		-	-		-		-
Land	-		-		-	-		-		-
Construction	-		-		-	-		-		-
Consumer & Other	-		-		-	-		-		-
Totals	-	$	-	$	-	1	$	85,397	$	85,397

For the three months ended March 31, 2015, no loans were modified as a TDR.

For the three months ended March 31, 2014, there was one loan modified as a TDR. This restructuring of a C&I loan included an extension of loan maturity date at an interest rate lower than the current rate for a new debt with similar risk. This C&I TDR was on non-accrual status at March 31, 2015.

None of the loans modified as a TDR during the previous twelve months were in default of their modified terms at March 31, 2015. At March 31, 2015 and December 31, 2014, the Bank had $3,938,642 and $2,347,989, respectively, in loans identified as TDRs of which $1,819,620 and $1,192,481, respectively, were on nonaccrual status.

NOTE 6 – ACCOUNTING FOR CERTAIN LOANS ACQUIRED IN A TRANSFER

The following table reflects the carrying amount of purchased credit impaired loans, which are included in the loan categories in Note 5 – Loans and Allowances for Loan Losses:



		March 31, 2015		December 31, 2014
Commercial & Industrial	$	1,804,176	$	2,022,667
Commercial Real Estate		18,608,840		20,104,460
Residential Real Estate		11,490,901		12,017,432
Home Equity Line of Credit		708,551		711,238
Land		2,045,951		3,408,487
Construction		622,198		671,706
Total Loans	$	35,280,617	$	38,935,990

The contractual amount outstanding for these loans totaled $42,482,285 and $47,678,935 as of March 31, 2015 and December 31, 2014, respectively.

The following table reflects activity in the accretable yield for these loans for the three months ended March 31, 2015 and 2014:



		Three months ended
		March 31, 2015		March 31, 2014
Balance at beginning of period	$	2,095,891	$	1,991,662
Reclassification from nonaccretable difference		665,256		816,368
Accretion into interest income		(480,321)		(1,082,103)
Disposals		(157,136)		(3,109)
Balance at end of period	$	2,123,690	$	1,722,818

The following table reflects activity in the allowance for loan losses for these loans for the three months ended March 31, 2015 and 2014:



		Three months ended
		March 31, 2015		March 31, 2014
Balance at beginning of period	$	-	$	-
Reclassification to TDR		-		-
Charge-offs		(141,340)		-
Recoveries		-		4,040
Provision for loan losses		186,340		(4,040)
Balance at end of period	$	45,000	$	-

NOTE 7 – REAL ESTATE ACQUIRED THROUGH FORECLOSURE

The following table reflects activity in real estate acquired through foreclosure for the three months ended March 31, 2015 and 2014:



		Three months ended March 31,
		2015		2014
Balance at beginning of period	$	1,480,472	$	1,290,120
New transfers from loans		130,910		425,764
Sales		(90,000)		(35,100)
Write-downs		(20,247)		(151,450)
Balance at end of period	$	1,501,135	$	1,529,334

NOTE 8 – CORE DEPOSIT INTANGIBLE ASSETS

The Company's core deposit intangible assets at March 31, 2015 had a remaining weighted average amortization period of approximately 2.87 years. The following table presents the changes in the net book value of core deposit intangible assets for the three months ended March 31, 2015 and 2014:


		Three months ended March 31,
		2015		2014
Balance at beginning of period	$	3,478,282	$	3,993,679
Amortization expense		(254,545)		(274,295)
Balance, September 30	$	3,223,737	$	3,719,384

The following table presents the gross carrying amount, accumulated amortization, and net carrying amount of core deposit intangible assets as of March 31, 2015 and December 31, 2014:



		March 31, 2015		December 31, 2014
Gross carrying amount	$	5,578,211	$	5,578,211
Accumulated amortization		(2,354,474)		(2,099,929)
Net carrying amount	$	3,223,737	$	3,478,282

The following table sets forth the future amortization expense for the Company’s core deposit intangible assets at March 31, 2015:


Periods ending December 31:		Amount
2015	$	599,553
2016		649,939
2017		490,846
2018		402,243
2019		368,806
Subsequent years		712,350
Total	$	3,223,737

NOTE 9 – SHORT-TERM BORROWINGS

Short-term borrowings consisted of the following:


Federal Home Loan Bank Advances		March 31, 2015		December 31, 2014
Due January, 2015, Fixed Rate 0.24%	$	-	$	8,000,000
Due April, 2015, Fixed Rate 0.19%		8,000,000		-
Due December, 2015, Daily Rate 0.355%		4,000,000		14,000,000
Atlantic Central Bankers Bank Advances
Due November, 2015, Fixed rate 4.50%		150,000		150,000
Total	$	12,150,000	$	22,150,000

Interest expense on FHLB advances and Atlantic Community Bankers Bank (“ACBB”) advances for the three months ended March 31, 2015 was $13,776.

The Company had no long-term borrowings at March 31, 2015.

NOTE 10 – STOCK-BASED COMPENSATION

The Jefferson Bancorp, Inc. 2010 Stock Option Plan (the “Jefferson Plan”) was adopted by the Jefferson Board of Directors in September 2010 and approved by Jefferson’s stockholders in April 2011. The Jefferson Plan provides for the granting of incentive stock options intended to comply with the requirements of Section 422 of the Internal Revenue Code and non-qualified stock options (collectively “Awards”). Awards were available for grant to officers, employees and non-employee directors, independent consultants and contractors of Jefferson and its affiliates, including the Bank.

The Jefferson Plan authorized the issuance of up to 577,642 shares of common stock adjusted for the post-merger exchange ratio of 2.2217 and had a term of ten years. In general, options granted under the Jefferson Plan have an exercise price equal to 100% of the fair market value of the common stock at the date of the grant and have a ten year term. Options relating to a total of 539,115 shares of common stock were outstanding as of March 31, 2015. As a result of the Merger, the Jefferson Plan is now administered by Bay Bancorp, Inc.’s Board of Directors.

The Carrollton Bancorp 2007 Equity Plan (the “Equity Plan” and, together with the Jefferson Plan, the “Plans”) was approved at the 2007 annual meeting of stockholders of Bay Bancorp, Inc. Under the Equity Plan, 500,000 shares of common stock were reserved for issuance. Options relating to a total of 203,900 shares of common stock were outstanding as of March 31, 2015.

The table below summarize the Company's stock options outstanding for the three months ended March 31, 2015 and December 31, 2014. There were no changes for the three months ended March 31, 2015.



	Stock Options Outstanding		Weighted Average Exercise Price	Weighted Average Remaining Contractual Life
Outstanding, December 31, 2014	743,015	$	4.99	6.5 years
Outstanding, March 31, 2015	743,015	$	4.99	6.6 years
Exercisable at March 31, 2015	642,783	$	4.95	6.3 years

Stock-based compensation expense is recognized on a straight-line basis over the vesting period of the stock options and is recorded in noninterest expense. For the three months ended March 31, 2015 and 2014, stock-based compensation expense applicable to the Plans was $25,614 and $125,448, respectively. Unrecognized stock-based compensation expense attributable to non-vested options was $159,583 at March 31, 2015. This amount is expected to be recognized over a remaining weighted average period of approximately 1.9 years.

Restricted Stock Awards

On June 26, 2013, the Company’s Board of Directors revised its director compensation policy to provide for an annual grant to each non-employee director of an award of shares of restricted common stock having a fair market value of $10,000 that will vest one year after the date of the grant. At December 31, 2014 and March 31, 2015, grants relating to 16,256 shares of unvested restricted common stock were outstanding. There was no activity related to unvested restricted shares for the three months ended March 31, 2015. Total stock-based compensation expense attributable to the shares of restricted common stock was $19,994 and $15,000 for the three months end March 31, 2015 and 2014, respectively. The total unrecognized compensation expense attributable to the shares of restricted common stock was $13,329 at March 31, 2015.

NOTE 11 – DEFINED BENEFIT PENSION PLAN

The Carrollton Bank Retirement Income Plan (the “Pension Plan”) provides defined benefits based on years of service and final average salary. Effective December 31, 2004, all benefit accruals for existing employees were frozen and no new employees were eligible for benefits under the Pension Plan.

The components of net periodic pension benefit are as follows:



		Three months ended March 31,
		2015	2014
Service cost	$	19,750	15,184
Interest cost		110,750	110,988
Expected return on plan assets		(157,250)	(149,585)
Amortization of net gain		-	(18,948)
Net periodic pension benefit	$	(26,750)	(42,361)

401(k) Plan

The Company has a 401(k) profit sharing plan covering substantially all full-time employees. At this time, the Company has elected not to match employee contributions as defined under this plan. Therefore, the expense associated with this plan during the three months ended March 31, 2015 and March 31, 2014 was $0.

NOTE 12 – INCOME TAXES

The differences between the statutory federal income tax rate of 34% and the effective tax rate for the Company are reconciled as follows:



	Three Months Ended March 31,
	2015	2014
Income tax expense at federal statutory rate	34.0%	34.0%
Increase (decrease) resulting from:
Reversal of valuation allowance attributable to future built-in losses	-	123.1%
Non-taxable income	-1.3%	-2.0%
State income taxes, net of federal income tax benefit	5.7%	6.0%
Incentive stock options	0.6%	2.6%
Other nondeductible expenses	3.9%	0.3%
Effective income tax rate	42.9%	164.0%

In accordance with ASC 740-270, Accounting for Interim Reporting, the provision for income taxes was recorded at March 31, 2015 and 2014 based on the current estimate of the effective annual rate. The expected effective tax rate for the year ended December 31, 2015, is 42.9% which is comparable to the expected effective tax rate of 40.9%, net of discrete items for the three months ended March 31, 2014. The actual effective tax rate of 164.0% for the three months ended March 31, 2014 included the impact of the reversal of a valuation allowance attributable to estimated future built-in losses that was recorded in 2013.

NOTE 13 - NET INCOME PER COMMON SHARE

Basic earnings per common share is derived by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period and does not included the effect of any potentially dilutive common stock equivalents. Diluted earnings per share is derived by dividing net income available to common stockholders by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding common stock equivalents. There is no dilutive effect on earnings per share during a loss period.

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


		Three Months Ended March 31,
		2015		2014
Basic earnings per share:
Net income	$	343,253	$	81,735
Weighted average shares outstanding		11,014,517		9,379,753
Basic net income per share	$	0.03	$	0.01

Diluted earnings per share:
Net income	$	343,253	$	81,735
Weighted average shares outstanding		11,014,517		9,379,753
Dilutive potential shares		178,300		32,946
Total diluted average shares outstanding		11,192,817		9,412,699
Total diluted net income per share	$	0.03	$	0.01

Anti-dilutive shares		333,666		191,225

NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments include loan commitments, unused lines of credit and standby letters of credit. The Company uses these financial instruments to meet the financing needs of its customers. Financial instruments 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 the accompanying consolidated financial statements.

Outstanding loan commitments and lines and letters of credit were as follows:



		March 31, 2015		December 31, 2014

Loan commitments	$	5,361,570	$	5,021,857
Unused lines of credit		68,517,012		64,761,646
Standby letters of credit		3,168,223		1,632,927

Loan commitments and unused lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company generally requires collateral to support financial instruments with credit risk on the same basis as it does for on-balance sheet instruments. The collateral requirement is based on management's credit evaluation of the counter party. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

In the ordinary course of business, the Company has various outstanding contingent liabilities that are not reflected in the accompanying consolidated financial statements. In the opinion of management, after consulting with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the financial condition of the Company.

NOTE 15 – FAIR VALUE

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

The Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets and liabilities.

Level 2 - Valuation is based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets and liabilities; quoted prices in 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 asset or liability.

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

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

Assets Recorded at Fair Value on a Recurring Basis

The following methods and assumptions were used by the Company to measure certain assets recorded at fair value on a recurring basis in the consolidated financial statements:

Investment Securities Available for Sale

The fair value of investment securities available for sale is the market value based on quoted market prices, when available (Level 1). If listed prices or quotes are not available, fair value is based upon quoted market prices for similar assets or, due to the limited market activity of the instrument, externally developed models that use significant observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3). It includes model pricing, defined as valuing securities based upon their relationship with other benchmark securities and market information from third party sources. In the absence of current market activity, securities may be evaluated either by reference to similarly situated bonds or based on the liquidation value or restructuring value of the underlying assets. There were no transfers between Level 1 and Level 2 and no change in valuation techniques used to measure fair value of securities available for sale for the period ended March 31, 2015.

The tables below present the recorded amount of assets measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014:



		Carrying Value (Fair Value)		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
March 31, 2015
U.S. government agency	$	5,818,941	$	-	$	5,818,941	$	-
Residential mortgage-backed securities		20,373,814		-		20,373,814		-
State and municipal		4,639,296		-		4,639,296		-
Corporate obligations		2,036,200				2,036,200		-
Equity securities		22,468		22,468		-		-
	$	32,890,719	$	22,468	$	32,868,251	$	-



		Carrying Value (Fair Value)		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)

December 31, 2014
U.S. government agency	$	7,778,271	$	-	$	7,778,271	$	-
Residential mortgage-backed securities		20,870,927		-		20,870,927		-
State and municipal		4,654,146		-		4,654,146		-
Corporate obligations		2,030,000				2,030,000		-
Equity securities		16,545		16,545		-		-
	$	35,349,889	$	16,545	$	35,333,344	$	-

Assets Recorded at Fair Value on a Nonrecurring Basis

On a nonrecurring basis, the Company may be required to measure certain assets at fair value in accordance with U.S. GAAP. These adjustments to fair value usually result from application of lower of cost or fair value accounting or write-downs of individual assets due to impairment.

The following methods and assumptions were used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:

Loans held for sale

Loans held for sale are recorded at the lower of cost or estimated market value on an aggregate basis. Market value is determined based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale. As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the three months ended March 31, 2015.

Impaired Loans

Loans for which it is probable that payment of principal and interest will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310, using the present value of expected cash flows, the loan’s observable market price, or the fair value of collateral (less selling costs) if the loan is collateral dependent. A specific allowance for loan loss is then established or a partial charge-off is recorded if the loan is collateral dependent and the loan is classified at a Level 3 in the fair value hierarchy. Appraised collateral 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 borrower’s business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the factors identified above. Valuation techniques are consistent with those applied in prior periods.

Real Estate Acquired Through Foreclosure

Real estate acquired through foreclosure (“REO”) is adjusted to fair value upon transfer of the loan to REO and is classified at Level 3 in the fair value hierarchy. Subsequently, the REO is carried at the lower of carrying value or fair value. The estimated fair value for REO included in Level 3 is determined by independent market based appraisals and other available market information, less estimated costs to sell, that may be reduced further based on market expectations or an executed sales agreement. If the fair value of REO deteriorates subsequent to the period of transfer, the REO is also classified at a Level 3 in the fair value hierarchy. Valuation techniques are consistent with those techniques applied in prior periods.

The tables below present the recorded assets measured at fair value on a nonrecurring basis as of March 31, 2015 and December 31, 2014:



March 31, 2015:		Carrying Value (Fair Value)		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
Impaired loans	$	415,047	$	-	$	-	$	415,047
Real estate acquired through foreclosure		130,911		-		-		130,911
	$	545,958	$	-	$	-	$	545,958



December 31, 2014:		Carrying Value (Fair Value)		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
Impaired loans	$	374,459	$	-	$	-	$	374,459
Real estate acquired through foreclosure		983,276		-		-		983,276
	$	1,357,735	$	-	$	-	$	1,357,735

Fair Value of Financial Instruments

The Company discloses fair value information about financial instruments, for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheets. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price, if one exists.

Quoted market prices, where available, are shown as estimates of fair market values. Because no quoted market prices are available for a significant part of the Company's financial instruments, the fair values of such instruments have been derived based on the amount and timing of estimated future cash flows and using market discount rates.

Present value techniques used in estimating the fair value of many of the Company's financial instruments are significantly affected by the assumptions used. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate cash settlement of the instrument. Additionally, the accompanying estimates of fair values are only representative of the fair values of the individual financial assets and liabilities and should not be considered an indication of the fair value of the Company.

The following disclosure of estimated fair values of the Company's financial instruments at March 31, 2015 and December 31, 2014 is made in accordance with the requirements of ASC Topic 820:





			March 31, 2015				December 31, 2014
	Level in Fair Value Hierarchy		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value

Financial assets:
Cash and cash equivalents	Level 1	$	23,585,200	$	23,585,200	$	16,857,325	$	16,857,325
Time deposits with banks	Level 2		-		-		34,849		34,849
Investment securities available for sale (debt)	Level 2		32,868,251		32,868,251		35,333,344		35,333,344
Investment securities available for sale (equity)	Level 1		22,468		22,468		16,545		16,545
Investment securities held to maturity (debt)	Level 2		1,296,793		1,326,827		1,315,718		1,324,797
Restricted equity securities	Level 2		1,291,095		1,291,095		1,862,995		1,862,995
Loans held for sale	Level 2		12,494,787		12,494,787		7,233,306		7,233,306
Loans, net of allowance	Level 3		390,183,422		400,829,683		391,756,216		401,651,659
Accrued interest receivable	Level 2		1,300,297		1,300,297		1,306,111		1,306,111

Financial liabilities:
Deposits	Level 3		404,304,599		405,202,505		387,830,132		388,705,645
Short-term borrowings	Level 2		12,150,000		12,150,000		22,150,000		22,150,000
Accrued interest payable	Level 2		25,164		25,164		25,350		25,350

The following methods and assumptions were used to estimate the fair value of each category of financial instruments for which it is practicable to estimate that value:

Cash and due from banks, federal funds sold and overnight investments. The carrying amount approximated the fair value.

Time deposits with banks. The carrying amount of time deposits with banks approximated fair value.

Investment securities (available for sale). The fair value of debt securities is based upon quoted prices for similar assets or externally developed models that use significant observable inputs. The fair value of equity securities is based on quoted market prices.

Investment securities (held to maturity). The fair value of debt securities is based upon quoted prices for similar assets or externally developed models that use significant observable inputs.

Restricted equity securities. Since these stocks are restricted as to marketability, the carrying value approximated fair value.

Loans held for sale. The carrying amount approximated the fair value.

Loans. The fair value of loans, except for purchased credit impaired loans that are collateral-dependent, was estimated by computing the discounted value of estimated cash flows, adjusted for probable credit losses, for pools of loans having similar characteristics. The discount rate was based upon the current market rate for a similar loan. The fair value of purchased credit impaired loans that are collateral-dependent was determined based on the estimated fair value of collateral less estimated costs to sell. Nonperforming loans have an assumed interest rate of 0%.

Accrued interest receivable and payable. The carrying amount approximated the fair value of accrued interest, considering the short-term nature of the instrument and its expected collection.

Deposit liabilities. The fair value of demand, money market savings and regular savings deposits, which have no stated maturity, were considered equal to their carrying amount, representing the amount payable on demand. The fair value of time deposits was based upon the discounted value of contractual cash flows at current rates for deposits of similar remaining maturity.

Short-term borrowings. The carrying amount of fixed rate FHLB advances and ACBB borrowings approximated fair value due to the short-term nature of the instrument. The carrying amount of variable rate FHLB advances and ACBB borrowings approximated the fair value.

Off-balance sheet instruments. The Company charges fees for commitments to extend credit. Interest rates on loans, for which these commitments are extended, are normally committed for periods of less than one month. Fees charged on standby letters of credit and other financial guarantees are deemed to be immaterial and these guarantees are expected to be settled at face amount or expire unused. It is impractical to assign any fair value to these commitments.

NOTE 16 – REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by 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 our 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 classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

In July 2013, federal bank regulatory agencies issued final rules to revise their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act (“Basel III”). On January 1, 2015, the Basel III rules became effective and include transition provisions which implement certain portions of the rules through January 1, 2019. Under the final rules, the effects of certain accumulated other comprehensive items are not excluded; however, banking organizations like the Company and the Bank that are not considered “advanced approaches” banking organizations may make a one-time permanent election to continue to exclude these items. With the submission of the Call Report for the first quarter of 2015, the Company and the Bank made this election in order to avoid significant variations in the level of capital that can be caused by interest rate fluctuations on the fair value of the Bank’s available for sale securities portfolio and by fluctuations in the net periodic pension benefit/obligation attributable to the Bank’s defined benefit pension plan.

In addition, the OCC requires that FSBs, like the Bank, maintain a minimum level of Tier 1 capital to average total assets excluding intangibles. This measure is known as the leverage ratio. The current regulatory minimum for the leverage ratio for institutions to be considered “well capitalized” is 5%, but an individual institution could be required to maintain a higher level. In connection with the Merger, the Bank entered into an Operating Agreement with the OCC (the “Operating Agreement”) pursuant to which the Bank agreed, among other things, to maintain a leverage ratio of 10% for the term of the Operating Agreement. The Operating Agreement will remain in effect until it is terminated by the OCC or the Bank ceases to be an FSB.

The following table summarizes capital ratios and related information in accordance with Basel III as measured at March 31, 2015 and pre-existing rules at December 31, 2014. For disclosure regarding changes resulting from Basel III see Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Financial Condition, Capital Resources, Basel III. The Bank was classified in the well capitalized category at both March 31, 2015 and December 31, 2014 under the regulatory capital rules in effect at each date. Since March 31, 2015, no conditions or events have occurred, of which the Company is aware, that have resulted in a material change in the Bank's regulatory risk category other than as reported in this Quarterly Report on Form 10-Q.

Actual capital amounts and ratios for the Bank are presented in the following tables (dollars in thousands):



										To Be Well
										Capitalized Under
						To Be Considered				Prompt Corrective
		Actual				Adequately Capitalized				Action Provisions
As of March 31, 2015:		Amount	Ratio			Amount	Ratio			Amount	Ratio

Common Equity Tier 1 Capital	$	62,818	16.22	%	$	17,432	4.50	%	$	25,180	6.50	%

Tier I Risk-Based Capital Ratio	$	62,818	16.22	%	$	23,243	6.00	%	$	30,990	8.00	%

Total Risk-Based Capital Ratio	$	64,172	16.57	%	$	30,990	8.00	%	$	38,738	10.00	%

Tier 1 Leverage Ratio	$	62,818	13.01	%	$	19,313	4.00	%	$	24,141	5.00	%

As of December 31, 2014:

Common Equity Tier 1 Capital		N/A	N/A			N/A	N/A			N/A	N/A

Tier I Risk-Based Capital Ratio	$	61,448	16.31	%	$	15,066	4.00	%	$	22,599	6.00	%

Total Risk-Based Capital Ratio	$	62,743	16.66	%	$	30,132	8.00	%	$	37,665	10.00	%

Tier 1 Leverage Ratio	$	61,448	12.94	%	$	18,988	4.00	%	$	23,735	5.00	%

Banking regulations also limit the amount of dividends that may be paid without prior approval by an FSB's regulatory agencies. In addition to these regulations, the Bank agreed in the Operating Agreement that it would not declare or pay any dividends or otherwise reduce its capital unless it is in compliance with the Operating Agreement, including the minimum capital requirements. Due to these restrictions and the Bank’s desire to preserve capital to fund its growth, the Company currently does not anticipate paying a dividend for the foreseeable future. In addition to these regulatory restrictions, it should be noted that the declaration of dividends is at the discretion of the Company’s Board of Directors and will depend, in part, on the Company’s earnings and future capital needs. Accordingly, there can be no assurance that dividends will be declared in any future period.

The Bank is required to maintain reserves against certain deposit liabilities which was satisfied with vault cash and balances on deposit with the Federal Reserve Bank of Richmond during the reserve maintenance periods that included March 31, 2015 and December 31, 2014.

Under current Federal Reserve regulations, the Bank is limited in the amount it may lend to the parent company and its nonbank subsidiaries. Loans to a single affiliate may not exceed 10%, and loans to all affiliates may not exceed 20% of the Bank’s capital stock, surplus, and undivided profits, plus the allowance for loan and lease losses. Loans from the Bank to nonbank affiliates, including the parent company, are also required to be collateralized according to regulatory guidelines. At March 31, 2015, there were no loans from the Bank to any nonbank affiliate, including the parent company.

NOTE 17 – OTHER COMPREHENSIVE INCOME

Comprehensive income is defined as net income plus transactions and other occurrences that are the result of non-owner changes in equity. For financial statements presented by the Company, non-equity changes are comprised of unrealized gains or losses on available for sale debt securities and any minimum pension liability adjustments. These items do not have an impact on the Company’s net income. The following table presents the activity in net accumulated other comprehensive income for the periods indicated:


		Unrealized Gains (losses) on Investments Available for Sale		Defined Benefit Pension Plan		Total
Balance at December 31, 2014	$	211,294	$	1,452,220	$	1,663,514
Other comprehensive loss:
Other comprehensive income (loss) before reclassification adjustments		200,569		(1,535,489)		(1,334,920)
Amounts reclassified from comprehensive income (loss)		(46,587)		-		(46,587)
Other comprehensive income (loss)		153,982		(1,535,489)		(1,381,507)
	$	365,276	$	(83,269)	$	282,007

		Unrealized Gains (losses) on Investments Available for Sale		Defined Benefit Pension Plan		Total
Balance at December 31, 2013	$	(190,971)	$	1,304,888	$	1,113,917
Other comprehensive gain		171,843		-		171,843
Balance at March 31, 2014	$	(19,128)	$	1,304,888	$	1,285,760

		Before Tax Amount		Tax (Expense) Benefit		Net of Tax Amount
For the Three Months Ended March 31, 2015
Other comprehensive loss:
Unrealized income on AFS debt securities:
Net AFS debt securities income	$	328,213	$	(127,644)	$	200,569
Reclassification adjustments		(77,490)		30,903		(46,587)
Net income recognized in other comprehensive loss		250,723		(96,741)		153,982
Defined benefit pension plan adjustments:
Net actuarial losses		(2,535,693)		1,000,204		(1,535,489)
Net loss recognized in other comprehensive loss		(2,535,693)		1,000,204		(1,535,489)
Other comprehensive loss	$	(2,284,970)	$	903,463	$	(1,381,507)

		Before Tax Amount		Tax (Expense) Benefit		Net of Tax Amount
For the Three Months Ended March 31, 2014
Other comprehensive income:
Unrealized income on AFS debt securities	$	283,803	$	(111,960)	$	171,843
Other comprehensive gain	$	283,803	$	(111,960)	$	171,843

The Company reflects the funded status of defined benefit pension plan liabilities on the balance sheet, which for the three months ended March 31, 2015 resulted in a $1.5 million charge to equity through a reduction of accumulated other comprehensive income. The loss was primarily due to the use of an updated mortality table issued by the Society of Actuaries in October 2014, which reflects longer life expectancies compared to previous mortality assumptions.

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

As used in this Quarterly Report, the term “the Company” refers to Bay Bancorp, Inc. and, unless the context clearly requires otherwise, the terms “we,” “us,” and “our,” refer to Bay Bancorp, Inc. and its consolidated subsidiaries.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements included or incorporated by reference in this Quarterly Report on Form 10-Q, other than statements that are purely historical, are forward-looking statements. Statements that include the use of terminology such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “estimates,” and similar expressions also identify forward-looking statements. The statements in this report with respect to, among other things, our plans and strategies; objectives and intentions and the anticipated results thereof; the impact of the Slavie Acquisition; the impact of regulations on our business; our potential exposure to various types of market risks, such as interest rate risk and credit risk; anticipated funding of commitments to extend credit and unused lines of credit; potential losses from off-balance sheet arrangements, taking advantage of opportunities emerging as the business environment improves and leads to increased loan demand in the future; the recovery of fair value of available for sale securities; the allowance for loan losses; liquidity sources and the impact of the outcome of pending legal proceedings are forward-looking. These forward-looking statements are based on our current intentions, beliefs, and expectations and are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict. Actual results may differ materially from these forward-looking statements because of, among other things:

unexpected changes or further deterioration in the housing market or in general economic conditions in our market area, or a slowing economic recovery;

unexpected changes in market interest rates or monetary policy;

the impact of new governmental regulations that might require changes in our business model;

changes in laws, regulations, policies and guidelines impacting our ability to collect on outstanding loans or otherwise negatively impacting its business;

higher than anticipated loan losses or the insufficiency of the allowance for credit losses;

changes in consumer confidence, spending and savings habits relative to the services we provide;

continued relationships with major customers;

competition from other financial institutions in originating loans, attracting deposits, and providing various financial services that may affect our profitability;

the ability to continue to grow our business internally and through acquisition and successful integration of bank entities while controlling our costs; and

changes in competitive, governmental, regulatory, accounting, technological and other factors that may affect us specifically or the banking industry generally, including as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”).

These and other risks are discussed in detail in the periodic reports that Bay Bancorp, Inc. files with the Securities and Exchange Commission (the “SEC”) (see Item 1A of Part II of this report for further information). Except as required by applicable laws, we undertake no obligation to update or revise the information contained in this report whether as a result of new information, future events or circumstances, or otherwise. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. Past results of operations may not be indicative of future results.

GENERAL

Bay Bancorp, Inc., a Maryland corporation organized in 1990, is a savings and loan holding company headquartered in Lutherville, Maryland. Until November 1, 2013, the Company operated under the name Carrollton Bancorp. Effective November 1, 2013, the Company’s name was changed to Bay Bancorp, Inc.

On April 19, 2013, the Company completed its merger with Jefferson Bancorp, Inc. (“Jefferson”) with the Company as the surviving corporation (the “Merger”). The Merger was accounted for as a reverse acquisition, which means that for accounting and financial reporting purposes, Jefferson was deemed to have acquired the Company in the Merger even though the Company was the legal successor in the Merger, and the historical financial statements of Jefferson have become the Company’s historical financial statements. Consequently, the assets and liabilities and the operations that are reflected in the historical consolidated financial statements prior to the Merger are those of Jefferson, and the historical consolidated financial statements after the Merger include the assets and liabilities of Jefferson and the Company, historical operations of Jefferson and operations of the combined Company after April l9, 2013.

The Merger has strengthened our market position geographically, enhanced our retail delivery channel, allowed us to provide extraordinary customer service while delivering a fuller range of services and products, and lessened our dependence on net interest income by adding fee-based sources of revenue including a mortgage origination division and an, electronic banking division.

Prior to the Merger, the Company had one bank subsidiary, Carrollton Bank, and Jefferson had one bank subsidiary, Bay Bank, FSB (the “Bank”). The Bank commenced operations on July 9, 2010 when it bought certain assets and assumed certain liabilities of Bay National Bank (“Bay National”) from the Federal Deposit Insurance Corporation (the “FDIC”). As part of the Merger, Carrollton Bank merged with and into the Bank, with the Bank as the surviving bank subsidiary of the Company. The Bank is a federal savings bank (“FSB”) that provides a full range of financial services to individuals, businesses and organizations through its branch and loan origination offices and its automated teller machines. Deposits in the Bank are insured by the FDIC. The Bank has five subsidiaries: Bay Financial Services, Inc. (“BFS”); Carrollton Community Development Corporation (“CCDC”); and three limited liability company subsidiaries.

On May 15, 2014, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Financial Services Partners Fund I, LLC (“FSPF”), and seven directors and executive officers of the Company (collectively, the “Investors”). Pursuant to the Purchase Agreement, the Company agreed to sell an aggregate of 1,422,764 shares of the Company’s common stock, par value $1.00 per share, to the Investors at a purchase price of $4.92 per share, which was the closing bid price of a share of common stock on May 14, 2014 as reported on The NASDAQ Capital Market. The closing of this transaction occurred on May 15, 2014, and the Company received aggregate gross proceeds of $7,000,000 from the transaction. The Company contributed these proceeds to the Bank, to bolster its regulatory capital and provide funds for future acquisitions and general working capital purposes.

On May 30, 2014, the Bank acquired certain assets and assumed substantially all deposits and certain other liabilities (the “Slavie Acquisition”) of Slavie Federal Savings Bank (“Slavie”), which was closed on May 30, 2014 by the Office of the Comptroller of the Currency (the “OCC”). The Slavie Acquisition was completed in accordance with the terms of the Purchase and Assumption Agreement All Deposits, with the FDIC. The Bank did not acquire any of Slavie’s other real estate owned. Additionally, the Bank did not at closing commit to purchase any owned or leased bank premises of Slavie; however, the Bank was granted an option to elect following closing to purchase any or all of the banking premises owned by Slavie except for Slavie’s former headquarters building in Bel Air, Maryland, or in the case of leased banking premises, to assume the lease.

We are focused on providing superior financial and customer service to small and medium-sized commercial and retail businesses, owners of these businesses and their employees, to business professionals and to individual consumers located in the central Maryland region, through our network of 11 branch locations. We attract deposit customers from the general public and use such funds, together with other borrowed funds, to make loans. Our results of operations are primarily determined by the difference between interest income earned on our interest-earning assets, primarily interest and fee income on loans, and interest paid on our interest-bearing liabilities, including deposits and borrowings.

Our mortgage division is in the business of originating residential mortgage loans and then selling them to investors. The mortgage banking business is structured to provide a source of fee income largely from the process of originating residential mortgage loans for sale in the secondary market. Mortgage banking products include Federal Housing Administration and Federal Veterans Administration loans, conventional and nonconforming first and second mortgages, and construction and permanent financing. Loans originated by the mortgage division are generally sold into the secondary market but may be considered for retention by us as part of our balance sheet strategy.

The Bank offers, through strategic partners, investment advisory and wealth management services. Through these affiliations, banking clients can receive a full range of financial services, including investment advice, personal and business insurance products and employee benefit products such as pension and 401(k) plan administration. To the extent permitted by applicable regulations, the strategic partners may share fees and commissions with the Bank. The Bank currently has no such fee arrangement in place. When sufficient volume is developed in any of these lines of business, the Bank may transition from providing referrals to these strategic partners to providing these services through its subsidiary, Bay Financial Services, if permitted by applicable regulations.

The Bank’s three limited liability company subsidiaries manage and dispose of real estate acquired through foreclosure.

CCDC was created to promote, develop, and improve the housing and economic conditions of people in Maryland. CCDC generates revenue through the origination of loans, but did not originate any loans during 2014 or 2015 and is in the process of being dissolved.

AVAILABILITY OF INFORMATION

We make available through the Investor Relations area of our website, at www.baybankmd.com, annual reports on Form 10-K, quarterly reports on Form 10-Q, news releases on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. In general, we intend that these reports be available as soon as practicable after they are filed with or furnished to the SEC. The SEC maintains a website (www.sec.gov) where these filings are also available through the SEC’s EDGAR system. There is no charge for access to these filings through either our site or the SEC’s site.

MARKET AREA

We consider our core markets to be the communities within the Baltimore Metropolitan Statistical Area, particularly Baltimore City and the Maryland counties of Baltimore, Anne Arundel, Howard, Carroll and Harford, as well as south along the Baltimore-Washington corridor. Lending activities are broader, including the entire State of Maryland, and, to a limited extent, the surrounding states. All of our revenue is generated within the United States.

COMPETITION

Our principal competitors for deposits are other financial institutions, including other savings institutions, commercial banks, credit unions, and local banks and branches or affiliates of other larger banks located in our primary market area. Competition among these institutions is based primarily on interest rates and other terms offered, service charges imposed on deposit accounts, the quality of services rendered, and the convenience of banking facilities. Additional competition for depositors' funds comes from mutual funds, U.S. Government securities, insurance companies and private issuers of debt obligations and suppliers of other investment alternatives for depositors such as securities firms. Competition from credit unions has intensified in recent years as historical federal limits on membership have been relaxed. Because federal law subsidizes credit unions by giving them a general exemption from federal income taxes, credit unions have a significant cost advantage over banks and savings associations, which are fully subject to federal income taxes. Credit unions may use this advantage to offer rates that are highly competitive with those offered by banks and thrifts.

Current federal law allows the acquisition of banks by bank holding companies nationwide. Further, federal and Maryland law permit interstate banking. Recent legislation has broadened the extent to which financial services companies, such as investment banks and insurance companies, may control commercial banks. As a consequence of these developments, competition in our principal market may increase, and a further consolidation of financial institutions in Maryland may occur.

STRATEGY

We operate on the premise that the consolidation activities in the banking industry have created an opportunity for a well-capitalized community bank to satisfy banking needs that are no longer being adequately met in the local market. Large national and regional banks are catering to larger customers and provide an impersonal experience, and typical community banks, because of their limited capacity, are unable to meet the needs of many small-to-medium-sized businesses. Specifically, as a result of bank mergers in the 1990s, many banks in the Baltimore metropolitan area became local branches of large regional and national banks. Although size gave the larger banks some advantages in competing for business from large corporations, including economies of scale and higher lending limits, we believe that these larger, national banks remain focused on a mass market approach which de-emphasizes personal contact and service. We also believe that the centralization of decision-making power at these large institutions has resulted in a lack of customer service. At many of these institutions, determinations are made at the out-of-state “home office" by individuals who lack personal contact with customers as well as an understanding of the customers' needs and scope of the relationship with the institution. We believe that this trend is ongoing, and continues to be particularly frustrating to owners of small and medium-sized businesses, business professionals and individual consumers who traditionally have been accustomed to dealing directly with a bank executive who had an understanding of their banking needs with the ability to deliver a prompt response.

We attempt to differentiate ourselves from the competition through personalized service, flexibility in meeting the needs of customers, prompt decision making and the availability of senior management to meet with customers and prospective customers.

OVERVIEW

The Merger and Slavie Acquisition strengthened our market position geographically and continued to enhance our delivery channels, allowing us to provide extraordinary customer service while delivering a fuller range of products and services and lessened our dependence on net interest income by adding fee-based sources of revenue including a mortgage origination division, and electronic banking division. Amid the growth, our focus is on a high quality balance sheet, expense efficiency and improved profitability.

Net income was $0.34 million or $0.03 per basic and diluted share for the three months ended March 31, 2015 when compared to net income of $0.08 million or $0.01 per basic and diluted share for the first three months of 2014. The net income improvement was the result of balance sheet leverage and improving expense metrics.

The return on average assets for the three months ended March 31, 2015 was 0.29%, compared to 0.08% for the same period of 2014. The return on average equity for the three months ended March 31, 2015 was 2.08%, compared to 0.61% for the same periods of 2014.

Total assets increased to $487 million at March 31, 2015 from $480 million at December 31, 2014. The balance sheet growth was driven by an increase in total deposits for the three months ended March 31, 2015. Total deposits of $404 million represented a $16 million or 4.2% increase from December 31, 2014. Noninterest-bearing deposits accounted for $10.0 million of the net growth, with the remaining $6.5 million net increase for the three months ended March 31, 2015 generated from interest-bearing accounts.

Total loans were $392 million at March 31, 2015, a decrease of 0.4% from $393 million at December 31, 2014. Loans held for sale increased to $12 million, an increase of 72.7% from $7 million at December 31, 2014. Investments declined by $3.0 million or 8% to $35.5 million at March 31, 2015 from $38.5 million at December 31, 2014. Cash and cash equivalents increased by $6.7 million or 40% to $23.6 million from $16.9 million at December 31, 2014.

Net interest income increased by $0.16 million to $5.3 million for the three months ended March 31, 2015 when compared to the same period of 2014. The increase was supported by a $69 million growth in average interest-earning assets largely due to the Slavie Acquisition on May 30, 2014, offset by a $0.42 million decline in net discount accretion of purchased loan discounts recognized in interest income and a $0.35 million decrease in the fair value amortization on deposits. Excluding the impact of the fair value accounting, net interest income for the first quarter of 2015 increased by $0.93 million when compared to the first quarter of 2014. The net interest margin for the three months ended March 31, 2015 decreased to 4.73% from 5.40% for the three months ended March 31, 2014, due mainly to the decline in discount accretion on loans and deposits.

Nonperforming assets, which consist of nonaccrual loans, troubled debt restructurings, accruing loans past due 90 days or more and real estate acquired through foreclosure, increased slightly to $15.61 million at March 31, 2015, up from $14.87 million at December 31, 2014. The increase included the reclassification of a $0.3 million PCI loan to TDR and $0.7 million increase in nonaccrual loans. Nonperforming assets represented 3.21% of total assets at March 31, 2015, which was slightly higher than the 3.10% recorded at December 31, 2014.

The provision for loan losses for the three months ended March 31, 2015 was $275,000, compared to $219,000 for the same period of 2014. The increase for the 2015 period was primarily the result of an increase in loan originations. As a result, the allowance for loan losses was $1.35 million at March 31, 2015, representing 0.35% of total loans, compared to $1.29 million, or 0.33% of total loans, at December 31, 2014. Management expects both the allowance for loan losses and the related provision for loan losses to increase in the future due to the gradual accretion of the discount on the acquired loan portfolios and an increase in new loan originations.

Stockholders’ equity decreased to $65.7 million at March 31, 2015 from $66.6 million at December 31, 2014. The decrease since December 31, 2014 related to an increase in the Bay Bank defined benefit pension plan liability due to changes in actuarial assumptions, offset by related deferred taxes. The book value of the Company’s common stock was $5.96 per share at March 31, 2015, compared to $6.05 per share at December 31, 2014.

Recent Events

On April 27, 2015, the Bank reclassified the Columbia branch located at 7151 Columbia Gateway Drive, Suite A, in Howard County, Maryland from a limited service branch to a full service branch in recognition of its desire to expand further south toward the Washington corridor. The branch is an in-line branch housed in the Bank’s Operations Center and has a compliment of associates who are actively working this market. Branch services will be available from 8:30 AM until 5:00 PM from Monday through Friday, with other times available by appointment.

During the second quarter of 2015, Bay Bank intends to move its corporate headquarters from 2328 West Joppa Road in Lutherville, Maryland to 7151 Columbia Gateway Drive, Suite A, in Howard County Maryland. The change demonstrates that while the Bank’s primary geographic footprint has historically been the greater Baltimore metropolitan area, the Bank continues to expand in the growing Howard County market and is part of a strategic extension of the Bank’s presence towards the Washington DC corridor.

CRITICAL ACCOUNTING POLICIES

Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany transactions are eliminated in consolidation and certain reclassifications are made when necessary in order to conform the previous year’s financial statements to the current year’s presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented. Therefore, actual results could differ from these estimates. Our financial condition and results of operations are sensitive to accounting measurements and estimates of matters that are inherently uncertain. When applying accounting policies in areas that are subjective in nature, management must use its best judgment to arrive at the carrying value of certain assets. The most critical accounting policies applied relate to treatment of the allowance for loan losses, accounting for acquired loans, valuation of the securities portfolio, and accounting for income taxes.

Allowance for Loan Losses

The allowance involves a higher degree of judgment and complexity than other significant accounting policies. The allowance is calculated with the objective of maintaining a reserve level believed by us to be sufficient to absorb estimated probable loan losses. Our determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, expected loan commitment usage, the amounts and timing of expected future cash flows on impaired and purchased credit impaired loans, value of collateral, estimated losses on consumer loans and residential mortgages and general amounts for historical loss experience. The process also considers economic conditions and inherent risks in the loan portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from our estimates, an additional provision for loan losses may be required that would adversely impact earnings in future periods. See the section of this document titled, “Allowance for Loan Losses and Credit Risk Management.”

Accounting for Acquired Loans

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past due and nonaccrual status, borrower credit scores and recent loan to value percentages. Purchased credit impaired loans are initially measured at fair value, which considers estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance related to these loans was not carried over and recorded at the acquisition date. We monitor actual loan cash flows to determine any improvement or deterioration from those forecasted as of the acquisition date. Our acquired loans with specific credit deterioration are accounted for in accordance with Financial Accounting Standards Board Accounting Standards Codification 310-30. Certain acquired loans, those for which specific credit related deterioration subsequent to origination is identified, are recorded at fair value reflecting the present value of the amounts expected to be collected. Income recognition on purchased credit impaired loans is based on a reasonable expectation about the timing and amount of cash flows to be collected.

Valuation of the Securities Portfolio

Securities are evaluated periodically to determine whether a decline in their value is other than temporary. The term “other than temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of an investment. We review other criteria such as magnitude and duration of the decline, as well as the reasons for the decline, to predict whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

Accounting for Income Taxes

We use the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e., temporary differences) and are measured at the enacted rates in effect when these differences reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We exercise significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods. Realization of deferred tax assets is dependent on generating sufficient taxable income in the future.

RESULTS OF OPERATIONS

Net Interest Income

The following table sets forth, for the periods indicated, information regarding the average balances of interest earning assets and interest bearing liabilities, the amount of interest income and interest expense and the resulting yields on average interest earning assets and rates paid on average interest bearing liabilities. No tax equivalent yield adjustments were made, as the effect thereof was not material.



		Three Months Ended March 31, 2015					Three Months Ended March 31, 2014

		Average Balance		Interest	Yield/Rate		Average Balance		Interest	Yield/Rate

ASSETS
Interest-earning assets:

Interest bearing deposits with banks and federal funds sold	$	22,358,085	$	10,612	0.19%	$	26,084,721	$	13,368	0.21%
Investment securities available for sale		34,010,593		236,561	2.82%		36,434,000		240,838	2.64%
				-
Investment securities held to maturity		1,308,259		7,511	2.33%		-		-	0.00%

Restricted equity securities		1,243,247		13,364	4.36%		982,989		6,511	2.65%
Total cash and investments		58,920,184		268,048	1.86%		63,501,710		260,717	1.67%

Loans held for sale		6,546,195		61,511	3.76%		8,263,308		85,801	4.15%
Loans, net
Commercial & Industrial		35,094,972		495,132	5.72%		32,696,980		575,366	7.14%
Commercial Real Estate		160,156,667		2,122,766	5.38%		157,626,386		2,603,202	6.70%
Residential Real Estate		138,052,342		2,143,411	6.21%		73,432,087		1,079,979	5.88%
HELOC		34,268,754		378,908	4.42%		32,443,433		500,167	6.17%
Construction		18,683,290		243,730	5.29%		17,819,565		306,919	6.99%
Land		5,504,731		98,955	7.29%		1,693,796		50,017	11.98%
Consumer & Other		1,019,943		24,865	9.89%		1,515,536		24,736	6.62%
Total loans, net (1)		392,780,699		5,507,767	5.69%		317,227,783		5,140,386	6.57%
Total earning assets		458,247,078	$	5,837,326	5.17%		388,992,801	$	5,486,904	5.72%
Cash		3,490,128					4,261,331
Allowance for loan losses		(1,383,464)					(847,448)
Market valuation		569,036					(2,469)
Other assets		24,105,024					24,614,512
Total non-earning assets		26,780,724					28,025,926
Total Assets	$	485,027,802				$	417,018,727

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing checking and savings	$	83,745,176	$	22,848	0.11%	$	67,276,513	$	19,443	0.12%
Money market		85,528,873		72,504	0.34%		83,958,088		72,734	0.35%
Certificates of deposit		131,805,843		389,049	1.20%		119,922,648		216,882	0.73%
Total interest-bearing deposits		301,079,892		484,401	0.65%		271,157,249		309,059	0.46%
Borrowed funds:
Federal funds purchased		-		-	-		-		-	-
FHLB advances		16,155,556		13,776	0.35%		-		-	-
Total borrowed funds		16,155,556		13,776	0.35%		-		-	-
Total interest-bearing funds		317,235,447		498,177	0.64%		271,157,249		309,059	0.46%
Noninterest-bearing deposits		98,169,855		-	-		88,772,338		-	-
Total cost of funds		415,405,302	$	498,177	0.49%		359,929,587	$	309,059	0.35%
Other liabilities and accrued expenses		2,836,818					2,337,859
Total Liabilities		418,242,120					362,267,446
Stockholders' Equity		66,785,682					54,751,281
Total Liabilities and Stockholders' Equity	$	485,027,802				$	417,018,727
Net interest income and spread (2)			$	5,339,149	4.53%			$	5,177,845	5.26%
Net interest margin (3)					4.67%					5.40%

(1)

Non-accrual loans are included in average loans.

(2)

Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(3)

Net interest margin represents net interest income as a percentage of average interest-earning assets.

Net interest income, the amount by which interest income on interest-earning assets exceeds interest expense on interest-bearing liabilities, is the most significant component of our earnings. Net interest income is a function of several factors, including the volume and mix of interest-earning assets and funding sources, as well as the relative level of market interest rates. While management’s policies influence some of these factors, external forces, including customer needs and demands, competition, the economic policies of the federal government and the monetary policies of the Federal Reserve also affect net interest income.

Net interest income increased by $0.2 million for the quarter ended March 31, 2015 when compared to the same period of 2014. The increase was supported by a $69 million growth in average interest-earning assets largely due to “the Slavie Acquisition” in May 30, 2014, offset by a $0.42 million decline in net discount accretion of purchased loan discounts recognized in interest income and a $0.35 million decrease in the fair value amortization on deposits. Excluding the impact of the fair value accounting, net interest income increased by $0.97 million when compared to the three months ended March 31, 2014. The net interest margin for the three months ended March 31, 2015 decreased to 4.67% from 5.40% for the same period in 2014 due to the decline in discount accretion on loans and deposits.

Total interest income increased by $0.35 million, or 6.39%, for the three months ended March 31, 2015 when compared to the same period of 2014. Interest income on loans increased by $0.37 million, or 7.15%, for the three months ended March 31, 2015 when compared to the same period of 2014. The average balance of loans increased by $75.6 million primarily due to the Slavie Acquisition, offset by a 0.88% decrease in average loan yield, when compared to the same period of 2014. The decrease in loan yield was due to both the decline in net discount accretion on purchased loan discounts and a decline in the core loan portfolio yield as rates on new loan production trailed the rates on principal payments received. Interest income on loans held for sale, investment securities and interest-bearing deposits in banks and federal funds sold was essentially unchanged for the three months ended March 31, 2015 when compared to the same period of 2014.

Total interest expense increased by $0.19 million, or 61.2%, for the three months ended March 31, 2015, when compared to the same period of 2014. Average interest bearing liabilities increased by $46.1 million for the three months ended March 31, 2015 when compared to the same period of 2014. The total cost of interest-bearing liabilities increased to 0.64% for the three months ended March 31, 2015, as compared to 0.46% for the same period of 2014. The increase in interest expenses related to a $0.35 million decline in the fair value amortization of deposits, when compared to the same period of 2014. Average noninterest-bearing deposits increased by $9.4 million for the three ended March 31, 2015, when compared to the same period in 2014, primarily due to the Slavie Acquisition.

Provision for Loan Losses

The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management's best estimate, is necessary to absorb probable losses within the existing loan portfolio. On a monthly basis, management reviews all loan portfolios to determine trends and monitor asset quality. For consumer loan portfolios, this review generally consists of reviewing delinquency levels on an aggregate basis with timely follow-up on accounts that become delinquent. In commercial loan portfolios, delinquency information is monitored and periodic reviews of business and property leasing operations are performed on an individual loan basis to determine potential collection and repayment problems. See the section captioned “Allowance for Loan Losses” elsewhere in this discussion for further analysis of the provision for loan losses.

The provision for loan losses for the three months ended March 31, 2015 was $275,000, compared to $219,000 for the same period of 2014. The increase for the 2015 period was primarily the result of an increase in loan originations. As a result, the allowance for loan losses was $1.35 million at March 31, 2015, representing 0.35% of total loans, compared to $1.29 million, or 0.33% of total loans, at December 31, 2014 and $0.94 million, or 0.30% of total loans, at March 31, 2014. Management expects both the allowance for loan losses and the related provision for loan losses to increase in the future due to the gradual accretion of the discount on the acquired loan portfolios and an increase in new loan originations.

Noninterest Income

The following tables reflect the amounts and changes in noninterest income for the three ended March 31, 2015 and 2014:



		Three Months Ended March 31,				2015 vs 2014
		2015		2014		$ Change	% Change

Electronic banking fees	$	576,190	$	639,994	$	(63,804)	-10%
Mortgage-banking fees and gains		393,642		312,675		80,967	26%
Net (loss) gain on sale of real estate acquired through foreclosure		(628)		1,829		(2,457)	-134%
Service charges on deposit accounts		79,017		92,513		(13,496)	-15%
Gain on redemption of securities		77,490		-		77,490	0%
Other income		111,509		206,361		(94,852)	-46%
Total Noninterest Income	$	1,237,220	$	1,253,372	$	(16,152)	-1%

Noninterest income for the three months ended March 31, 2015 was $1.24 million, compared to $1.25 million for the same period in 2014. This decrease was primarily the result of $0.06 million decrease in electronic banking fees and a $0.09 million decrease in other income, partially offset by a $0.08 million increase in mortgage banking fees and gains and a $0.08 million increase in gain on redemption of investment securities. Expectations are for mortgage fees and gains to increase in 2015.

Noninterest Expenses

The following table reflects the amounts and changes in noninterest expense for the three months ended March 31, 2015 and 2014:



		Three Months Ended March 31,				2015 vs 2014
		2015		2014		$ Change	% Change

Salary and employee benefits	$	2,919,119	$	3,365,432	$	(446,313)	-13%
Occupancy expenses		719,832		749,279		(29,447)	-4%
Furniture and equipment expenses		275,401		312,129		(36,728)	-12%
Legal, accounting and other professional fees		368,028		394,120		(26,092)	-7%
Data processing and items processing services		342,673		275,150		67,523	25%
FDIC insurance costs		106,311		67,709		38,602	57%
Advertising and marketing related expenses		28,749		39,405		(10,656)	-27%
Foreclosed property expenses		60,363		199,363		(139,000)	-70%
Loan collection costs		87,510		47,179		40,331	85%
Core deposit intangible amortization		254,545		274,295		(19,750)	-7%
Merger and acquisition related expenses		-		111,323		(111,323)	-100%
Other expenses		537,353		504,289		33,064	7%
Total Noninterest Expenses	$	5,699,884	$	6,339,673	$	(639,789)	-10%

Noninterest expense reduction is a key focus for 2015 net income improvement. For the three months ended March 31, 2015, noninterest expense was $5.7 million, compared to $6.3 million for the three months ended March 31, 2014. The primary contributors to the decrease when compared to the first quarter of 2014 were decreases of $0.45 million in salary and employee benefits influenced by 2014 branch closures and position reductions, $0.14 million in foreclosed property expenses and $0.11 million in merger and acquisition related expenses. Partially offsetting these reductions were increases of $0.07 million and $0.04 million in data and items processing and FDIC insurance costs, respectively, primarily attributable to the increase in accounts and balances from the Slavie Acquisition.

Income Taxes

The provision for income taxes totaled $0.3 million, or an effective tax rate of 42.9%, for the three months ended March 31, 2015, compared to a $0.2 million benefit, or an effective tax rate of 164.0%, for the same period in 2014. The effective tax rate for the three months ended March 31, 2014 included the impact of the reversal of a valuation allowance attributable to future built-in losses that was recorded in 2013. The effective rate of 42.9% for the three month ended March 31, 2015 is comparable to the effective rate for the same period in 2014, excluding the tax benefit resulting from the reversal of the valuation allowance, or 40.9%.

FINANCIAL CONDITION

Total assets were $487 million at March 31, 2015, an increase of $7.1 million, or 1.5%, when compared to December 31, 2014. The increase was due to net increases in cash and interest bearing deposits of $6.7 million, or 39.6%, and an increase in loans held for sale $5.3 million, or 72.7%. This was offset by a $3.0 million, or 7.9%, decline in investment securities and a $1.5 million, or 0.4%, decrease in loans. The Bank generated $15.0 million of new commercial loan production for the three months ended March 31, 2015.

Total deposits were $404.3 million at March 31, 2015, an increase of $16.5 million, or 4.2%, when compared to December 31, 2014. The increase was primarily driven by a $10.0 million, or 10.9%, increase in noninterest bearing deposits. Interest bearing deposits increased by $6.5 million, or 2.2%, for the three months ended March 31, 2015. Supported by the deposit growth, the Company was successful in reducing borrowings to $12.2 million at March 31, 2015, a decrease of $10.0 million, or 45.1%, when compared to December 31, 2014.

Stockholders’ equity was $65.7 million at March 31, 2015, a decrease of $1.0 million when compared to December 31, 2014. The decrease related to an increase in the Bay Bank defined benefit pension plan liability due to changes in actuarial assumptions, offset by related deferred taxes and the Company’s net income for the three months ended March 31, 2015 of $0.34 million.

Investment Securities

Our investment policy authorizes management to invest in traditional securities instruments in order to provide ongoing liquidity, income and a ready source of collateral that can be pledged in order to access other sources of funds. The investment portfolio consists of available for sale and held to maturity securities. Available for sale securities are those securities that we intend to hold for an indefinite period of time but not necessarily until maturity. These securities are carried at fair value and may be sold as part of an asset/liability management strategy, liquidity management, interest rate risk management, regulatory capital management or other similar factors. Held to maturity securities are securities we have the intent and ability to hold until maturity. These securities are carried at amortized cost.

The investment portfolio consists primarily of U.S. Government agency securities, residential mortgage-backed securities, and state and municipal obligations. The income from state and municipal obligations is exempt from federal income tax. Certain agency securities are exempt from state income taxes. We use the investment portfolio as a source of both liquidity and earnings. Management continues to evaluate investment options that will produce income without assuming significant credit or interest rate risk and to look for opportunities to use liquidity from maturing investments to reduce our use of high cost time deposits and borrowed funds.

Investment securities decreased $3.0 million, or 7.9%, to $35.5 million at March 31, 2015, from $38.5 million at December 31, 2014. This decrease was the result of net principal pay downs of $0.8 million and Federal Home Loan Bank of Atlanta (“FHLB”) stock redemptions of $0.6 million, a $1.9 million principal call on an Agency security and an increase in the fair value of available for sale securities $0.2 million.

Restricted Equity Securities

Restricted equity securities decreased $0.6 million, or 30.7%, to $1.3 at March 31, 2015, from $1.9 million at December 31, 2014. This decrease was the result of the redemption of FHLB stock required as a result of decreased borrowings from the FHLB.

Loans Held for Sale

Loans held for sale were $12.5 million at March 31, 2015, compared to $7.2 million at December 31, 2014. The increase in loans held for sale was due to new originations outpacing loan sales during the first three months of 2015. Loans originated for sale to third-party investors generally remain on our balance sheet for an average of 45 days.

Loans

Loans, net of deferred fees and costs, decreased by $1.6 million from $393.1 million at December 31, 2014 to $391.5 million at March 31, 2015, primarily due to pay downs outpacing originations.

Loans are placed on nonaccrual status when they are past-due 90 days as to either principal or interest or when, in the opinion of management, the collection of all interest and/or principal is in doubt. Placing a loan on nonaccrual status means that we no longer accrue interest on such loan and reverse any interest previously accrued but not collected. Management may grant a waiver from nonaccrual status for a 90-day past-due loan that is both well secured and in the process of collection. A loan remains on nonaccrual status until the loan is current as to payment of both principal and interest and the borrower demonstrates the ability to make payments in accordance with the terms of the loan and remain current.

A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the fair value of the collateral for collateral dependent loans and at the present value of expected future cash flows using the loans’ effective interest rates for loans that are not collateral dependent.

At March 31, 2015, we had 277 impaired loans totaling $43.2 million (including PCI loans of $35.3 million). Of this amount, 86 impaired loans totaling $7.9 million were classified as nonaccrual loans. At March 31, 2015, troubled debt restructurings, or TDRs, included in impaired loans totaled $3.9 million, 19 loans of which were included in nonaccrual loans having a total balance of $1.8 million. Borrowers under all other restructured loans are paying in accordance with the terms of the modified loan agreement and have been placed on accrual status after a period of performance with the restructured terms. At March 31, 2015, there was a specific reserve included in the allowance for loan losses for impaired loans of $45,000.

The following table presents details of our nonperforming loans and nonperforming assets, as these asset quality metrics are evaluated by management, at the dates indicated:




	March 31, 2015		December 31, 2014

Nonaccrual loans excluding PCI loans	$	5,756,335	$	5,237,356
Nonaccrual PCI loans		2,141,669		1,620,710
TDR loans excluding those in nonaccrual loans or past due 90+ days		2,119,022		1,155,508
Accruing PCI loans past due 90+ days		4,091,907		5,380,847

Total nonperforming loans		14,108,933		13,394,421

Real estate acquired through foreclosure		1,501,135		1,480,472

Total nonperforming assets	$	15,610,068	$	14,874,893

Nonperforming assets, which consist of nonaccrual loans, troubled debt restructurings, accruing loans past due 90 days or more, and real estate acquired through foreclosure, increased to $15.61 million at March 31, 2015 from $14.87 million at December 31, 2014. The increase included the reclassification of a $0.3 million PCI loan to TDR and $0.7 million increase in nonaccrual loans. Nonperforming assets represented 3.21% of total assets at March 31, 2015, which represents a 0.11% increase from the 3.10% recorded at December 31, 2014.

Potential problem loans consist of loans that are performing under contract but for which credit problems have caused us to place them on our list of criticized loans. These loans have a risk rating of 6 (Special Mention) or higher, and exclude all nonaccrual loans and accruing loans past due 90+ days. As of March 31, 2015, these loans totaled $31.6 million and consisted primarily of Commercial Real Estate loans and Residential Real Estate loans which had balances of $18.5 million and $9.5 million, respectively. Difficulties in the economy and the accompanying impact on these borrowers, as well as future events, such as regulatory examination assessments, may result in these loans and others being classified as nonperforming assets in the future.

Allowance for Loan Losses and Credit Risk Management

The allowance for loan losses is established to estimate losses that may occur on loans by recording a provision for loan losses that is charged to earnings in the current period. The allowance is evaluated on a quarterly basis by management and is based upon management’s periodic review of the collectability of the loans in light of historic experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Measured impairment and credit losses are charged against the allowance when management believes the loan or a portion of the loan’s balance is not collectable. Subsequent recoveries, if any, are credited to the allowance.

The allowance consists of specific and general components. The specific component relates to individual loans that are classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement and primarily includes nonaccrual loans, troubled debt restructurings, and purchased credit impaired loans where cash flows have deteriorated from those forecasted as of the acquisition date. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value, or observable market price, whichever is appropriate, of the impaired loan is lower than the carrying value of the loan. For collateral-dependent impaired loans, any measured impairment is properly charged-off against the loan and allowance in the applicable reporting period. The specific component may fluctuate from period to period if changes occur in the nature and volume of impaired loans.

The general component covers pools of similar loans, including purchased loans that did not have deteriorated credit quality and new loan originations, and is based upon historical loss experience of the bank or peer bank group if the bank’s loss experience is deemed by management to be insufficient and several qualitative factors. These qualitative factors address various risk characteristics in the Bank’s loan portfolio after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss data. Management will continue to evaluate the appropriateness of the peer group data used with each quarterly allowance analysis until such time that the Bank has sufficient loss experience to provide a foundation for the general reserve requirement. The general component may fluctuate from period to period if changes occur in the mix of the Bank’s loan portfolio, economic conditions, or specific industry conditions.

A test of the adequacy of the allowance, using the methodology outlined above, is performed by management and reported to the Board of Directors on at least a quarterly basis. The complex evaluations involved in such testing require significant estimates. Management uses available data to establish the allowance at a prudent level, recognizing that the determination is inherently subjective, and that future adjustments may be necessary, depending upon many items including a change in economic conditions affecting specific borrowers, or in general economic conditions, and new information that becomes available. However, there are no assurances that the allowance will be sufficient to absorb losses on nonperforming loans, or that the allowance will be sufficient to cover losses on nonperforming loans in the future

The allowance was $1,353,849 at March 31, 2015, compared to $1,294,976 at December 31, 2014. The allowance as a percentage of total portfolio loans was 0.35% at March 31, 2015 and 0.33% at December 31, 2014. Management expects continued gradual increases in our allowance for loan losses due to the gradual runoff of the discount on the acquired loan portfolio and an increase in new loan originations.

For non-impaired loans acquired by the Bank from Bay National Bank on July 10, 2010 without evidence of deteriorated credit quality, there was a net unamortized discount of $0.8 million and $0.7 million at March 31, 2015 and December 31, 2014, respectively, which represented 3.5% and 3.3%, respectively, of the related loan balance. For non-impaired acquired legacy Carrollton Bank portfolio loans without evidence of deteriorated credit quality, there was a net unamortized discount of $1.3 million and $1.3 million at March 31, 2015 and December 31, 2014, respectively, which represented 1.1% and 1.0%, respectively, of the related loan balance. For non-impaired acquired legacy Slavie portfolio loans without evidence of deteriorated credit quality, there was an unamortized discount of $2.1 million and $2.2 million at March 31, 2015 and December 31, 2014, respectively, which represented 4.2% and 3.9%, respectively, of the related loan balance at those dates. As the total combined remaining discount exceeded the indicated total required reserve for these loan pools, no additional reserves were recorded.

During the three months ended March 31, 2015, we recorded net charge-offs of $216,236, compared to net charge-offs of $128,450 during the same period of 2014.

The following table reflects activity in the allowance for loan losses for the periods indicated:


	Three Months Ended March 31,
		2015		2014
Balance at beginning of year	$	1,294,976	$	851,000
Chargeoffs:
Commercial & Industrial		-		-
Commercial Real Estate		-		(47,791)
Residential Real Estate		(215,236)		(37,478)
Home Equity Line of Credit		-		(63,984)
Land		-		-
Construction		-		-
Consumer & Other		(1,000)		-
Total charge-offs		(216,236)		(149,253)

Recoveries:
Commercial & Industrial		-		-
Commercial Real Estate		-		-
Residential Real Estate		-		1,859
Home Equity Line of Credit		-		8,844
Land		-		-
Construction		-		-
Consumer & Other		-		10,100
Total recoveries		-		20,803

Net charge-offs		(216,236)		(128,450)
Provision for loan loss		275,109		219,165

Balance at end of period	$	1,353,849	$	941,715

Net charge-offs annualized as a percentage of average loans		0.22%		0.16%

Deposits

The following deposit table presents the composition of deposits at the dates indicated.



	March 31, 2015			December 31, 2014				2015 vs 2014
		Amount	% of Total		Amount	% of Total		$ Change	% Change
Noninterest-bearing deposits	$	101,629,926	25%	$	91,676,534	24%	$	9,953,392	11%

Interest-bearing deposits:
Checking		54,312,746	13%		54,844,855	14%		(532,109)	-1%
Savings		37,562,592	9%		36,233,369	9%		1,329,223	4%
Money market		84,024,515	21%		82,651,992	21%		1,372,523	2%
Total interest-bearing checking, savings and money market deposits		175,899,853	44%		173,730,216	46%		2,169,637	1%

Time deposits under $100,000		49,869,670	12%		50,313,096	13%		(443,426)	-1%
Time deposits of $100,000 or more		76,905,150	19%		72,110,286	19%		4,794,864	7%
Total time deposits		126,774,820	31%		122,423,382	31%		4,351,438	4%
			��
Total interest bearing deposits		302,674,673	75%		296,153,598	76%		6,521,075	2%

Total Deposits	$	404,304,599	100%	$	387,830,132	100%	$	16,474,467	4%

Total deposits were $404 million at March 31, 2015, an increase of $16 million, or 4%, when compared to December 31, 2014. Within the deposit base, noninterest bearing demand account balances increased $10 million, or 11%, interest bearing savings account balances increased by $1 million, or 4%, money market balances increased $1 million, or 2%, and time deposit balances increased by $4 million, or 4%, when compared to the amounts at December 31, 2014.

The ratio of noninterest bearing deposits to total deposits was 25% as of March 31, 2015, 1% higher than at December 31, 2014. Included in our deposit portfolio are brokered deposits through the Promontory Interfinancial Network (the “Network”). Through this deposit matching network, which includes Certificate of Deposit Registry Service (“CDARS“) and Insured Cash Sweep service (“ICS”) deposits, we have the ability to offer our customers access to FDIC-insured deposit products in aggregate amounts exceeding current insurance limits. When we place funds through the Network on behalf of a customer, we typically receive matching deposits through the network’s reciprocal deposit program. At March 31, 2015, we had $17.2 million in deposits through the Network compared to $8.9 million at December 31, 2014. We can also choose to place deposits through the Network without receiving matching deposits. At March 31, 2015, we had placed $0.2 million of deposits through the Network for which we received no matching deposits, compared to $0.3 million at December 31, 2014.

Borrowings

Borrowings at March 31, 2015 consisted of FHLB advance of $12 million and Atlantic Community Bankers Bank advances of $0.2 million, compared to $22 million and $0.2 million, respectively as of December 31, 2014.

CAPITAL RESOURCES

Ample capital is necessary to sustain growth, provide a measure of protection against unanticipated declines in asset values and safeguard the funds of depositors. Capital also provides a source of funds to meet loan demand and enables us to manage assets and liabilities effectively.

At March 31, 2015, our total stockholders’ equity decreased to $65.7 million from $66.6 million at December 31, 2014. The decrease was attributable to a $1.5 million net unrealized loss on our defined benefit pension plan which more than offset the increases to equity from a $.1 million unrealized gain on available for sale investment securities and the retention of $.4 million of corporate earnings.

In July 2013, federal bank regulatory agencies issued a final rule that revises their risk based capital requirements and the method for calculating risk weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision (“Basel III”) and certain provisions of the Dodd-Frank Act. The rule is applicable to the Bank effective January 1, 2015. However, the rule does not apply to the Company since it is a small bank holding company with less than $500 million in total consolidated assets.

The rule imposes higher risk based capital and leverage requirements than those in place at the time the rule was issued. Specifically, the rule imposes the following minimum capital requirements to be considered adequately capitalized:

A new common equity Tier 1 risk based capital ratio of 4.5%;

A Tier 1 risk-based capital ratio of 6% (increased from the previous 4% requirement);

A total risk-based capital ratio of 8% (unchanged from previous requirements); and

A leverage ratio of 4%.

The rule also includes changes in what constitutes regulatory capital, some of which are subject to a transition period. These changes include the phasing out of certain instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Certain deferred tax assets over designated percentages of common stock are required to be deducted from capital, subject to a transition period. Finally, common equity Tier 1 capital includes accumulated other comprehensive income (which includes all unrealized net gains and losses on available for sale debt and equity securities and all unrealized net gain or loss on defined benefit pension plan), subject to a transition period and a one-time opt-out election. The Bank elected to opt-out of this provision. As such, accumulated comprehensive income is not included in determining the Bank’s regulatory capital ratios.

The rule also includes changes in the risk weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and non-residential mortgage loans that are 90 days past due or otherwise on nonaccrual status, a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not

unconditionally cancellable, a 250% risk weight (up from 100%) for deferred tax assets that are not deducted from capital and increased risk weights (from 0% to up to 600%) for certain equity exposures.

Finally, the rule limits capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% (once fully phased in) of common equity Tier 1 capital to risk weighted assets in addition to the amount necessary to meet its minimum risk based capital requirements.

The final rule became effective on January 1, 2015, and the requirements in the rule will be fully phased-in by January 1, 2019. While the ultimate impact of the fully phased-in capital standards on the Company and the Bank is currently being reviewed, we currently do not believe that compliance with Basel III will have a material impact once fully implemented.

Regulatory Capital and Other Requirements

The Bank is required to meet regulatory capital requirements that include several measures of capital. As permitted by the regulatory capital regulations in effect as of March 31, 2015, the Bank made a one-time election to exclude all of the components of accumulated other comprehensive income (loss) from its regulatory capital calculation.

For regulatory capital purposes as of March 31, 2015, deferred tax assets that arise from net operating loss and tax credit carryforwards (net of any related valuations allowances and net of deferred tax liabilities) are excluded from regulatory capital, in addition to certain overall limits on net deferred tax assets as a percentage of common equity Tier 1 capital. At March 31, 2015, $2.2 million of the Bank’s net deferred tax asset was included in common equity Tier 1, Tier 1 and total regulatory capital. We will continue to evaluate the realizability of our net deferred tax asset on a quarterly basis for both financial reporting and regulatory capital purposes. This evaluation may result in the inclusion of a deferred tax asset in regulatory capital in an amount that is different from the amount determined under GAAP.

In addition, the OCC requires that FSBs, like the Bank, maintain a minimum level of Tier 1 capital to average total assets excluding intangibles. This measure is known as the leverage ratio. The current regulatory minimum for the leverage ratio for institutions to be considered adequately capitalized is 4%, but an individual institution could be required to maintain a higher level. In connection with the Merger, the Bank entered into an Operating Agreement with the OCC pursuant to which the Bank agreed, among other things, to maintain a leverage ratio of at least 10% for the term of the Operating Agreement. The Operating Agreement will remain in effect until it is terminated by the OCC or the Bank ceases to be an FSB.

Actual capital amounts and ratios for the Bank are presented in the following table (dollars in thousands):



										To Be Well
										Capitalized Under
						To Be Considered				Prompt Corrective
		Actual				Adequately Capitalized				Action Provisions
As of March 31, 2015:		Amount	Ratio			Amount	Ratio			Amount	Ratio

Common Equity Tier 1 Capital	$	62,818	16.22	%	$	17,432	4.50	%	$	25,180	6.50	%

Tier I Risk-Based Capital Ratio	$	62,818	16.22	%	$	23,243	6.00	%	$	30,990	8.00	%

Total Risk-Based Capital Ratio	$	64,172	16.57	%	$	30,990	8.00	%	$	38,738	10.00	%

Tier 1 Leverage Ratio	$	62,818	13.01	%	$	19,313	4.00	%	$	24,141	5.00	%

As of December 31, 2014:

Common Equity Tier 1 Capital		N/A	N/A			N/A	N/A			N/A	N/A

Tier I Risk-Based Capital Ratio	$	61,448	16.31	%	$	15,066	4.00	%	$	22,599	6.00	%

Total Risk-Based Capital Ratio	$	62,743	16.66	%	$	30,132	8.00	%	$	37,665	10.00	%

Tier 1 Leverage Ratio	$	61,448	12.94	%	$	18,988	4.00	%	$	23,735	5.00	%

The OCC is required to take certain supervisory actions against an undercapitalized FSB, the severity of which depends upon the FSB’s degree of capitalization. Failure to maintain an appropriate level of capital could cause the OCC to take any one or more of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

Banking regulations also limit the amount of dividends that may be paid without prior approval by an FSB's regulatory agency. In addition to these regulations, the Bank agreed in the Operating Agreement that it would not declare or pay any dividends or otherwise reduce its capital unless it is in compliance with the Operating Agreement, including the minimum capital requirements. Due to the Bank’s desire to preserve capital to fund its growth, we currently do not anticipate paying a dividend for the foreseeable future. In addition to these regulatory restrictions, it should be noted that the declaration of dividends is at the discretion of our Board of Directors and will depend, in part, on our earnings and future capital needs.

LIQUIDITY

Liquidity describes our ability to meet financial obligations, including lending commitments and contingencies, which arise during the normal course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of the Company’s customers, as well as to meet current and planned expenditures. Management monitors the liquidity position daily.

Our liquidity is derived primarily from our deposit base, scheduled amortization and prepayments of loans and investment securities, funds provided by operations and capital. Additionally, liquidity is provided through our portfolios of cash and interest-bearing deposits in other banks, federal funds sold, loans held for sale, and securities available for sale. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by the Bank’s competition.

The borrowing requirements of customers include commitments to extend credit and the unused portion of lines of credit, which totaled $77.0 million at March 31, 2015. Management notes that, historically, a small percentage of unused lines of credit are actually drawn down by customers within a 12 month period.

Our most liquid assets are cash and assets that can be readily converted into cash, including interest-bearing deposits with banks and federal funds sold, and investment securities. As of March 31, 2015, we had $6.3 million in cash and due from banks, $17.3 million in interest-bearing deposits with banks and federal funds sold, and $32.9 million in investment securities available for sale.

The Bank also has external sources of funds through the Federal Reserve Bank and FHLB, which can be drawn upon when required. The Bank has a line of credit totaling approximately $96.0 million with the FHLB of which $66.1 million was available to be drawn on March 31, 2015 based on outstanding advances and qualifying loans pledged as collateral. In addition, the Bank can pledge securities at the Federal Reserve Bank and FHLB and, depending on the type of security, may borrow approximately 50% to 97%, of the fair market value of the securities. The Bank had $18.2 million of securities pledged at the FHLB, $0.1 million of securities pledged at the Federal Reserve Bank, and an additional $15.8 million of unpledged securities. Using all securities as collateral, the Bank could borrow approximately $25.1 million as of March 31, 2015. Additionally, the Bank has unsecured federal funds lines of credit totaling $8.0 million with two institutions and a $4.0 million secured federal funds line of credit with another institution. The secured federal funds line of credit with another institution would require the Bank to transfer securities currently pledged at the FHLB or the Federal Reserve Bank or to pledge unpledged securities to this institution before it could borrow against this line. At March 31, 2015, the Bank had $12.0 million of FHLB advances outstanding.

To further aid in managing liquidity, the Bank’s Board of Directors has an Asset/Liability Management Committee (“ALCO”) to review and discuss recommendations for the use of available cash and to maintain an investment portfolio. By limiting the maturity of securities and maintaining a conservative investment posture, management can rely on the investment portfolio to help meet short-term funding needs.

We believe the Bank has adequate cash on hand and available through liquidation of investment securities and available borrowing capacity to meet our liquidity needs. Although we believe sufficient liquidity exists, if economic conditions and consumer confidence deteriorate, this liquidity could be depleted, which would then materially affect our ability to meet operating needs and to raise additional capital.

MARKET RISK AND INTEREST RATE SENSITIVITY

Our primary market risk is interest rate fluctuation. Interest rate risk results primarily from the traditional banking activities in which the Bank engages, such as gathering deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences affect the difference between the interest earned on our assets and the interest paid on liabilities. Our interest rate risk represents the level of exposure we have to fluctuations in interest rates and is primarily measured as the change in earnings and the theoretical market value of equity that results from changes in interest rates. The ALCO oversees our management of interest rate risk. The objective of the management of interest rate risk is to maximize

stockholder value, enhance profitability and increase capital, serve customer and community needs, and protect us from any material financial consequences associated with changes in interest rate risk.

Interest rate risk is that risk to earnings or capital arising from movement of interest rates. It arises from differences between the timing of rate changes and the timing of cash flows (repricing risk); from changing rate relationships across yield curves that affect bank activities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve risk); and from interest rate related options embedded in certain bank products (option risk). Changes in interest rates may also affect a bank’s underlying economic value. The value of a bank’s assets, liabilities, and interest-rate related, off-balance sheet contracts is affected by a change in rates because the present value of future cash flows, and in some cases the cash flows themselves, is changed.

We believe that accepting some level of interest rate risk is necessary in order to achieve realistic profit goals. Management and the Board have chosen an interest rate risk profile that is consistent with our strategic business plan.

The Company’s board of directors has established a comprehensive interest rate risk management policy, which is administered by our ALCO. The policy establishes limits on risk, which are quantitative measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity or “EVE” at risk) resulting from a hypothetical change in U.S. Treasury interest rates. We measure the potential adverse impacts that changing interest rates may have on our short-term earnings, long-term value, and liquidity by employing simulation analysis through the use of computer modeling. The simulation model captures optionality factors such as call features and interest rate caps and floors imbedded in investment and loan portfolio contracts. As with any method of gauging interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology we employ. When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model. Finally, the methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan customers’ ability to service their debts, or the impact of rate changes on demand for loan and deposit products.

We prepare a current base case and eight alternative simulations at least once a quarter and report the analysis to the board of directors. In addition, more frequent forecasts are produced when the direction or degree of change in interest rates are particularly uncertain to evaluate the impact of balance sheet strategies or when other business conditions so dictate.

The statement of condition is subject to quarterly testing for eight alternative interest rate shock possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by +/ - 100, 200, 300, and 400 basis points (“bp”), although we may elect not to use particular scenarios that we determine are impractical in the current rate environment. It is our goal to structure the balance sheet so that net interest-earnings at risk over a twelve-month period and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels.

At March 31, 2015, the simulation analysis reflected that the Bank is in a slightly asset sensitive position. Management currently strives to manage higher costing fixed rate funding instruments, while increasing assets that are more fluid in their repricing. An asset sensitive position, theoretically, is favorable in a rising rate environment since more assets than liabilities will re-price in a given time frame as interest rates rise. Similarly, a liability sensitive position, theoretically, is favorable in a declining interest rate environment since more liabilities than assets will re-price in a given time frame as interest rates decline. Management works to maintain a consistent spread between yields on assets and costs of deposits and borrowings, regardless of the direction of interest rates.

OFF-BALANCE SHEET ARRANGEMENTS

We enter into off-balance sheet arrangements in the normal course of business. These arrangements consist primarily of commitments to extend credit, lines of credit, and letters of credit issued by the Bank. Credit commitments are agreements to lend to a customer as long as there is no violation of any condition to the contract. Loan commitments generally have interest rates fixed at current market amounts, fixed expiration dates, and may require payment of a fee. Lines of credit generally have variable interest rates. Such lines do not represent future cash requirements because it is unlikely that all customers will draw upon their lines in full at any time. Letters of credit are commitments issued to guarantee the performance of a customer to a third party.

Our exposure to credit loss in the event of nonperformance by the borrower is the contract amount of the commitment. Loan commitments, lines of credit, and letters of credit are made on the same terms, including collateral, as outstanding loans. Management is not aware of any accounting loss that we would incur by funding these commitments.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is a “smaller reporting company” and, as such, disclosure pursuant to this Item 3 is not required.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in Bay Bancorp, Inc. reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the SEC, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in those rules and forms, and that such information is accumulated and communicated to management, including Bay Bancorp, Inc.’ principal executive officer (“PEO”) and its principal accounting officer (“PAO”), as appropriate, to allow for timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

An evaluation of the effectiveness of these disclosure controls as of March 31, 2015 was carried out under the supervision and with the participation of management, including the PEO and the PAO. Based on that evaluation, management, including the PEO and the PAO, has concluded that the Company’s disclosure controls and procedures are, in fact, effective at the reasonable assurance level.

During the three months ended March 31, 2015, there were no changes in the Company’s internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is involved in various legal actions arising from the normal business activities. In management’s opinion, the outcome of these matters, individually or in the aggregate, will not have a material adverse impact on the results of its operations or financial condition.

ITEM 1A. RISK FACTORS

The risks and uncertainties to which the Company’s financial condition and results of operations are subject were discussed in Bay’s Annual Report on Form 10-K for the year ended December 31, 2014. Management does not believe that any material changes in these risk factors have occurred since they were last disclosed.

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

The exhibits filed or furnished with this quarterly report are listed in the exhibit index that immediately follows the signature hereto, which list is incorporated herein by reference.

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.

BAY BANCORP, INC



Date	May 15, 2015	By:	/s/Joseph J. Thomas
			Joseph J. Thomas
			Chairman, President and Chief Executive Officer
			(Principal Executive Officer)





Date	May 15, 2015	By:	/s/ Larry D. Pickett
			Larry D. Pickett
			Executive Vice President and Chief Financial Officer
			(Principal Accounting Officer)

EXHIBIT INDEX


Exhibit No.	Description
31.1	Rule 13a-14(a) Certification by the Principal Executive Officer (filed herewith)

31.2	Rule 13a-14(a) Certification by the Principal Accounting Officer (filed herewith)

32.1	Certification by the Principal Executive Officer of the periodic financial reports, required by Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

32.2	Certification by the Principal Accounting Officer of the periodic financial reports, required by Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

101	Interactive Data Files pursuant to Rule 405 of Regulation S-T (filed herewith)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Bad

Bay Bancorp (BYBK) Inactive 10-Q2015 Q1 Quarterly report

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