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EX-31.1 - SECTION 302 CEO CERTIFICATION - Carroll Bancorp, Inc.d236413dex311.htm
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EX-32.1 - SECTION 906 CEO CERTIFICATION - Carroll Bancorp, Inc.d236413dex321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - Carroll Bancorp, Inc.d236413dex312.htm
Table of Contents

 

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2011

 

 

 

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

For the transition period from             to             

Commission file number 000-54422

 

 

CARROLL BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

MARYLAND   27-5463184

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

1321 Liberty Road, Sykesville, Maryland 21784

(Address of principal executive offices) (Zip Code)

(410) 795-1900

(Registrant’s telephone number, including area code)

 

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

 

 

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

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

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

 

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

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

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

common stock, as of the latest practicable date:

no shares of common stock outstanding at September 26, 2011

 

 

 


Table of Contents

Explanatory Note

Carroll Bancorp, Inc. (the “Company”) filed a Registration Statement on Form S-1 (the “Form S-1”), as amended, with the U.S. Securities and Exchange Commission (the “SEC”), which the SEC declared effective on August 12, 2011. The Form S-1 includes financial statements for the interim period ended March 31, 2011. Therefore, the Company is filing this Form 10-Q pursuant to Rule 13a-13 of the Securities Exchange Act of 1934, as amended, in order to file financial statements for the first quarter subsequent to the quarter reported upon the Form S-1.

The Company was incorporated in February, 2011 by Carroll Community Bank, Sykesville, Maryland (the “Bank”), to be the Bank’s holding company upon completion of the Bank’s conversion from a mutual to stock form of organization. Upon completion of the conversion, the Company will own all of the Bank’s outstanding capital stock and will direct, plan and coordinate the Bank’s business activities. The Company is not currently an operating entity and, therefore, the information presented in this report is the accounts only of the Bank.


Table of Contents

CARROLL BANCORP, INC.

Form 10-Q

Table of Contents

 

     PAGE  

PART I - FINANCIAL INFORMATION

  

Item 1. Financial Statements:

  

Consolidated Statements of Financial Condition as of June 30, 2011 (unaudited) and December  31, 2010

     4   

Consolidated Statements of Operations for the Three and Six Months Ended June  30, 2011 and 2010 (unaudited)

     5   

Consolidated Statements of Equity for the Six Months Ended June 30, 2011 and 2010 (unaudited)

     6   

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (unaudited)

     7   

Notes to Consolidated Financial Statements

     8   

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

     24   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     37   

Item 4. Controls and Procedures

     37   

PART II - OTHER INFORMATION

  

Item 1. Legal Proceedings

     37   

Item 1A. Risk Factors

     37   

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

     37   

Item 3. Defaults Upon Senior Securities

     37   

Item 4. (Removed and Reserved)

     37   

Item 5. Other Information

     37   

Item 6. Exhibits

     37   
SIGNATURES      39   


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

Carroll Bancorp, Inc.

Consolidated Statements of Financial Condition

 

     June 30,
2011
     December 31,
2010
 
     (unaudited)         
Assets   

Cash and due from banks

   $ 934,924       $ 786,990   

Interest-bearing deposits with depository institutions

     6,103,552         9,042,193   

Federal funds sold

     1,260,000         1,258,000   
  

 

 

    

 

 

 

Cash and cash equivalents

     8,298,476         11,087,183   

Securities available for sale, at fair value

     19,751,712         17,918,952   

Securities held to maturity (fair value 2011 $803,846, 2010 $776,130)

     807,604         808,351   

Loans, net of allowance for loan losses - 2011 $579,000 2010 $675,000

     60,637,936         60,909,115   

Accrued interest receivable

     275,854         251,177   

Other equity securities, at cost

     537,096         464,000   

Bank-owned life insurance

     1,439,853         1,413,347   

Premises and equipment, net

     1,489,081         1,514,298   

Foreclosed assets, net

     826,300         190,000   

Other assets

     1,042,471         1,033,366   
  

 

 

    

 

 

 

Total Assets

   $ 95,106,383       $ 95,589,789   
  

 

 

    

 

 

 
Liabilities and Equity   

Liabilities:

     

Deposits

     

Noninterest-bearing

   $ 2,437,493       $ 1,383,246   

Interest-bearing

     81,673,336         83,383,411   
  

 

 

    

 

 

 

Total deposits

     84,110,829         84,766,657   

Advances from the Federal Home Loan Bank

     5,000,000         5,000,000   

Other liabilities

     75,329         45,991   
  

 

 

    

 

 

 

Total liabilities

     89,186,158         89,812,648   
  

 

 

    

 

 

 

Equity:

     

Retained earnings

     5,793,132         5,747,842   

Accumulated other comprehensive income

     127,093         29,299   
  

 

 

    

 

 

 

Total equity

     5,920,225         5,777,141   
  

 

 

    

 

 

 

Total Liabilities and Equity

   $ 95,106,383       $ 95,589,789   
  

 

 

    

 

 

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

 

4


Table of Contents

Carroll Bancorp, Inc.

Consolidated Statements of Operations

(Unaudited)

 

     For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
     2011      2010     2011      2010  

Interest income:

          

Loans

   $ 840,503       $ 846,236      $ 1,697,296       $ 1,640,559   

Securities available for sale

     114,363         110,827        200,383         223,769   

Securities held to maturity

     4,810         —          9,617         —     

Interest-bearing deposits

     9,709         18,097        20,550         36,772   

Federal funds sold

     223         1,110        1,442         2,329   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest income

     969,608         976,270        1,929,288         1,903,429   

Interest expense:

          

Interest on deposits

     284,605         370,358        583,342         746,884   

Interest on long-term borrowings

     28,943         28,943        57,568         57,568   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense

     313,548         399,301        640,910         804,452   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Interest Income

     656,060         576,969        1,288,378         1,098,977   

Provision for loan losses

     3,000         11,001        3,253         126,751   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan losses

     653,060         565,968        1,285,125         972,226   
  

 

 

    

 

 

   

 

 

    

 

 

 

Non-interest income:

          

Gain on sale of securities available for sale

     28,385         —          68,025         73,270   

Gain on loans held for sale

     —           —          2,090         —     

Increase in cash surrender value - life insurance

     13,319         14,332        26,506         28,348   

Service charges on deposit accounts

     15,078         9,560        30,108         18,343   

Loan fee income

     7,988         14,680        15,225         27,632   

Other income

     2,508         1,916        4,925         3,180   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-interest income

     67,278         40,488        146,879         150,773   

Non-interest expense:

          

Salaries and employee benefits

     332,848         316,198        647,481         608,374   

Premises and equipment

     81,827         48,975        156,492         98,078   

Data processing

     76,103         55,584        150,513         110,958   

Professional fees

     56,300         77,955        107,468         120,361   

FDIC insurance

     16,072         35,029        56,511         71,510   

Directors’ fees

     22,776         23,375        54,652         43,091   

Corporate insurance

     12,232         13,029        25,054         27,913   

Printing and office supplies

     10,575         8,754        26,255         21,649   

Other operating expenses

     81,665         61,567        150,053         136,583   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-interest expenses

     690,398         640,466        1,374,479         1,238,517   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income (loss) before income tax expense

     29,940         (34,010     57,525         (115,518

Income tax expense (benefit)

     6,504         (19,068     12,235         (56,748
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss)

   $ 23,436       $ (14,942   $ 45,290       $ (58,770
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

5


Table of Contents

Carroll Bancorp, Inc.

Consolidated Statements of Changes in Equity

For the Six Months Ended June 30, 2011 and 2010

(Unaudited)

 

     Retained
Earnings
    Accumulated
Other
Comprehensive
Income
     Total
Equity
 

Balance at January 1, 2011

   $ 5,747,842      $ 29,299       $ 5,777,141   

Comprehensive income:

       

Net income

     45,290           45,290   

Unrealized gain on securities available for sale, net of taxes of $65,196 and net of reclassification adjustment

       97,794         97,794   
       

 

 

 

Total comprehensive income:

          143,084   
  

 

 

   

 

 

    

 

 

 

Balance at June 30, 2011

   $ 5,793,132      $ 127,093       $ 5,920,225   
  

 

 

   

 

 

    

 

 

 

Balance at January 1, 2010

   $ 5,883,512      $ 129,516       $ 6,013,028   

Comprehensive income (loss):

       

Net loss

     (58,770        (58,770

Unrealized gain on securities available for sale, net of taxes of $46,708 and net of reclassification adjustment

       70,062         70,062   
       

 

 

 

Total comprehensive income:

          11,292   
  

 

 

   

 

 

    

 

 

 

Balance at June 30, 2010

   $ 5,824,742      $ 199,578       $ 6,024,320   
  

 

 

   

 

 

    

 

 

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

 

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Table of Contents

Carroll Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

     For the Six Months Ended June 30,  
     2011     2010  

Cash flows from operating activities:

    

Net income (loss)

   $ 45,290      $ (58,770

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Gain on sale of securities available for sale

     (68,025     (73,270

Gain on sale of loans held for sale

     (2,090     —     

Originations of loans held for sale

     (219,000     —     

Proceeds from sale of loans held for sale

     221,090        —     

Amortization and accretion of securities

     171,314        109,944   

Amortization of deferred loan fees

     996        (9,455

Provision for loan losses

     3,253        126,751   

Depreciation of premises and equipment

     73,144        33,161   

Increase in cash surrender value of bank-owned life insurance

     (26,506     (28,347

Increase in accrued interest receivable

     (24,677     (60,304

Decrease in deferred income tax receivable

     8,968        —     

(Increase) decrease in other assets

     (83,269     50,542   

Increase (decrease) in other liabilities

     29,338        (28,267
  

 

 

   

 

 

 

Net cash provided by operating activities

     129,826        61,985   

Cash flows from investing activities:

    

Purchase of securities available for sale

     (10,335,252     (7,734,561

Proceeds from sales and redemptions of securities available for sale

     6,196,525        3,727,035   

Principal collected on securities available for sale

     2,366,414        1,914,946   

Increase in loans

     (369,370     (6,393,806

Redemption of other equity securities

     10,500        —     

Purchase of other equity securities

     (83,596     —     

Purchase of premises and equipment

     (47,926     (100,913
  

 

 

   

 

 

 

Net cash used in by investing activities

     (2,262,705     (8,587,299

Cash flows from financing activities:

    

(Decrease) increase in deposits

     (655,828     1,976,761   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (655,828     1,976,761   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (2,788,707     (6,548,553

Cash and cash equivalents, beginning balance

     11,087,183        18,674,384   
  

 

 

   

 

 

 

Cash and cash equivalents, ending balance

   $ 8,298,476      $ 12,125,831   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Interest paid

   $ 642,541      $ 808,736   

Income taxes paid

   $ —        $ 8,477   

Supplemental schedule of noncash investing and financing activities:

    

Foreclosed real estate acquired in settlement of loans

   $ 636,300      $ —     

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

 

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Table of Contents

CARROLL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Financial Statement Presentation

Carroll Bancorp, Inc. (the “Company”) was incorporated on February 18, 2011 as the proposed holding company for Carroll Community Bank (the “Bank”) in conjunction with the Bank’s plan of conversion from a mutual to stock form of ownership (see Note 2). The Company has no assets at June 30, 2011. The interim financial statement presented in this report includes only the interim financial information of the Bank.

The accompanying statements of financial condition at December 31, 2010, which has been derived from audited financial statements and unaudited interim financial statements, have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions for Form 10-Q and Article 8 of Regulation S-X as promulgated by the SEC. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United Sates for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation of the financial position and results of operations for the periods presented have been included. The operating results for the three and six months ended June 30, 2011, are not necessarily indicative of the results that may be expected for the entire year or any other interim period. For further information, refer to the Bank’s annual audited financial statements and the accompanying notes for the year ended December 31, 2010 included in the Company’s final prospectus dated August 12, 2011, as filed with the SEC pursuant to Rule 424 under the Securities Act of 1933 on August 24, 2011 (the “Final Prospectus”).

Nature of Operations

Carroll Community Bank (formerly Sykesville Federal Savings Association) is headquartered in Sykesville, Maryland. The Bank is a community-oriented financial institution providing financial services to individuals, families and businesses through two banking offices located in Sykesville and Westminster, Maryland. The Bank is subject to the regulation, examination and supervision by the State of Maryland Department of Licensing and Regulation and the Federal Deposit Insurance Corporation (“FDIC”), our deposit insurer. On July 1, 2010 the Bank converted to a state-chartered mutual savings bank from a federal thrift charter. At the same time, the Bank changed its name to better reflect its demographic presence.

Use of Estimates

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

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

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company has included the required disclosures in its financial statements.

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance will significantly expand the existing requirements and will lead to greater transparency into a company’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period will become effective for both interim and annual reporting periods ending at December 31, 2010. Specific items regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures will be required for periods beginning after December 31, 2010. The Company has included the required disclosures in its financial statements.

 

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In March 2011, the SEC issued Staff Accounting Bulletin (SAB) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the Staff Accounting Bulletin Series. This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASB’s Codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing through the SAB Series. The effective date for SAB 114 is March 28, 2011. The adoption of the new guidance did not have a material impact on the Company’s financial statements.

In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is A Troubled Debt Restructuring”. The ASU provides additional guidance to creditors in determining what constitutes a troubled debt restructuring. The ASU also amends ASU 2010-20 to defer the disclosure of troubled debt restructurings to coincide with the effective date of this ASU. ASU 2011-02 is effective for interim and annual periods beginning on or after June 15, 2011 for public entities and interim and annual periods ending on or after December 15, 2012 for nonpublic entities. The release will not have a material impact on the Company’s financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU is the result of joint efforts by the FASB and IASB to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and IFRSs. The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. The Company is currently assessing the impact that ASU 2011-04 will have on its financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company is currently assessing the impact that ASU 2011-05 will have on its financial statements.

The SEC has issued Final Rule No. 33-9002, “Interactive data to Improve Financial Reporting”, which requires companies to submit financial statements in XBRL (extensible business reporting language) format with their SEC filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010. All remaining filers are required to provide interactive data reports with their first quarterly report for fiscal periods ending on or after June 15, 2011. The release will not have a material impact on the Company’s consolidated financial statements.

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

Note 2. Plan of Conversion and Change in Corporate Form

On February 28, 2011, the Bank’s Board of Directors approved a plan (the “Plan”) pursuant to which the Bank will convert from a state-chartered mutual savings bank to a state-chartered commercial bank, a stock form of organization, subject to approval by the Bank’s members. The Plan, which includes formation of a holding company to own all of the outstanding capital stock of the Bank, is subject to final approval by the Maryland Commissioner of Financial Regulation and final non-objection by the FDIC and includes the filing of a registration statement with the SEC.

The cost of conversion and issuing and selling the capital stock will be deferred and deducted from the proceeds of the offering. In the event the conversion and offering are not completed, any deferred costs will be charged to operations. At June 30, 2011, the Bank had incurred $122,000 in conversion costs.

The Plan calls for the common stock of the holding company to be offered to various parties in a subscription offering at a price based on an independent appraisal of the Bank. It is anticipated that any shares not purchased in the subscription offering will be offered in a community offering.

 

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Note 3. Supplemental Disclosure for Earnings per Share

When presented, basic earnings per share are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Because the mutual to stock conversion was not completed as of June 30, 2011, per share earnings data is not meaningful for this quarter or prior comparative periods and therefore is not presented.

Note 4. Securities

The amortized cost and estimated market value of securities available for sale and held to maturity at June 30, 2011 and December 31, 2010 are as follows:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 

June 30, 2011

          

Securities available for sale:

          

U.S Government agency

   $ 750,150       $ —         $ (3,255   $ 746,895   

Residential mortgage-backed securities

     18,789,741         215,076         —          19,004,817   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 19,539,891       $ 215,076       $ (3,255   $ 19,751,712   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities held to maturity:

          
  

 

 

    

 

 

    

 

 

   

 

 

 

Municipal bonds

   $ 807,604       $ 301       $ (4,060   $ 803,845   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2010

          

Securities available for sale

          

U.S Government agency

   $ 2,472,116       $ 304       $ (25,342   $ 2,447,078   

Residential mortgage-backed securities

     15,398,004         96,732         (22,862     15,471,874   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 17,870,120       $ 97,036       $ (48,204   $ 17,918,952   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities held to maturity

          
  

 

 

    

 

 

    

 

 

   

 

 

 

Municipal bonds

   $ 808,351       $ —         $ (32,221   $ 776,130   
  

 

 

    

 

 

    

 

 

   

 

 

 

The Bank had no private label residential mortgage-backed securities at June 30, 2011 and December 31, 2010 or during the six months or year then ended, respectively.

 

10


Table of Contents

The amortized cost and estimated market value of securities at June 30, 2011 and December 31, 2010, by contractual maturity, are shown below. Expected maturities for residential mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     June 30, 2011  
     Securities available for sale      Securities held to maturity  
     Amortized
Cost
     Estimated
Fair Value
     Amortized
Cost
     Estimated
Fair Value
 

Under 1 year

   $ 482,680       $ 489,817       $ —         $ —     

Over 1 year through 5 years

     750,150         746,895         317,011         317,312   

After 5 years through 10 years

     10,389,947         10,518,069         490,593         486,533   

Over 10 years

     7,917,114         7,996,931         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 19,539,891       $ 19,751,712       $ 807,604       $ 803,845   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2010  
     Securities available for sale      Securities held to maturity  
     Amortized
Cost
     Estimated
Fair Value
     Amortized
Cost
     Estimated
Fair Value
 

Under 1 year

   $ 814,248       $ 822,241       $ —         $ —     

Over 1 year through 5 years

     2,164,607         2,168,897         317,304         306,980   

After 5 years through 10 years

     8,806,941         8,801,373         491,047         469,150   

Over 10 years

     6,084,324         6,126,441         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 17,870,120       $ 17,918,952       $ 808,351       $ 776,130   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Bank recognized gross realized gains of $68,025 and $73,270 on securities available for sale for the six months ended June 30, 2011 and 2010, respectively.

 

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Table of Contents

Securities with gross unrealized losses at June 30, 2011 and December 31, 2010, aggregated by investment category and length of time individual securities have been in a continual loss position, are as follows:

 

     June 30, 2011  
     Less than 12 Months      12 Months or More      Total  
     Estimated
Fair Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
 

Securities available for sale:

                 

U.S. Government agency

   $ 746,895       $ 3,255       $ —         $ —         $ 746,895       $ 3,255   

Residential mortgage-backed securities

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 746,895       $ 3,255       $ —         $ —         $ 746,895       $ 3,255   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities held to maturity:

                 

Municipal bonds

   $ 486,534       $ 4,060       $ —         $ —         $ 486,534       $ 4,060   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2010  
     Less than 12 Months      12 Months or More      Total  
     Estimated
Fair Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
 

Securities available for sale:

                 

U.S. Government agency

   $ 1,445,317       $ 25,343       $ —         $ —         $ 1,445,317       $ 25,343   

Residential mortgage-backed securities

     7,027,118         22,861         —           —           7,049,979         22,861   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,472,435       $ 48,204       $ —         $ —         $ 8,495,296       $ 48,204   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities held to maturity:

                 

Municipal bonds

   $ 776,130       $ 32,221       $ —         $ —         $ 776,130       $ 32,221   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 5. Credit Quality of Loans and Allowance for Loan Losses

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

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

 

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Table of Contents

Loans at June 30, 2011 and December 31, 2010 are summarized as follows:

 

     June 30, 2011     December 31, 2011  
     Balance     Percent
of Total
    Balance     Percent
of Total
 

Residential owner occupied - first lien

   $ 39,143,373        63.9   $ 40,849,645        66.3

Residential owner occupied - junior lien

     4,075,143        6.7     3,891,565        6.3

Residential non-owner occupied (investor)

     8,647,353        14.1     9,832,946        16.0

Commercial owner occupied

     3,203,272        5.2     2,373,067        3.9

Other commercial loans

     5,982,914        9.8     4,469,043        7.3

Consumer loans

     215,072        0.4     211,676        0.3
  

 

 

   

 

 

   

 

 

   

 

 

 
     61,267,127        100.0     61,627,942        100.0
    

 

 

     

 

 

 

Net deferred fees and in process accounts

     (50,191       (43,827  

Allowance for loan losses

     (579,000       (675,000  
  

 

 

     

 

 

   
   $ 60,637,936        $ 60,909,115     
  

 

 

     

 

 

   

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

 

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

 

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

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

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

The Bank’s charge-off policy states after all collection efforts have been exhausted, the loan is deemed to be a loss and the loss amount has been determined, the loss amount will be charged to the established allowance for loan losses. Loans secured by real estate, either residential or commercial, are evaluated for loss potential at the 60 day past due threshold. At 90 days past due the loan is placed on nonaccrual status and a specific reserve is established if the net realizable value in less than the principal value of the loan

 

13


Table of Contents

balance(s). Once the actual loss value has been determined, a charge-off to the allowance for loan losses for the amount of the loss is taken. Each loss is evaluated on its specific facts regarding the appropriate timing to recognize the loss. Unsecured loans are charged-off to the allowance for loan losses at the 90 day past due threshold or when an actual loss has been determined whichever is earlier.

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

 

   

changes in the levels of concentration of credit;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

changes in external factors such as competition and legal and regulatory oversight;

 

   

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

 

   

changes in lending strategies; and

 

   

changes in lending policies and procedures.

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

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

The following tables set forth as of the end of each reporting period, the balance of the allowance for loan losses by portfolio segment, disaggregated by impairment methodology, which is then further segregated by amounts evaluated for impairment collectively and individually. The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.

 

14


Table of Contents
     For the Six Months Ended June 30, 2011  
     Residential owner
occupied - first lien
    Residential owner
occupied -

junior lien
    Residential non-
owner occupied
(investor)
     Commercial owner
occupied
 

Allowance for loan losses:

         

Beginning balance

   $ 347,647      $ 25,711      $ 102,990       $ 24,247   

Charge-offs

     57,000        —          42,253         —     

Recoveries

     —          —          —           —     

Provision

     (54,377     (10,633     15,565         8,134   
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 236,270      $ 15,078      $ 76,302       $ 32,381   
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ —        $ —        $ —         $ —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 236,270      $ 15,078      $ 76,302       $ 32,381   
  

 

 

   

 

 

   

 

 

    

 

 

 

Loans:

         

Ending balance

   $ 39,143,373      $ 4,075,143      $ 8,647,353       $ 3,203,272   
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 778,941      $ —        $ —         $ —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 38,364,432      $ 4,075,143      $ 8,647,353       $ 3,203,272   
  

 

 

   

 

 

   

 

 

    

 

 

 
     Other commercial
loans
    Consumer loans     Unallocated      Total  

Allowance for loan losses:

         

Beginning balance

   $ 174,405      $ —        $ —         $ 675,000   

Charge-offs

     —          —          —           99,253   

Recoveries

     —          —          —           —     

Provision

     14,564        —          30,000         3,253   
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 188,969      $ —        $ 30,000       $ 579,000   
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 130,917      $ —        $ —         $ 130,917   
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 58,052      $ —        $ 30,000       $ 448,083   
  

 

 

   

 

 

   

 

 

    

 

 

 

Loans:

         

Ending balance

   $ 5,982,914      $ 215,072         $ 61,267,127   
  

 

 

   

 

 

      

 

 

 

Ending balance: individually evaluated for impairment

   $ 624,917      $ —           $ 1,403,858   
  

 

 

   

 

 

      

 

 

 

Ending balance: collectively evaluated for impairment

   $ 5,357,997      $ 215,072         $ 59,863,269   
  

 

 

   

 

 

      

 

 

 

 

15


Table of Contents

The following tables are a summary of the loan portfolio quality indicators by loan class recorded investment as of June 30, 2011 and December 31, 2010:

 

     June 30, 2011  
     Residential owner
occupied - first lien
     Residential owner
occupied -

junior lien
     Residential non-
owner occupied
(investor)
     Commercial owner
occupied
 

Pass

   $ 37,893,050       $ 4,075,143       $ 8,647,353       $ 3,203,272   

Special Mention

     471,382         —           —           —     

Substandard

     778,941         —           —           —     

Doubtful

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 39,143,373       $ 4,075,143       $ 8,647,353       $ 3,203,272   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Other commercial
loans
     Consumer loans      Total  

Pass

   $ 5,357,997       $ 215,072       $ 59,391,887   

Special Mention

     —           —           471,382   

Substandard

     624,917         —           1,403,858   

Doubtful

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 5,982,914       $ 215,072       $ 61,267,127   
  

 

 

    

 

 

    

 

 

 

 

     December 31, 2010  
     Residential owner
occupied - first lien
     Residential owner
occupied -

junior lien
     Residential non-
owner occupied
(investor)
     Commercial owner
occupied
 

Pass

   $ 39,062,113       $ 3,790,490       $ 8,896,375       $ 2,166,564   

Special Mention

     127,001         101,075         258,018         206,503   

Substandard

     1,603,059         —           678,553         —     

Doubtful

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 40,792,173       $ 3,891,565       $ 9,832,946       $ 2,373,067   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Other commercial
loans
     Consumer loans      Total  

Pass

   $ 3,892,146       $ 211,676       $ 58,019,364   

Special Mention

     —           —           692,597   

Substandard

     634,369         —           2,915,981   

Doubtful

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 4,526,515       $ 211,676       $ 61,627,942   
  

 

 

    

 

 

    

 

 

 

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

 

   

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

 

   

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

 

   

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

 

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Table of Contents
   

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

 

   

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

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

The following tables set forth certain information with respect to our loan delinquencies by portfolio segment and amount as of June 30, 2011 and December 31, 2010:

 

     June 30, 2011  
     Residential
owner
occupied -
first lien
     Residential
owner
occupied -
junior lien
     Residential
non-owner
occupied
(investor)
     Commercial
owner

occupied
     Other
commercial
loans
     Consumer
loans
     Total  

Current

   $ 37,775,856       $ 4,053,111       $ 8,647,353       $ 3,203,272       $ 5,357,997       $ 215,072       $ 59,252,661   

30-59 days past due

     267,271         22,032         —           —           —           —           289,303   

60-89 days past due

     321,305         —           —           —           —           —           321,305   

Greater than 90 days past due

     778,941         —           —           —           624,917         —           1,403,858   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due

     1,367,517         22,032         —           —           624,917         —           2,014,466   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 39,143,373       $ 4,075,143       $ 8,647,353       $ 3,203,272       $ 5,982,914       $ 215,072       $ 61,267,127   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2010  
     Residential
owner
occupied -
first lien
     Residential
owner
occupied -
junior lien
     Residential
non-owner
occupied
(investor)
     Commercial
owner
occupied
     Other
commercial
loans
     Consumer
loans
     Total  

Current

   $ 38,129,372       $ 3,790,490       $ 9,154,393       $ 2,350,120       $ 3,892,146       $ 211,676       $ 57,528,197   

30-59 days past due

     1,059,742         45,839         —           —           —           —           1,105,581   

60-89 days past due

     —           55,236         —           22,947         —           —           78,183   

Greater than 90 days past due

     1,603,059         —           678,553         —           634,369         —           2,915,981   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due

     2,662,801         101,075         678,553         22,947         634,369         —           4,099,745   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 40,792,173       $ 3,891,565       $ 9,832,946       $ 2,373,067       $ 4,526,515       $ 211,676       $ 61,627,942   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

The following tables are a summary of impaired loans by class as of June 30, 2011 and December 31, 2010:

 

     At or For the Six Months Ended June 30, 2011  
     Residential
owner
occupied -
first lien
    Residential
owner
occupied -
junior lien
     Residential
non-owner
occupied
(investor)
     Commercial
owner
occupied
     Other
commercial
loans
     Consumer
loans
     Total  

With no related allowance recorded:

                   

Recorded Investment

   $ 778,941      $ —         $ —         $ —         $ —         $ —         $ 778,941   

Unpaid Principal Balance

     835,941        —           —           —           —           —           835,941   

Average recorded investment

     708,024        —           —           —           —           —           708,024   

Interest income that would have been recognized

     21,543        —           —           —           —           —           21,543   

Interest income recognized (cash basis)

     6,250        —           —           —           —           —           6,250   

Interest income foregone

     15,293        —           —           —           —           —           15,293   

With an allowance recorded:

                   

Recorded Investment

   $ —        $ —         $ —         $ —         $ 624,917       $ —         $ 624,917   

Unpaid Principal Balance

     —          —           —           —           624,917         —           624,917   

Related Allowance

     —          —           —           —           130,917         —           130,917   

Average recorded investment

     493,877        —           226,184         —           630,259         —           1,350,320   

Interest income that would have been recognized

     16,091        —           4,389         —           26,356         —           46,836   

Interest income recognized (cash basis)

     18,898        —           —           —           —           —           18,898   

Interest income foregone

     (2,807     —           4,389         —           26,356         —           27,938   

Total

                   

Recorded Investment

   $ 778,941      $ —         $ —         $ —         $ 624,917       $ —         $ 1,403,858   

Unpaid Principal Balance

     835,941        —           —           —           624,917         —           1,460,858   

Related Allowance

     —          —           —           —           130,917         —           130,917   

Average recorded investment

     1,201,901        —           226,184         —           630,259         —           2,058,344   

Interest income that would have been recognized

     37,634        —           4,389         —           26,356         —           68,379   

Interest income recognized (cash basis)

     25,148        —           —           —           —           —           25,148   

Interest income foregone

     12,486        —           4,389         —           26,356         —           43,231   

 

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Table of Contents
     At or For the Year Ended December 31, 2010  
     Residential
owner
occupied -
first lien
     Residential
owner
occupied -
junior lien
    Residential
non-owner
occupied
(investor)
    Commercial
owner
occupied
     Other
commercial
loans
     Consumer
loans
     Total  

With no related allowance recorded:

                  

Recorded Investment

   $ 771,299       $ —        $ —        $ —         $ 342,316       $ —         $ 1,113,615   

Unpaid Principal Balance

     771,299         —          —          —           342,316         —           1,113,615   

Average recorded investment

     1,001,347         152,399        200,325        —           323,069         —           1,677,139   

Interest income that would have been recognized

     59,655         24,425        9,842        —           25,240         —           119,162   

Interest income recognized

     13,788         33,203        14,007        —           13,947         —           74,945   

Interest income foregone

     45,867         (8,778     (4,165     —           11,293         —           44,217   

With an allowance recorded:

                  

Recorded Investment

   $ 831,760       $ —        $ 678,553      $ —         $ 292,053       $ —         $ 1,802,366   

Unpaid Principal Balance

     831,760         —          678,553        —           292,053         —           1,802,366   

Related Allowance

     116,108         —          69,405        —           127,869         —           313,382   

Average recorded investment

     664,426         27,889        676,869        —           64,327         —           1,433,511   

Interest income that would have been recognized

     78,289         104        42,473        —           18,097         —           138,963   

Interest income recognized

     39,235         —          —          —           9,060         —           48,295   

Interest income foregone

     39,054         104        42,473        —           9,037         —           90,668   

Total

                  

Recorded Investment

   $ 1,603,059       $ —        $ 678,553      $ —         $ 634,369       $ —         $ 2,915,981   

Unpaid Principal Balance

     1,603,059         —          678,553        —           634,369         —           2,915,981   

Related Allowance

     116,108         —          69,405        —           127,869         —           313,382   

Average recorded investment

     1,665,773         180,288        877,194        —           387,395         —           3,110,650   

Interest income that would have been recognized

     137,944         24,529        52,315        —           43,337         —           258,125   

Interest income recognized

     53,023         33,203        14,007        —           23,007         —           123,240   

Interest income foregone

     84,921         (8,674     38,308        —           20,330         —           134,885   

The following table is a summary of the recorded investment in nonaccrual loans as of the dates indicated:

 

     June 30,
2011
     December 31,
2010
 

Nonaccrual loans with a valuation allowance

   $ 624,917       $ 1,802,366   

Nonaccrual loans without a valuation allowance

     778,941         1,113,615   
  

 

 

    

 

 

 

Total nonaccrual loans

   $ 1,403,858       $ 2,915,981   
  

 

 

    

 

 

 

Allowance for loan loss related to nonaccrual loans

   $ 130,917       $ 313,382   
  

 

 

    

 

 

 

For the six months ended June 30, 2011, two loans were modified with aggregate balances of $231,000 and neither was classified as a troubled debt restructure. During 2010 a total of ten loans with balances of $2.0 million were modified, of which three loans with balances of $991,000 were classified as a troubled debt restructure. For modified loans not classified as a troubled debt restructure, the interest rate was lowered due to the lower rate environment in order to maintain the customer lending relationship. The troubled debt restructure loans were modified due to the borrower’s financial difficulties. In each case the interest rate was lowered to a current market rate and all past due interest and fees were capitalized as part of the new loan balance. Troubled debt restructures are treated as nonaccrual loans until the borrower has made at least six consecutive payments based on the contractual terms of their new loan. Interest collected during the nonaccrual period is recognized as interest income on a cash basis.

At June 30, 2011, we had one troubled debt restructured residential real estate loan with aggregate principle due of $262,000 in nonaccrual status of which $57,000 was charged-off lowering our recorded investment to $205,000 and six troubled debt restructured residential real estate loans with an aggregate balance of $1.8 million in performing status. At December 31, 2010, we had three troubled debt restructured residential real estate loans with aggregate outstanding balances of $832,000 in nonaccrual status and four troubled debt restructured residential loans with an aggregate balance of $1.2 million in performing status.

 

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Note 6. Deposits

Deposit product segment balances are as follows:

 

     At June 30, 2011     At December 31, 2010  
     Balance      Percent of
Total
    Balance      Percent of
Total
 

Non-interest bearing checking accounts

   $ 2,437,494         2.9   $ 1,383,246         1.6

Interest-bearing checking accounts

     2,817,602         3.3     2,718,530         3.2

Savings accounts

     1,862,816         2.2     1,645,000         1.9

Premium savings accounts

     24,202,910         28.8     24,052,826         28.4

Money market accounts

     3,349,133         4.0     2,131,696         2.5

IRA accounts, non-certificate

     12,807,605         15.2     13,385,126         15.8

Certificates of deposit

     36,633,269         43.6     39,450,233         46.5
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 84,110,829         100.0   $ 84,766,657         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Certificates of deposit scheduled maturities are as follows:

 

     June 30,      December 31,  
Period to Maturity:    2011      2010  

Less Than or Equal to One Year

   $ 13,911,608       $ 16,903,013   

More Than One to Two Years

     13,865,301         8,022,709   

More Than Two to Three Years

     6,243,515         10,967,795   

More Than Three to Four Years

     749,295         1,745,076   

More Than Four to Five Years

     1,863,550         1,811,640   
  

 

 

    

 

 

 
   $ 36,633,269       $ 39,450,233   
  

 

 

    

 

 

 

Note 7. Fair Value Measurements

The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 825 “Financial Instruments” which provides guidance on the fair value option for financial assets and liabilities. This guidance permits entities to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a commitment. Subsequent changes must be recorded in earnings.

Simultaneously with the adoption of ASC 825, the Bank adopted ASC 820, Fair Value Measurements, effective January 1, 2008. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Under ASC 820, fair value measurements are not adjusted for transaction costs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below.

 

  Level 1 Valuations for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

 

  Level 2 Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

  Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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

 

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Table of Contents

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

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

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

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

Foreclosed assets are adjusted for fair value upon transfer of loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value and fair value. Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Bank records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market prices, the Bank records the foreclosed asset as nonrecurring Level 3.

The following table presents a summary of financial assets measured at fair value on a recurring basis at June 30, 2011 and December 31, 2010:

 

            Quoted Prices in
Active Markets for
Identical Assets
     Significant Other
Observable Inputs
     Significant
Unobservable
Inputs
 
     Carrying Value      Level 1      Level 2      Level 3  

June 30, 2011

           

Securities available for sale

   $ 19,751,712       $ —         $ 19,751,712       $ —     

December 31, 2010

           

Securities available for sale

   $ 17,918,952       $ —         $ 17,918,952       $ —     

The following table presents a summary of financial assets measured at fair value on a non-recurring basis at June 30, 2011 and December 31, 2010:

 

            Quoted Prices in
Active Markets for
Identical Assets
     Significant Other
Observable Inputs
     Significant
Unobservable
Inputs
 
     Carrying Value      Level 1      Level 2      Level 3  

June 30, 2011

           

Impaired loans

   $ 1,403,858       $ —         $ —         $ 1,403,858   

Foreclosed real estate

     826,300               826,300   

December 31, 2010

           

Impaired loans

   $ 2,915,981       $ —         $ —         $ 2,915,981   

Foreclosed real estate

     190,000               190,000   

 

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

 

     Impaired Loans     Foreclosed
Real Estate
 

Balance, January 1, 2010

   $ 3,376,318      $ 60,000   

Total realized and unrealized gains and (losses):

    

Included in net income

     (347,341     (18,544

Included in other comprehensive income

     —          —     

Purchases, issuances and settlements

     (790,589     (53,956

Transfers in and/or out of Level 3

     677,593        202,500   
  

 

 

   

 

 

 

Balance, December 31, 2010

   $ 2,915,981      $ 190,000   

Total realized and unrealized gains and (losses):

    

Included in net income (unaudited)

     (99,253     —     

Included in other comprehensive income

     —          —     

Purchases, issuances and settlements

     (206,918     —     

Transfers in and/or out of Level 3 (unaudited)

     (1,205,952     636,300   
  

 

 

   

 

 

 

Balance, June 30, 2011 (unaudited)

   $ 1,403,858      $ 826,300   
  

 

 

   

 

 

 

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

Cash and Cash Equivalents (Carried at Cost). The carrying amounts of cash and cash equivalents approximate fair value.

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

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

Loans Receivable (Carried at Cost). The fair values of loans are estimated using discounted cash flow analyses, using market rates at the statement of condition date that reflect the credit and interest rate risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values.

Impaired Loans (Generally Carried at Fair Value). Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. Impaired loans are measured at an observable market price (if available), or at fair value of the loan’s collateral (if the loan is collateral dependent). When the loan is dependent on collateral, fair value of collateral is determined by appraisal or independent valuation, which is then adjusted for the related cost to sell. Impaired loans allocated to the allowance for loan losses are measured at the lower of cost or fair value on a nonrecurring basis.

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

Deposit Liabilities (Carried at Cost). The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities.

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

 

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Table of Contents

Accrued Interest Receivable and Payable (Carried at Cost). The carrying amounts of accrued interest approximate fair value.

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

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

 

     June 30, 2011      December 31, 2010  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets:

           

Cash and cash equivalents

   $ 8,298,476       $ 8,298,476       $ 11,087,183       $ 11,087,183   

Securities available for sale

     19,751,712         19,751,712         17,918,952         17,918,952   

Securities held to maturity

     807,604         803,845         808,351         776,130   

Loans receivable, net

     60,637,936         62,050,000         60,909,115         62,203,000   

Accrued interest receivable

     275,854         275,854         251,177         251,177   

Other equity securities

     537,096         537,096         464,000         464,000   

Financial liabilities:

           

Deposits

   $ 84,110,829       $ 79,164,000       $ 84,766,657       $ 79,842,000   

Federal Home Loan Bank advances

     5,000,000         5,224,000         5,000,000         5,210,000   

Off-balance sheet financial instruments

   $ —         $ —         $ —         $ —     

Note 8. Regulatory Capital Requirements

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

 

     Actual     For Capital Adequacy
Purposes
    To be well Capitalized
Under Prompt Corrective
Action Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (Dollars in thousands)  

June 30, 2011

               

Tangible capital (to adjusted total assets)

   $ 5,793         6.1   $ 1,423         1.5     N/A         N/A   

Tier 1 capital (to adjusted total assets)

     5,677         6.0     3,796         4.0     4,745         5.0

Tier 1 capital (to risk-based assets)

     5,677         12.0     N/A         N/A        2,844         6.0

Total risk-based capital (to risk-based assets)

     6,256         13.2     3,791         8.0     4,740         10.0

December 31, 2010

               

Tangible capital (to adjusted total assets)

   $ 5,748         6.0   $ 1,437         1.5     N/A         N/A   

Tier 1 capital (to adjusted total assets)

     5,633         5.9     3,819         4.0     4,774         5.0

Tier 1 capital (to risk-based assets)

     5,633         12.4     N/A         N/A        2,726         6.0

Total risk-based capital (to risk-based assets)

     6,202         13.6     3,648         8.0     4,553         10.0

 

 

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

Forward-Looking Statements

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

Overview

Carroll Community Bank is a Maryland state-chartered mutual savings bank. The Bank’s board of directors adopted a plan of conversion in February 2011 pursuant to which the Bank will convert to a Maryland state-chartered commercial bank, a stock form of organization. In connection with the Plan, the Bank incorporated Carroll Bancorp, Inc. in February 2011 to serve as the holding company for the Bank. The Bank’s stockholders approved the plan of conversion at a special meeting on the Bank’s members held on September 21, 2011. Pursuant to the Plan, Carroll Bancorp is currently conducting a public offering of its common stock. Upon completion of the offering, which is expected to occur in October, 2011, Carroll Bancorp, Inc. will own 100% of the Bank’s outstanding shares of common stock, and all of the common stock of Carroll Bancorp, Inc. will be owned by purchasers in the offering. We must, however, comply with certain conditions set forth in the Certificate of Approval issued by the Maryland Office of the Commissioner of Financial Regulation and receive a letter of final non-objection from the FDIC after complying with the conditions set forth in its Letter of Intent Not to Object.

Historically, Carroll Community Bank has operated as a traditional community savings association. As such, our business consisted primarily of originating one-to four-family real estate loans secured by property in our market area and investing in mortgage-backed and U.S. Agency securities. Typically, one-to four-family loans involve a lower degree of risk and carry a lower yield than commercial real estate and business loans. At June 30, 2011, $51.7 million, or 84.4%, of our loan portfolio consisted of longer-term, one- to four-family residential real estate loans (including investor residential mortgage loans), of which $49.8 million, or 96.2%, were fixed rate loans and $1.9 million, or 3.8%, were adjustable rate loans. This resulted in our being particularly vulnerable to increases in interest rates, as our interest-bearing liabilities mature or reprice more quickly than our interest-earning assets. Although we plan to continue to originate one- to four-family residential mortgage loans going forward, we intend to increase our focus on the origination of commercial real estate loans, which generally provide higher returns and have shorter durations than one- to four-family residential mortgage loans. Our loans are primarily funded by savings accounts and certificates of deposit.

The results of our operations depend mainly on our net interest income, which is the difference between the interest income we earn on our loan and investment portfolios and the interest expense we pay on deposits and borrowings. Results of operations are also affected by provisions for loan losses, non-interest income and non-interest expense. Our non-interest expense consists primarily of compensation and employee benefits, as well as office occupancy, deposit insurance and general administrative and data processing expenses. Our operations are significantly affected by general economic and competitive conditions, particularly with respect to changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially affect our financial condition and results of operations.

During the three and six months ended June 30, 2011, our net interest income increased $79,000, or 13.7%, and $189,000, or17.2%, respectively, compared to the three and six months ended June 30, 2010, primarily as a result of lower interest paid on deposits during the 2011 periods. We had net income of $23,000 and $45,000, respectively, during the three and six months ended June 30, 2011 compared to net losses of $15,000 and $59,000 for the same periods in 2010, for increases of $38,000 and $104,000, respectively. These increases were primarily the result of growth in net interest income, and, particularly in the six-month period, a decrease in the provision for loan losses of $123,000, or 97.4%, partially offset by increases in non-interest expenses and income tax expense. Deposits decreased $656,000, or 0.8%, during the six months ended June 30, 2011. In addition, our net loan portfolio decreased $271,000 during the six months ended June 30, 2011 as a result of scheduled principal repayments, loan payoffs and foreclosures during the quarter, which was partially offset by loan originations during the six-month period.

Our nonperforming assets totaled $2.2 million, or 2.34% of total assets, at June 30, 2011, compared to $3.1 million, or 3.25% of total assets, at December 31, 2010 and $3.7 million, or 3.86% of total assets, at June 30, 2010. Of the $2.2 million of nonperforming assets at June 30, 2011, $1.8 million, or 82.3% of total nonperforming assets, are related to three customer relationships that we believe are adequately collateralized and reserved against. We had one loan totaling $321,000 delinquent at least 60 but less than 90 days at June 30, 2011 compared to $78,000 (two loans) and $75,000 (two loans) of such delinquencies at December 31, 2010 and June 30, 2010, respectively. Total nonperforming and past due loans however, decreased to $2.0 million at June 30, 2011 from $4.1 million at December 31, 2010 and $4.8 million at June 30, 2010. We provided $3,000 for loan losses for each of the three and six months ended June 30, 2011 compared to $11,000 and $127,000, respectively, for the three and six months ended June 30, 2010, as a result of a decrease in nonperforming loans and a lower level of required specific reserves during the three and six months ended June 30, 2011.

 

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The recent recession and ongoing economic crisis has negatively affected the real estate market in our primary market areas. These declines have in turn negatively affected our ability to make loans in the residential real estate markets, both with respect to the number of loans and the amount of such loans. Similar declines in the commercial real estate market have also affected our ability to make loans in the commercial real estate context, although to a lesser extent. Of course, the downturn in the real estate market and the broader effect on the economy contributed to a higher level of nonperforming loans and charge-offs as borrowers were unable to pay their loans due to job loss or other economic factors, refinance their loans or sell the underlying property. In 2011, however, we have begun to see signs of market stability and we anticipate that as market conditions return to a more normal level, there will be increased mortgage loan opportunities.

The real estate downturn has not significantly affected our investment portfolio or any investment opportunities related to that portfolio, although our portfolio has been negatively impacted by declining interest rates.

We do not offer “interest only” mortgage loans on one- to four-family residential properties (where the borrower pays interest but no principal for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on their loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” (loans that generally are made to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (traditionally defined as loans having less than full documentation). We also do not own any private label mortgage-backed securities.

We do not currently offer, nor do we currently have exposure to, acquisition, development and construction loans. We currently do not have any significant exposure to commercial real estate loans nor concentration issues regarding commercial real estate loans, although we intend to increase the amount of commercial real estate loans we originate and hold in our portfolio going forward.

At June 30, 2011 and December 31, 2010, all of our mortgage-backed securities have been issued and guaranteed by the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), Government National Mortgage Association (Ginnie Mae) or U.S. government-sponsored agencies. These entities guarantee the payment of principal and interest on our mortgage-backed securities. The balance of our investment securities are issued either by U.S. government sponsored agencies or local municipalities.

Our Business Strategy

Highlights of our business strategy are as follows:

 

   

Maintaining capital at “well capitalized” levels. Our policy has always been and will continue to be to protect the safety and soundness of Carroll Community Bank through conservative credit and operational risk management, balance sheet strength, and safe and sound operations. As a result, our capital ratios are in excess of the “well capitalized” standards set by the FDIC. We have maintained and seek to maintain “well capitalized” levels of regulatory capital through balance sheet management and additions to capital from profits. The conversion and offering will further increase our capital levels and help allow us to maintain and exceed our “well capitalized” status.

 

   

Maintaining a Quality Loan Portfolio While Exercising Prudent Underwriting Standards. While the delinquencies in our loan portfolio increased during the current economic downturn, we continue to emphasize maintaining strong asset quality by following conservative underwriting criteria, diligently applying our collection efforts, and originating loans secured primarily by real estate. We will continue to focus on asset quality as we seek to expand our commercial lending activities. The increase in our delinquencies was primarily due to the effects of weakened economic conditions on our borrowers. To address increased problem assets, we have placed more attention and resources on loan workouts and, in certain cases, have modified loans with delinquent borrowers. We attribute our recent low level of net-charge-offs and lower level of nonperforming and past due loans, noted above, in part, to these workout efforts. Our net charge offs were 0.33% and 0.57% of our average loans outstanding for the six months ended June 30, 2011 and the year ended December 31, 2010, respectively. Finally, we annually engage an outside loan review firm to perform a thorough review of our loan portfolio. This review involves analyzing all large borrowing relationships, delinquency trends and loan collateral valuation in order to identify impaired loans.

 

   

Improve Our Earnings and Diversify Our Loan Portfolio. We continue to seek ways of increasing our net interest income, net interest margin and other sources of non-interest income.

 

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Emphasizing Origination of Commercial Real Estate Loans. Commercial real estate loans are attractive because they generally provide us with higher yields and less interest rate risk because they typically have adjustable rates of interest and/or shorter terms to maturity in comparison to traditional single-family residential mortgage loans. We intend to emphasize growth in our commercial real estate lending in a manner consistent with our loan underwriting policies and procedures while recognizing the increased risk inherent in commercial real estate loans.

 

   

Expanding Commercial Banking Operations. We hired an experienced commercial loan officer in October 2010 and an additional commercial loan officer in April 2011 to facilitate our loan origination efforts on local real estate investors, builders and other area businesses to capitalize on our commercial banking experience and to further penetrate the markets we serve. As a community-based bank, we believe that we offer high quality customer service by combining locally based management for fast decisions on loan applications and approvals with customized deposit services that are attractive to small and medium sized businesses.

 

   

Controlling Non-interest Expense. We monitor our expense ratios closely and strive to improve our efficiency ratio through expense control. Our largest non-interest expense is compensation. We work to limit growth of compensation expense by controlling increases in the number of employees to those needed to support our growth and by maximizing the use of technology to increase efficiency. However, we anticipate that our non-interest expense will increase going forward as a result of the increased costs associated with managing a public company, increased compensation expenses associated with the purchases of shares of common stock by our employee stock ownership plan, and the adoption of one or more stock-based benefit plans, if approved by our stockholders.

 

   

Offering Additional Products and Services. We intend to utilize technology to increase productivity and provide additional products and services, including but not limited to merchant services, online bill payment, ACH, and remote deposit capture. We continue to enhance the internet banking services platform currently offered to our business and retail customers. We expect that these new products and services will help to maintain and increase our deposit base and will attract business and retail customers. We analyze the profitability of products and services and allocate our resources to those areas we believe offer the greatest future potential.

 

   

Continuing Residential Mortgage Lending. As a community bank we continue our mission of supporting the communities we serve by offering a strong line of traditional single-family residential mortgage products. We offer first and second mortgages of various terms using fixed or adjustable rate products. In addition, we offer home equity loans and lines of credit to support short term financing needs. At June 30, 2011, our loans secured by residential properties amounted to $51.7 million or 84.4% of our total loan portfolio. This includes $4.1 million in second lien loans, including home equity loans and lines of credit. In order to manage our interest rate risk, it is our policy to sell all loans with terms of more than 15 years, which improves our interest rate risk position and non-interest income.

 

   

Improve our Funding Mix and Increase Core Deposits. We are continuing our efforts to increase our core deposits in order to help reduce and control our cost of funds. We value core deposits because they represent longer-term customer relationships and lower costs of funds. As part of our strategy to expand our commercial real estate portfolio, we expect to attract lower cost core deposits as part of these borrower relationships. We offer competitive rates on a wide variety of deposit products to meet the individual needs of our customers. We also promote longer term deposits where possible, consistent with our asset liability management goals.

 

   

Expand Our Market Presence and Geographic Reach Through De Novo Branching and Complementary Branch Acquisitions. We continue to seek ways to increase our market penetration to grow our business and expand our geographic reach, including, potentially, though new branch locations, either on a de novo basis or through acquisitions to provide our customers with better access and service in addition to filling any gaps in our footprint. While our business plan indicates our intention to open a new de novo branch office by 2014, any such openings will be subject to, among other factors, market conditions, the economic environment, regulatory approval and the identification of sites which are acceptable to us being available within our targeted expense range. Except as set forth above, we currently have no specific agreements or understandings with respect to any acquisitions or de novo openings.

Critical Accounting Policies

During the three and six month periods ended June 30, 2011, there was no significant change in the Bank’s critical accounting policies or the application of critical accounting policies as disclosed in the Bank’s audited financial statements and related footnotes for the year ended December 31, 2010 included in the Final prospectus.

 

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Our accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the financial statements require management to exercise significant judgment or discretion or make significant assumptions based on the information available that have, or could have, a material impact on the carrying value of certain assets or on income, to be significant accounting policies. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. In reviewing and understanding financial information for us, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements.

The allowance for loan losses is established through a provision for loan losses charged against income. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that represents the amount of probable and reasonably estimable known and inherent losses in the loan portfolio, based on evaluations of the collectability of loans. The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impacted loans, value of collateral, estimated losses on our loan portfolios as well as consideration of general loss experience. Based on our estimate of the level of allowance for loan losses required, we record a provision for loan losses to maintain the allowance for loan losses at an appropriate level.

We cannot predict with certainty the amount of loan charge-offs that we will incur. We do not currently determine a range of loss with respect to the allowance for loan losses. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review our allowance for loan losses. Such agencies may require that we recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.

Comparison of Financial Condition at June 30, 2011 and December 31, 2010.

Assets. Total assets decreased $483,000, or 0.5%, to $95.1 million at June 30, 2011 compared to $95.6 million at December 31, 2010. This decrease was mainly due to a $2.8 million, or 25.2%, decrease in cash and cash equivalents. The decrease in cash and cash equivalents is a result of a $656,000, or 0.8%, decline in deposits triggering a reduction in our cash position and the use of cash and cash equivalents to fund investment securities purchases of $1.8 million. Total net loans declined by $271,000 during the six months ended June 30, 2011. Exclusive of the impact of two loan foreclosures in the aggregate amount of $678,000, loans would have increased by $410,000 during the six-month period. Foreclosed assets increased by $636,000 to $826,000 due to the above-mentioned foreclosures (after charging off $42,000 due to the net realizable value of the collateral being less than the loan balances).

Loans. Net loans decreased $271,000 to $60.6 million at June 30, 2011 from $60.9 million at December 31, 2010. New loan originations of $4.1 million during the six-month period were offset by scheduled principal repayments of $1.6 million, loan payoffs of $2.1 million and loan foreclosures mentioned above in the amount of $678,000, for a net decrease of $271,000. Consistent with our business strategy, we increased the amount of commercial real estate loans in our portfolio by $2.3 million, or 34.3% during the six months ended June 30, 2011, while residential-based loans decreased $2.7 million, or 5.0%, for the same period.

Deposits. Deposits decreased $656,000, or 0.8%, to $84.1 million at June 30, 2011 from $84.8 million at December 31, 2010, as a result of a $2.8 million, or 7.1%, and a $578,000, or 4.3%, decrease in certificates of deposit and IRA accounts, respectively, due to the continued low interest rate environment and our deposit pricing strategy. This was mostly offset by a $1.2 million, or 57.1%, and a $1.1 million, or 76.2%, increase in money market and non-interest bearing deposit accounts, respectively. The increase in non-interest bearing deposits is consistent with our business plan to improve our funding mix and increase core deposits.

Equity. Total equity increased by $143,000, or 2.5%, to $5.9 million at June 30, 2011 compared to $5.8 million as of December 31, 2010. The increase was primarily due to an increase of $98,000 in accumulated other comprehensive income and $45,000 in net income for the six months ended June 30, 2011. The change in accumulated other comprehensive income is due to the effects of interest rate fluctuations on our securities available for sale portfolio.

 

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Allowance for Loan Losses

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

 

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

 

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

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

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

 

   

changes in the levels of concentration of credit;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

changes in external factors such as competition and legal and regulatory oversight;

 

   

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

 

   

changes in lending strategies; and

 

   

changes in lending policies and procedures.

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

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

Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results.

 

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We evaluate the loan portfolio on at least a quarterly basis, more frequently if conditions warrant, and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the Maryland Office of the Commissioner of Financial Regulation and the FDIC will periodically review the allowance for loan losses. The Maryland Office of the Commissioner of Financial Regulation and the FDIC may require us to recognize additions to the allowance based on their analysis of information available to them at the time of their examination.

Comparison of Results of Operations for the Three Months Ended June 30, 2011 and June 30, 2010

General. Net income increased $38,000, or 256.8%, to $23,000 for the three months ended June 30, 2011 compared to a net loss of $15,000 for the same period in 2010. The increase in net income was primarily due to a $79,000 increase in net interest income and a $27,000 increase in non-interest income, partially offset by an increase in non-interest expenses of $50,000 for the three months ended June 30, 2011 compared to the three months ended June 30, 2010.

Net Interest Income. Net interest income is determined by the interest rate spread (i.e., the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income increased $79,000, or 13.7%, during the three months ended June 30, 2011 compared to the same period in 2010, primarily as a result of the decrease in interest expense during the 2011 period. Due to the items mentioned in Interest Income and Interest Expense below, our net interest rate spread increased to 2.93% for the three months ended June 30, 2011 compared to 2.45% for the three months ended June 30, 2010.

Interest Income. Interest income decreased $6,000, or 0.7%, to $970,000 during the three months ended June 30, 2011 from $976,000 during the three months ended June 30, 2010. This decrease was primarily the result of decreases of $6,000 in interest income on loans and $8,000 in interest income on interest-bearing deposits. The decrease in interest income on loans was due primarily to a 5 basis point, or 0.8%, decrease in the average loan portfolio yield. The decrease in interest income on interest-bearing deposits is a result of a $7.0 million, or 51.3%, decrease in the average balance of balances due from depository institutions as cash was deployed into investment securities and loan originations. These decreases were partially offset by $5,000 in interest income from securities held to maturity compared to no such income in the 2010 period as a result of the purchase of municipal bonds classified as held to maturity in late 2010, and a $4,000 increase in interest income on securities available for sale as a result of a $3.3 million, or 21.0% increase in the average balance of securities available for sale during the 2011 period partially offset by a 43 basis point decrease in the average yield on such securities.

Interest Expense. Interest expense decreased $85,000, or 21.5%, to $314,000 for the three months ended June 30, 2011 compared to $399,000 for the three months ended June 30, 2010. This decrease was entirely attributable to a decline in interest expense on interest-bearing deposits due to a 40 basis point, or 22.5%, drop in the average rate paid on interest-bearing deposits and the average balance for interest-bearing deposits declining by $673,000, or 0.8%. The decrease in the average rates paid on deposits is the result of the continuing low interest rate environment, and, to a lesser extent, the shift of certain time deposits into lower cost of funds products such as money market and savings accounts.

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

Based on management’s evaluation of the above factors, the provision for loan losses decreased by $8,000, or 72.7%, to $3,000 for the three months ended June 30, 2011 compared to $11,000 for the three months ended June 30, 2010. The decrease in the provision for loan losses was due to the three months ending June 30, 2011 having a decline in loans balances compared to the three months ending June 30, 2010, during which loan balances increased by $3.3 million. These items were offset by the continuing impact of increasing our commercial loan mix within the loan portfolio in 2011. Management analyzes the allowance for loan losses as described in Note 5 of the financial statements and the Allowance for Loan Losses section on page 28. The provision that is recorded is sufficient, in management’s judgment, to bring the allowance for loan losses to a level that reflects the losses inherent in our loan portfolio relative to loan mix, economic conditions and historical loss experience. Management believes, to the best of their knowledge, that all known losses as of June 30, 2011 have been recorded.

Non-Interest Income. Non-interest income was $67,000 for the three months ended June 30, 2011 compared to $40,000 for the same period in 2010. The $27,000, or 66.2%, increase in non-interest income is primarily attributable to $28,000 in securities gains recognized during the three months ended June 30, 2011 compared to zero for the three months ended June 30, 2010. We did not sell

 

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any securities during the three months ended June 30, 2010. Also contributing to the change in non-interest income was an increase of $6,000, or 57.7%, in service charges on deposit accounts due to an upsurge in ATM fees and overdraft charges, offset by a $7,000, or 45.6%, decrease in loan fee income as a result of fewer loan applications compared to the prior year period.

Non-Interest Expenses. Non-interest expenses increased $50,000, or 7.8%, to $690,000 for the three months ended June 30, 2011 compared to the same period in 2010. The increase was primarily due to a $17,000, or 5.3%, increase in salaries and employee benefits due to the addition of a commercial loan officer and merit, promotion and position salary increases, a $33,000, or 67.1%, increase in premises and equipment mainly the result of relocating the Westminster branch location in October 2010, a $21,000, or 36.9%, increase in data processing due mainly to the addition of new products and services and a $20,000, or 32.6% increase in other operating expenses which is primarily attributable to costs associated with loan workouts. These items were partially offset by decreases in professional fees of $22,000, or 27.8%, due to 2010 including attorney costs for the state charter conversion and FDIC insurance of $19,000, or 54.1%, as a result of the new insurance premium calculation methodology that went into effect April 1, 2011.

Income Tax Expense (Benefit). Income tax expense (benefit) amounted to $7,000 and $(19,000) for the three months ended June 30, 2011 and 2010, respectively, resulting in effective tax rates of 21.7% and (56.1)%, respectively. The increase in income tax expense was primarily due to higher income before income tax expense for the three months ended June 30, 2011 compared to a loss before income tax benefit for the three months ended June 30, 2010. The effective tax rate is influenced by the relation of tax exempt income from bank owned life insurance relative to pre-tax income.

Total Comprehensive Income. Total comprehensive income for the periods presented consisted of net income and the change in unrealized gains (losses) on securities available for sale, net of income tax. Total comprehensive income was $123,000 and $77,000 for the three months ended June 30, 2011 and 2010, respectively. The increase of $46,000, or 59.2%, in total comprehensive income resulted from an increase of $38,000 in net income and an increase of $8,000 in accumulated other comprehensive income from the change in unrealized gains (losses) on securities available for sale.

Comparison of Results of Operations for the Six Months Ended June 30, 2011 and June 30, 2010

General. Net income increased $104,000, or 177.1%, to $45,000 for the six months ended June 30, 2011 compared to a net loss of $59,000 for the same period in 2010. The increase in net income was primarily due to an $189,000 increase in net interest income and a $123,000 decrease in the provision for loan losses, partially offset by an increase in non-interest expenses of $136,000 for the six months ended June 30, 2011 compared to the six months ended June 30, 2010.

Net Interest Income. Net interest income increased $189,000, or 17.2%, during the six months ended June 30, 2011 compared to the same period in 2010, primarily due to the reduction in interest expense on interest-bearing deposits. Our net interest rate spread increased to 2.87% for the six months ended June 30, 2011 compared to 2.37% for the six months ended June 30, 2010.

Interest Income. Interest income increased $26,000, or 1.4%, remaining at $1.9 million during the six months ended June 30, 2011 and June 30, 2010. This increase was primarily the result of increases of $57,000, or 3.5%, in interest income from loans and $10,000 in interest income from securities held to maturity compared to no such income in the 2010 period, partially offset by decreases of $23,000, or 10.5%, in interest income on securities available for sale and $16,000, or 44.1%, in interest income on interest-bearing deposits. The increase in interest income on loans is the result of the average loan balances growing by $1.9 million, or 3.3%, and the increase in interest income on securities held to maturity is due to the purchase of municipal bonds classified as held to maturity in late 2010. The decrease in interest income on interest-bearing deposits is a result of $7.2 million, or 48.5%, decrease in the average balance of balances due from depository institutions as cash was deployed into investment securities and loan originations. The decrease in interest income from securities available for sale is a result of an 81 basis point decrease in the average yield on such securities, partially offset by a $3.4 million, or 22.4% increase in the average balance of securities available for sale during 2011.

Interest Expense. Interest expense decreased $163,000, or 20.3%, to $641,000 for the six months ended June 30, 2011 compared to $804,000 for the six months ended June 30, 2010. This decrease was entirely attributable to a decrease in interest expense on interest-bearing deposits due to a 41 basis point, or 22.3%, decrease in the average rate paid on interest-bearing deposits. The decrease in the average rates paid on deposits is the result of the continuing low interest rate environment, and, to a lesser extent, the shift of certain time deposits into lower cost of funds products such as money market and savings accounts.

Provision for Loan Losses. Provision for loan losses decreased by $124,000 to $3,000 for the six months ended June 30, 2011 compared to $127,000 for the six months ended June 30, 2010. The $127,000 provision during the 2010 period reflects the impact of two loans requiring specific reserves in the amount of $59,000 along with net loan growth of $6.2 million in the first six months of 2010. The need for only a nominal provision for loan losses in for the six months ending June 30, 2011 was due to offsetting circumstances. Two loans which had specific reserves totaling $70,000 were moved to performing status after the loans performed for six months after the loans were restructured. In addition, three loans with specific reserves were partially charged-off in the amount of $99,000. These items were partially offset by increases in our general allowance reserve of $85,000.

 

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Non-Interest Income. Non-interest income was $147,000 for the six months ended June 30, 2011 compared to $151,000 for the same period in 2010. The $4,000, or 2.6%, decrease in non-interest income is primarily attributable a $5,000 decrease in gains from securities available for sale for the six months ended June 30, 2011 compared to the six months ended June 30, 2010. Also contributing to the change in non-interest income was an increase of $12,000, or 64.1%, in service charges on deposit accounts due to an upsurge in ATM fees and overdraft charges, offset by a $12,000, or 44.9%, decrease in loan fee income as a result of fewer loan applications compared to the prior year period.

Non-Interest Expenses. Non-interest expenses increased $136,000, or 11.0%, to $1.4 million for the six months ended June 30, 2011 compared to the same period in 2010. The increase was primarily due to a $39,000, or 6.4%, increase in salaries and employee benefits due to the addition of a commercial loan officer and merit, promotion and position salary increases, a $58,000, or 59.6%, increase in premises and equipment mainly the result of relocating the Westminster branch location in October 2010, a $40,000, or 35.6%, increase in data processing due mainly to the addition of new products and services, a $12,000, or 26.8%, increase in director’s fees due to the additional meetings necessary in connection with the stock conversion process and our board including one additional director as of January 2011 and a $13,000, or 9.9%, increase in other operating expenses which is primarily attributable to costs associated with loan workouts. These items were partially offset by decreases in professional fees of $13,000, or 10.7%, due to 2010 including attorney costs for the state charter conversion and FDIC insurance of $15,000, or 21.0%, as a result of the new insurance premium calculation methodology that went into effect April 1, 2011.

Income Tax Expense (Benefit). Income tax expense (benefit) amounted to $12,000 and $(57,000) for the six months ended June 30, 2011 and 2010, respectively, resulting in effective tax rates of 21.3% and (49.1)%, respectively. The increase in income tax expense was primarily due to higher income before income tax expense for the six months ended June 30, 2011 compared to a loss before income tax benefit for the six months ended June 30, 2010. The effective tax rate is influenced by the relation of tax exempt income from bank owned life insurance relative to pre-tax income.

Total Comprehensive Income. Total comprehensive income for the periods presented consisted of net income and the change in unrealized gains (losses) on securities available for sale, net of income tax. Total comprehensive income was $143,000 and $11,000 for the six months ended June 30, 2011 and 2010, respectively. The increase of $132,000 in total comprehensive income resulted from an increase of $104,000 in net income and an increase of $28,000 in adjustments to accumulated other comprehensive income from the change in unrealized gains (losses) on securities available for sale.

 

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Average Balance and Yields

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

 

     For the Three Months Ended June 30,  
     2011     2010  
     Average
Outstanding
Balance
    Interest      Yield /
Rate
    Average
Outstanding
Balance
    Interest      Yield /
Rate
 
     (Dollars in thousands)  

Interest-earning assets:

              

Loans

   $ 61,200      $ 841         5.51   $ 61,045      $ 846         5.56

Securities available for sale

     19,100        114         2.39     15,789        111         2.82

Securities held to maturity

     808        5         2.48     —          —           —     

Interest earning deposits

     6,660        9         0.54     13,675        18         0.53

Federal funds sold

     1,259        1         0.32     1,349        1         0.30
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     89,027        970         4.37     91,858        976         4.26
    

 

 

        

 

 

    

Noninterest-earning assets

     6,285             3,899        
  

 

 

        

 

 

      

Total assets

   $ 95,312           $ 95,757        
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

Savings accounts

   $ 38,924        72         0.74   $ 39,430        115         1.17

Certificates of deposit

     37,693        204         2.17     41,372        254         2.46

Money market accounts

     3,024        7         0.93     130        —           —     

Now accounts

     2,942        2         0.27     2,324        1         0.17
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     82,583        285         1.38     83,256        370         1.78

Federal Home Loan Bank advances

     5,000        29         2.33     5,000        29         2.33
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     87,583        314         1.44     88,256        399         1.81
    

 

 

        

 

 

    

Noninterest-bearing deposits

     1,758             1,422        

Noninterest-bearing liabilities

     98             97        
  

 

 

        

 

 

      

Total liabilities

     89,439             89,775        

Equity

     5,873             5,982        
  

 

 

        

 

 

      

Total liabilities and capital

   $ 95,312           $ 95,757        
  

 

 

        

 

 

      

Net interest income

     $ 656           $ 577      
    

 

 

        

 

 

    

Net interest rate spread

          2.93          2.45

Net interest-earning assets

   $ 1,444           $ 3,602        
  

 

 

        

 

 

      

Net interest margin

          2.96          2.52

Average interest-earning assets to interest-bearing liabilities

     101.65          104.08     

 

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     For the Six Months Ended June 30,  
     2011     2010  
     Average
Outstanding
Balance
    Interest      Yield /
Rate
    Average
Outstanding
Balance
    Interest      Yield /
Rate
 
     (Dollars in thousands)  

Interest-earning assets:

              

Loans

   $ 61,334      $ 1,697         5.58   $ 59,401      $ 1,640         5.57

Securities available for sale

     18,491        200         2.18     15,104        224         2.99

Securities held to maturity

     808        10         2.50     —          —           —     

Interest earning deposits

     7,673        20         0.53     14,902        37         0.50

Federal funds sold

     1,259        2         0.32     1,424        2         0.28
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     89,565        1,929         4.34     90,831        1,903         4.22
    

 

 

        

 

 

    

Noninterest-earning assets

     5,778             3,952        
  

 

 

        

 

 

      

Total assets

   $ 95,343           $ 94,783        
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

Savings accounts

   $ 39,162        150         0.77   $ 38,938        232         1.20

Certificates of deposit

     38,161        418         2.21     41,056        512         2.51

Money market accounts

     2,669        12         0.91     77        —           —     

Now accounts

     2,816        3         0.21     2,239        2         0.18
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     82,808        583         1.42     82,310        746         1.83

Federal Home Loan Bank advances

     5,000        58         2.34     5,000        58         2.34
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     87,808        641         1.47     87,310        804         1.86
    

 

 

        

 

 

    

Noninterest-bearing deposits

     1,595             1,372        

Noninterest-bearing liabilities

     97             112        
  

 

 

        

 

 

      

Total liabilities

     89,500             88,794        

Equity

     5,843             5,989        
  

 

 

        

 

 

      

Total liabilities and capital

   $ 95,343           $ 94,783        
  

 

 

        

 

 

      

Net interest income

     $ 1,288           $ 1,099      
    

 

 

        

 

 

    

Net interest rate spread

          2.87          2.37

Net interest-earning assets

   $ 1,757           $ 3,521        
  

 

 

        

 

 

      

Net interest margin

          2.90          2.44

Average interest-earning assets to interest-bearing liabilities

     102.00          104.03     

 

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Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

 

     For the Three Months Ended June 30,
2011 vs 2010
 
     Increase (Decrease) Due to     Total Increase  
     Volume     Rate     (Decrease)  
     (in thousands)  

Interest-earning assets:

      

Loans

   $ 2      $ (8   $ (6

Securities available for sale

     23        (20     3   

Securities held to maturity

     —          5        5   

Interest earning deposits

     (9     —          (9

Federal funds sold

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     (30     24        (6
  

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

      

Savings accounts

     (1     (42     (43

Certificates of deposit

     (23     (27     (50

Money market accounts

     —          7        7   

Now accounts

     —          1        1   
  

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     (3     (82     (85

Federal Home Loan Bank advances

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     (3     (82     (85
  

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ (27   $ 106      $ 79   
  

 

 

   

 

 

   

 

 

 
     For the Six Months Ended June 30,
2011 vs 2010
 
     Increase (Decrease) Due to     Total Increase  
     Volume     Rate     (Decrease)  
     (in thousands)  

Interest-earning assets:

      

Loans

   $ 53      $ 4      $ 57   

Securities available for sale

     50        (74     (24

Securities held to maturity

     —          10        10   

Interest earning deposits

     (18     1        (17

Federal funds sold

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     (27     51        25   
  

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

      

Savings accounts

     1        (84     (83

Certificates of deposit

     (36     (58     (94

Money market accounts

     —          12        12   

Now accounts

     1        —          1   
  

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     5        (167     (163

Federal Home Loan Bank advances

     —          0        0   
  

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     5        (169     (164
  

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ (31   $ 220      $ 189   
  

 

 

   

 

 

   

 

 

 

 

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Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, loan repayments, short-term lines of credit with correspondent banks, advances from the Federal Home Loan Bank of Atlanta, principal repayments and the sale of securities available for sale. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of June 30, 2011 and December 31, 2010. We anticipate that we will maintain higher liquidity levels following the completion of the offering.

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

 

   

expected loan demand;

 

   

expected deposit flows and borrowing maturities;

 

   

yields available on interest-earning deposits and securities; and

 

   

the objectives of our asset/liability management program.

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

Our most liquid assets are cash and cash equivalents. The level of these assets is dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2011 and December 31, 2010, cash and cash equivalents totaled $8.3 million and $11.1 million, respectively.

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

At June 30, 2011 and December 31, 2010, we had $136,000 and $780,000, respectively, in loan commitments outstanding, all of which was for consumer loans at June 30, 2011, and all of which was for commercial real estate loans at December 31, 2010. In addition to commitments to originate loans, we had $2.2 million and $1.7 million in unused lines of credit to borrowers, including $1.4 million with respect to consumer loans and $781,000 and $283,000 for commercial real estate loans at June 30, 2011 and December 31, 2010, respectively. Certificates of deposit due within one year of June 30, 2011 and December 31, 2010 totaled $13.9 million, or 16.5% of total deposits, and $16.9 million, or $19.9% of total deposits, respectively. If these deposits do not remain with us, we may be required to seek other sources of funds, including loan and securities sales, draws on our short-term lines of credit with correspondent banks and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on our deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2012. We believe, however, based on historical experience and current market interest rates, that we will retain upon maturity a large portion of our certificates of deposit with maturities of one year or less as of June 30, 2011.

Our investing activities are primarily loan originations and to a lesser extent security purchases. During the six months ended June 30, 2011 and the year ended December 31, 2010, we originated $4.1 million and $15.3 million of loans, respectively. In addition, during these periods, we purchased $10.3 million and $18.8 million of securities available for sale, respectively.

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced a net decrease in deposits during the six months ended June 30, 2011 of $656,000 and an increase in deposits of $2.3 million for the year ended December 31, 2010. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Atlanta, which provide an additional source of funds. Federal Home Loan Bank advances remained steady at $5.0 million during the six months ended June 30, 2011 and the year ended December 31, 2010. At June 30, 2011, we had the ability to borrow up to an additional $2.0 million from our correspondent banks under short-term lines of credit and $4.0 million from the Federal Home Loan Bank of Atlanta.

Carroll Community Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. As of June 30, 2011, the Bank was in compliance with all regulatory capital requirements, which were effective as of such date, with tier 1 core, tier 1 risk-based, and total risk-based capital ratios of 5.96%, 11.98% and 13.20%, respectively. Carroll Community Bank is considered “well capitalized” under regulatory guidelines.

The net proceeds from the offering will significantly increase our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the offering are used for general corporate purposes, including the funding of loans.

 

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Table of Contents

Our financial condition and results of operations will be enhanced by the net proceeds from the offering, resulting in increased interest-earning assets and net interest income. However, due to the increase in equity resulting from the net proceeds raised in the offering, our return on equity will be adversely affected following the offering.

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

Impact of Inflation and Changing Prices

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

Information Regarding Forward-Looking Statements

This report contains certain 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”). We may also include forward-looking statements in other statements that we make. All statements that are not descriptions of historical facts are forward-looking statements. Forward-looking statements often use words such as “believe,” “expect,” “plan,” “may,” “will,” “should,” “project,” “contemplate,” “anticipate,” “forecast,” “intend” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.

These forward-looking statements include, but are not limited to: (i) statements of our goals, intentions and expectations, particularly with respect to our business plan and strategies, including with respect to (a) increasing our focus on commercial real estate lending, (b) attracting lower-cost deposits, (c) hiring intensions and the impact of such hiring, (d) increased use of technology and expansion of our web-based services, and the impact of such expansion, (e) development of new products and services and the impact of developing such new products and services, (f) anticipated branch expansion, and (g) potential future acquisitions; (ii) statements regarding our prospects and future expansion and growth; (iii) statements regarding future increases in non-interest expenses; (iv) statements regarding the expected closing of our offering and the Bank’s conversion to a state-chartered commercial bank pursuant to the plan of conversion; (v) statements with respect to maintaining “well capitalized” status; (vi) statements with respect to our allowance for loan losses, and the adequacy thereof; (vii) our statement with respect to anticipated loan opportunities as the real estate markets stabilize; (viii) our statement with respect to maintaining higher capital levels after completion of our stock offering; and (ix) statements with respect to the effectiveness of our plan of conversion and closing of our stock offering.

We base these statements on our beliefs, assumptions and on information available to us as of the date of this filing, which involves risks and uncertainties. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: further deterioration in general economic conditions or a slower than anticipated recovery; competition among depository and other financial institutions; inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; changes in regulatory requirements and/or restrictive banking legislation may adversely affect us, including regulations adopted pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; we may not be able to enter new markets successfully and capitalize on growth opportunities; we may not be able to successfully integrate acquired entities, if any; changes in consumer spending, borrowing and savings habits; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board; changes in our organization, compensation and benefit plans; changes in our financial condition or results of operations that reduce capital available to pay dividends; changes in competitive, governmental, regulatory, technological and other factors which may affect us specifically or the banking industry generally other risk and uncertainties discussed in this report and in other SEC filings we will make. For a more complete discussion of some of these risks and uncertainties see “Risk Factors” in Carroll Bancorp’s registration statement on Form S-1 originally filed on March 11, 2011 and the Final Prospectus.

Our actual results and the actual outcome of our expectations and strategies could differ materially from those anticipated or estimated because of these risks and uncertainties and you should not put undue reliance on any forward-looking statements. All forward-looking statements speak only as of the date of this report on Form 10-Q, and we undertake no obligation to update the forward-looking statements to reflect factual assumptions, circumstances or events that have changed after we have made the forward-looking statements.

 

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Table of Contents
Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

 

Item 4. Controls and Procedures

We maintain disclosure controls and procedures (as that term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to provide material information about the Company to the chief executive officer, the chief financial officer, and others within the Company so that information may be recorded, processed, summarized, and reported as required under the SEC’s rules and forms. The Company’s chief executive officer and chief financial officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report and, based on that evaluation, have each concluded that such disclosure controls and procedures are effective as of June 30, 2011.

There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15 under the Exchange Act) during the quarter ended June 30, 2011, that have materially affected or are reasonably likely to materially affect, the internal control over financial reporting.

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

The Company is involved in various legal actions arising from 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 our results of operation or financial condition.

 

Item 1A. Risk Factors

There has been no material changes in the risk factors from those disclosed in our Final Prospectus.

 

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

None.

 

Item 3. Defaults upon Senior Securities

None.

 

Item 4. (Removed and Reserved)

 

Item 5. Other Information

None.

 

Item 6. Exhibits

(a) Exhibits

 

(31.1)

   Rule 13a-14(a) Certification by the Principal Executive Officer

(31.2)

   Rule 13a-14(a) Certification by the Principal Financial Officer

(32.1)

   Certification by the Principal Executive Officer of the periodic financial reports, required by Section 906 of the Sarbanes-Oxley Act of 2002

 

37


Table of Contents

(32.2)

   Certification by the Principal Financial Officer of the periodic financial reports, required by Section 906 of the Sarbanes-Oxley Act of 2002

 

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Table of Contents

SIGNATURES

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

 

       CARROLL BANCORP, INC.
       PRINCIPAL EXECUTIVE OFFICER:
Date   

September 26, 2011

   

/s/ Russell J. Grimes

       Russell J. Grimes
       President and Chief Executive Officer
       PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
Date   

September 26, 2011

   

/s/ Michael J. Gallina

       Michael J. Gallina
       Chief Financial Officer

 

39