Carroll Bancorp, Inc. - FORM 10-Q

Carroll Bancorp, Inc. - FORM 10-Q - August 12, 2014

Attached files

Attached files

Carroll Bancorp, Inc. Reports

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EX-32.2 - EX-32.2 - Carroll Bancorp, Inc.	d762110dex322.htm
EX-31.1 - EX-31.1 - Carroll Bancorp, Inc.	d762110dex311.htm
EX-32.1 - EX-32.1 - Carroll Bancorp, Inc.	d762110dex321.htm
EX-31.2 - EX-31.2 - Carroll Bancorp, Inc.	d762110dex312.htm
EXCEL - IDEA: XBRL DOCUMENT - Carroll Bancorp, Inc.	Financial_Report.xls

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, 2014

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

For the transition period from to

Commission File Number 000-54422

CARROLL BANCORP, INC.

(Exact name of registrant as specified in its charter)


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

1321 Liberty Road, Sykesville, Maryland 21784

(Address of principal executive offices) (Zip Code)

(410) 795-1900

(Registrant’s telephone number, including area code)

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

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

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

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

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: 484,438 shares of common stock outstanding at August 11, 2014.

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, 2014 (unaudited) and December 31, 2013		3
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)		4
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)		5
Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2014 and 2013 (unaudited)		6
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (unaudited)		7
Notes to Consolidated Financial Statements (unaudited)		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3. Quantitative and Qualitative Disclosures about Market Risk		41
Item 4. Controls and Procedures		42
PART II - OTHER INFORMATION
Item 1. Legal Proceedings		42
Item 1A. Risk Factors		42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		42
Item 3. Defaults Upon Senior Securities		42
Item 4. Mine Safety Disclosures		42
Item 5. Other Information		42
Item 6. Exhibits		42
SIGNATURES		43

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

Carroll Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition


	June 30, 2014			December 31, 2013
	(unaudited)			(audited)
Assets:
Cash and due from banks	$	1,431,069		$	1,310,430
Interest-bearing deposits with depository institutions		5,439,852			3,718,884

Cash and cash equivalents		6,870,921			5,029,314
Certificates of deposit with depository institutions		2,104,294			1,856,469
Securities available for sale, at fair value		9,716,581			11,877,088
Loans, net of allowance for loan losses - June 30, 2014 $699,000 and December 31, 2013 $682,000		87,399,421			83,492,498
Accrued interest receivable		261,168			279,661
Other equity securities, at cost		538,096			496,696
Bank-owned life insurance		2,021,960			1,992,367
Premises and equipment, net		1,332,735			1,401,502
Foreclosed assets		52,964			462,005
Other assets		691,321			825,131

Total Assets	$	110,989,461		$	107,712,731

Liabilities:
Deposits
Noninterest-bearing	$	5,430,750		$	4,866,188
Interest-bearing		88,444,797			86,897,767

Total deposits		93,875,547			91,763,955
Federal Home Loan Bank Advances		6,500,000			7,365,350
Other liabilities		227,488			167,728

Total liabilities		100,603,035			99,297,033

Stockholders’ Equity:
Preferred Stock (par value $0.01); authorized 1,000,000 shares; no shares issued and outstanding		0			—
Common Stock (par value $0.01); authorized 9,000,000 shares; issued and outstanding 484,438 shares at June 30, 2014 and 359,456 at December 31, 2013		4,844			3,595
Additional paid-in capital		4,810,814			2,897,054
Unallocated ESOP shares		(303,287	)		(183,319	)
Unallocated RSP shares		(193,931	)		(133,947	)
Retained earnings		6,082,282			5,927,209
Accumulated other comprehensive loss		(14,296	)		(94,894	)

Total stockholders’ equity		10,386,426			8,415,698

Total liabilities and stockholders’ equity	$	110,989,461		$	107,712,731

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

Carroll Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

(unaudited)


	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2014		2013			2014			2013
Interest income:
Loans	$	1,056,703	$	1,057,541		$	2,067,902		$	2,098,697
Securities available for sale		48,015		39,367			103,094			59,266
Certificates of deposit		4,302		9,596			8,543			19,081
Interest-earning deposits		7,187		4,612			13,375			9,675

Total interest income		1,116,207		1,111,116			2,192,914			2,186,719
Interest expense:
Deposits		135,975		186,869			272,843			392,029
Borrowings		29,485		30,099			58,817			59,530

Total interest expense		165,460		216,968			331,660			451,559

Net interest income		950,747		894,148			1,861,254			1,735,160
Provision for loan losses		12,529		54,501			10,916			82,804

Net interest income after provision for loan losses		938,218		839,647			1,850,338			1,652,356

Non-interest income:
Gain on sale of securities		112		7,044			11,374			16,594
Gain on loans held for sale		855		—			855			6,535
Income (loss) on sale/writedown of OREO		11,473		(501	)		(2,632	)		(8,613	)
Increase in cash surrender value - life insurance		14,773		15,773			29,592			31,362
Customer service fees		23,314		20,329			44,630			38,272
Loan fee income		7,615		20,061			16,505			32,285
Other income		3,377		2,754			8,980			5,282

Total non-interest income		61,519		65,460			109,304			121,717
Non-interest expense:
Salaries and employee benefits		419,052		375,563			865,883			765,470
Premises and equipment		87,876		81,942			169,706			157,102
Data processing		116,761		95,602			223,724			189,597
Professional fees		79,325		82,034			151,409			155,229
FDIC insurance		14,851		22,553			36,369			44,916
Directors’ fees		36,500		34,925			76,225			70,100
Corporate insurance		10,918		9,196			20,952			18,439
Printing and office supplies		9,914		11,980			15,412			21,991
Other operating expenses		78,088		107,078			157,606			206,206

Total non-interest expenses		853,285		820,873			1,717,286			1,629,050
Income before income tax expense		146,452		84,234			242,356			145,023
Income tax expense		64,564		22,931			87,283			33,154

Net income	$	81,888	$	61,303		$	155,073		$	111,869

Basic earnings per share	$	0.18	$	0.18		$	0.39		$	0.33

Diluted earnings per share	$	0.18	$	0.18		$	0.38		$	0.33

Basic weighted average shares outstanding		455,323		334,278			397,320			336,893

Diluted weighted average shares outstanding		466,725		334,278			408,477			336,893

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

Carroll Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income (Loss)

(unaudited)


	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2014		2013			2014		2013
Net income	$	81,888	$	61,303		$	155,073	$	111,869
Other comprehensive income (loss), before income tax:
Securities available for sale:
Net unrealized holding gains (losses) arising during the period		87,663		(244,049	)		145,705		(252,546	)
Less reclassification adjustment for gains on the sale of securities available for sale included in net income		112		7,044			11,374		16,594

Other comprehensive income (loss), before income tax		87,551		(251,093	)		134,331		(269,140	)
Income tax effect		35,020		(100,437	)		53,733		(107,656	)

Other comprehensive income (loss), net of tax		52,531		(150,656	)		80,598		(161,484	)

Total comprehensive income (loss)	$	134,419	$	(89,353	)	$	235,671	$	(49,615	)

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

Carroll Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

For the Six Months Ended June 30, 2014 and 2013

(unaudited)


	Common Stock		Additional Paid-in Capital		Unallocated ESOP Shares			Unallocated RSP Shares			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
Balances at January 1, 2014	$	3,595	$	2,897,054	$	(183,319	)	$	(133,947	)	$	5,927,209	$	(94,894	)	$	8,415,698
Net income		0		0		0			0			155,073		0			155,073
Other comprehensive income		0		0		0			0			0		80,598			80,598
RSP compensation		0		17,576		0			0			0		0			17,576
Rights offering:
Issuance of 124,982 shares of common stock net of offering costs		1,249		1,896,184		0			0			0		0			1,897,433
ESOP purchase of 7,498 shares		0		0		(119,968	)		0			0		0			(119,968	)
RSP purchase of 3,749 shares		0		0		0			(59,984	)		0		0			(59,984	)

Balances at June 30, 2014	$	4,844	$	4,810,814	$	(303,287	)	$	(193,931	)	$	6,082,282	$	(14,296	)	$	10,386,426

Balances at January 1, 2013	$	3,595	$	2,884,039	$	(194,103	)	$	—		$	5,705,419	$	68,881		$	8,467,831
Net income												111,869					111,869
Other comprehensive loss														(161,484	)		(161,484	)
Common stock acquired by RSP									(133,947	)							(133,947	)

Balances at June 30, 2013	$	3,595	$	2,884,039	$	(194,103	)	$	(133,947	)	$	5,817,288	$	(92,603	)	$	8,284,269

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

Carroll Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

(unaudited)


	For the Six Months Ended June 30,
	2014			2013
Cash flows from operating activities:
Net income	$	155,073		$	111,869
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of securities available for sale		(11,374	)		(16,594	)
Gain on sale of loans held for sale		(855	)		(6,535	)
Origination of loans held for sale		(76,000	)		(367,000	)
Proceeds from sale of loans held for sale		76,855			373,535
Amortization and accretion of securities		63,000			118,513
Amortization of deferred loan origination fees, net of costs					19,377
Provision for loan losses		10,916			82,804
Loan loss recoveries		6,084
Provision for loss on real estate acquired through foreclosure		0			10,000
Loss (gain) on sale of real estate acquired through foreclosure		2,632			(1,388	)
Depreciation of premises and equipment		79,146			70,447
Increase in cash surrender value of bank-owned life insurance		(29,592	)		(31,362	)
ESOP compensation expense		9,000			5,400
RSP compensation expense		17,576
Decrease in deferred tax assets		87,283			45,561
Decrease (increase) in accrued interest receivable		18,493			(8,139	)
(Increase) decrease in other assets		(7,204	)		165,255
Increase in other liabilities		50,760			26,007

Net cash provided operating activities		451,793			597,750
Cash flows from investing activities:
Purchase of securities available for sale		(2,360,436	)		(4,778,215	)
Proceeds from sales and redemptions of securities available for sale		3,823,823			2,064,570
Principal collected on securities available for sale		781,684			1,815,385
Purchase of certificates of deposits		(249,685	)		—
Redemption of certificates of deposit		0			—
Increase in loans		(3,923,923	)		(4,746,357	)
Purchase of premises and equipment		(10,380	)		(172,136	)
Redemption of other equity securities		26,100			21,300
Purchase of other equity securities		(67,500	)		(45,000	)
Capitalized costs on real estate acquired through foreclosure		0			(2,280	)
Proceeds from the sale of real estate aquired through foreclosure		406,408			212,888

Net cash used by investing activities		(1,573,909	)		(5,629,845	)
Cash flows from financing activities:
Increase in deposits		2,111,592			3,710,717
Proceeds from FHLB advances		3,500,000			4,000,000
Repayment of FHLB advances		(4,365,350	)		(3,000,000	)
Proceeds from rights offering		1,897,433			—
Loan to purchase common stock for the ESOP		(119,968	)		—
Purchase common stock for RSP		(59,984	)		(133,947	)

Net cash provided by financing activities		2,963,723			4,576,770

Net increase (decrease) in cash and cash equivalents		1,841,607			(455,325	)
Cash and cash equivalents, beginning balance		5,029,314			4,871,174

Cash and cash equivalents, ending balance	$	6,870,921		$	4,415,849

Supplemental disclosure of cash flow information:
Interest paid	$	332,040		$	451,360
Income taxes (refund) paid	$	0		$	(30,859	)

Supplemental schedule of noncash investing and financing activities:
Foreclosed real estate acquired in settlement of loans	$	0		$	225,000

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

CARROLL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Summary of Significant Accounting Policies

Organization and Nature of Operations

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

On March 26, 2014, pursuant to its rights offering, the Company issued 124,982 shares and warrants (“Units”) at $16.00 per Unit resulting in gross proceeds of $1,999,712. After taking into consideration the offering costs and the Units purchased by the share-based compensation plans, $1,800,000 was contributed to the Bank. The warrants give the holder the right to purchase one-half of a share of common stock at a price of $16.00 per whole share. If fully exercised an additional 62,491 shares of common stock could be issued. The warrants expire on March 20, 2017.

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

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank. All significant intercompany balances and transactions between the Company and the Bank have been eliminated. The Bank has one subsidiary which holds foreclosed real estate.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and are presented in accordance with the instructions for Form 10-Q. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation are of a normal and recurring nature and have been included. The balances as of December 31, 2013 have been derived from audited financial statements. There have been no significant changes to the Company’s accounting policies as disclosed in the 2013 Annual Report on Form 10-K

Operating results for the three months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 or any other interim period. The consolidated financial statements presented in this report should be read in conjunction with audited consolidated financial statements and the accompanying notes filed on Form 10-K for the year ended December 31, 2013.

Use of Estimates

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

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

Reclassifications

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

Recent Accounting Pronouncements

In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings By Creditors (Subtopic 310-40) – Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. This amendment clarifies the circumstances under which an in substance repossession or foreclosure is deemed to occur determining when all or a portion of the loan should be derecognized and the real estate property received should be recognized. The amendment is effective for annual and interim periods beginning after December 15, 2014. Early adoption is permitted.

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. Securities

The amortized cost and fair value of securities available for sale at June 30, 2014 and December 31, 2013 are as follows:


	At June 30, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Residential mortgage-backed securities	$	9,461,787	$	34,409	$	56,285	$	9,439,911
Municipal bonds		278,621		207		2,158		276,670

	$	9,740,408	$	34,616	$	58,443	$	9,716,581


	At December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
US government agency securities	$	1,001,000	$	1,170	$	—	$	1,002,170
Residential mortgage-backed securities		9,977,056		26,370		174,381		9,829,045
Asset-backed securities (SLMA)		775,320		1,273		7		776,586
Municipal bonds		281,869		—		12,582		269,287

	$	12,035,245	$	28,813	$	186,970	$	11,877,088

The Bank had no private label residential mortgage-backed securities at June 30, 2014 and December 31, 2013 or during the six months or year then ended, respectively.

The amortized cost and fair value of securities available for sale at June 30, 2014 and December 31, 2013, by contractual maturity, are shown below. Expected maturities for residential mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	At June 30, 2014				At December 31, 2013
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Under 1 year	$	0	$	0	$	—	$	—
Over 1 year through 5 years		110,742		108,584		1,747,113		1,749,556
After 5 years through 10 years		2,082,305		2,097,548		1,692,291		1,699,707
Over 10 years		7,547,361		7,510,449		8,595,841		8,427,825

	$	9,740,408	$	9,716,581	$	12,035,245	$	11,877,088

The Bank sold and redeemed $3.8 million and $2.1 million, respectively, in securities available for sale during the six months ended June 30, 2014 and 2013. From those sale transactions, the Bank recognized gross realized gains of $11,374 and $16,594 respectively, for the same periods.

Securities with gross unrealized losses at June 30, 2014 and December 31, 2013, aggregated by investment category and length of time individual securities have been in a continual loss position, are as follows:


	At June 30, 2014
	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
Residential mortgage-backed securities	$	1,781,664	$	8,066	$	4,337,713	$	48,219	$	6,119,377	$	56,285
Municipal bonds		0		0		108,584		2,158		108,584		2,158

	$	1,781,664	$	8,066	$	4,446,297	$	50,377	$	6,227,961	$	58,443


	At December 31, 2013
	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
Residential mortgage-backed securities	$	8,674,466	$	174,381	$	—	$	—	$	8,674,466	$	174,381
Asset-backed securities (SLMA)		29,200		7		—		—		29,200		7
Municipal bonds		269,287		12,582		—		—		269,287		12,582

	$	8,972,953	$	186,970	$	—	$	—	$	8,972,953	$	186,970

The carrying amount of securities pledged as collateral for uninsured public fund deposits was $1.4 million at June 30, 2014 and December 31, 2013.

Note 3. Loans

Loans at June 30, 2014 and December 31, 2013 are summarized as follows:


	At June 30, 2014						At December 31, 2013
				Percent						Percent
	Balance			of Total			Balance			of Total
Residential owner occupied - first lien	$	36,813,044			41.9	%	$	37,954,506			45.2	%
Residential owner occupied - junior lien		5,494,783			6.2	%		5,703,159			6.8	%
Residential non-owner occupied (investor)		8,931,177			10.2	%		8,400,861			10.0	%
Commercial owner occupied		9,724,644			11.0	%		8,479,176			10.1	%
Other commercial loans		26,573,186			30.2	%		23,279,588			27.7	%
Consumer loans		403,315			0.5	%		207,757			0.2	%

Total loans		87,940,149			100.0	%		84,025,047			100.0	%

Net deferred fees, costs and purchase premiums		158,272						149,451
Allowance for loan losses		(699,000	)					(682,000	)

Total loans, net	$	87,399,421					$	83,492,498

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

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

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

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

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

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

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

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

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

•

changes in the types of loans in the loan portfolio and the size of the segment to the entire loan portfolio;

•

changes in the levels of concentration of credit;

•

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

•

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

•

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

•

changes in lending policies and procedures;

•

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

•

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

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

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

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

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

The following tables summarize the activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2014 and 2013.


	For the Three Months Ended June 30, 2014
	Residential owner occupied - first lien			Residential owner occupied - junior lien			Residential non-owner occupied (investor)			Commercial owner occupied			Other commercial loans		Consumer loans		Total
Allowance for loan losses:
Beginning balance	$	242,022		$	27,291		$	70,133		$	78,739		$	263,815	$	0	$	682,000
Charge-offs		0			0			0			0			0		0		0
Recoveries		4,071			0			400			0			0		0		4,471
Provision		(6,608	)		(1,345	)		(276	)		4,018			16,740		0		12,529

Ending Balance	$	239,485		$	25,946		$	70,257		$	82,757		$	280,555	$	0	$	699,000


	For the Three Months Ended June 30, 2013
	Residential owner occupied - first lien			Residential owner occupied - junior lien			Residential non-owner occupied (investor)			Commercial owner occupied			Other commercial loans		Consumer loans		Total
Allowance for loan losses:
Beginning balance	$	242,282		$	27,914		$	239,120		$	72,526		$	231,158	$	—	$	813,000
Charge-offs		173,501			—			—			—			—		—		173,501
Recoveries		—			—			—			—			—		—		—
Provision		185,050			(1,449	)		(150,748	)		(2,177	)		23,825		—		54,501

Ending Balance	$	253,831		$	26,465		$	88,372		$	70,349		$	254,983	$	—	$	694,000


	For the Six Months Ended June 30, 2014
	Residential owner occupied - first lien			Residential owner occupied - junior lien			Residential non-owner occupied (investor)			Commercial owner occupied			Other commercial loans		Consumer loans		Total
Allowance for loan losses:
Beginning balance	$	244,288		$	26,704		$	70,334		$	72,751		$	267,923	$	0	$	682,000
Charge-offs		0			0			0			0			0		0		0
Recoveries		5,684			0			400			0			0		0		6,084
Provision		(10,487	)		(758	)		(477	)		10,006			12,632		0		10,916

Ending Balance	$	239,485		$	25,946		$	70,257		$	82,757		$	280,555	$	0	$	699,000


	For the Six Months Ended June 30, 2013
	Residential owner occupied - first lien			Residential owner occupied - junior lien			Residential non-owner occupied (investor)			Commercial owner occupied			Other commercial loans		Consumer loans		Total
Allowance for loan losses:
Beginning balance	$	310,865		$	25,152		$	235,381		$	69,436		$	218,166	$	—	$	859,000
Charge-offs		247,804			—			—			—			—		—		247,804
Recoveries		—			—			—			—			—		—		—
Provision		190,770			1,313			(147,009	)		913			36,817		—		82,804

Ending Balance	$	253,831		$	26,465		$	88,372		$	70,349		$	254,983	$	—	$	694,000

The following tables set forth the balance of the allowance for loan losses by portfolio segment, disaggregated by impairment methodology, which is then further segregated by amounts evaluated for impairment collectively and individually at June 30, 2014 and December 31, 2013:


	At June 30, 2014
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
Allowance for loan losses:
Ending balance	$	239,485	$	25,946	$	70,257	$	82,757	$	280,555	$	0	$	699,000

Ending balance: individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	0	$	0

Ending balance: collectively evaluated for impairment	$	239,485	$	25,946	$	70,257	$	82,757	$	280,555	$	0	$	699,000

Loans:
Ending balance	$	36,813,044	$	5,494,783	$	8,931,177	$	9,724,644	$	26,573,186	$	403,315	$	87,940,149

Ending balance: individually evaluated for impairment	$	180,180	$	9,417	$	120,334	$	0	$	0	$	0	$	309,931

Ending balance: collectively evaluated for impairment	$	36,632,864	$	5,485,366	$	8,810,843	$	9,724,644	$	26,573,186	$	403,315	$	87,630,218


	At December 31, 2013
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
Allowance for loan losses:
Ending balance	$	244,288	$	26,704	$	70,334	$	72,751	$	267,923	$	—	$	682,000

Ending balance: individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Ending balance: collectively evaluated for impairment	$	244,288	$	26,704	$	70,334	$	72,751	$	267,923	$	—	$	682,000

Loans:
Ending balance	$	37,954,506	$	5,703,159	$	8,400,861	$	8,479,176	$	23,279,588	$	207,757	$	84,025,047

Ending balance: individually evaluated for impairment	$	181,186	$	9,417	$	125,206	$	—	$	733,229	$	—	$	1,049,038

Ending balance: collectively evaluated for impairment	$	37,773,320	$	5,693,742	$	8,275,655	$	8,479,176	$	22,546,359	$	207,757	$	82,976,009

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.

The following tables are a summary of the loan portfolio quality indicators by portfolio segment at June 30, 2014 and December 31, 2013:


	At June 30, 2014
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
Pass	$	36,632,864	$	5,485,366	$	8,309,843	$	9,724,644	$	26,199,910	$	403,315	$	86,755,942
Special Mention		0		0		0		0		0		0		0
Substandard		180,180		9,417		621,334		0		373,276		0		1,184,207
Doubtful		0		0		0		0		0		0		0

Total	$	36,813,044	$	5,494,783	$	8,931,177	$	9,724,644	$	26,573,186	$	403,315	$	87,940,149


	At December 31, 2013
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
Pass	$	37,773,320	$	5,693,742	$	7,789,131	$	8,479,176	$	22,546,359	$	207,757	$	82,489,485
Special Mention		—		—		—		—		—		—		—
Substandard		181,186		9,417		611,730		—		733,229		—		1,535,562
Doubtful		—		—		—		—		—		—		—

Total	$	37,954,506	$	5,703,159	$	8,400,861	$	8,479,176	$	23,279,588	$	207,757	$	84,025,047

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

•

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

•

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

•

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

•

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

•

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

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

The following tables set forth certain information with respect to our loan delinquencies by portfolio segment at June 30, 2014 and December 31, 2013:


	At June 30, 2014
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
Current	$	36,254,062	$	5,485,366	$	8,931,177	$	9,724,644	$	26,573,186	$	403,315	$	87,371,750

30-59 days past due		84,206		0		0		0		0		0		84,206
60-89 days past due		294,596		0		0		0		0		0		294,596
Greater than 90 days past due		180,180		9,417		0		0		0		0		189,597

Total past due		558,982		9,417		0		0		0		0		568,399

Total	$	36,813,044	$	5,494,783	$	8,931,177	$	9,724,644	$	26,573,186	$	403,315	$	87,940,149


	At December 31, 2013
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
Current	$	37,290,317	$	5,693,742	$	8,400,861	$	8,479,176	$	23,279,588	$	207,757	$	83,351,441

30-59 days past due		396,903		9,417		—		—		—		—		406,320
60-89 days past due		266,280		—		—		—		—		—		266,280
Greater than 90 days past due		1,006		—		—		—		—		—		1,006

Total past due		664,189		9,417		—		—		—		—		673,606

Total	$	37,954,506	$	5,703,159	$	8,400,861	$	8,479,176	$	23,279,588	$	207,757	$	84,025,047

The following tables are a summary of impaired loans by portfolio segment at June 30, 2014 and December 31, 2013:


	At June 30, 2014
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
With no related allowance recorded:
Recorded Investment	$	180,180	$	9,417	$	120,334	$	0	$	0	$	0	$	309,931
Unpaid Principal Balance		180,180		9,417		120,334		0		0		0		309,931

With an allowance recorded:
Recorded Investment	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Unpaid Principal Balance		0		0		0		0		0		0		0
Related Allowance		0		0		0		0		0		0		0

Total impaired loans:
Recorded Investment	$	180,180	$	9,417	$	120,334	$	0	$	0	$	0	$	309,931
Unpaid Principal Balance		180,180		9,417		120,334		0		0		0		309,931
Related Allowance		0		0		0		0		0		0		0

	At December 31, 2013
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
With no related allowance recorded:
Recorded Investment	$	181,186	$	9,417	$	125,206	$	—	$	733,229	$	—	$	1,049,038
Unpaid Principal Balance		181,186		9,417		125,206		—		733,229		—		1,049,038

With an allowance recorded:
Recorded Investment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Unpaid Principal Balance		—		—		—		—		—		—		—
Related Allowance		—		—		—		—		—		—		—

Total impaired loans:
Recorded Investment	$	181,186	$	9,417	$	125,206	$	—	$	733,229	$	—	$	1,049,038
Unpaid Principal Balance		181,186		9,417		125,206		—		733,229		—		1,049,038
Related Allowance		—		—		—		—		—		—		—

The following tables present by portfolio segment, information related to the average recorded investment and the interest income foregone and recognized on impaired loans for the three and six months ended June 30, 2014 and 2013:


	For the Three Months Ended June 30, 2014
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
With no related allowance recorded:
Average recorded investment	$	180,318	$	9,417	$	121,392	$	0	$	0	$	0	$	311,127
Interest income that would have been recognized		1,783		99		0		0		0		0		1,882
Interest income recognized (cash basis)		0		0		0		0		0		0		0
Interest income foregone (recovered)		1,783		99		0		0		0		0		1,882

With an allowance recorded:
Average recorded investment	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Interest income that would have been recognized		0		0		0		0		0		0		0
Interest income recognized (cash basis)		0		0		0		0		0		0		0
Interest income foregone (recovered)		0		0		0		0		0		0		0

Total impaired loans:
Average recorded investment	$	180,318	$	9,417	$	121,392	$	0	$	0	$	0	$	311,127
Interest income that would have been recognized		1,783		99		0		0		0		0		1,882
Interest income recognized (cash basis)		0		0		0		0		0		0		0
Interest income foregone (recovered)		1,783		99		0		0		0		0		1,882

	For the Three Months Ended June 30, 2013
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
With no related allowance recorded:
Average recorded investment	$	466,472	$	—	$	129,647	$	—	$	—	$	—	$	596,119
Interest income that would have been recognized		10,900		—		965		—		—		—		11,865
Interest income recognized (cash basis)		—		—		965		—		—		—		965
Interest income foregone (recovered)		10,900		—		—		—		—		—		10,900

With an allowance recorded:
Average recorded investment	$	—	$	—	$	45,859	$	—	$	—	$	—	$	45,859
Interest income that would have been recognized		—		—		2,290		—		—		—		2,290
Interest income recognized (cash basis)		—		—		—		—		—		—		—
Interest income foregone (recovered)		—		—		2,290		—		—		—		2,290

Total impaired loans:
Average recorded investment	$	466,472	$	—	$	175,506	$	—	$	—	$	—	$	641,978
Interest income that would have been recognized		10,900		—		3,255		—		—		—		14,155
Interest income recognized (cash basis)		—		—		965		—		—		—		965
Interest income foregone (recovered)		10,900		—		2,290		—		—		—		13,190


	For the Six Months Ended June 30, 2014
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans			Consumer loans		Total
With no related allowance recorded:
Average recorded investment	$	180,607	$	9,417	$	122,663	$	0	$	244,410		$	0	$	557,097
Interest income that would have been recognized		3,554		197		0		0		4,934			0		8,685
Interest income recognized (cash basis)		0		0		0		0		7,805			0		7,805
Interest income foregone (recovered)		3,554		197		0		0		(2,871	)		0		880

With an allowance recorded:
Average recorded investment	$	0	$	0	$	0	$	0	$	0		$	0	$	0
Interest income that would have been recognized		0		0		0		0		0			0		0
Interest income recognized (cash basis)		0		0		0		0		0			0		0
Interest income foregone (recovered)		0		0		0		0		0			0		0

Total impaired loans:
Average recorded investment	$	180,607	$	9,417	$	122,663	$	0	$	244,410		$	0	$	557,097
Interest income that would have been recognized		3,554		197		0		0		4,934			0		8,685
Interest income recognized (cash basis)		0		0		0		0		7,805			0		7,805
Interest income foregone (recovered)		3,554		197		0		0		(2,871	)		0		880

	For the Six Months Ended June 30, 2013
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans			Consumer loans		Total
With no related allowance recorded:
Average recorded investment	$	292,328	$	—	$	42,876	$	—	$	—		$	—	$	335,204
Interest income that would have been recognized		14,902		—		965		—		—			—		15,867
Interest income recognized (cash basis)		—		—		965		—		—			—		965
Interest income foregone (recovered)		14,902		—		—		—		—			—		14,902

With an allowance recorded:
Average recorded investment	$	244,536	$	—	$	30,573	$	—	$	—		$	—	$	275,109
Interest income that would have been recognized		5,390		—		2,290		—		—			—		7,680
Interest income recognized (cash basis)		—		—		—		—		—			—		—
Interest income foregone (recovered)		5,390		—		2,290		—		—			—		7,680

Total impaired loans:
Average recorded investment	$	536,864	$	—	$	73,449	$	—	$	—		$	—	$	610,313
Interest income that would have been recognized		20,292		—		3,255		—		—			—		23,547
Interest income recognized (cash basis)		—		—		965		—		—			—		965
Interest income foregone (recovered)		20,292		—		2,290		—		—			—		22,582

The following table is a summary of performing and nonperforming impaired loans by portfolio segment at June 30, 2014 and December 31, 2013:


	At June 30, 2014		At December 31, 2013
Performing loans:
Impaired performing loans:
Residential owner occupied - first lien	$	0	$	—
Residential owner occupied - junior lien		0		—
Residential non-owner occupied (investor)		0		—
Commercial owner occupied		0		—
Other commercial loans		0		—
Consumer loans		0		—
Troubled debt restructurings:
Residential owner occupied - first lien		0		78,601
Residential owner occupied - junior lien		0		—
Residential non-owner occupied (investor)		120,334		—
Commercial owner occupied		0		—
Other commercial loans		0		—
Consumer loans		0		—

Total impaired performing loans		120,334		78,601

Nonperforming loans:
Impaired nonperforming loans:
Residential owner occupied - first lien		180,180		181,186
Residential owner occupied - junior lien		9,417		9,417
Residential non-owner occupied (investor)		0		—
Commercial owner occupied		0		—
Other commercial loans		0		733,229
Consumer loans		0		—
Troubled debt restructurings:
Residential owner occupied - first lien		0		—
Residential owner occupied - junior lien		0		—
Residential non-owner occupied (investor)		0		125,206
Commercial owner occupied		0		—
Other commercial loans		0		—
Consumer loans		0		—

Total impaired nonperforming loans:		189,597		1,049,038

Total impaired loans	$	309,931	$	1,127,639

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

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

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

The following table is a summary of impaired loans that were modified pursuant to a TDR during the three and six months ended June 30, 2014 and 2013:


Loan Type	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment

	During the Three Months Ended June 30, 2014
Residential non-owner occupied (investor)		0	$	0	$	0

	During the Three Months Ended June 30, 2013
Residential non-owner occupied (investor)		—	$	—	$	—

	During the Six Months Ended June 30, 2014
Residential non-owner occupied (investor)		0	$	0	$	0

	During the Six Months Ended June 30, 2013
Residential non-owner occupied (investor)		1	$	127,675	$	130,664

There were no defaults on any TDRs (that were restructured within the previous twelve months) during the six months ending June 30, 2014 or June 30, 2013.

Note 5. Deposits

Deposits were comprised of the following at June 30, 2014 and December 31, 2013:


	At June 30, 2014					At December 31, 2013
	Balance		Percent of Total			Balance		Percent of Total
Non-interest bearing checking	$	5,430,750		5.8	%	$	4,866,188		5.3	%
Interest-bearing checking		5,448,197		5.8	%		5,306,684		5.8	%
Savings		2,513,631		2.7	%		2,144,938		2.3	%
Premium savings		22,603,749		24.1	%		22,440,482		24.4	%
IRA savings		8,113,982		8.6	%		8,423,727		9.2	%
Money market		11,719,445		12.5	%		10,880,101		11.9	%
Certificates of deposit		38,045,793		40.5	%		37,701,835		41.1	%

Total deposits	$	93,875,547		100.0	%	$	91,763,955		100.0	%

Certificates of deposit scheduled maturities are as follows:


	At June 30, 2014		At December 31, 2013
Period to Maturity:
Less than or equal to one year	$	12,583,710	$	10,088,619
More than one to two years		7,162,536		9,778,501
More than two to three years		6,448,517		3,932,122
More than three to four years		5,316,678		6,438,083
More than four to five years		6,534,352		7,464,510

Total certificates of deposit	$	38,045,793	$	37,701,835

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

Note 6. Fair Value Measurements

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

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

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

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

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

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

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

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

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

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

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

The following table presents a summary of financial assets measured at fair value on a recurring basis at June 30, 2014 and December 31, 2013:


	At June 30, 2014
	Carrying Value		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Residential mortgage-backed securities	$	9,439,911	$	0	$	9,439,911	$	0
Municipal bonds		276,670		0		276,670		0

Total securities available for sale	$	9,716,581	$	0	$	9,716,581	$	0


	At December 31, 2013
	Carrying Value		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
US government agency securities	$	1,002,170	$	—	$	1,002,170	$	—
Residential mortgage-backed securities		9,829,045		—		9,829,045		—
Asset-backed securities (SLMA)		776,586		—		776,586		—
Municipal bonds		269,287		—		269,287		—

Total securities available for sale	$	11,877,088	$	—	$	11,877,088	$	—

The following table presents a summary of financial assets measured at fair value on a non-recurring basis at June 30, 2014 and December 31, 2013:


	At June 30, 2014
	Carrying Value		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Residential owner occupied - first lien	$	180,180	$	0	$	0	$	180,180
Residential owner occupied - junior lien		9,417		0		0		9,417
Residential non-owner occupied (investor)		120,334		0		0		120,334

Total nonperforming impaired loans	$	309,931	$	0	$	0	$	309,931

Foreclosed real estate	$	52,964	$	0	$	0	$	52,964


	At December 31, 2013
	Carrying Value		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Residential owner occupied - first lien	$	181,186	$	—	$	—	$	181,186
Residential owner occupied - junior lien		9,417		—		—		9,417
Residential non-owner occupied (investor)		125,206		—		—		125,206
Other commercial loans		733,229		—		—		733,229

Total nonperforming impaired loans	$	1,049,038	$	—	$	—	$	1,049,038

Foreclosed real estate	$	462,005	$	—	$	—	$	462,005

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


	Impaired Loans			Foreclosed Real Estate
Balance, January 1, 2013	$	677,648		$	788,619
Total realized and unrealized losses included in net income		(264,659	)		(65,333	)
Settlements		(38,859	)		(652,781	)
Transfers in and/or out of Level 3		674,908			391,500

Balance, December 31, 2013	$	1,049,038		$	462,005
Total realized and unrealized losses included in net income		0			(2,632	)
Settlements		(739,107	)		(406,409	)
Transfers in and/or out of Level 3		0			0

Balance, June 30, 2014	$	309,931		$	52,964

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

Certificates of Deposit with Depository Institutions (Carried at Cost). The carrying amounts of the certificates of deposit approximate fair value.

Securities Available for Sale (Carried at Fair Value). Where quoted prices are available in an active market, securities available for sale are classified within Level 1 of the valuation hierarchy. Level 1 would include highly liquid government bonds, mortgage products and exchange-traded equities. If quoted market prices are not available, securities available for sale are classified within level 2 and fair value values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 would include U.S. agency securities, mortgage-backed securities, obligations

of states and political subdivisions and certain corporate, asset-backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities available for sale are classified within Level 3 of the valuation hierarchy.

Loans, Net of Allowance for Loan Losses (Carried at Cost). The fair values of loans are estimated using discounted cash flow analyses, using market rates at the statement of condition date that reflect the credit and interest rate risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values. Impaired loans are measured at an observable market price (if available), or at fair value of the loan’s collateral (if the loan is collateral dependent). When the loan is dependent on collateral, fair value of collateral is determined by an appraisal or independent valuation, which is then adjusted for the estimated cost to sell. Impaired loans allocated to the allowance for loan losses are measured at the lower of cost or fair value on a nonrecurring basis.

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

Bank-Owned Life Insurance (Carried at Surrender Value). The carrying amount of the life insurance policies is based on the accumulated cash surrender value of each policy.

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

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

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

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

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


	At June 30, 2014
	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Financial instruments - assets:
Certificates of deposit with depository institutions	$	2,104,294	$	2,104,294	$	0	$	2,104,294	$	0
Securities available for sale		9,716,581		9,716,581		0		9,716,581		0
Loans, net of allowance for loan losses		87,399,421		89,144,000		0		0		89,144,000
Foreclosed assets		52,964		52,964		0		0		52,964
Bank-owned life insurance		2,021,960		2,021,960		0		2,021,960		0
Other equity securities		538,096		538,096		0		0		538,096

Financial instruments - liabilities:
Deposits	$	93,875,547	$	93,838,000	$	0	$	93,838,000	$	0
Federal Home Loan Bank Advances		6,500,000		6,722,000		0		6,722,000		0

Financial instruments - off-balance sheet	$	0	$	0	$	0	$	0	$	0

	At December 31, 2013
	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Financial instruments - assets:
Certificates of deposit with depository institutions	$	1,856,469	$	1,856,469	$	—	$	1,856,469	$	—
Securities available for sale		11,877,088		11,877,088		—		11,877,088		—
Loans, net of allowance for loan losses		83,492,498		85,164,000		—		—		85,164,000
Foreclosed assets		462,005		462,005		—		—		462,005
Bank-owned life insurance		1,992,367		1,992,367		—		1,992,367		—
Other equity securities		496,696		496,696		—		—		496,696

Financial instruments - liabilities:
Deposits	$	91,763,955	$	91,674,000	$	—	$	91,674,000	$	—
Federal Home Loan Bank Advances		7,365,350		7,610,000		—		7,610,000		—

Financial instruments - off-balance sheet	$	—	$	—	$	—	$	—	$	—

Note 7. Stockholders’ Equity

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

On February 20, 2013, the Board of Directors authorized the Company to repurchase up to 10,783 shares of common stock for the 2011 Employee Recognition and Retention Plan and Trust. As of June 18, 2013 all 10,783 shares were repurchased at an aggregate expenditure of $134,000, or $12.42 per share. The shares will be held in trust for the allocation to employees and non-employee directors as directed by the Compensation Committee of the Board.

On March 26, 2014, pursuant to its rights offering, the Company issued 124,982 shares and warrants (“Units”) at $16.00 per Unit resulting in gross proceeds of $1,999,712. After taking into consideration the offering costs and the shares purchased by the share-based compensation plans, $1,800,000 was contributed to the Bank. The warrants give the holder the right to purchase one-half of a share of common stock at a price of $16.00 per whole share. If fully exercised an additional 62,491 shares of common stock could be issued. The warrants expire on March 20, 2017.

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk weighted assets, core capital to adjusted tangible assets and tangible capital to tangible assets. Management believes, as of June 30, 2014, the Bank met all capital adequacy requirements to which it is subject.

As of October 2012, the most recent notification from the Bank’s regulators, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed the Bank’s category.

The Bank’s actual capital amounts and ratios at June 30, 2014 and December 31, 2013 are presented in the table below:


	At June 30, 2014
	Actual					For Capital Adequacy Purposes					To be well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets)	$	10,743		15.2	%	$	5,645		8.0	%	$	7,057		10.0	%
Tier 1 capital (to risk-weighted assets)		10,044		14.2	%		2,823		4.0	%		4,234		6.0	%
Tier 1 capital (to average assets)		10,044		9.1	%		4,424		4.0	%		5,530		5.0	%
Tangible capital (to tangible assets)		10,040		9.1	%		1,665		1.5	%		N/A		N/A

	At December 31, 2013
	Actual					For Capital Adequacy Purposes					To be well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets)	$	8,716		12.9	%	$	5,416		8.0	%	$	6,770		10.0	%
Tier 1 capital (to risk-weighted assets)		8,034		11.9	%		2,708		4.0	%		4,062		6.0	%
Tier 1 capital (to average assets)		8,034		7.4	%		4,320		4.0	%		5,400		5.0	%
Tangible capital (to tangible assets)		8,109		7.5	%		1,616		1.5	%		N/A		N/A

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


	At June 30, 2014			At December 31, 2013
Consolidated GAAP equity	$	10,386,426		$	8,415,698
Consolidated equity in excess of Bank equity		(346,138	)		(306,273	)

Bank GAAP equity - Tangible capital		10,040,288			8,109,425
Less:
Accumulated other comprehensive income (loss), net of tax		(14,296	)		(94,894	)
Disallowed deferred tax assets		10,000			170,000

Tier 1 capital		10,044,584			8,034,319
Plus:
Allowance for loan losses (1.25% of risk-weighted assets)		699,000			682,000

Total risk-based capital	$	10,743,584		$	8,716,319

Note 8. Earnings Per Share

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

The calculation of net income per common share for the three and six months ended June 30, 2014 and 2013 are as follows:


	For the Three Months Ended June 30, 2014		For the Three Months Ended June 30, 2013		For the Six Months Ended June 30, 2014		For the Six Months Ended June 30, 2013
Net Income available to common shareholders	$	81,888	$	61,303	$	155,073	$	111,869

Weighted average number of shares used in:
Basic earnings per share		455,323		334,278		397,320		336,893
Adjustment for common share equivalents		11,402		0		11,157		0

Diluted earnings per share		466,725		334,278		408,477		336,893
Basic net income per common share	$	0.18	$	0.18	$	0.39	$	0.33

Diluted net income per common share	$	0.18	$	0.18	$	0.38	$	0.33

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section is intended to help readers understand our financial performance through a discussion of the factors affecting our financial condition at June 30, 2014 and December 31, 2013. This section should be read in conjunction with the consolidated financial statements and accompanying notes that appear elsewhere in this Form 10-Q.

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

Carroll Bancorp, Inc.

Carroll Bancorp, Inc., which we sometimes refer to as “the Company,” is a Maryland corporation that owns 100% of the outstanding common stock of Carroll Community Bank, which we sometimes refer to as “the Bank.” On October 12, 2011, we completed our initial public offering of common stock in connection with the Bank’s conversion from a state-chartered mutual savings bank to a state-chartered commercial bank, a stock form of organization. We sold 359,456 shares of common stock at $10.00 per share raising $3.6 million of gross proceeds. Carroll Bancorp, Inc. has not engaged in any significant business activity other than owning the common stock of and maintaining deposits in the Bank, and lending funds to the employee stock ownership plan (“ESOP”) trust.

On March 26, 2014, pursuant to its rights offering, the Company issued 124,982 Units, with each Unit consisting of one share of common stock and one warrant, for a purchase price of $16.00 per Unit resulting in gross proceeds of $1,999,712. After taking into consideration the offering costs and the Units purchased by the share-based compensation plans, the Company contributed the net proceeds of $1,800,000 to the Bank. The warrants give the holder the right to purchase one-half of a share of common stock at a price of $16.00 per whole share. If the warrants are fully exercised, the Company will issue up to an additional 62,491 shares of common stock. The warrants expire on March 20, 2017.

Carroll Community Bank

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

Overview

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

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

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

The economic crisis that began in late 2007 negatively affected real estate lending in our market area. The number of housing units sold in Carroll and Howard Counties has declined from the pre-2008 levels. These declines 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. The declines also affected our ability to make loans in the commercial real estate market, although to a lesser extent. Beginning in 2011 and continuing through the second quarter of 2014, we have seen signs of an improving residential and commercial real estate market and we anticipate that as market conditions slowly return to a more normal level, there will be increased lending opportunities.

The following table summarizes the highlights of our financial performance for the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013 (amounts in the table may not match those discussed in the balance of this section due to rounding):


(unaudited)	For the Three Months Ended June 30,
( Dollars in thousands, except per share data)	2014			2013			$ Change			% Change
Net income	$	82		$	61		$	21			34.4	%
Basic earnings per share		0.18			0.18			—			0.0	%
Diluted earnings per share		0.18			0.18			—			0.0	%
Interest income		1,116			1,111			5			0.5	%
Interest expense		165			217			(52	)		-24.0	%
Net interest income		951			894			57			6.4	%
Noninterest income		62			66			(4	)		-6.1	%
Noninterest expense		853			821			32			3.9	%
Average Loans		87,393			82,199			5,194			6.3	%
Average Earning Assets		104,890			99,541			5,349			5.4	%
Average Interest-Bearing Liabilities		94,574			92,394			2,180			2.4	%
Return on average assets		0.30	%		0.23	%
Return on average equity		3.17	%		2.89	%
Net interest margin		3.64	%		3.60	%

	For the Six Months Ended June 30,
	2014			2013			$ Change			% Change
Net income	$	155		$	112		$	43			38.4	%
Basic earnings per share		0.39			0.33			0.06			18.2	%
Diluted earnings per share		0.38			0.33			0.05			15.2	%
Interest income		2,193			2,187			6			0.3	%
Interest expense		332			452			(120	)		-26.5	%
Net interest income		1,861			1,735			126			7.3	%
Noninterest income		109			122			(13	)		-10.7	%
Noninterest expense		1,717			1,629			88			5.4	%
Average Loans		85,941			81,433			4,508			5.5	%
Average Earning Assets		102,817			98,594			4,223			4.3	%
Average Interest-Bearing Liabilities		93,767			91,974			1,793			1.9	%
Return on average assets		0.29	%		0.22	%
Return on average equity		3.29	%		2.65	%
Net interest margin		3.65	%		3.55	%

Average Balances and Yields

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


	For the Three Months Ended June 30,
	2014								2013
(Dollars in thousands)	Average Outstanding Balance			Interest		Yield / Rate			Average Outstanding Balance			Interest		Yield / Rate
Interest-earning assets:
Loans	$	87,393		$	1,057		4.85	%	$	82,199		$	1,058		5.16	%
Investment securities		9,762			48		1.97	%		11,571			39		1.35	%
Certificates of deposit		1,935			4		0.83	%		2,600			9		1.39	%
Interest earning deposits		5,800			7		0.48	%		3,171			5		0.63	%

Total interest-earning assets		104,890			1,116		4.27	%		99,541			1,111		4.48	%

Noninterest-earning assets		5,711								6,280

Total assets	$	110,601							$	105,821

Interest-bearing liabilities:
Savings accounts	$	33,249			22		0.27	%	$	35,744			34		0.38	%
Certificates of deposit		38,347			100		1.05	%		35,711			137		1.54	%
Money market accounts		11,630			13		0.45	%		9,729			15		0.62	%
Now accounts		5,340			1		0.08	%		4,320			1		0.09	%

Total interest-bearing deposits		88,566			136		0.62	%		85,504			187		0.88	%
Federal Home Loan Bank advances		6,008			29		1.94	%		6,890			30		1.75	%

Total interest-bearing liabilities		94,574			165		0.70	%		92,394			217		0.94	%

Noninterest-bearing deposits		5,451								4,807
Noninterest-bearing liabilities		220								123

Total liabilities		100,245								97,324
Equity		10,356								8,497

Total liabilities and capital	$	110,601							$	105,821

Net interest income				$	951							$	894

Net interest rate spread (1)							3.57	%							3.54	%
Net interest-earning assets (2)	$	10,316							$	7,147

Net interest margin (3)							3.64	%							3.60	%
Average interest-earning assets to interest-bearing liabilities		110.91	%							107.74	%

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

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

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


	For the Six Months Ended June 30,
	2014								2013
(Dollars in thousands)	Average Outstanding Balance			Interest		Yield / Rate			Average Outstanding Balance			Interest		Yield / Rate
Interest-earning assets:
Loans	$	85,941		$	2,068		4.85	%	$	81,433		$	2,099		5.20	%
Investment securities		10,698			103		1.94	%		11,061			59		1.08	%
Certificates of deposit		1,896			9		0.96	%		2,600			19		1.47	%
Interest earning deposits		4,282			13		0.61	%		3,500			10		0.58	%

Total interest-earning assets		102,817			2,193		4.30	%		98,594			2,187		4.47	%

Noninterest-earning assets		5,995								6,322

Total assets	$	108,812							$	104,916

Interest-bearing liabilities:
Savings accounts	$	33,091			44		0.27	%	$	35,542			72		0.41	%
Certificates of deposit		38,177			202		1.07	%		36,393			288		1.60	%
Money market accounts		11,307			25		0.45	%		9,198			30		0.66	%
Now accounts		5,297			2		0.08	%		4,145			2		0.10	%

Total interest-bearing deposits		87,872			273		0.63	%		85,278			392		0.93	%
Federal Home Loan Bank advances		5,895			59		2.02	%		6,696			60		1.81	%

Total interest-bearing liabilities		93,767			332		0.71	%		91,974			452		0.99	%

Noninterest-bearing deposits		5,328								4,305
Noninterest-bearing liabilities		208								124

Total liabilities		99,303								96,403
Equity		9,509								8,513

Total liabilities and capital	$	108,812							$	104,916

Net interest income				$	1,861							$	1,735

Net interest rate spread (1)							3.59	%							3.48	%
Net interest-earning assets (2)	$	9,050							$	6,620

Net interest margin (3)							3.65	%							3.55	%
Average interest-earning assets to interest-bearing liabilities		109.65	%							107.20	%

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

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

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

Rate/Volume Analysis

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


	For the Three Months Ended June 30, 2014 vs 2013
	Increase (Decrease) Due to
(in thousands)	Volume			Rate			Rate/ Volume			Total Increase (Decrease)
Interest income from:
Loans	$	66		$	(63	)	$	(4	)	$	(1	)
Investment securities		(6	)		18			(3	)		9
Certificates of deposit		(2	)		(4	)		1			(5	)
Interest earning deposits		4			(1	)		(1	)		2

Total interest income (1)		59			(51	)		(3	)		5

Interest expense on:
Savings accounts		(2	)		(10	)		—			(12	)
Certificates of deposit		10			(43	)		(4	)		(37	)
Money market accounts		3			(4	)		(1	)		(2	)
Now accounts		—			—			—			—

Total interest-bearing deposits		7			(56	)		(2	)		(51	)
Federal Home Loan Bank advances		(4	)		3			—			(1	)

Total interest expense (1)		5			(56	)		(1	)		(52	)

Change in net interest income	$	54		$	5		$	(2	)	$	57

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


	For the Six Months Ended June 30, 2014 vs 2013
	Increase (Decrease) Due to
(in thousands)	Volume			Rate			Rate/ Volume			Total Increase (Decrease)
Interest income from:
Loans	$	116		$	(139	)	$	(8	)	$	(31	)
Investment securities		(2	)		48			(2	)		44
Certificates of deposit		(5	)		(7	)		2			(10	)
Interest earning deposits		2			1			—			3

Total interest income (1)		94			(84	)		(4	)		6

Interest expense on:
Savings accounts		(5	)		(25	)		2			(28	)
Certificates of deposit		14			(95	)		(5	)		(86	)
Money market accounts		7			(10	)		(2	)		(5	)
Now accounts		—			—			—			—

Total interest-bearing deposits		12			(127	)		(4	)		(119	)
Federal Home Loan Bank advances		(7	)		6			—			(1	)

Total interest expense (1)		9			(127	)		(2	)		(120	)

Change in net interest income	$	85		$	43		$	(2	)	$	126

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

Comparison of Results of Operations for the Three Months Ended June 30, 2014 and June 30, 2013

General. Net income increased by $21,000 to $82,000 for the three months ended June 30, 2014 compared to a net income of $61,000 for the same period in 2013. The increase in net income for the three month period is attributable to higher net interest income and a lower provision for loan losses, partially offset by an increase in non-interest expenses.

Net Interest Income. Net interest income is determined by the interest rate spread (i.e., the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income increased by $57,000, or 6.4%, during the three months ended June 30, 2014 compared to the same period in 2013, primarily due to the decline in interest expense. Our net interest rate spread increased to 3.57% for the three months ended June 30, 2014 compared to 3.54% for the three months ended June 30, 2013.

Interest Income. Interest income remained flat at $1.1 million for the three months ended June 30, 2014 and 2013. Average earning assets increased by $5.3 million to $104.9 million for the three months ended June 30, 2014 from $99.5 million for the three months ended June 30, 2013. This growth was offset by the decline in yield on our earning assets to 4.27% for the three months ended June 30, 2014 from 4.48% for the three months ended June 30, 2013.

Interest Expense. Interest expense decreased by $52,000, or 24.0%, to $165,000 for the three months ended June 30, 2014 compared to $217,000 for the three months ended June 30, 2013. This decrease was almost entirely attributable to a decline in interest expense on interest-bearing deposits as the average rate paid dropped by 26 basis points, or 29.5%, slightly offset by an increase in the average balance of interest-bearing deposits of $3.1 million, or 3.6%. The decrease in average rates was primarily attributable to the decline of interest rates on certificates of deposit. The average rate on certificates of deposit dropped to 1.05% during the three months ended June 30, 2014 from 1.54% during the three months ended June 30, 2013. The continued historically low level of market interest rates enabled us to renew maturing certificates of deposit at significantly lower interest rates.

Provision for Loan Losses. We establish a provision for loan losses, which is charged to operations, in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loan losses we

consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonperforming loans. The amount of the allowance is based on estimates and actual losses may vary from such estimates as more information becomes available or economic conditions change. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as circumstances change as more information becomes available. The allowance for loan losses is assessed on a quarterly basis and provisions are made for loan losses as required in order to maintain the allowance.

Based on management’s evaluation of the above factors, the provision for loan losses was $13,000 for the three months ended June 30, 2014 compared to $55,000 for the three months ended June 30, 2013. The decrease in the provision for loan losses was mainly due to a specific reserve taken in the 2013 period for a nonperforming investor residential mortgage loan. In both of the periods, loan growth and the increase in our commercial loan mix within the loan portfolio contributed to the amount of provision recorded. Management believes, to the best of their knowledge, that all known losses as of June 30, 2014 have been recorded.

The allowance for loan losses represented 0.79% of gross loans at June 30, 2014 and 0.81% of gross loans as of December 31, 2013. Based on our analysis and the historical performance of the loan portfolio, we believe the allowance appropriately reflects the inherit risk of loss in our loan portfolio.

Non-Interest Income. Non-interest income was $62,000 for the three months ended June 30, 2014 compared to $66,000 for the same period in 2013. The $4,000 decrease in non-interest income is primarily attributable to a $12,000 decrease in loan fees and a $7,000 decrease in gains on sales of securities available for sale partially offset by an $11,000 gain on the sale of OREO in the 2014 period.

Non-Interest Expenses. Non-interest expenses increased by $32,000, or 3.9%, to $853,000 for the three months ended June 30, 2014 compared to $821,000 during the same period in 2013. The increase was primarily due to a $43,000, or 11.6%, increase in salaries and employee benefits due to a new employee performance based incentive program, higher health care and stock based compensation expenses and a $21,000, or 22.1%, increase in data processing due to post conversion costs related to our core processing system and higher transaction volumes. These increases were partially offset by a $29,000, or 27.1%, decrease in other operating expenses due to a decline of $19,000 in OREO repair and maintenance costs, a $4,000 decrease in advertising and marketing expenditures and expenses incurred during the three months ended June 30, 2013 of $7,000 for post robbery security expenditures for which there was no corresponding expenditures in the 2014 period.

Income Tax Expense. Income tax expense amounted to $65,000 and $23,000, respectively, for the three months ended June 30, 2014 and 2013 resulting in effective tax rates of 44.1% and 27.2%, respectively. Our effective tax rate is influenced by the relation of tax exempt income from bank owned life insurance relative to pre-tax income.

Comparison of Results of Operations for the Six Months Ended June 30, 2014 and June 30, 2013

General. Net income increased by $43,000 to $155,000 for the six months ended June 30, 2014 compared to $112,000 for the same period in 2013. The increase in net income for the six month period is attributable to higher net interest income and a lower provision for loan losses, partially offset by an increase in non-interest expenses.

Net Interest Income. Net interest income increased by $126,000, or 7.3%, during the six months ended June 30, 2014 compared to the same period in 2013, due to the continued decline in interest expense. Our net interest rate spread increased to 3.59% for the six months ended June 30, 2014 compared to 3.48% for the six months ended June 30, 2013.

Interest Income. Interest income remained flat at $2.2 million for the six months ended June 30, 2014 and 2013. Average earning assets increased by $4.2 million to $102.8 million for the six months ended June 30, 2014 from $98.6 million for the six months ended June 30, 2013. This growth was offset by the decline in yield on our earning assets to 4.30% for the six months ended June 30, 2014 from 4.47% for the six months ended June 30, 2013.

Interest Expense. Interest expense decreased by $120,000, or 26.5%, to $332,000 for the six months ended June 30, 2014 compared to $452,000 for the six months ended June 30, 2013. This decrease was mainly attributable to a decline in interest expense on interest-bearing deposits as the average rate paid on interest-bearing deposits dropped by 30 basis points, or 32.3%, slightly offset by an increase in the average balance of interest-bearing deposits of $2.6 million, or 3.0%. The decline in average rates was primarily attributable to the decline of interest rates on certificates of deposit. The average rate on certificates of deposit dropped to 1.07% during the six months ended June 30, 2014 from 1.60% during the six months ended June 30, 2013. The continued historically low level of market interest rates have enabled us to renew maturing certificates of deposit at significantly lower interest rates.

Provision for Loan Losses. The provision for loan losses was $11,000 for the six months ended June 30, 2014 compared to $83,000 for the six months ended June 30, 2013. The decrease in the provision for loan losses was due to 2013 including an increase in our historical loss factors as a result of a charge-off and a specific reserve for a nonperforming investor residential mortgage loan. In both of the periods, loan growth and the increase in our commercial loan mix within the loan portfolio contributed to the amount of provision recorded.

Non-Interest Income. Non-interest income was $109,000 for the six months ended June 30, 2014 compared to $122,000 for the same period in 2013. The $13,000, or 10.2%, decrease in non-interest income was primarily attributable to a $16,000 decrease in loan fees due to lower late fee and loan processing fee collections, a $6,000 decrease in gains on the sale of loans and a $5,000 decrease on the sale of securities available for sale during the six months ended June 30, 2014. These items were partially offset by higher ATM fees of $9,000 and a decrease of $6,000 for losses on the sale of OREO.

Non-Interest Expenses. Non-interest expense increased by $88,000, or 5.4%, to $1.7 million for the six months ended June 30, 2014 compared to $1.6 million during the same period in 2013. The increase was due to a $100,000, or 13.1%, increase in salaries and employee benefits due to a new employee incentive program, higher health care costs and stock based compensation expenses and a $34,000, or 18.0%, increase in data processing due to post conversion costs related to our core processing system and higher transaction volumes. These items were partially offset by a decrease of $21,000 in OREO and loan workout expenses, a $9,000 decrease in advertising and marketing expenditures and expenses incurred during the six months ended June 30, 2013 of $11,000 in post robbery security expenditures and $7,000 in fraudulent check losses for which there was no corresponding expenditures during the 2014 period.

Income Tax Expense. Income tax expense amounted to $87,000 and $33,000, respectively, for the six months ended June 30, 2014 and 2013 resulting in effective tax rates of 36.0% and 22.9%, respectively. Our effective tax rate is influenced by the relation of tax exempt income from bank owned life insurance relative to pre-tax income.

Comparison of Financial Condition at June 30, 2014 and December 31, 2013.

Assets. Total assets increased by $3.3 million, or 3.0%, to $111.0 million at June 30, 2014 compared to $107.7 million at December 31, 2013, primarily due to funding provided by the increase in capital resulting from the rights offering in early 2014 and a $2.1 million increase in deposits.

Loans. Loan balances increased by $3.9 million, or 4.7%, to $87.4 million at June 30, 2014 compared to $83.5 million at December 31, 2013. During the second quarter we bought back loan participations sold of $3.4 million due to the increase in our loans to one borrower limit after the rights offering. New loan balances of $10.4 million recorded during the six months ending June 30, 2014 were partially offset by loan payoffs of $3.6 million and scheduled principal repayments of $2.8 million.

Nonperforming Loans and Assets. Our nonperforming loans and assets were $190,000 and $243,000, respectively, at June 30, 2014 compared to $1.0 million and $1.5 million, respectively, at December 31, 2013. The ratio of nonperforming loans to total loans was 0.21% at June 30, 2014 compared to 1.25% at December 31, 2013. In addition, our ratio of nonperforming assets was 0.22% as of June 30, 2014 compared to 1.40% as of December 31, 2013.

Deposits. Deposits increased by $2.1 million, or 2.3%, to $93.9 million at June 30, 2014 from $91.8 million at December 31, 2013. Money market deposits increased by $839,000, or 7.7%, checking account deposits increased by $706,000, or 6.9% and savings account deposits increased by $532,000, or 2.2%. We continue to focus our efforts on improving our funding mix and increasing core deposits especially non-interest and interest bearing checking deposits.

Stockholders’ Equity. Stockholders’ equity increased by $2.0 million, or 23.4%, to $10.4 million at June 30, 2014 from $8.4 million at December 31, 2013. The increase was a result of the successful closing of our rights offering in early 2014. Gross proceeds were approximately $2.0 million before expenses and Units purchased by our shared-based compensation plans.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, loan repayments, the sale of securities available for sale, short-term lines of credit with correspondent banks and advances from the Federal Home Loan Bank of Atlanta. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of June 30, 2014.

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

(i)

expected loan demand;

(ii)

expected deposit flows and borrowing maturities;

(iii)

yields available on interest-earning deposits and securities; and

(iv)

the objectives of our asset and liability management program.

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

Our most liquid assets are cash and cash equivalents. The level of these assets is dependent on our operating, financing, lending and investing activities during any given period as reported in our statement of cash flows included in our financial statements. At June 30, 2014, cash and cash equivalents totaled $6.9 million.

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

At June 30, 2014, we had $2.0 million in loan origination commitments outstanding and $7.3 million in unused available lines of credit. Certificates of deposit due within one year of June 30, 2014 totaled $12.6 million, or 13.4% of total deposits. If these deposits do not remain with us, we may be required to seek other sources of funds, including loan and securities sales, acquiring brokered deposits, Federal Home Loan Bank advances and draws on our short-term lines of credit with correspondent banks. Depending on market conditions, we may be required to pay higher rates on our deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2015. We believe, however, based on historical experience and current market interest rates that we will retain upon maturity a large portion of our certificates of deposit with maturities of one year or less as of June 30, 2014.

Our primary investing activity is originating loans. During the six months ended June 30, 2014, we recorded $10.4 million in new loan balances.

Financing activities consist primarily of activity in deposit accounts. We experienced a net increase in deposits during the six months ended June 30, 2014 of $2.1 million, or 2.3%. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Atlanta, which provide an additional source of funds. Federal Home Loan Bank advances totaled $6.5 million at June 30, 2014 and we had the ability to borrow up to an additional $4.5 million from the Federal Home Loan Bank of Atlanta and $10.5 million from correspondent banks under short-term line of credit agreements. In addition, our Board of Directors has approved the use of brokered deposits, up to 15% of total deposits, as a funding source. At June 30, 2014, we had $2.5 million in brokered CDs and the ability to acquire up to $11.5 million in additional brokered deposits.

Carroll Bancorp, Inc. is a separate legal entity from the Bank and has to provide for its own liquidity to pay its operating expenses and other financial obligations. Virtually all of the Company’s revenue will be interest earned on the loan to the ESOP and stock dividends received from the Bank when the Bank begins paying dividends.

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

Carroll Community Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2014, Carroll Community Bank exceeded all regulatory capital requirements. Carroll Community Bank is considered “well capitalized” under regulatory guidelines. See Note 7 of the accompanying consolidated financial statements for additional information.

Off-Balance Sheet Arrangements, Commitments and Aggregate Contractual Obligations

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

Outstanding loan commitments and available lines of credit at June 30, 2014 and December 31, 2013 are as follows:


(in thousands)	At June 30, 2014		At December 31, 2013
Commitments to extend credit:
Consumer loans	$	239	$	207
Commercial loans		1,797		3,583

		2,036		3,790

Commitments under available lines of credit:
Consumer loans		4,849		4,366
Commercial loans		2,405		2,845

		7,254		7,211

Standby letter of credit		79		—

Total Commitments	$	9,369	$	11,001

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. We generally require collateral to support financial instruments with credit risk on the same basis as we do for balance sheet instruments. Management generally bases the collateral required on the credit evaluation of the counterparty. Commitments generally have interest rates fixed at current market rates, expiration dates or other termination clauses and may require payment of a fee. Available credit lines represent the unused portion of lines of credit previously extended and available to the customer so long as there is no violation of any contractual condition. These lines generally have variable interest rates. Since we expect many of the commitments to expire without being drawn upon, and since it is unlikely that customers will draw upon their lines of credit in full at any time, the total commitment amount or line of credit amount does not necessarily represent future cash requirements. We evaluate each customer’s credit-worthiness on a case-by-case basis. Because we conservatively underwrite these facilities at inception, we have not had to withdraw any commitments. We are not aware of any loss that we would incur by funding our commitments or lines of credit.

The credit risks involved in these financial instruments are essentially the same as that involved in extending loan facilities to customers. No amount has been recognized in the statement of financial condition at June 30, 2014 or December 31, 2013 as a liability for credit loss related to these commitments.

Impact of Inflation and Changing Prices

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

Critical Accounting Policies

During the three months ended June 30, 2014, there was no significant change in our critical accounting policies or the application of critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

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

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

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

Forward-Looking Statements

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

•

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

•

statement regarding increased lending opportunities as market conditions return to a more normal level;

•

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

•

statements regarding adequate liquidity for our short- and long-term needs;

•

statements with respect to our allowance for loan losses, the adequacy thereof and that all known loan losses have been recorded and expected changes in the allowance; and

•

statement regarding the impact of pending legal proceedings.

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

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

•

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

•

competition among depository and other financial institutions;

•

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

•

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

•

changes in consumer spending, borrowing and savings habits;

•

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission (“SEC”) and the Public Company Accounting Oversight Board; and

•

changes in competitive, governmental, regulatory, technological and other factors which may affect us specifically or the banking industry and other risk and uncertainties discussed in this report and in other SEC filings we may make.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

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, 2014.

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, 2014, that have materially affected or are reasonably likely to materially affect, the internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes in the risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

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

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits



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

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

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

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

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

SIGNATURES

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


	CARROLL BANCORP, INC.

Date: August 12, 2014	By:	/s/ Russell J. Grimes
		Russell J. Grimes
	President, Chief Executive Officer and Director
	(Principal Executive Officer)

Date: August 12, 2014	By:	/s/ Michael J. Gallina
		Michael J. Gallina
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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