Carroll Bancorp, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - Carroll Bancorp, Inc.	ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - Carroll Bancorp, Inc.	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Carroll Bancorp, Inc.	ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - Carroll Bancorp, Inc.	ex32-1.htm

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2016

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

For the transition period from to

Commission File Number 000-54422

_______________

CARROLL BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

1321 Liberty Road, Sykesville, Maryland 21784

(Address of principal executive offices) (Zip Code)

(410) 795-1900

(Registrant’s telephone number, including area code)

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

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

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

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

Large accelerated filer ☐ Accelerated filer ☐

Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☒

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

Indicate the number shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 978,306 shares of common stock outstanding at May 9, 2016.

CARROLL BANCORP, INC.

Form 10-Q

Table of Contents


		Page
PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements:
	Consolidated Statements of Financial Condition as of March 31, 2016 (unaudited) and December 31, 2015 (audited)	1
	Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015 (unaudited)	2
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015 (unaudited)	3
	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2016 and 2015 (unaudited)	4
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (unaudited)	5
	Notes to Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35
Item 4.	Controls and Procedures	35

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	36

SIGNATURES		37

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

Carroll Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

	March 31,			December 31,
	2016			2015
	(unaudited)			(audited)
Assets:
Cash and due from banks	$	1,371,543		$	1,583,914
Interest-bearing deposits with depository institutions		10,768,615			6,623,853
Cash and cash equivalents		12,140,158			8,207,767
Certificates of deposit with depository institutions		2,450,268			2,450,248
Securities available for sale, at fair value		4,707,844			4,812,384
Securities held to maturity (fair value March 31, 2016 $2,134,727 and December 31, 2015 $2,011,900)		2,105,667			2,005,775
Loans, net of allowance for loan losses - March 31, 2016 $938,000 and December 31, 2015 $901,000		128,114,540			128,433,411
Accrued interest receivable		407,761			403,535
Other equity securities, at cost		1,028,596			869,296
Bank-owned life insurance		2,121,806			2,107,770
Premises and equipment, net		1,345,353			1,303,648
Foreclosed assets		199,374			199,374
Other assets		517,203			544,059
Total assets	$	155,138,570		$	151,337,267

Liabilities:
Deposits
Noninterest-bearing	$	9,510,881		$	8,718,993
Interest-bearing		111,357,829			113,382,169
Total deposits		120,868,710			122,101,162
Federal Home Loan Bank Advances		17,500,000			12,500,000
Other liabilities		363,193			442,935
Total liabilities		138,731,903			135,044,097

Stockholders' Equity:
Preferred Stock (par value $0.01); authorized 1,000,000 shares; no shares issued and outstanding		-			-
Common Stock (par value $0.01); authorized 9,000,000 shares; issued and outstanding 978,306 shares at March 31, 2016 and 978,279 shares at December 31, 2015		9,783			9,783
Additional paid-in capital		12,799,725			12,799,995
Unallocated ESOP shares		(261,088	)		(261,088	)
Unearned RSP shares		(131,713	)		(144,599	)
Retained earnings		3,956,425			3,886,581
Accumulated other comprehensive income		33,535			2,498
Total stockholders' equity		16,406,667			16,293,170
Total liabilities and stockholders' equity	$	155,138,570		$	151,337,267

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 March 31,
	2016			2015
Interest income:
Loans	$	1,386,634		$	1,110,820
Securities available for sale		23,935			36,145
Securities held to maturity		25,272			13,228
Certificates of deposit		10,560			10,525
Interest-earning deposits		23,594			9,665
Total interest income		1,469,995			1,180,383
Interest expense:
Deposits		179,936			125,763
Borrowings		46,242			30,516
Total interest expense		226,178			156,279
Net interest income		1,243,817			1,024,104
Provision for loan losses		30,166			28,658
Net interest income after provision for loan losses		1,213,651			995,446
Non-interest income:
Loss on sale of securities		(1,061	)		(100	)
Gain on loans held for sale		28,063			2,187
Increase in cash surrender value - life insurance		14,035			13,890
Customer service fees		23,776			17,360
Loan fee income		11,691			6,392
Other income		3,536			4,396
Total non-interest income		80,040			44,125
Non-interest expense:
Salaries and employee benefits		676,923			547,846
Premises and equipment		131,934			85,590
Data processing		123,776			105,267
Professional fees		68,127			65,383
FDIC insurance		29,392			17,505
Directors' fees		54,800			53,800
Corporate insurance		11,908			10,068
Printing and office supplies		10,945			9,172
Other operating expenses		86,458			61,828
Total non-interest expenses		1,194,263			956,459
Income before income tax expense		99,428			83,112
Income tax expense		29,584			27,697
Net income	$	69,844		$	55,415

Basic earnings per share	$	0.07		$	0.07
Diluted earnings per share	$	0.07		$	0.07
Basic weighted average shares outstanding		938,323			823,630
Diluted weighted average shares outstanding		957,581			838,557

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

Carroll Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income

(unaudited)

	For the Three Months Ended March 31,
	2016			2015

Net income	$	69,844		$	55,415

Other comprehensive income, before income tax:
Securities available for sale:
Net unrealized holding gains arising during the period		50,667			33,638
Less reclassification adjustment for loss on the sale of securities available for sale included in net income		(1,061	)		(100	)
Other comprehensive income,
before income tax		51,728			33,738
Income tax effect		20,691			13,495
Other comprehensive income, net of tax		31,037			20,243
Total comprehensive income	$	100,881		$	75,658

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 Three Months Ended March 31, 2016 and 2015

(unaudited)

															Accumulated
			Additional			Unallocated			Unallocated						Other
	Common		Paid-in			ESOP			RSP			Retained			Comprehensive
	Stock		Capital			Shares			Shares			Earnings			Income		Total

Balances at January 1, 2016	$	9,783	$	12,799,995		$	(261,088	)	$	(144,599	)	$	3,886,581		$	2,498	$	16,293,170
Net income													69,844					69,844
Other comprehensive income																31,037		31,037
RSP compensation				12,256														12,256
Restricted stock vesting				(12,886	)					12,886								-
Warrants exercised				360														360
Balances at March 31, 2016	$	9,783	$	12,799,725		$	(261,088	)	$	(131,713	)	$	3,956,425		$	33,535	$	16,406,667

Balances at January 1, 2015	$	4,884	$	4,873,447		$	(285,447	)	$	(170,217	)	$	6,317,654		$	10,176	$	10,750,497
Net income													55,415					55,415
Other comprehensive income																20,243		20,243
RSP compensation				10,027														10,027
Private placement offering:
Issuance of 310,848 shares of common stock net of offering costs		3,108		4,962,721														4,965,829
Restricted stock vesting				(2,993	)					2,993								-
Stock dividend declared				2,701,482									(2,701,482	)				-
Balances at March 31, 2015	$	7,992	$	12,544,684		$	(285,447	)	$	(167,224	)	$	3,671,587		$	30,419	$	15,802,011

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 Three Months Ended March 31,
	2016			2015
Cash flows from operating activities:
Net income	$	69,844		$	55,415
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on sale of securities available for sale		1,061			100
Gain on sale of loans held for sale		(28,063	)		(2,187	)
Origination of loans held for sale		(1,207,500	)		(175,000	)
Proceeds from sale of loans held for sale		1,235,563			177,187
Amortization and accretion of securities		12,818			31,558
Amortization of deferred loan costs, net of origination fees		45,165			7,126
Provision for loan losses		30,166			28,658
Loan loss recoveries		6,834			10,342
Depreciation of premises and equipment		45,949			39,190
Increase in cash surrender value of bank-owned life insurance		(14,035	)		(13,890	)
ESOP compensation expense		7,500			6,200
RSP compensation expense		12,256			10,027
Increase in deferred tax assets		(9,960	)		(20,134	)
(Increase) decrease in accrued interest receivable		(4,227	)		837
Decrease (increase) in other assets		16,125			(150,584	)
(Decrease) increase in other liabilities		(87,242	)		20
Net cash provided by operating activities		132,254			4,865
Cash flows from investing activities:
Purchase of securities held to maturity		(100,000	)		-
Proceeds from sale or redemption of securities available for sale		15,000			2,689,379
Principal collected on securities available for sale		127,478			401,687
Decrease (increase) in loans		236,705			(7,967,152	)
Purchase of premises and equipment		(87,654	)		(8,168	)
Purchase of other equity securities		(159,300	)		(51,200	)
Net cash provided by (used in) investing activities		32,229			(4,935,454	)
Cash flows from financing activities:
Decrease in deposits		(1,232,452	)		(2,227,358	)
Proceeds from FHLB advances		5,000,000			3,000,000
Repayment of FHLB advances		-			(1,500,000	)
Warrant exercise		360			-
Proceeds from private placement offering		-			4,965,829
Net cash provided by financing activities		3,767,908			4,238,471
Net increase (decrease) in cash and cash equivalents		3,932,391			(692,118	)
Cash and cash equivalents, beginning balance		8,207,767			6,909,391
Cash and cash equivalents, ending balance	$	12,140,158		$	6,217,273

Supplemental disclosure of cash flow information:
Interest paid	$	209,834		$	157,501
Income tax paid	$	57,500		$	44,000

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 Company’s common stock is quoted on the OTC Pink marketplace of the OTC Markets Group under the symbol “CROL”.

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

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

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank. All significant intercompany balances and transactions between the Company and the Bank have been eliminated.

Use of Estimates

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

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

Reclassifications

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

Accounting Standards Pending Adoption

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to customers. The guidance also provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. This standard may affect an entity’s financial statements, business processes and internal control over financial reporting. The guidance is effective for the first interim or annual period beginning after December 15, 2017. The guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. The Company is currently evaluating the provisions of ASU No. 2014-09 and will be closely monitoring developments and additional guidance to determine the potential impact the new standard will have on the Company’s financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-1, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance in a deferred tax asset related to available for sale. ASU 2016-1 will be effective for the interim and annual reporting periods beginning after December 15, 2017 and is not expected to have a significant impact on our financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which will now require organizations that lease assets – or lessees – to recognize assets and liabilities on their balance sheets for leases with lease terms of more than 12 months. Previously, the recognition, measurement, and presentation of expenses and cash flows arising from a lease for lessees primarily depended on its classification as a finance (capital) lease or operating lease. But unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new standard requires companies to include both types of leases on their books. For finance leases, lessees will be required to (i) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payment, in the statement of financial position, (ii) recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of comprehensive income and (iii) classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows. For operating leases, lessees will be required to (i) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payment, in the statement of financial position, (ii) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis and (iii) classify all cash payments within operating activities in the statement of cash flows. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. Public companies will be required to adopt the new standard for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018. For calendar year-end public companies, this means an adoption date of Jan. 1, 2019, and retroactive application to previously issued annual and interim financial statements for 2018 and 2017. The Company is currently evaluating the provisions of ASU No. 2016-02 to determine the potential impact the new standard will have on the Company’s financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting. All excess tax benefits and tax deficiencies, including tax benefits of dividends on share-based payment awards, should be recognized as income tax expense or benefit in the income statement. The tax consequences of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Excess tax benefits should be classified along with other income tax cash flows as an operating activity. The amendments in this ASU take effect for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any organization in any interim or annual period. The Company is currently evaluating the provisions of ASU No. 2016-09 to determine the potential impact the new standard will have on the Company’s financial statements.

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

Note 2. Securities

The amortized cost and fair value of securities available for sale and held to maturity at March 31, 2016 and December 31, 2015 are as follows:

	At March 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available for sale:
Residential mortgage-backed securities	$	2,411,436	$	22,159	$	-	$	2,433,595
Commercial mortgage-backed securities		2,016,367		30,853		-		2,047,220
Municipal bonds		224,150		2,879		-		227,029
	$	4,651,953	$	55,891	$	-	$	4,707,844

Securities held to maturity:
Municipal bonds	$	500,000	$	14,657	$	-	$	514,657
Corporate bonds		1,605,667		14,403		-		1,620,070
	$	2,105,667	$	29,060	$	-	$	2,134,727

	At December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available for sale:
Residential mortgage-backed securities	$	2,549,295	$	12,146	$	8,818	$	2,552,623
Commercial mortgage-backed securities		2,017,187		-		-		2,017,187
Municipal bonds		241,739		2,503		1,668		242,574
	$	4,808,221	$	14,649	$	10,486	$	4,812,384

Securities held to maturity:
Municipal bonds	$	500,000	$	9,470	$	-	$	509,470
Corporate bonds		1,505,775		250		3,595		1,502,430
	$	2,005,775	$	9,720	$	3,595	$	2,011,900

The Bank had no private label residential mortgage-backed securities at March 31, 2016 and December 31, 2015 or during the three months or year then ended, respectively.

At March 31, 2016 and December 31, 2015 the carrying amount of securities pledged as collateral for uninsured public fund deposits was $3.1 million and $2.3 million, respectively.

The amortized cost and fair value of securities available for sale and held to maturity at March 31, 2016 and December 31, 2015, by contractual maturity, are shown below. Expected maturities for residential mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	At March 31, 2016
	Securities available for sale				Securities held to maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value

Under 1 year	$	-	$	-	$	-	$	-
Over 1 year through 5 years		2,365,830		2,400,153		-		-
After 5 years through 10 years		1,701,337		1,709,917		1,855,667		1,877,757
Over 10 years		584,786		597,774		250,000		256,970
	$	4,651,953	$	4,707,844	$	2,105,667	$	2,134,727

	At December 31, 2015
	Securities available for sale				Securities held to maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value

Under 1 year	$	-	$	-	$	-	$	-
Over 1 year through 5 years		378,316		379,770		-		-
After 5 years through 10 years		3,822,110		3,816,649		1,755,775		1,756,777
Over 10 years		607,795		615,965		250,000		255,123
	$	4,808,221	$	4,812,384	$	2,005,775	$	2,011,900

The Bank sold or had called $15,000 and $2.7 million, respectively, in securities available for sale during the three months ended March 31, 2016 and 2015. From those sale transactions, the Bank realized a net loss of $1,061 and $100, respectively, for those periods.

Securities with gross unrealized losses at March 31, 2016 and December 31, 2015, aggregated by investment category and length of time individual securities have been in a continual loss position, are as follows:

At March 31, 2016

Less than 12 Months

12 Months or More

Total

Estimated Fair Value

Gross Unrealized Losses

Estimated Fair Value

Gross Unrealized Losses

Estimated Fair Value

Gross Unrealized Losses

Securities available for sale:

Residential mortgage-backed securities

Municipal bonds

Securities held to maturity:

Corporate

	At December 31, 2015
	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
Securities available for sale:
Residential mortgage-backed securities	$	1,801,533	$	8,818	$	-	$	-	$	1,801,533	$	8,818
Municipal bonds		-		-		78,916		1,668		78,916		1,668
	$	1,801,533	$	8,818	$	78,916	$	1,668	$	1,880,449	$	10,486

Securities held to maturity:
Corporate	$	652,180	$	3,595	$	-	$	-	$	652,180	$	3,595

Note 3. Loans

Loans at March 31, 2016 and December 31, 2015 are summarized as follows:

	At March 31, 2016						At December 31, 2015
				Percent						Percent
	Balance			of Total			Balance			of Total

Residential owner occupied - first lien	$	41,450,859			32.3	%	$	44,890,154			34.9	%
Residential owner occupied - junior lien		4,539,288			3.5	%		4,988,405			3.9	%
Residential non-owner occupied (investor)		15,792,947			12.3	%		15,849,835			12.3	%
Commercial owner occupied		14,270,230			11.1	%		14,717,990			11.4	%
Other commercial loans		52,109,025			40.6	%		47,883,818			37.2	%
Consumer loans		301,599			0.2	%		376,070			0.3	%
Total loans		128,463,948			100.0	%		128,706,272			100.0	%
Net deferred fees, costs and purchase premiums		588,592						628,139
Allowance for loan losses		(938,000	)					(901,000	)
Total loans, net	$	128,114,540					$	128,433,411

Our residential one- to four-family first lien mortgage loan portfolio is pledged as collateral for our advances with the 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 substandard or doubtful. For loans classified as impaired, the allowance is established when the net realizable value (collateral value less costs to sell) of the 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 portfolio basis for loans that do not meet the definition of impaired loans. The portfolio is grouped into similar risk characteristics, primarily loan type and regulatory classification. We apply an estimated loss rate to each loan group. The loss rates applied are based upon our loss experience adjusted, as appropriate, for the qualitative factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions.

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

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

●

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

●

changes in the levels of concentration of credit;

●

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

●

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

●

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

●

changes in lending policies and procedures;

●

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

●

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

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

The Bank’s charge-off policy states after all collection efforts have been exhausted, the loan is deemed to be a loss and the loss amount has been determined, the loss amount will be charged to the established allowance for loan losses. Loans secured by real estate, either residential or commercial, are evaluated for loss potential at the 60 day past due threshold. At 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 we originate, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related business and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy. Therefore, we expect that the percentage of the allowance for loan losses as a percentage of the loan portfolio will increase going forward as we 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 months ended March 31, 2016 and 2015.

	For the Three Months Ended March 31, 2016
	Residential owner occupied - first lien			Residential owner occupied - junior lien			Residential non-owner occupied (investor)		Commercial owner occupied			Other commercial loans		Consumer loans		Total

Beginning balance	$	206,169		$	21,450		$	69,898	$	117,744		$	485,739	$	-	$	901,000
Charge-offs		-			-			-		-			-		-		-
Recoveries		6,834			-			-		-			-		-		6,834
Provision		(49,265	)		(1,568	)		46,655		(3,582	)		37,926		-		30,166
Ending Balance	$	163,738		$	19,882		$	116,553	$	114,162		$	523,665	$	-	$	938,000

	For the Three Months Ended March 31, 2015
	Residential owner occupied - first lien			Residential owner occupied - junior lien			Residential non-owner occupied (investor)			Commercial owner occupied		Other commercial loans		Consumer loans		Total

Beginning balance	$	228,461		$	25,051		$	46,047		$	89,811	$	332,630	$	-	$	722,000
Charge-offs		-			-			-			-		-		-		-
Recoveries		7,785			-			2,557			-		-		-		10,342
Provision		(40,661	)		(2,885	)		(2,839	)		10,009		65,034		-		28,658
Ending Balance	$	195,585		$	22,166		$	45,765		$	99,820	$	397,664	$	-	$	761,000

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 March 31, 2016 and December 31, 2015:

	At March 31, 2016
	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	$	163,738	$	19,882	$	116,553	$	114,162	$	523,665	$	-	$	938,000
Ending balance individually evaluated for impairment	$	-	$	-	$	55,220	$	-	$	-	$	-	$	55,220
Ending balance collectively evaluated for impairment	$	163,738	$	19,882	$	61,333	$	114,162	$	523,665	$	-	$	882,780
Loans:
Ending balance	$	41,450,859	$	4,539,288	$	15,792,947	$	14,270,230	$	52,109,025	$	301,599	$	128,463,948
Ending balance individually evaluated for impairment	$	-	$	-	$	250,540	$	-	$	-	$	-	$	250,540
Ending balance collectively evaluated for impairment	$	41,450,859	$	4,539,288	$	15,542,407	$	14,270,230	$	52,109,025	$	301,599	$	128,213,408

	At December 31, 2015
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
Allowance for loan losses:
Ending balance	$	206,169	$	21,450	$	69,898	$	117,744	$	485,739	$	-	$	901,000
Ending balance individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Ending balance collectively evaluated for impairment	$	206,169	$	21,450	$	69,898	$	117,744	$	485,739	$	-	$	901,000
Loans:
Ending balance	$	44,890,154	$	4,988,405	$	15,849,835	$	14,717,990	$	47,883,818	$	376,070	$	128,706,272
Ending balance individually evaluated for impairment	$	-	$	-	$	108,188	$	-	$	-	$	-	$	108,188
Ending balance collectively evaluated for impairment	$	44,890,154	$	4,988,405	$	15,741,647	$	14,717,990	$	47,883,818	$	376,070	$	128,598,084

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 March 31, 2016 and December 31, 2015:

	At March 31, 2016
	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	$	41,423,300	$	4,539,288	$	15,081,612	$	14,270,230	$	50,309,025	$	301,599	$	125,925,054
Special Mention		-		-		-		-		1,800,000		-		1,800,000
Substandard		27,559		-		711,335		-		-		-		738,894
Doubtful		-		-		-		-		-		-		-
Total	$	41,450,859	$	4,539,288	$	15,792,947	$	14,270,230	$	52,109,025	$	301,599	$	128,463,948

	At December 31, 2015
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
Pass	$	44,890,154	$	4,988,405	$	15,252,037	$	14,717,990	$	47,883,818	$	376,070	$	128,108,474
Special Mention		-		-		-		-		-		-		-
Substandard		-		-		597,798		-		-		-		597,798
Doubtful		-		-		-		-		-		-		-
Total	$	44,890,154	$	4,988,405	$	15,849,835	$	14,717,990	$	47,883,818	$	376,070	$	128,706,272

During the first quarter of 2016, a loan for $1.8 million was downgraded to Special Mention due to the borrower’s inability to complete the project without additional funding. While there is a temporary heightened level of risk, the market conditions and collateral coverage remain satisfactory. Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized and are aggregated as a “Pass” rating.

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

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

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

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

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

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

The following tables set forth certain information with respect to our loan delinquencies by portfolio segment at March 31, 2016 and December 31, 2015:

	At March 31, 2016
	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	$	40,813,665	$	4,539,288	$	15,300,112	$	14,270,230	$	51,549,639	$	301,599	$	126,774,533
30-59 days past due		637,194		-		385,374		-		559,386		-		1,581,954
60-89 days past due		-		-		107,461		-		-		-		107,461
Greater than 90 days past due		-		-		-		-		-		-		-
Total past due		637,194		-		492,835		-		559,386		-		1,689,415
Total	$	41,450,859	$	4,539,288	$	15,792,947	$	14,270,230	$	52,109,025	$	301,599	$	128,463,948

	At December 31, 2015
	Residential owner occupied - first lien		Residential owner occupied - junior lien		Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total
Current	$	44,522,124	$	4,988,405	$	15,731,641	$	14,717,990	$	46,621,559	$	376,070	$	126,957,789
30-59 days past due		122,300		-		118,194		-		1,262,259		-		1,502,753
60-89 days past due		245,730		-		-		-		-		-		245,730
Greater than 90 days past due		-		-		-		-		-		-		-
Total past due		368,030		-		118,194		-		1,262,259		-		1,748,483
Total	$	44,890,154	$	4,988,405	$	15,849,835	$	14,717,990	$	47,883,818	$	376,070	$	128,706,272

The following tables are a summary of impaired loans by portfolio segment at March 31, 2016 and December 31, 2015:

	At March 31, 2016
Impaired Loans:	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	$	27,559	$	-	$	107,461	$	-	$	-	$	-	$	135,020
Unpaid Principal Balance		27,559		-		107,461		-		-		-		135,020

With an allowance recorded:
Recorded Investment	$	-	$	-	$	115,520	$	-	$	-	$	-	$	115,520
Unpaid Principal Balance		-		-		117,737		-		-		-		117,737
Related Allowance		-		-		55,220		-		-		-		55,220

Total impaired loans:
Recorded Investment	$	27,559	$	-	$	222,981	$	-	$	-	$	-	$	250,540
Unpaid Principal Balance		27,559		-		225,198		-		-		-		252,757
Related Allowance		-		-		55,220		-		-		-		55,220

	At December 31, 2015
Impaired Loans:	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	$	-	$	-	$	108,188	$	-	$	-	$	-	$	108,188
Unpaid Principal Balance		-		-		108,188		-		-		-		108,188

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

Total impaired loans:
Recorded Investment	$	-	$	-	$	108,188	$	-	$	-	$	-	$	108,188
Unpaid Principal Balance		-		-		108,188		-		-		-		108,188
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 months ended March 31, 2016 and 2015:

	For the Three Months Ended March 31, 2016
	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	$	13,780	$	-	$	107,825	$	-	$	-	$	-	$	121,605
Interest income that would have been recognized		349		-		-		-		-		-		349
Interest income recognized (cash basis)		-		-		-		-		-		-		-
Interest income foregone (recovered)		349		-		-		-		-		-		349

With an allowance recorded:
Average recorded investment	$	-	$	-	$	57,760	$	-	$	-	$	-	$	57,760
Interest income that would have been recognized		-		-		2,137		-		-		-		2,137
Interest income recognized (cash basis)		-		-		-		-		-		-		-
Interest income foregone (recovered)		-		-		2,137		-		-		-		2,137

Total impaired loans:
Average recorded investment	$	13,780	$	-	$	165,585	$	-	$	-	$	-	$	179,365
Interest income that would have been recognized		349		-		2,137		-		-		-		2,486
Interest income recognized (cash basis)		-		-		-		-		-		-		-
Interest income foregone (recovered)		349		-		2,137		-		-		-		2,486

	For the Three Months Ended March 31, 2015
	Residential owner occupied - first lien			Residential owner occupied - junior lien			Residential non-owner occupied (investor)		Commercial owner occupied		Other commercial loans		Consumer loans		Total

With no related allowance recorded:
Average recorded investment	$	308,010		$	4,709		$	114,976	$	-	$	-	$	-	$	427,695
Interest income that would have been recognized		5,612			98			-		-		-		-		5,710
Interest income recognized (cash basis)		18,898			611			-		-		-		-		19,509
Interest income foregone (recovered)		(13,286	)		(513	)		-		-		-		-		(13,799	)

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

Total impaired loans:
Average recorded investment	$	308,010		$	4,709		$	114,976	$	-	$	-	$	-	$	427,695
Interest income that would have been recognized		5,612			98			-		-		-		-		5,710
Interest income recognized (cash basis)		18,898			611			-		-		-		-		19,509
Interest income foregone (recovered)		(13,286	)		(513	)		-		-		-		-		(13,799	)

The following table is a summary of performing and nonperforming impaired loans by portfolio segment at March 31, 2016 and December 31, 2015:

	At March 31,		At December 31,
	2016		2015
Performing loans:
Impaired performing loans:
Residential owner occupied - first lien	$	-	$	-
Residential owner occupied - junior lien		-		-
Residential non-owner occupied (investor)		-		-
Commercial owner occupied		-		-
Other commercial loans		-		-
Consumer loans		-		-
Troubled debt restructurings:
Residential owner occupied - first lien		-		-
Residential owner occupied - junior lien		-		-
Residential non-owner occupied (investor)		107,461		108,188
Commercial owner occupied		-		-
Other commercial loans		-		-
Consumer loans		-		-
Total impaired performing loans		107,461		108,188

Nonperforming loans:
Impaired nonperforming loans (nonaccrual):
Residential owner occupied - first lien		27,559		-
Residential owner occupied - junior lien		-		-
Residential non-owner occupied (investor)		115,520		-
Commercial owner occupied		-		-
Other commercial loans		-		-
Consumer loans		-		-
Troubled debt restructurings:
Residential owner occupied - first lien		-		-
Residential owner occupied - junior lien		-		-
Residential non-owner occupied (investor)		-		-
Commercial owner occupied		-		-
Other commercial loans		-		-
Consumer loans		-		-
Total impaired nonperforming loans (nonaccrual):		143,079		-
Total impaired loans	$	250,540	$	108,188

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

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

There were no TDRs modified during the three months ended March 31, 2016 or the year ended December 31, 2015.

Note 5. Deposits

Deposits were comprised of the following at March 31, 2016 and December 31, 2015:

	At March 31, 2016					At December 31, 2015
	Balance		Percent of Total			Balance		Percent of Total

Non-interest bearing checking	$	9,510,881		7.9	%	$	8,718,993		7.1	%
Interest-bearing checking		10,313,782		8.5	%		8,098,550		6.6	%
Savings		3,429,246		2.8	%		2,512,638		2.1	%
Premium savings		20,623,731		17.1	%		20,619,758		16.9	%
IRA savings		6,087,296		5.0	%		6,325,231		5.2	%
Money market		11,613,039		9.6	%		11,892,738		9.7	%
Certificates of deposit		59,290,735		49.1	%		63,933,254		52.4	%
Total deposits	$	120,868,710		100.0	%	$	122,101,162		100.0	%

Certificates of deposit scheduled maturities are as follows:

	At March 31, 2016		At December 31, 2015
Period to Maturity:
Less than or equal to one year	$	30,283,394	$	36,634,331
More than one to two years		15,002,187		13,245,022
More than two to three years		8,291,803		8,965,734
More than three to four years		1,270,730		1,798,769
More than four to five years		4,442,621		3,289,398
Total certificates of deposit	$	59,290,735	$	63,933,254

Certificates of deposit included $19.6 million and $27.8 million, respectively, of brokered and listing service deposits at March 31, 2016 and December 31, 2015. 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 Bank. 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 March 31, 2016 and December 31, 2015:

	At March 31, 2016
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying Value		Level 1		Level 2		Level 3
Residential mortgage-backed securities	$	2,433,595	$	-	$	2,433,595	$	-
Commercial mortgage-backed securities		2,047,220		-		2,047,220		-
Municipal bonds		227,029		-		227,029		-
Total securities available for sale	$	4,707,844	$	-	$	4,707,844	$	-

	At December 31, 2015
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying Value		Level 1		Level 2		Level 3
Residential mortgage-backed securities	$	2,552,623	$	-	$	2,552,623	$	-
Commercial mortgage-backed securities		2,017,187		-		2,017,187		-
Municipal bonds		242,574		-		242,574		-
Total securities available for sale	$	4,812,384	$	-	$	4,812,384	$	-

The following table presents a summary of financial assets measured at fair value on a non-recurring basis at March 31, 2016 and December 31, 2015:

	At March 31, 2016
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying Value		Level 1		Level 2		Level 3
Residential non-owner occupied (investor)	$	250,540	$	-	$	-	$	250,540
Total impaired loans	$	250,540	$	-	$	-	$	250,540

Residential owner occupied - first lien	$	199,374	$	-	$	-	$	199,374
Total foreclosed real estate	$	199,374	$	-	$	-	$	199,374

	At December 31, 2015
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Carrying Value		Level 1		Level 2		Level 3
Residential non-owner occupied (investor)	$	108,188	$	-	$	-	$	108,188
Total impaired loans	$	108,188	$	-	$	-	$	108,188

Residential owner occupied - first lien	$	199,374	$	-	$	-	$	199,374
Total foreclosed real estate	$	199,374	$	-	$	-	$	199,374

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

	Impaired Loans			Foreclosed Real Estate
Balance, January 1, 2015	$	595,070		$	52,964
Total realized and unrealized gains (losses):
Included in net income		-			-
Settlements		(253,803	)		-
Transfers in and/or out of Level 3		(233,079	)		146,410
Balance, December 31, 2015	$	108,188		$	199,374
Total realized and unrealized gains (losses):
Included in net income		-			-
Settlements		(2,944	)		-
Transfers in and/or out of Level 3		145,296			-
Balance, March 31, 2016	$	250,540		$	199,374

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

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

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

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

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

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

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

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

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

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 the dates indicated:

	At March 31, 2016
	Carrying				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Amount		Fair Value		Level 1		Level 2		Level 3
Financial instruments - assets:
Certificates of deposit with depository institutions	$	2,450,268	$	2,450,268	$	-	$	2,450,268	$	-
Securities available for sale		4,707,844		4,707,844		-		4,707,844		-
Securities held to maturity		2,105,667		2,134,727		-		2,134,727		-
Loans, net of allowance for loan losses		128,114,540		128,743,000		-		-		128,743,000
Bank-owned life insurance		2,121,806		2,121,806		-		2,121,806		-
Other equity securities		1,028,596		1,028,596		-		-		1,028,596

Financial instruments - liabilities:
Deposits	$	120,868,710	$	120,900,000	$	-	$	120,900,000	$	-
Federal Home Loan Bank advances		17,500,000		17,662,000		-		17,662,000		-

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

	At December 31, 2015
	Carrying				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Amount		Fair Value		Level 1		Level 2		Level 3
Financial instruments - assets:
Certificates of deposit with depository institutions	$	2,450,248	$	2,450,248	$	-	$	2,450,248	$	-
Securities available for sale		4,812,384		4,812,384		-		4,812,384		-
Securities held to maturity		2,005,775		2,011,900		-		2,011,900		-
Loans, net of allowance for loan losses		128,433,411		129,910,000		-		-		129,910,000
Bank-owned life insurance		2,107,770		2,107,770		-		2,107,770		-
Other equity securities		869,296		869,296		-		-		869,296

Financial instruments - liabilities:
Deposits	$	122,101,162	$	121,806,000	$	-	$	121,806,000	$	-
Federal Home Loan Bank advances		12,500,000		12,616,000		-		12,616,000		-

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

Note 7. Capital Requirements and Regulatory Matters

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

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

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total, tier I and common equity tier 1 capital to risk weighted assets, tier 1 leverage to average assets and tangible capital to tangible assets. Management believes, as of March 31, 2016, the Bank met all capital adequacy requirements to which it is subject.

As of September 2015, the most recent notification from the Bank’s regulators, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed the Bank’s category.

The Bank’s actual capital amounts and ratios at March 31, 2016 and December 31, 2015 are presented in the table below:

	At March 31, 2016
	Actual					For Capital Adequacy Purposes					To be well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets	$	16,701,769		15.8	%	$	8,450,263		8.0	%	$	10,562,829		10.0	%
Tier 1 capital to risk-weighted assets		15,763,769		14.9	%		6,337,697		6.0	%		8,450,263		8.0	%
Common equity tier 1 capital to risk-weighted assets		15,763,769		14.9	%		4,753,273		4.5	%		6,865,839		6.5	%
Tier 1 leverage to average assets		15,763,769		10.3	%		6,136,531		4.0	%		7,670,664		5.0	%
Tangible capital to tangible assets		15,797,304		10.2	%		N/A		N/A			N/A		N/A

	At December 31, 2015
	Actual					For Capital Adequacy Purposes					To be well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets	$	16,584,390		16.0	%	$	8,301,696		8.0	%	$	10,377,120		10.0	%
Tier 1 capital to risk-weighted assets		15,683,390		15.1	%		6,226,272		6.0	%		8,301,696		8.0	%
Common equity tier 1 capital to risk-weighted assets		15,683,390		15.1	%		4,669,704		4.5	%		6,745,128		6.5	%
Tier 1 leverage to average assets		15,683,390		10.0	%		6,304,897		4.0	%		7,881,122		5.0	%
Tangible capital to tangible assets		15,685,888		10.4	%		N/A		N/A			N/A		N/A

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

	At March 31,			At December 31,
	2016			2015
Consolidated GAAP equity	$	16,406,667		$	16,293,170
Consolidated equity in excess of Bank equity		(609,363	)		(607,282	)
Bank GAAP equity - Tangible capital		15,797,304			15,685,888
Less:
Accumulated other comprehensive income, net of tax		33,535			2,498
Disallowed deferred tax assets		-			-
Common equity tier 1 capital		15,763,769			15,683,390
Plus:
Additional tier 1 capital		-			-
Tier 1 capital		15,763,769			15,683,390
Plus:
Allowance for loan losses (1.25% of risk-weighted assets)		938,000			901,000
Total risk-based capital	$	16,701,769		$	16,584,390

Note 8. Earnings Per Share

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

The calculation of net income per common share for the three months ended March 31, 2016 and 2015 are as follows:

	For the Three Months Ended March 31, 2016		For the Three Months Ended March 31, 2015

Net Income available to common shareholders	$	69,844	$	55,415
Weighted average number of shares used in:
Basic earnings per share		938,323		823,630
Adjustment for common share equivalents		19,258		14,927
Diluted earnings per share		957,581		838,557
Basic net income per common share	$	0.07	$	0.07
Diluted net income per common share	$	0.07	$	0.07

Item 2.

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

This section is intended to help readers understand our financial performance through a discussion of the factors affecting our financial condition at March 31, 2016 and December 31, 2015. This section should be read in conjunction with the consolidated financial statements and accompanying notes that appear elsewhere in this Form 10-Q.

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

Carroll Bancorp, Inc.

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

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

Carroll Community Bank

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

Overview

Our business consists primarily of attracting and accepting deposits from the general public in the areas surrounding our offices and investing those deposits, together with funds generated from operations, primarily in commercial real estate and residential mortgage loans. Prior to 2011, as a mutual savings bank we focused on originating residential mortgage loans, but changed our strategic focus to include commercial real estate loans following our conversion to a state-chartered commercial bank. Although we plan to continue to originate one- to four-family residential mortgage loans going forward, we have been and intend to continue our focus on the origination of commercial real estate and business loans and related products. In this regard we offer demand deposit accounts, remote deposit capture and business internet banking to support the business community. We are committed to meeting the credit needs of our community, consistent with safe and sound operations.

We offer a variety of deposit products, including savings accounts, certificates of deposit, money market accounts, business and retail noninterest and interest bearing checking accounts and individual retirement accounts. We have three full service branches with each providing an automated teller machine, or ATM, and two of which have a drive-through facility for our customers’ convenience.

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

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

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

We are operating in a challenging and uncertain economic environment. Economic growth continues to be slow and uneven and wage growth is stagnant. A return to recessionary conditions or to prolonged stagnant or deteriorating economic conditions could significantly affect the markets in which we do business, the value of our loans and investments, the demand for our products and services and our ongoing operations, costs and profitability. Declines in sales volumes and increases in unemployment levels in connection with these events may result in higher than expected loan delinquencies, increases in our nonperforming and adversely classified assets and a decline in demand for our products and services. These events may cause us to incur losses and may adversely affect our financial condition and results of operations.

The following table summarizes the highlights of our financial performance for the three month period ended March 31, 2016 compared to the three month period ended March 31, 2015 (amounts in the table may not match those discussed in the balance of this section due to rounding):

(unaudited)	For the Three Months Ended March 31,
(Dollars in thousands, except per share data)	2016			2015			$ Change		% Change
Net income	$	70		$	55		$	15		27.3	%
Basic earnings per share		0.07			0.07			-		0.0	%
Diluted earnings per share		0.07			0.07			-		0.0	%

Interest income		1,470			1,180			290		24.6	%
Interest expense		226			156			70		44.9	%
Net interest income		1,244			1,024			220		21.5	%
Noninterest income		80			44			36		81.8	%
Noninterest expense		1,194			956			238		24.9	%

Average Loans		127,686			92,301			35,385		38.3	%
Average Earning Assets		147,289			112,541			34,748		30.9	%
Average Interest-Bearing Liabilities		127,710			95,767			31,943		33.4	%

Return on average assets		0.18	%		0.19	%
Return on average equity		1.71	%		1.53	%
Net interest margin		3.40	%		3.69	%

Average Balances and Yields

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

	For the Three Months Ended March 31,
	2016								2015
(Dollars in thousands)	Average Outstanding Balance			Interest		Yield / Rate			Average Outstanding Balance			Interest		Yield / Rate
Interest-earning assets:
Loans	$	127,686		$	1,387		4.37	%	$	92,301		$	1,111		4.88	%
Investment securities		6,835			49		2.88	%		9,166			49		2.17	%
Certificates of deposit		2,450			10		1.64	%		3,103			10		1.31	%
Interest-earning deposits		10,318			24		0.94	%		7,971			10		0.51	%
Total interest-earning assets		147,289			1,470		4.01	%		112,541			1,180		4.25	%
Noninterest-earning assets		6,174								5,835
Total assets	$	153,463							$	118,376

Interest-bearing liabilities:
Savings	$	29,443			16		0.22	%	$	31,362			16		0.21	%
Certificates of deposit		64,549			148		0.92	%		39,798			98		1.00	%
Money market		11,795			12		0.41	%		11,021			10		0.37	%
Interest-bearing checking		9,368			4		0.17	%		5,569			1		0.07	%
Total interest-bearing deposits		115,155			180		0.63	%		87,750			125		0.58	%
Federal Home Loan Bank advances		12,555			46		1.47	%		8,017			31		1.57	%
Total interest-bearing liabilities		127,710			226		0.71	%		95,767			156		0.66	%
Noninterest-bearing deposits		8,900								7,625
Noninterest-bearing liabilities		415								297
Total liabilities		137,025								103,689
Equity		16,438								14,687
Total liabilities and capital	$	153,463							$	118,376
Net interest income				$	1,244							$	1,024
Net interest rate spread (1)							3.30	%							3.59	%
Net interest-earning assets (2)	$	19,579							$	16,774
Net interest margin (3)							3.40	%							3.69	%

Average interest-earning assets to interest-bearing liabilities		115.33	%							117.51	%

⁽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 March 31,
	2016 vs 2015
	Increase (Decrease) Due to
							Rate/			Total Increase
(in thousands)	Volume			Rate			Volume			(Decrease)
Interest income from:
Loans	$	426		$	(116	)	$	(34	)	$	276
Investment securities		(12	)		16			(4	)		-
Certificates of deposit		(2	)		3			(1	)		-
Interest-earning deposits		3			9			2			14
Total interest income (1)		364			(67	)		(7	)		290

Interest expense on:
Savings		(1	)		1			-			-
Certificates of deposit		61			(8	)		(3	)		50
Money market		1			1			-			2
Interest-bearing checking		1			1			1			3
Total interest-bearing deposits		39			11			5			55
Federal Home Loan Bank advances		18			(2	)		(1	)		15
Total interest expense (1)		52			12			6			70

Change in net interest income	$	312		$	(79	)	$	(13	)	$	220

(1)

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

Comparison of Results of Operations for the Three Months Ended March 31, 2016 and March 31, 2015

General. Net income increased by $15,000 to $70,000 for the three months ended March 31, 2016 compared to $55,000 for the same period in 2015. The increase in net income for the three month period is mainly attributable to the increase in net interest income as a result of our loan growth over the last twelve months partially offset by the increase in employee costs as a result of our expansion into the Washington Metropolitan area.

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 $220,000, or 21.5%, during the three months ended March 31, 2016 compared to the same period in 2015, primarily as a result of a $34.7 million, or 30.9%, increase in average earning assets, partially offset by an increase in interest expense due to higher deposit and borrowing balances. Our net interest rate spread decreased to 3.30% for the three months ended March 31, 2016 compared to 3.59% for the three months ended March 31, 2015, primarily as a result of new loan originations carrying lower rates than the average weighted rate of the existing loan portfolio.

Interest Income. Interest income increased by $290,000 to $1.5 million for the three months ended March 31, 2016 compared to $1.2 million for the three months ended March 31, 2015. The increase was primarily attributable to loan interest income resulting from the $35.4 million, or 38.3%, increase in average loan balances for the three months ended March 31, 2016 compared to the same period last year, partially offset by a 51 basis point decrease in the average yield on loans over the same period.

Interest Expense. Interest expense increased by $70,000, or 44.9%, to $226,000 for the three months ended March 31, 2016 compared to $156,000 for the three months ended March 31, 2015. This increase was primarily due to the increase in the average balances of certificates of deposit and FHLB advances during the three months ended March 31, 2016 compared to the same period last year.

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 and as more information becomes available. The allowance for loan losses is assessed on a quarterly basis and provisions are made for loan losses as required in order to maintain the allowance.

Based on management’s evaluation of the above factors, the provision for loan losses increased slightly to $30,000 for the three months ended March 31, 2016 compared to $29,000 for the three months ended March 31, 2015. The provision for loan losses for the quarter ending March 31, 2016 was due to specific reserves recorded for two loans that were downgraded to substandard with insufficient collateral to cover the loan balances. The provision for loan losses for March 31, 2015 was due to an increase in loan balances of $8.0 million. Loan balances at March 31, 2016 remained relatively flat with December 31, 2015.

The allowance for loan losses represented 0.73% of gross loans at March 31, 2016, 0.70% at December 31, 2015 and 0.77% of gross loans at March 31, 2015.

Management believes, to the best of their knowledge, that all known losses as of March 31, 2016 have been recorded and based on our analysis and the historical performance of the loan portfolio, we believe the allowance appropriately reflects the inherit risk of loss in our loan portfolio.

Noninterest Income. Noninterest income was $80,000 for the three months ended March 31, 2016 compared to $44,000 for the same period in 2015. The $36,000 increase was primarily attributable to $28,000 in gains recognized on the sale of loans held for sale during the three months ended March 31, 2016 compared to $2,000 during the 2015 period, as a result of our implementation of a new secondary market loan program with FHLB during the first quarter of 2016. In addition, comparing the three months ended March 31, 2016 to the same period last year, customer service fees increased by $6,000 due to higher ATM transaction fees and overdraft fees and loan fees increased by $5,000 as a result of a prepayment penalty.

Noninterest Expenses. Noninterest expenses increased by $238,000, or 24.9%, to $1.2 million for the three months ended March 31, 2016 compared to $956,000 during the same period in 2015. The increase was due primarily to a $129,000, or 23.6%, increase in salaries and employee benefits due to higher staffing levels relating to the expansion of our market area, in particular, the opening of our Bethesda, Maryland branch in September 2015, hiring experienced personnel for vacant positions and merit salary increases along with higher health care insurance costs and an increase in the 401(k) employer match contributions as a result of the increase in the number of employees participating in the plan. Premises and equipment increased by $46,000 due to the opening of the Bethesda branch, the build-out of our headquarters building to convert the basement into office space, and licensing agreements for software relating to selling loans in the secondary market and commercial real estate research and listing service. Data processing expense increased by $19,000 due to higher transaction volumes and additional tech support for our internal network. FDIC insurance premiums increased by $12,000 due to the growth in total assets and an increase in the factors used for the calculation of the premium. Other non-interest expenses increased by $25,000 due primarily to recruiting fees in connection with filling commercial lending positions as well as costs associated with our employee wellness initiative, our state assessment expense, advertising and contributions expense and customer check order expense.

Income Tax Expense. Income tax expense amounted to $30,000 and $28,000, respectively, for the three months ended March 31, 2016 and 2015, resulting in effective tax rates of 29.8% and 33.3%, 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 March 31, 2016 and December 31, 2015.

Assets. Total assets increased by $3.8 million, or 2.5%, to $155.1 million at March 31, 2016 compared to $151.3 million at December 31, 2015.

Loans. Net loans remained relatively flat at $128.1 million at March 31, 2016 compared to $128.4 million at December 31, 2015. New loan originations of $6.2 million, primarily commercial loans, during the three month period ending March 31, 2016 were offset by loan payoffs of $4.1 million, mostly residential mortgages, and principal repayments of $2.4 million.

Nonperforming Loans and Assets. Our nonperforming loans and assets were $143,000 and $342,000, respectively, at March 31, 2016 compared to $0 and $199,000, respectively, at December 31, 2015. During the three months ending March 31, 2016, three loans with balances totaling $143,000 were placed in nonaccrual status and specific reserves of $55,000 were recorded for two of those loans. The ratio of nonperforming loans to total loans was 0.11% at March 31, 2016 compared to 0.00% at December 31, 2015. In addition, our ratio of nonperforming assets to total assets was 0.22% at March 31, 2016 compared to 0.13% at December 31, 2015.

Deposits. Deposits decreased by $1.2 million, or 1.0%, to $120.9 million at March 31, 2016 from $122.1 million at December 31, 2015, however, core deposits increased by $7.0 million, or 7.4%, while brokered certificates of deposit decreased by $8.2 million during the three months ended March 31, 2016. The increase in core deposits occurred primarily in certificates of deposit, which increased by $3.6 million, and noninterest and interest bearing checking, which increased by $3.0 million.

Stockholders’ Equity. Stockholders’ equity increased slightly to $16.4 million at March 31, 2016 from $16.3 million at December 31, 2015. The increase was the result of net income for the quarter and an increase in accumulated other comprehensive income.

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 and payoffs, advances from the FHLB, short-term lines of credit with correspondent banks and the sale of securities available for sale. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset Liability Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of March 31, 2016.

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, investing and financing activities during any given period as reported in our statement of cash flows included in our financial statements. At March 31, 2016, cash and cash equivalents totaled $12.1 million.

At March 31, 2016, we had $5.3 million in loan origination commitments outstanding and $7.6 million in unused available lines of credit. Certificates of deposit due within one year of March 31, 2016 totaled $30.3 million, or 25.1% of total deposits. If these deposits do not remain with us, we may be required to seek other sources of funds, including FHLB advances, loan and securities sales 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. Of the $30.3 million in certificates of deposit due within one year of March 31, 2016, $19.6 million are brokered and listing service certificates of deposit. For the other certificates of deposit maturing in one year or less, we believe we will retain upon maturity a large portion of those deposits based on our historical experience and current market interest rates.

Our primary investing activity is loan originations. During the three months ended March 31, 2016, we originated $6.2 million in loans.

Financing activities consist primarily of activity in deposit balances and FHLB advances. We experienced a net decrease in deposits $1.2 million, or 1.0%, and an increase of $5.0 million, or 40%, in FHLB advances, during the three months ended March 31, 2016. 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 FHLB that provide an additional source of funds. FHLB advances totaled $17.5 million at March 31, 2016 and we had the ability to borrow up to an additional $12.8 million from the FHLB and $11.5 million from correspondent banks under short-term line of credit agreements. In addition, our Board of Directors has approved the use of brokered deposits, in amounts consisting of up to 15% of our total deposits, as a funding source for the Bank. At March 31, 2016, we had $19.6 million in brokered and listing service certificates of deposit.

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 is and will continue to be interest earned on the loan to the employee stock ownership plan trust to fund its purchase of the Company’s common stock and, when and if the Bank begins paying dividends, stock dividends received from the Bank.

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

Carroll Community Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2016, 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 that 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 that would have a material effect on our consolidated financial statements.

Outstanding loan commitments and available lines of credit at March 31, 2016 and December 31, 2015 are as follows:

	At March 31,		At December 31,
(in thousands)	2016		2015
Commitments to extend credit:
Consumer loans	$	995	$	642
Commercial loans		4,312		4,251
		5,307		4,893
Commitments under available lines of credit:
Consumer loans		5,020		3,737
Commercial loans		2,641		1,766
		7,661		5,503
Total Commitments	$	12,968	$	10,396

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

The credit risks involved in these financial instruments are essentially the same as that involved in extending loan facilities to customers. No amount has been recognized in the statement of financial condition at March 31, 2016 or December 31, 2015 as a liability for credit loss related to these commitments.

Impact of Inflation and Changing Prices

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

Critical Accounting Policies

During the three months ended March 31, 2016, 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, 2015.

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, goals and operating strategies; particularly with respect to (i) continuing our focus on commercial real estate and business lending and related products, and (ii) retention of maturing certificates of deposit;

●

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

●

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

●

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

●

statement regarding the expected impact of any pending legal proceedings.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We 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.

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;

●

adverse changes in the securities markets;

●

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 ( the “SEC”) and the Public Company Accounting Oversight Board;

●

any interruption or breach of security of our information systems, including our third party vendors, resulting in failures or disruptions in service or processing; and

●

changes in competitive, governmental, regulatory, technological and other factors which may affect us specifically or the banking industry as a whole and other risks 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.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4.

Controls and Procedures

We maintain disclosure controls and procedures (as that term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to provide material information about the Company to the chief executive officer, the chief financial officer, and others within the Company so that information may be recorded, processed, summarized, and reported as required under the SEC’s rules and forms. The Company’s chief executive officer and chief financial officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report and, based on that evaluation, have each concluded that such disclosure controls and procedures are effective as of March 31, 2016.

There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15 under the Exchange Act) during the quarter ended March 31, 2016, 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, 2015.

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: May 10, 2016	By:	/s/ Russell J. Grimes
		Russell J. Grimes
	President, Chief Executive Officer and Director
	(Principal Executive Officer)

Date: May 10, 2016	By:	/s/ Michael J. Gallina
		Michael J. Gallina
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

Carroll Bancorp, Inc. - FORM 10-Q - May 10, 2016

Attached files

Carroll Bancorp, Inc. Reports