UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________

 

**FORM 10-Q**

 

|   | [ x ] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
|--------|-------|---------------------------------------------------------|

|   | SECURITIES EXCHANGE ACT OF 1934 |
|--------|---------------------------------|

|   | For the quarterly period ended September 30, 2009. |
|--------|----------------------------------------------------|

 

OR

 

|   | [ | ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
|--------|---|---|----------------------------------------------------------|

|   | SECURITIES EXCHANGE ACT OF 1934 |
|--------|---------------------------------|

|   | For the transition period from __________ to __________ |
|--------|---------------------------------------------------------|

 

Commission File Number 0-24926

 

 

| **CECIL BANCORP, INC.**                                |
|--------------------------------------------------------|
| (Exact name of Registrant as specified in its charter) |

 

| Maryland                                                        |   | 52-1883546                           |
|-----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of

Incorporation or organization) |   | (I.R.S. Employer Identification No.) |

 

| 127 North Street, Elkton, Maryland       |   | 21921      |   |
|------------------------------------------|--------|------------|--------|
| (Address of principal executive offices) |   | (Zip Code) |   |

 

| (410) 398-1650                                             |
|------------------------------------------------------------|
| (Registrant’s telephone number, including area code) |

 

 

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.

[ x ] YES         [ ] NO

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

|   | [ | ] YES | [ | ] NO |
|--------|---|-------|---|------|

 

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

 

|   | Large accelerated filer o |   | Accelerated filer o         |
|--------|---------------------------|--------|-----------------------------|
|   | Non-accelerated filer o   |   | Smaller reporting company x |

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[ ] YES           [ x ] NO

 

APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

At October 30, 2009, there were 3,689,346 shares of common stock outstanding

 

1

 

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CECIL BANCORP INC. AND SUBSIDIARIES

 

CONTENTS

 

|                              |                                                              | PAGE   |
|-----------------------------------|-------------------------------------------------------------------|--------|
| PART I - FINANCIAL INFORMATION    |                                                              |   |
|                              |                                                              |   |
| ITEM 1.                           | Financial Statements (unaudited)                                  |   |   |
|                              |                                                              |   |   |
|                              | Consolidated Balance Sheets -                                     |   | 3 |
|                              | September 30, 2009 and December 31, 2008                          |   |   |
|                              |                                                              |   |   |
|                              | Consolidated Statements of Income (Loss) and Comprehensive Income |   | 4-5 |
|                              | for the Three and Nine Months Ended September 30, 2009 and 2008)  |   |   |
|                              |                                                              |   |   |
|                              | Consolidated Statements of Cash Flows                             |   | 6 |
|                              | for the Nine Months Ended September 30, 2009 and 2008 (Unaudited) |   |   |
|                              |                                                              |   |   |
|                              | Notes to Consolidated Financial Statements                        |   | 7-12 |
|                              |                                                              |   |   |
| ITEM 2.                           | Management’s Discussion and Analysis of Financial Condition |   | 13-21 |
|                              | and Results of Operations                                         |   |   |
|                              |                                                              |   |
| ITEM 3.                           | Quantitative and Qualitative Disclosure About Market Risk         |   | 21 |
|                              |                                                              |   |
| ITEM 4T.                          | Controls and Procedures                                           |   | 21 |
|                              |                                                              |   |
| PART II – OTHER INFORMATION |                                                              | 22-23  |
|                              |                                                              |   |
| SIGNATURES                        |                                                              | 24     |
|                              |                                                              |   |
| CERTIFICATIONS                    |                                                              | 25-28  |
|                              |                                                              |   |

 

 

2

 

 

----

| PART I. | FINANCIAL INFORMATION |
|---------|-----------------------|

| ITEM 1. | FINANCIAL STATEMENTS |
|---------|----------------------|

 

**CECIL BANCORP, INC. AND SUBSIDIARIES**

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

 

|                                                      | **September 30,** |    | **December 31,** |   |
|-----------------------------------------------------------|-------------------|---------|------------------|--------|
|                                                      | **2009**          |    | **2008**         |   |
|                                                      | (Unaudited)       |    |             |   |   |
| ASSETS:                                                   |              |    |             |   |   |   |
| Cash and due from banks                                   | $                 | 6,002   |             | $      | 4,627 |   |
| Interest bearing deposits with banks                      |              | 26,645  |             |   | 36,793 |   |
| Federal funds sold                                        |              | 90      |             |   | — |   |
| Cash and cash equivalents                                 |              | 32,737  |             |   | 41,420 |   |
| Investment securities:                                    |              |    |             |   |   |   |
| Securities available-for-sale at fair value               |              | 1,729   |             |   | 11,712 |   |
| Securities held-to-maturity (fair value of $550           |              |    |             |   |   |   |
| in 2009 and $300 in 2008)                                 |              | 550     |             |   | 300 |   |
| Restricted investment securities – at cost          |              | 4,396   |             |   | 3,918 |   |
| Loans receivable                                          |              | 433,755 |             |   | 408,063 |   |
| Less: allowance for loan losses                           |              | (14,071 | )                |   | (6,314 | ) |
| Net loans receivable                                      |              | 419,684 |             |   | 401,749 |   |
| Other real estate owned                                   |              | 5,268   |             |   | 2,843 |   |
| Premises and equipment, net                               |              | 11,861  |             |   | 12,071 |   |
| Accrued interest receivable                               |              | 2,044   |             |   | 2,225 |   |
| Goodwill                                                  |              | 2,182   |             |   | 2,182 |   |
| Other intangible assets                                   |              | 406     |             |   | 329 |   |
| Bank owned life insurance                                 |              | 7,819   |             |   | 7,787 |   |
| Other assets                                              |              | 8,479   |             |   | 5,861 |   |
|                                                      |              |    |             |   |   |   |
| TOTAL ASSETS                                              | $                 | 497,155 |             | $      | 492,397 |   |
|                                                      |              |    |             |   |   |   |
| LIABILITIES:                                              |              |    |             |   |   |   |
| Deposits                                                  |              | 371,222 |             |   | 364,551 |   |
| Other liabilities                                         |              | 7,852   |             |   | 6,668 |   |
| Junior subordinated debentures                            |              | 17,000  |             |   | 17,000 |   |
| Advances from Federal Home Loan Bank of Atlanta           |              | 63,714  |             |   | 63,786 |   |
|                                                      |              |    |             |   |   |   |
| Total liabilities                                         |              | 459,788 |             |   | 452,005 |   |
|                                                      |              |    |             |   |   |   |
| STOCKHOLDERS’ EQUITY:                               |              |    |             |   |   |   |
| Preferred stock, $.01 par value; authorized 1,000,000     |              |    |             |   |   |   |
| shares, issued and outstanding 11,560 shares, liquidation |              |    |             |   |   |   |
| preference $1,000 per share, in 2009 and 2008             |              | 10,883  |             |   | 10,786 |   |
| Common stock, $.01 par value; authorized 10,000,000       |              |    |             |   |   |   |
| shares, issued and outstanding 3,689,346 shares in        |              |    |             |   |   |   |
| 2009 and 3,686,580 shares in 2008                         |              | 37      |             |   | 37 |   |
| Additional paid in capital                                |              | 12,251  |             |   | 12,234 |   |
| Retained earnings                                         |              | 14,205  |             |   | 17,339 |   |
| Accumulated other comprehensive loss                      |              | (9      | )                |   | (4 | ) |
|                                                      |              |    |             |   |   |   |
| Total stockholders’ equity                          |              | 37,367  |             |   | 40,392 |   |
|                                                      |              |    |             |   |   |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY          | $                 | 497,155 |             | $      | 492,397 |   |

 

See accompanying notes to consolidated financial statements**.**

 

3

 

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**CECIL BANCORP, INC. AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

(dollars in thousands, except per share data)

 

|                                               |   | **Three Months Ended** |    | **Nine Months Ended** |   |
|----------------------------------------------------|--------|------------------------|---------|-----------------------|--------|
|                                               |   | **September 30,**      |    | **September 30.**     |   |
|                                               |   | **2009**               |    | **2008**              |   | **2009** |   | **2008** |   |
| INTEREST INCOME:                                   |   |                   |    |                  |   |   |   |   |   |   |   |   |   |
| Interest and fees on loans                         |   | $                      | 7,685   |                  | $      | 7,323 |   | $ | 22,588 |   | $ | 21,454 |   |
| Interest on investment securities                  |   |                   | 24      |                  |   | 62 |   |   | 110 |   |   | 185 |   |
| Dividends on FHLB and FRB stock                    |   |                   | 18      |                  |   | 38 |   |   | 30 |   |   | 181 |   |
| Other interest income                              |   |                   | 11      |                  |   | 10 |   |   | 31 |   |   | 34 |   |
| Total interest income                              |   |                   | 7,738   |                  |   | 7,433 |   |   | 22,759 |   |   | 21,854 |   |
|                                               |   |                   |    |                  |   |   |   |   |   |   |   |   |   |
| INTEREST EXPENSE:                                  |   |                   |    |                  |   |   |   |   |   |   |   |   |   |
| Interest expense on deposits                       |   |                   | 2,191   |                  |   | 2,366 |   |   | 6,815 |   |   | 7,388 |   |
| Interest expense on junior subordinated debentures |   |                   | 282     |                  |   | 282 |   |   | 838 |   |   | 842 |   |
| Interest expense on federal funds purchased        |   |                   | — |                  |   | 13 |   |   | 1 |   |   | 13 |   |
| Interest expense on advances from FHLB             |   |                   | 622     |                  |   | 767 |   |   | 1,848 |   |   | 2,242 |   |
| Total interest expense                             |   |                   | 3,095   |                  |   | 3,428 |   |   | 9,502 |   |   | 10,485 |   |
|                                               |   |                   |    |                  |   |   |   |   |   |   |   |   |   |
| NET INTEREST INCOME                                |   |                   | 4,643   |                  |   | 4,005 |   |   | 13,257 |   |   | 11,369 |   |
|                                               |   |                   |    |                  |   |   |   |   |   |   |   |   |   |
| PROVISION FOR LOAN LOSSES                          |   |                   | 6,460   |                  |   | 330 |   |   | 10,280 |   |   | 930 |   |
|                                               |   |                   |    |                  |   |   |   |   |   |   |   |   |   |
| NET INTEREST INCOME AFTER                          |   |                   |    |                  |   |   |   |   |   |   |   |   |   |
| PROVISION FOR LOAN LOSSES                          |   |                   | (1,817  | )                     |   | 3,675 |   |   | 2,977 |   |   | 10,439 |   |
|                                               |   |                   |    |                  |   |   |   |   |   |   |   |   |   |
| NONINTEREST INCOME:                                |   |                   |    |                  |   |   |   |   |   |   |   |   |   |
| Deposit account fees                               |   |                   | 186     |                  |   | 165 |   |   | 497 |   |   | 482 |   |
| ATM fees                                           |   |                   | 103     |                  |   | 94 |   |   | 299 |   |   | 274 |   |
| Commission income                                  |   |                   | 2       |                  |   | 13 |   |   | 7 |   |   | 49 |   |
| Gain on sale of loans                              |   |                   | 305     |                  |   | 32 |   |   | 427 |   |   | 140 |   |
| Gain on sale of other real estate owned            |   |                   | 12      |                  |   | 11 |   |   | 151 |   |   | 11 |   |
| Impairment loss on investment securities           |   |                   | — |                  |   | (106 | ) |   | — |   |   | (106 | ) |
| Income from bank owned life insurance              |   |                   | 46      |                  |   | 81 |   |   | 32 |   |   | 185 |   |
| Other                                              |   |                   | 63      |                  |   | 58 |   |   | 171 |   |   | 185 |   |
| Total noninterest income                           |   |                   | 717     |                  |   | 348 |   |   | 1,584 |   |   | 1,220 |   |
|                                               |   |                   |    |                  |   |   |   |   |   |   |   |   |   |
| NONINTEREST EXPENSE:                               |   |                   |    |                  |   |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                     |   |                   | 1,463   |                  |   | 1,556 |   |   | 4,667 |   |   | 4,754 |   |
| Occupancy expense                                  |   |                   | 161     |                  |   | 180 |   |   | 527 |   |   | 531 |   |
| Equipment and data processing expense              |   |                   | 298     |                  |   | 354 |   |   | 921 |   |   | 1,005 |   |
| FDIC deposit insurance premiums                    |   |                   | 170     |                  |   | 69 |   |   | 652 |   |   | 231 |   |
| Other                                              |   |                   | 523     |                  |   | 379 |   |   | 1,507 |   |   | 978 |   |
| Total noninterest expense                          |   |                   | 2,615   |                  |   | 2,538 |   |   | 8,274 |   |   | 7,499 |   |
|                                               |   |                   |    |                  |   |   |   |   |   |   |   |   |   |
| NET (LOSS) INCOME BEFORE INCOME TAXES              |   |                   | (3,715  | )                     |   | 1,485 |   |   | (3,713 | ) |   | 4,160 |   |
|                                               |   |                   |    |                  |   |   |   |   |   |   |   |   |   |
| INCOME TAX BENEFIT (EXPENSE)                       |   |                   | 1,496   |                  |   | (565 | ) |   | 1,470 |   |   | (1,603 | ) |
|                                               |   |                   |    |                  |   |   |   |   |   |   |   |   |   |
| NET (LOSS) INCOME                                  |   | $                      | (2,219  | )                     | $      | 920 |   | $ | (2,243 | ) | $ | 2,557 |   |

 

 

4

 

 

----

**CECIL BANCORP, INC. AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

(dollars in thousands, except per share data)

 

(Continued)

 

 

|                                       |   | **Three Months Ended** |   | **Nine Months Ended** |   |
|--------------------------------------------|--------|------------------------|--------|-----------------------|--------|
|                                       |   | **September 30,**      |   | **September 30,**     |   |
|                                       |   | **2009**               |   | **2008**              |   | **2009** |   | **2008** |   |
|                                       |   |                   |   |                  |   |   |   |   |   |   |   |   |   |
| NET (LOSS) INCOME                          |   | $                      | (2,219 | )                     | $      | 920 |   | $ | (2,243 | ) | $ | 2,557 |   |
|                                       |   |                   |   |                  |   |   |   |   |   |   |   |   |   |
| OTHER COMPREHENSIVE INCOME                 |   |                   |   |                  |   |   |   |   |   |   |   |   |   |
| Unrealized gains (losses) on               |   |                   |   |                  |   |   |   |   |   |   |   |   |   |
| investment securities,                     |   |                   |   |                  |   |   |   |   |   |   |   |   |   |
| net of tax                                 |   |                   | 38     |                  |   | (42 | ) |   | (6 | ) |   | (152 | ) |
|                                       |   |                   |   |                  |   |   |   |   |   |   |   |   |   |
| TOTAL COMPREHENSIVE (LOSS) INCOME          |   | $                      | (2,181 | )                     | $      | 878 |   | $ | (2,249 | ) | $ | 2,405 |   |
|                                       |   |                   |   |                  |   |   |   |   |   |   |   |   |   |
| NET (LOSS) INCOME                          |   | $                      | (2,219 | )                     | $      | 920 |   | $ | (2,243 | ) | $ | 2,557 |   |
|                                       |   |                   |   |                  |   |   |   |   |   |   |   |   |   |
| PREFERRED STOCK DIVIDENDS AND DISCOUNT     |   |                   | (177   | )                     |   | — |   |   | (614 | ) |   | — |   |
|                                       |   |                   |   |                  |   |   |   |   |   |   |   |   |   |
| NET (LOSS) INCOME AVAILABLE TO             |   |                   |   |                  |   |   |   |   |   |   |   |   |   |
| COMMON STOCKHOLDERS                        |   | $                      | (2,396 | )                     | $      | 920 |   | $ | (2,857 | ) | $ | 2,557 |   |
|                                       |   |                   |   |                  |   |   |   |   |   |   |   |   |   |
|                                       |   |                   |   |                  |   |   |   |   |   |   |   |   |   |
| (Loss) earnings per common share - basic   |   | $                      | (0.65  | )                     | $      | 0.25 |   | $ | (0.77 | ) | $ | 0.69 |   |
|                                       |   |                   |   |                  |   |   |   |   |   |   |   |   |   |
| (Loss) earnings per common share - diluted |   | $                      | (0.65  | )                     | $      | 0.25 |   | $ | (0.77 | ) | $ | 0.69 |   |
|                                       |   |                   |   |                  |   |   |   |   |   |   |   |   |   |
| Dividends declared per common share        |   | $                      | 0.025  |                  | $      | 0.025 |   | $ | 0.075 |   | $ | 0.075 |   |

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

5

 

 

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**CECIL BANCORP, INC. AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(dollars in thousands)

 

|                                                             |   | **2009** |    | **2008** |   |
|------------------------------------------------------------------|--------|----------|---------|----------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                            |   |     |    |     |   |   |   |
| Net (loss) income                                                |   | $        | (2,243  | )        | $      | 2,557 |   |
| Adjustments to reconcile net (loss) income to net cash           |   |     |    |     |   |   |   |
| provided by operating activities:                                |   |     |    |     |   |   |   |
| Depreciation and amortization                                    |   |     | 424     |     |   | 438 |   |
| Provision for loan losses                                        |   |     | 10,280  |     |   | 930 |   |
| Gain on sale of loans                                            |   |     | (427    | )        |   | (140 | ) |
| Gain on sale of other real estate owned                          |   |     | (151    | )        |   | (11 | ) |
| Gain on disposal of premises and equipment                       |   |     | — |     |   | (3 | ) |
| Impairment loss on investment securities                         |   |     | — |     |   | 106 |   |
| Income from bank owned life insurance                            |   |     | (32     | )        |   | (185 | ) |
| Excess servicing rights                                          |   |     | (166    | )        |   | (116 | ) |
| Reinvested dividends on investments                              |   |     | — |     |   | (27 | ) |
| Origination of loans held for sale                               |   |     | (14,295 | )        |   | (7,861 | ) |
| Proceeds from sales of loans held for sale                       |   |     | 14,339  |     |   | 7,928 |   |
| Net change in:                                                   |   |     |    |     |   |   |   |
| Accrued interest receivable and other assets                     |   |     | (2,174  | )        |   | 1,417 |   |
| Other liabilities                                                |   |     | 1,184   |     |   | 2,979 |   |
| Net cash provided by operating activities                        |   |     | 6,739   |     |   | 8,012 |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                            |   |     |    |     |   |   |   |
| Purchases of investment securities available-for-sale            |   |     | — |     |   | (2,162 | ) |
| Purchases of investment securities held-to-maturity              |   |     | (749    | )        |   | (495 | ) |
| Net (purchase) redemption of restricted investment securities    |   |     | (479    | )        |   | 833 |   |
| Proceeds from sales, maturities, calls and principal payments of |   |     |    |     |   |   |   |
| investment securities available-for-sale                         |   |     | 10,007  |     |   | 2,151 |   |
| Proceeds from maturities, calls and principal payments of        |   |     |    |     |   |   |   |
| investment securities held-to-maturity                           |   |     | 500     |     |   | 3,000 |   |
| Net increase in loans                                            |   |     | (32,812 | )        |   | (44,555 | ) |
| Proceeds from sale of other real estate owned                    |   |     | 2,448   |     |   | 320 |   |
| Proceeds from disposal of premises and equipment                 |   |     | — |     |   | 5 |   |
| Purchases of premises and equipment - net                        |   |     | (160    | )        |   | (492 | ) |
| Net cash used in investing activities                            |   |     | (21,245 | )        |   | (41,395 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                            |   |     |    |     |   |   |   |
| Net increase in deposits                                         |   |     | 6,671   |     |   | 70,692 |   |
| Net decrease in advances from Federal Home Loan Bank of Atlanta  |   |     | (71     | )        |   | (20,641 | ) |
| Proceeds from issuance of common stock                           |   |     | 17      |     |   | 40 |   |
| Payments of cash dividends                                       |   |     | (794    | )        |   | (276 | ) |
| Net cash provided by financing activities                        |   |     | 5,823   |     |   | 49,815 |   |
|                                                             |   |     |    |     |   |   |   |
| (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                 |   |     | (8,683  | )        |   | 16,432 |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                 |   |     | 41,420  |     |   | 5,511 |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                       |   | $        | 32,737  |     | $      | 21,943 |   |
|                                                             |   |     |    |     |   |   |   |
| Supplemental disclosures of cash flows information:              |   |     |    |     |   |   |   |
| Cash paid for income taxes                                       |   | $        | 1,030   |     | $      | 2,465 |   |
| Cash paid for interest                                           |   | $        | 9,755   |     | $      | 10,482 |   |
| Transfer of loans to other real estate owned                     |   | $        | 4,981   |     | $      | 1,605 |   |

 

See accompanying notes to consolidated financial statements.

 

6

 

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**CECIL BANCORP, INC. AND SUBSIDIARIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

 

|   | 1. | GENERAL |
|--------|----|---------|

 

In the opinion of Cecil Bancorp, Inc. and subsidiaries (the “Company”), the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2009 and the results of its operations and cash flows for the three and            nine months ended September 30, 2009 and 2008. These statements are condensed and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The statements should be read in conjunction with the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. The results of            operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year or for any other period. The Company has evaluated subsequent events for potential recognition and/or disclosure through November 13, 2009, the date the consolidated financial statements included in this Form 10-Q are being issued.

 

|   | 2. | FINANCIAL STATEMENT PREPARATION |
|--------|----|---------------------------------|

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts            of revenues and expenses during the reporting period. Estimates are used when accounting for uncollectible loans, depreciation and amortization, intangible assets, deferred income taxes, and contingencies, among others. Actual results could differ from those estimates.

 

|   | 3. | RECENT ACCOUNTING PRONOUNCEMENTS |
|--------|----|----------------------------------|

 

In April 2009, the Financial Accounting Standards Board (“FASB”) issued Financial Statement of Position FAS 115-2 and FAS 124-2, *“Recognition and Presentation of Other-Than-Temporary Impairments”*(“FSP FAS 115-2/124-2”), now included in the Codification as part of FASB ASC            320-10-35. FASB has issued the staff positions to address concerns regarding (1) determining whether a market is not active and a transaction is not orderly, (2) recognition and presentation of other-than-temporary impairments and (3) interim disclosures of fair values of financial instruments. The staff positions will be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted the            staff positions effective for the period ending June 30, 2009, but that adoption did not result in a material effect on consolidated results of operations.

 

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, *“Interim Disclosures about Fair Value of Financial Instruments”*(“FSP FAS 107-1 and APB 28-1”), now included in the Codification as part of FASB ASC 270-10-05. This standard requires disclosures about fair value of financial            instruments in interim and annual financial statements. The Company adopted this standard effective for the quarter ending June 30, 2009, but the adoption did not result in a material effect consolidated financial position or results of operations.

 

In May 2009, the FASB issued SFAS No. 165, “*Subsequent Events”*(“SFAS 165”), now included in the Codification as part of FASB ASC 855-10-55. This standard is intended to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but            before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. This standard is effective for interim or annual financial periods ending after June 15, 2009.

 

In June 2009, the FASB issued SFAS No. 166 (not incorporated into the Codification yet), a revision to SFAS No. 140, “*Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,”*and will require more information about transferred of financial assets and            where companies have continuing exposure to the risks related to transferred financial assets. SFAS 166 is effective at the start of a company’s first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis.

 

In June 2009, the FASB issued SFAS No. 167 (not incorporated into the Codification yet), a revision to FASB Interpretation No. 46(R), “*Consolidation of Variable Interest Entities*,” and will change how a company determines when an 

 

7

 

 

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entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. Under SFAS No. 167, determining whether a company is required to consolidate an entity will be based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact            the entity’s economic performance. SFAS 167 is effective at the start of a company’s first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis.

 

In June 2009, the FASB issued SFAS No. 168, “*The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162.”*  The change initiated by this Statement is now included in the Codification as FASB ASC            105-10-10 and establishes the *Financial Accounting Standards Board (FASB) Accounting Standards Codification* as the source of authoritative principles and standards recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP).  Rules and interpretive releases of the Securities and Exchange Commission            (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this standard, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative. This standard is effective for financial statements issued for interim and annual periods ending after September 15,            2009. In the FASB’s view, the Codification does not change GAAP, except for those nonpublic nongovernmental entities that must apply the American Institute of Certified Public Accountants Technical Inquiry Service Section 5100, “Revenue Recognition,” paragraphs 38–76, now included as part of FASB ASC Topic 985. The Company adopted FASB ASC Topic 105-10-10 effective for the quarter ending September 30, 2009. The adoption did not have an impact on the            Company’s financial position or results of operations.

 

|   | 4. | EARNINGS PER SHARE |
|--------|----|--------------------|

 

Basic earnings per common share are computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are computed after adjusting the denominator of the basic earnings per share computation for the effects of all dilutive potential common shares            outstanding during the period. The dilutive effects of options, warrants, and their equivalents are computed using the “treasury stock” method. For the three and nine months ended September 30, 2009, all options and warrants were excluded from the diluted earnings per share calculation because their effect was antidilutive. For the three and nine months ended September 30, 2008, there were no options excluded from the diluted earnings per share calculation because their            effect was antidilutive. 

 

|                                                              |   | **Three Months Ended** |       | **Nine Months Ended** |   |
|-------------------------------------------------------------------|--------|------------------------|------------|-----------------------|--------|
|                                                              |   | **September 30,**      |       | **September 30,**     |   |
|                                                              |   | **2009**               |       | **2008**              |   | **2009** |   | **2008** |   |
| Basic:                                                            |   |                   |       |                  |   |   |   |   |   |   |   |   |   |
| Net (loss) income                                            |   | $                      | (2,219,000 | )                     | $      | 920,000 |   | $ | (2,243,000 | ) | $ | 2,557,000 |   |
| Preferred stock dividends and discount                            |   |                   | (177,000   | )                     |   | — |   |   | (614,000 | ) |   | — |   |
| Net (loss) income available to common stockholders |   | $                      | (2,396,000 | )                     | $      | 920,000 |   | $ | (2,857,000 | ) | $ | 2,557,000 |   |
|                                                              |   |                   |       |                  |   |   |   |   |   |   |   |   |   |
| Average common shares outstanding                                 |   |                   | 3,689,346  |                  |   | 683,401 |   |   | 3,688,968 |   |   | 3,680,501 |   |
|                                                              |   |                   |       |                  |   |   |   |   |   |   |   |   |   |
| Basic (loss) earnings per common share                  |   | $                      | (0.65      | )                     | $      | 0.25 |   | $ | (0.77 | ) | $ | 0.69 |   |
|                                                              |   |                   |       |                  |   |   |   |   |   |   |   |   |   |
| Diluted:                                                          |   |                   |       |                  |   |   |   |   |   |   |   |   |   |
| Net (loss) income                                            |   | $                      | (2,219,000 | )                     | $      | 920,000 |   | $ | (2,243,000 | ) | $ | 2,557,000 |   |
| Preferred stock dividends and discount                            |   |                   | (177,000   | )                     |   | — |   |   | (614,000 | ) |   | — |   |
| Net (loss) income available to common stockholders      |   | $                      | (2,396,000 | )                     | $      | 920,000 |   | $ | (2,857,000 | ) | $ | 2,557,000 |   |
|                                                              |   |                   |       |                  |   |   |   |   |   |   |   |   |   |
| Average common shares outstanding                                 |   |                   | 3,689,346  |                  |   | 3,683,401 |   |   | 3,688,968 |   |   | 3,680,501 |   |
| Stock option adjustment                                           |   |                   | —    |                  |   | 2,549 |   |   | — |   |   | 3,507 |   |
|                                                              |   |                   |       |                  |   |   |   |   |   |   |   |   |   |
| Average common shares outstanding – diluted                 |   |                   | 3,689,346  |                  |   | 3,685,950 |   |   | 3,688,968 |   |   | 3,684,008 |   |
|                                                              |   |                   |       |                  |   |   |   |   |   |   |   |   |   |
| Diluted (loss) earnings per common share                     |   | $                      | (0.65      | )                     | $      | 0.25 |   | $ | (0.77 | ) | $ | 0.69 |   |

 

 

8

 

 

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5.      ACCOUNTING FOR STOCK OPTIONS

 

No options were granted or vested during the three and nine months ended September 30, 2009 and 2008. A summary of the Company’s stock option activity, and related information for the periods indicated is as follows:

 

 

|                                 |   | **Nine Months Ended**  |   | **Year Ended**        |    |
|--------------------------------------|--------|------------------------|--------|-----------------------|---------|
|                                 |   | **September 30, 2009** |   | **December 31, 2008** |    |
|                                 |   |                   |   | **Weighted-**         |    |   |   | **Weighted-** |   |
|                                 |   |                   |   | **Average**           |    |   |   | **Average** |   |
|                                 |   | **Shares**             |   | **Exercise Price**    |    | **Shares** |   | **Exercise Price** |   |
|                                 |   |                   |   |                  |    |   |   |   |   |   |   |
| Outstanding at beginning of period   |   | 12,024                 |   | $                     | 6.00    |   | 16,032 |   | $ | 6.00 |   |
| Granted                              |   | —                |   |                  | — |   | — |   |   | — |   |
| Exercised                            |   | —                |   |                  | — |   | (4,008 | ) |   | 6.00 |   |
| Canceled/expired                     |   | (12,024                | )      |                  | 6.00    |   | — |   |   | — |   |
| Outstanding at end of period         |   | —                |   |                  | — |   | 12,024 |   | $ | 6.00 |   |
|                                 |   |                   |   |                  |    |   |   |   |   |   |   |
| Options exercisable at end of period |   | —                |   |                  | — |   | 16,032 |   | $ | 6.00 |   |

 

|   | 6. | ASSETS MEASURED AT FAIR VALUE |
|--------|----|-------------------------------|

 

In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements”, now included in the Codification as part of FASB ASC 820-10-50. ASC 820-10-50 establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands            disclosures about fair value measurements. While the Statement applies under other accounting pronouncements that require or permit fair value measurements, it does not require any new fair value measurements. ASC 820-10-50 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In addition, the Statement establishes a fair value hierarchy,            which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 assets are valued based on readily available pricing sources for transactions involving identical assets. Level 2 assets are valued based on transactions in less active markets. Valuations are obtained from third parting pricing services which use observable inputs for comparable assets other than level 1 assets. Level 3 assets are valued based on unobservable inputs that            are supported by little or no market activity that are significant to the fair value. Lastly, ASC 820-10-50 requires additional disclosures for each interim and annual period separately for each major category of assets and liabilities. The following table shows the value (in thousands) at September 30, 2009 of each major category of assets measured at fair value on the consolidated balance sheets, which consists solely of investment securities available-for-sale. The changes in            fair value were reflected as a component of other comprehensive income and did not affect net income. 

 

 

|                       |        |                   |        | **Fair Value Measurements at Reporting Date Using**           |
|-----------------------|--------|-------------------|--------|---------------------------------------------------------------|
| **Description**       |   | **CarryingValue** |   | **Quoted Pricesin ActiveMarkets ForIdenticalAssets(Level 1)** |   | **SignificantOtherObservableInputs(Level 2)** |   | **SignificantUnobservableInputs(Level 3)** |
|                  |   |              |   |                                                          |   |   |   |   |
| Investment securities |   |              |   |                                                          |   |   |   |   |
| available-for-sale    |   | $1,729            |   | $1,648                                                        |   | $81 |   | $0 |

 

We may be required from time to time to measure certain other financial assets and liabilities at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower of cost or market accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis at September 30, 2009, the            following table provides (in thousands) the level of valuation assumptions used to determine each adjustment and the carrying value of the assets. For both other real estate owned and impaired loans, Level 3 assets are valued at the lesser of the unpaid principal balance of the loan, or the appraised value of the underlying collateral, as determined by a third party appraiser.

 

9

 

 

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|                         |        |                   |        | **Fair Value Measurements at Reporting Date Using**           |
|-------------------------|--------|-------------------|--------|---------------------------------------------------------------|
| **Description**         |   | **CarryingValue** |   | **Quoted Pricesin ActiveMarkets ForIdenticalAssets(Level 1)** |   | **SignificantOtherObservableInputs(Level 2)** |   | **SignificantUnobservableInputs(Level 3)** |
|                    |   |              |   |                                                          |   |   |   |   |
| Other real estate owned |   | $  5,268     |   | $ --                            |   | $ -- |   | $  5,268 |
| Impaired loans          |   | 37,242            |   |   --                                                     |   | -- |   | 37,242 |

 

| 7. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
|----|-------------------------------------|

 

SFAS No. 107 “*Disclosure About Fair Value of Financial Instruments”*, now included in the Codification as part of FASB ASC 825-10-50 requires that the Company disclose estimated fair values for both its on and off-balance-sheet financial instruments. The following methods and assumptions were used to estimate the fair            value of the Company’s financial instruments. Changes in estimates and assumptions could have a significant impact on these fair values.

 

Cash and Cash Equivalents- The fair values of cash and cash equivalents approximate their carrying values.

 

Investment Securities- The fair values of investment securities are based on quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted market prices of comparable instruments.

 

Loans- The fair value of the loan portfolio is estimated by evaluating homogeneous categories of loans with similar financial and credit risk characteristics. Loans are segregated by types, such as residential mortgage, commercial real estate and consumer. Each loan category is further segmented into fixed and adjustable-rate interest            terms.

 

The fair values of each loan category are estimated by discounting contractual cash flows adjusted for estimated prepayments. Assumptions regarding prepayment estimates and discount rates are judgmentally determined by using available market information.

 

Accrued Interest Receivable- The fair value of the Company’s interest receivable approximates its carrying value.

 

Restricted Investment Securities- The fair value of the Company’s investment in stock of the FHLB and FRB approximates its carrying value.

 

Deposits- The fair values of deposits are estimated using a discounted cash flow calculation, adjusted for estimated decay rates, that applies interest rates currently offered for funding sources with similar maturities. Assumptions regarding discount rates and decay estimates are judgmentally determined by using available market            information.

 

Advances from the FHLB- The fair value of FHLB advances was estimated by computing the discounted value of contractual cash flows payable at current interest rates for obligations with similar remaining terms.

 

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

 

 

 

10

 

 

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The estimated fair values of financial instruments (in thousands) at September 30, 2009 are as follows:

 

|                             |   | **Carrying** |    | **Fair**  |   |
|----------------------------------|--------|--------------|---------|-----------|--------|
|                             |   | **Value**    |    | **Value** |   |
| Financial assets:                |   |         |    |      |   |   |   |
| Cash and cash equivalents        |   | $            | 32,737  |      | $      | 32,737 |   |
| Investment securities:           |   |         |    |      |   |   |   |
| Available-for-sale               |   |         | 1,729   |      |   | 1,729 |   |
| Held-to-maturity                 |   |         | 550     |      |   | 550 |   |
| Loans receivable                 |   |         | 433,755 |      |   | 458,937 |   |
| Restricted investment securities |   |         | 4,396   |      |   | 4,396 |   |
| Accrued interest receivable      |   |         | 2,044   |      |   | 2,044 |   |
| Financial liabilities:           |   |         |    |      |   |   |   |
| Deposits                         |   |         | 371,222 |      |   | 370,824 |   |
| Junior subordinated debentures   |   |         | 17,000  |      |   | 21,002 |   |
| Advances from FHLB               |   |         | 63,714  |      |   | 64,185 |   |

 

|   | The estimated fair values of financial instruments (in thousands) at December 31, 2008 are as follows: |
|--------|--------------------------------------------------------------------------------------------------------|

 

|                             |   | **Carrying** |    | **Fair**  |   |
|----------------------------------|--------|--------------|---------|-----------|--------|
|                             |   | **Value**    |    | **Value** |   |
| Financial assets:                |   |         |    |      |   |   |   |
| Cash and cash equivalents        |   | $            | 41,420  |      | $      | 41,420 |   |
| Investment securities:           |   |         |    |      |   |   |   |
| Available-for-sale               |   |         | 11,712  |      |   | 11,712 |   |
| Held-to-maturity                 |   |         | 300     |      |   | 300 |   |
| Loans receivable                 |   |         | 408,063 |      |   | 436,382 |   |
| Restricted investment securities |   |         | 3,918   |      |   | 3,918 |   |
| Accrued interest receivable      |   |         | 2,225   |      |   | 2,225 |   |
| Financial liabilities:           |   |         |    |      |   |   |   |
| Deposits                         |   |         | 364,551 |      |   | 365,786 |   |
| Junior subordinated debentures   |   |         | 17,000  |      |   | 19,968 |   |
| Advances from FHLB               |   |         | 63,786  |      |   | 64,677 |   |

 

| 8. | INVESTMENT SECURITIES |
|----|-----------------------|

 

Investment securities have been classified in the consolidated balance sheets according to management’s intent and ability to hold the investment. Investment securities at September 30, 2009 and December 31, 2008 are summarized in the following table (in thousands).

 

|                                      | **September 30, 2009** |   |           |
|-------------------------------------------|------------------------|--------|----------------|
|                                      |                   |   | **Gross**      |   | **Gross** |   | **Estimated** |   |   |
|                                      | **Amortized**          |   | **Unrealized** |   | **Unrealized** |   | **Fair** |   |   |
|                                      | **Cost**               |   | **Gains**      |   | **Losses** |   | **Value** |   |   |
| Available-for-sale                        |                   |   |           |   |   |   |   |   |   |   |   |   |
| Mutual funds - mortgage securities        | **$**                  | 747    |           | **$** | — |   | $ | 26 |   | $ | 721 |   |
| Mutual funds - U.S. Government securities |                   | 686    |           |   | 7 |   |   | — |   |   | 693 |   |
| Equity securities                         |                   | 226    |           |   | 8 |   |   | **—** |   |   | 234 |   |
| Mortgage-backed securities                |                   | 86     |           |   | — |   |   | 5 |   |   | 81 |   |
|                                      | **$**                  | 1,745  |           | **$** | 15 |   | $ | 31 |   | $ | 1,729 |   |
| Held-to-Maturity:                         |                   |   |           |   |   |   |   |   |   |   |   |   |
| Other                                     | **$**                  | 50     |           | **$** | — |   | $ | — |   | $ | 50 |   |
| U. S. Treasury securities and obligations |                   | 500    |           |   | — |   |   | — |   |   | 500 |   |
|                                      | **$**                  | 550    |           | **$** | — |   | $ | — |   | $ | 550 |   |
|                                           |                        |        |                |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

11

 

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|                                      | **December 31, 2008** |   |           |
|-------------------------------------------|-----------------------|--------|----------------|
|                                      |                  |   | **Gross**      |   | **Gross** |   | **Estimated** |   |   |
|                                      | **Amortized**         |   | **Unrealized** |   | **Unrealized** |   | **Fair** |   |   |
|                                      | **Cost**              |   | **Gains**      |   | **Losses** |   | **Value** |   |   |
|                                      |                  |   |           |   |   |   |   |   |   |   |   |   |
| Available-for-sale                        |                  |   |           |   |   |   |   |   |   |   |   |   |
| Mutual funds - mortgage securities        | **$**                 | 747    |           | **$** | — |   | $ | — |   | $ | 747 |   |
| Mutual funds - U.S. Government securities |                  | 686    |           |   | — |   |   | **—** |   |   | 686 |   |
| Equity securities                         |                  | 226    |           |   | — |   |   | 33 |   |   | 193 |   |
| FNMA discount note                        |                  | 9,966  |           |   | 33 |   |   | **—** |   |   | 9,999 |   |
| Mortgage-backed securities                |                  | 93     |           |   | — |   |   | 6 |   |   | 87 |   |
|                                      | **$**                 | 11,718 |           | **$** | 33 |   | $ | 39 |   | $ | 11,712 |   |
|                                      |                  |   |           |   |   |   |   |   |   |   |   |   |
| Held-to-Maturity:                         |                  |   |           |   |   |   |   |   |   |   |   |   |
| Other                                     | **$**                 | 50     |           | **$** | **—** |   | **$** | — |   | **$** | 50 |   |
| U. S. Treasury securities and obligations |                  | 250    |           |   | **—** |   |   | — |   |   | 250 |   |
|                                      | **$**                 | 300    |           | **$** | **—** |   | $ | — |   | $ | 300 |   |
|                                           |                       |        |                |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of September 30, 2009, unrealized losses (in thousands) on securities were comprised of the following based on the length of time that the securities have been in a continuous loss position:

 

 

|                                                                       |   | **Less than 12 Months** |    | **More than 12 Months** |   | **Total** |   |
|----------------------------------------------------------------------------|--------|-------------------------|---------|-------------------------|--------|-----------|--------|
|                                                                       |   | **Fair**                |    | **Unrealized**          |   | **Fair**  |   | **Unrealized** |   | **Fair** |   | **Unrealized** |   |
|                                                                       |   | **Value**               |    | **Losses**              |   | **Value** |   | **Losses** |   | **Value** |   | **Losses** |   |
| Available-for-Sale:                                                        |   |                    |    |                    |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mutual funds - mortgage                               securities |   | $                       | 721     |                    | $      | 26        |   | $ | — |   | $ | — |   | $ | 721 |   | $ | 26 |   |
| Mortgage-backed securities                                                 |   |                    | — |                    |   | —   |   |   | 81 |   |   | 5 |   |   | 81 |   |   | 5 |   |
|                                                                       |   | $                       | 721     |                    | $      | 26        |   | $ | 81 |   | $ | 5 |   | $ | 802 |   | $ | 31 |   |

 

The securities with unrealized holding losses are impaired due to declines in fair value resulting from changes in interest rates. None of these securities have exhibited a decline in value due to changes in credit risk. Additionally, the Company has the intent and ability to hold the mortgage-backed securities until they mature, and the equity securities until the foreseeable            future, and does not expect to realize losses on any of the investments. Therefore, management does not consider the declines in fair value to be other than temporary. 

 

12

 

 

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**CECIL BANCORP, INC. AND SUBSIDIARIES**

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008

 

**Forward-Looking Statements**. This Management’s Discussion and Analysis of financial condition and results of operations and other portions of this report include forward-looking statements such as: statements of the Company’s goals, intentions, and expectations; estimates of risks and of future costs and benefits; assessments of loan quality and of possible loan            losses; and statements of the Company’s ability to achieve financial and other goals. These forward-looking statements are subject to significant uncertainties because they are based upon: future interest rates, market behavior, and other economic conditions; future laws and regulations; and a variety of other matters. Because of these uncertainties, the actual future results may be materially different from the results indicated by these forward-looking statements. In            addition, the Company’s past growth and performance do not necessarily indicate its future results.

 

You should read this Management’s Discussion and Analysis of the Company’s consolidated financial condition and results of operations in conjunction with the Company’s unaudited consolidated financial statements and the accompanying notes.

 

**General**

Cecil Bancorp, Inc. (the “Company”) is the holding company for Cecil Bank (the “Bank”). The Company is subject to regulation by the Federal Reserve System. The Bank is a community-oriented Maryland chartered commercial bank, is a member of the Federal Reserve Bank (“FRB”) of Richmond and the Federal Home Loan Bank (“FHLB”) of            Atlanta, and is an Equal Housing Lender. Its deposits are insured by the Deposit Insurance Fund (“DIF”) of the Federal Deposit Insurance Corporation (“FDIC”). The Bank commenced operations in 1959 as a Federal savings and loan association. On October 1, 2002, the Bank converted from a stock federal savings bank to a commercial bank. Its deposits have been federally insured up to applicable limits, and it has been a member of the FHLB system since 1959.            

The Bank conducts its business through its main office in Elkton, Maryland, and branches in Elkton, North East, Fair Hill, Rising Sun, Cecilton, Aberdeen, Conowingo, and Havre de Grace, Maryland.

 

The Bank’s business strategy is to operate as an independent, community-oriented commercial bank dedicated to real estate, commercial, and consumer lending, funded primarily by retail deposits. The Bank has sought to implement this strategy by (1) continuing to emphasize residential mortgage lending through the origination of adjustable rate mortgage loans while increasing            its commercial and consumer lending portfolios; (2) investing in adjustable rate and short-term liquid investments; (3) controlling interest rate risk exposure; (4) maintaining asset quality; (5) containing operating expenses; and (6) maintaining “well capitalized” status. The Bank offers a full range of brokerage and investment services through a relationship with Community Bankers Securities, LLC. 

 

In December, 2008, the Company sold 11,560 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) at $1,000 per share and simultaneously issued a ten-year warrant to purchase 261,538 shares of the Company’s common stock at $6.63 per share to the United States Department of the Treasury as part of the Troubled Asset            Relief Program (“TARP”) Capital Purchase Program. The Series A Preferred Stock pays cumulative quarterly dividends at a rate of 5% per annum for the first five years, and, unless earlier redeemed, 9% per annum thereafter. We may not declare or pay a dividend or other distribution on our common stock (other than dividends payable solely in common stock), and we generally may not directly or indirectly purchase, redeem or otherwise acquire any shares of common stock unless            all accrued and unpaid dividends on the Series A Preferred Stock have been paid in full. Whenever six or more quarterly dividends, whether or not consecutive, have not been paid, the holders of the Series A Preferred Stock will have the right to elect two directors until all accrued but unpaid dividends have been paid in full. Holders of the Series A Preferred Stock will also have the right to vote as a class on certain amendments to our Articles of Incorporation and on certain            mergers. Until the third anniversary of the issuance of the Series A Preferred Stock or its earlier redemption or transfer by the Department of Treasury to an unaffiliated holder, the Company may not increase the dividend on the common stock or repurchase any shares of common stock. In the event of any liquidation or dissolution of the Company, holders of the Series A Preferred Stock will have priority over holders of the common stock to the extent of (i) the liquidation amount of            $1,000 per share and (ii) the amount of any accrued and unpaid dividends.

 

13

 

 

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**Asset/Liability Management**

 

The ability to maximize net interest income is largely dependent upon the achievement of a positive interest rate spread (the difference between the weighted average interest yields earned on interest-earning assets and the weighted average interest rates paid on interest-bearing liabilities) that can be sustained during fluctuations in prevailing interest rates. The            Company’s asset/liability management policies are designed to reduce the impact of changes in interest rates on its net interest income by achieving a favorable relationship between the maturities or repricing dates of its interest-earning assets and interest-bearing liabilities. The Bank’s lending policy emphasizes the origination of one-year, three-year, or five-year adjustable rate mortgage loans, adjustable rate commercial loans and lines of credit, and short-term            consumer loans. The Bank is currently originating residential mortgage loans for sale in the secondary market through the Federal Home Loan Mortgage Corporation. Management has been monitoring the retention of fixed rate loans through its asset/liability management policy.

 

**Comparison of Financial Condition at September 30, 2009 and December 31, 2008**

 

The Company’s assets increased by $4.8 million, or 1.0%, to $497.2 million at September 30, 2009 from $492.4 million at December 31, 2008 primarily as a result of increases in loans receivable, other assets, and other real estate owned, partially offset by an increase in the allowance for loan losses and decreases in investment securities available-for-sale and cash and cash            equivalents. This increase was funded by increases in deposits and other liabilities. 

 

Cash and cash equivalents decreased by $8.7 million, or 20.1%, to $32.7 million at September 30, 2009 from $41.4 million at December 31, 2008 primarily due to growth in the loans receivable portfolio and the repayment of brokered deposits. Investment securities available-for-sale decreased by $10.0 million, or 85.2%, to $1.7 million at September 30, 2009 from $11.7 million at            December 31, 2008 primarily due to the maturity of a FNMA discount note. Restricted investment securities, which consist of Federal Home Loan and Federal Reserve Bank stock, increased by $478,000, or 12.2%, to $4.4 million at September 30, 2009 from $3.9 million at December 31, 2008 as a result of the ongoing review of the investment requirements by the FHLB and the FRB. 

 

Gross loans receivable increased by $25.7 million, or 6.3%, to $433.8 million at September 30, 2009 from $408.1 million at December 31, 2008, primarily as a result of increased marketing efforts of our business development and loan departments. During the period, we realized a $23.4 million (16.4%) increase in commercial real estate loans, a $4.8 million (30.1%) increase in            commercial business loans, and a $3.3 million (2.5%) increase in one-to-four family residential and home equity loans, offset in part by a $5.4 million (5.2%) decrease in construction loans. The allowance for loan losses increased by $7.8 million, or 122.9%, during the period (see “Analysis of Allowance for Loan Losses” below). The increase in the allowance for loan losses is a result of the consequences of an unpredictable economy and an unstable financial and real            estate market, which has led to an increase in nonperforming assets and charge-offs during 2009. Additional provisions have been added for several development loans whose progress has slowed due to the slowdown in home sales. Management is anticipating that developers will have to carry projects for a longer period than anticipated. The Bank has added additional provisions based on the current condition of the economy. A now sustained period of slow home sales, higher unemployment,            and increased delinquencies have been taken into consideration when reviewing the methodology. Management has determined that increased provisions for all of these factors are necessary to reflect the losses within the portfolio as of the balance sheet date.

 

Other real estate owned increased by $2.4 million, or 85.3%, to $5.3 million at September 30, 2009 from $2.8 million at December 31, 2008 due to the acquisition of properties securing nonperforming loans receivable. Other assets increased by $2.6 million, or 44.7%, to $8.5 million at September 30, 2009 from $5.9 million at December 31, 2008 primarily as a result of an increase in            income taxes receivable arising from the income tax benefit associated with the net loss. 

 

The Company’s liabilities increased $7.8 million, or 1.7%, to $459.8 million at September 30, 2009 from $452.0 million at December 31, 2008. Deposits increased $6.7 million, or 1.8%, to $371.2 million at September 30, 2009 from $364.6 million at December 31, 2008. Increases in certificates of deposit (up $40.3 million, or 20.3%), NOW accounts (up $5.2 million, or 25.5%),            checking accounts (up $4.0 million, or 20.3%), IRA certificates (up $3.2 million, or 21.5%), money market accounts (up $1.8 million, or 28.9%), and statement savings accounts (up $1.2 million, or 13.8%), partially offset by a decrease in money market certificates (down $1.1 million, or 15.9%), were primarily due to marketing campaigns and product specials focused on local core funding. These core deposit changes were negatively impacted by a decline of $47.6 million, or 60.8%, in            national certificates of deposit as part of the Bank’s continuing effort to pay off all brokered deposits during the second and third quarters of 2009. Other liabilities increased by $1.2 million, or 17.8%, to $7.9 million at September 30, 2009 from $6.7 million at December 31, 2008 primarily due to increases in SERP payable and the amount owed to MoneyGram Payment Systems for the official checks written on September 30, 2009. 

 

14

 

 

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The Company’s stockholders’ equity decreased by $3.0 million, or 7.5%, to $37.4 million at September 30, 2009 from $40.4 million at December 31, 2008. This decrease is primarily the result of a net loss of $2.2 million, the Company’s regular cash dividend of $0.075 per common share, or $277,000, preferred stock dividends paid totaling $517,000, and a $5,000            decrease in the Company’s accumulated other comprehensive income, partially offset by $17,000 in proceeds received from the sale of common stock associated with new shares issued through the Company’s dividend reinvestment plan.

 

**Comparison of Results of Operations for the Three Months Ended September 30, 2009 and 2008**

 

Net loss for the three month period ended September 30, 2009 was $2.2 million, a decrease of $3.1 million, or 341.2%, from net income of $920,000 earned over the same period in 2008. This decrease was primarily the result of an increase in the provision for loan losses, partially offset by increases in net interest income and noninterest income and a decrease in income tax expense.            Net loss available to common stockholders for the three-month period ended September 30, 2009 was $2.4 million as compared to net income available to common stockholders for the same period in 2008 of $920,000. Net loss available to common stockholders for the 2009 period reflects $177,000 in dividends and discount accretion on the Series A Preferred Stock in addition to the net loss for the period. Basic and diluted loss per common share was $0.65 for the third quarter of 2009 as            compared to basic and diluted earnings per common share of $0.25 for the third quarter of 2008. The annualized return on average assets and annualized return on average equity were -1.71% and -22.18%, respectively, for the three-month period ended September 30, 2009. This compares to an annualized return on average assets and annualized return on average equity of 0.84% and 12.71%, respectively, for the same period in 2008. 

 

Net interest income, the Company’s primary source of income, increased 15.9%, or $638,000, to $4.6 million for the three months ended September 30, 2009, from $4.0 million over the same period in 2008. The weighted average yield on interest earning assets decreased to 6.52% for the three months ended September 30, 2009 from 7.36% for the three months ended September 30, 2008.            The weighted average rate paid on interest bearing liabilities decreased to 2.63% for the three months ended September 30, 2009 from 3.40% for the three months ended September 30, 2008. The interest rate spread and the net interest margin were 3.88% and 3.91%, respectively, for the quarter ended September 30, 2009, as compared to 3.96% for both ratios for the quarter ended September 30, 2008. 

 

Interest and fees on loans receivable increased by $362,000, or 4.9%, to $7.7 million for the three months ended September 30, 2009 from $7.3 million for the three months ended September 30, 2008. The increase is attributable to an increase in the average balance outstanding, partially offset by a decrease in the weighted-average yield. The average balance outstanding increased by            $28.6 million to $421.9 million for the three months ended September 30, 2009 from $393.3 million for the three months ending September 30, 2008. The weighted-average yield decreased to 7.29% for the three months ended September 30, 2009 from 7.45% for the three months ended September 30, 2008.            

 

Interest income on investment securities decreased $38,000, or 61.3%, to $24,000 for the three months ended September 30, 2009 from $62,000 for the three months ended September 30, 2008. The average balance outstanding decreased $2.4 million to $2.1 million for the three months ended September 30, 2009 from $4.4 million for the three months ended September 30, 2008. The            weighted-average yield decreased to 4.66% for the three months ended September 30, 2009 from 5.56% for the three months ended September 30, 2008.

 

Dividends on FHLB and FRB stock decreased $20,000, or 52.6%, to $18,000 for the three months ended September 30, 2009 from $38,000 for the three months ended September 30, 2008 due to a decrease in the crediting rate paid by FHLB. The average balance outstanding decreased $605,000 to $4.4 million for the three months ended September 30, 2009 from $5.0 million for the three months            ended September 30, 2008. The weighted-average yield decreased to 1.59% for the three months ended September 30, 2009 from 3.10% for the three months ended September 30, 2008. 

 

Interest expense on deposits decreased $175,000, or 7.4%, to $2.2 million for the three months ended September 30, 2009 from $2.4 million for the three months ended September 30, 2008. The average balance outstanding increased $92.6 million, or 31.2%, to $389.5 million for the three months ended September 30, 2009 from $296.9 million for the same period in 2008. The            weighted-average rate decreased to 2.25% for the three months ended September 30, 2009 from 3.19% for the three months ended September 30, 2008.

 

15

 

 

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There was no interest expense on fed funds purchased for the three months ended September 30, 2009 as compared to $13,000 for the three months ended September 30, 2008 since there were no fed funds purchased during the quarter. The average balance of fed funds purchased outstanding was $1.7 million and the weighted-average rate was 3.12% for the three months ended September 30,            2008.

 

Interest expense on advances from the FHLB decreased $145,000, or 18.9%, to $622,000 for the three months ended September 30, 2009 from $767,000 for the three months ended September 30, 2008. The average balance outstanding decreased $23.9 million to $63.7 million for the three months ended September 30, 2009 from $87.6 million for the three months ended September 30, 2008. The            weighted average rate increased to 3.91% for the three months ended September 30, 2009 from 3.50% for the three months ended September 30, 2008.

 

The provision for loan losses increased by $6.1 million to $6.5 million for the three months ended September 30, 2009 from $330,000 over the same period in 2008 (see “Analysis of Allowance for Loan Losses” below).

 

Noninterest income increased 106.0%, or $369,000, to $717,000 for the three months ended September 30, 2009, from $348,000 over the same period in 2008. Deposit account fees increased $21,000 to $186,000 for the three months ended September 30, 2009 from $165,000 for the same period in 2008. Commission income decreased $11,000 to $2,000 for the three months ended September 30, 2009            from $13,000 for the three months ended September 30, 2008. Gain on sale of loans increased by $273,000 to $305,000 for the third quarter of 2009 as compared to $32,000 during the three months ended September 30, 2008 primarily due to one loan that was sold for a gain of $250,000. There were no investment gains or losses during the three months ended September 30, 2009 as compared to a $106,000 impairment loss on the Company’s investment in Triangle Capital Corporation for the            three months ended September 30, 2008. Income from bank owned life insurance decreased by $35,000, or 43.2%, to $46,000 for the three months ended September 30, 2009 from $81,000 for the three months ended September 30, 2008 due to a decrease in the crediting rate paid by the carriers. 

 

Noninterest expense increased $77,000, or 3.0%, to $2.6 million for the three months ended September 30, 2009, from $2.5 million over the same period in 2008. Salaries and employee benefits decreased $93,000, or 6.0%, to $1.5 million for the three months ended September 30, 2009 as compared to $1.6 million over the same period in 2008 primarily due to declines in supplemental            executive retirement plan expense and bonuses. Occupancy expense decreased by $19,000, or 10.6%, to $161,000 for the three months ended September 30, 2009 from $180,000 for the same period in 2008 primarily due a decrease in utilities expense. Equipment and data processing expenses decreased $56,000, or 15.8%, to $298,000 for the three months ended September 30, 2009 from $354,000 for the three months ended September 30, 2008 primarily due to a decrease in fees for the            Company’s data service provider. The FDIC insurance premium expense increased by $101,000, or 146.4%, to $170,000 for the three months ended September 30, 2009 from $69,000 for the three months ended September 30, 2008 partially due to the significant increase in deposits over the period. Additionally, beginning in January 2009, the FDIC doubled the assessment rate for most insured institutions. In order to increase the funds available to the Deposit Insurance Fund, the FDIC            is requiring all insured depository institutions to prepay their federal deposit insurance assessments through 2012. The prepayment will be due December 30, 2009 and will be based on the institution’s assessment base and assessment rate as of September 30, 2009 assuming a 5% annual growth in deposits  and three basis point increase in the assessment rate  during years 2011 and 2012. Based on our deposits and assessment rate at September 30, 2009, we            estimate that our prepayment amount will be approximately $2 million. We expect that we will be able to make the prepayment from available cash on hand. Other expenses increased $144,000, or 38.0%, to $523,000 for the three months ended September 30, 2009 from $379,000 for the three months ended September 30, 2008, primarily as a result of increases in other real estate owned expense due to an increase in the number of properties, as well as valuation adjustments resulting from the            unstable real estate market.

 

Income tax benefit for the three-month period ended September 30, 2009 was $1.5 million as compared to income tax expense of $565,000 for the same period in 2008, which equates to effective rates of 40.3% and 38.0% respectively. 

 

**Comparison of Results of Operations for the Nine Months Ended September 30, 2009 and 2008**

 

Net loss for the nine month period ended September 30, 2009 was $2.2 million, a decrease of $4.8 million, or 187.7%, as compared to net income of $2.6 million for the same period in 2008. This decrease was primarily the result of an increase in the provision for loan losses and noninterest expense, partially offset by increases in net interest income and noninterest income and a            decrease in income tax expense. Net loss available to common stockholders for the nine-month period ended September 30, 2009 was $2.9 million as compared to net income available to common stockholders for the same period in 2008 of $2.6 million. Net loss available to common stockholders for the 2009 period reflects $614,000 in dividends and discount accretion on the Series A Preferred Stock in addition to the net loss for the period. Basic and diluted loss per common share were both            $0.77 for the first nine months of 2009, a decrease of 211.6% from the earnings per common share of $0.69 for the first nine months of 2008. The 

 

16

 

 

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annualized return on average assets and annualized return on average equity were -0.60% and -7.49%, respectively, for the nine month period ended September 30, 2009. This compares to an annualized return on average assets and annualized return on average equity of 0.81% and 12.08%, respectively, for the same period in 2008. 

 

Net interest income, the Company’s primary source of income, increased 16.6%, or $1.9 million, to $13.3 million for the nine months ended September 30, 2009, from $11.4 million over the same period in 2008. The weighted-average yield on interest earning assets decreased to 6.65% for the nine months ended September 30, 2009 from 7.54% for the nine months ended September 30,            2008. The weighted average rate paid on interest bearing liabilities decreased to 2.81% for the nine months ended September 30, 2009 from 3.62% for the nine months ended September 30, 2008. The interest rate spread and the net interest margin were 3.84% and 3.88%, respectively, for the nine-month period ended September 30, 2009 as compared to 3.92% for both ratios for the same period in 2008.

 

Interest and fees on loans receivable increased by $1.1 million, or 5.3%, to $22.6 million for the nine months ended September 30, 2009 from $21.5 million for the nine months ended September 30, 2008. The average balance outstanding increased $37.1 million, or 9.9%, to $413.7 million for the nine months ended September 30, 2009 from $376.6 million for the nine months ended            September 30, 2008. The weighted-average yield decreased to 7.28% for the nine months ended September 30, 2009 from 7.60% for the nine months ended September 30, 2008.

 

Interest income on investment securities decreased $75,000, or 40.5%, to $110,000 for the nine months ended September 30, 2009 from $185,000 for the nine months ended September 30, 2008. The average balance outstanding decreased $532,000, or 11.2%, to $4.2 million for the nine months ended September 30, 2009 from $4.7 million for the nine months ended September 30, 2008. The            weighted-average yield decreased to 3.49% for the nine months ended September 30, 2009 from 5.20% for the nine months ended September 30, 2008. 

 

Dividends on FHLB and FRB stock decreased $151,000 to $30,000 for the nine months ended September 30, 2009 from $181,000 for the same period in 2008. The Federal Home Loan Bank of Atlanta discontinued dividend payments for the first half of 2009, and although a dividend was received during the third quarter, it was at a much lower rate than the corresponding period in 2008. The            weighted-average yield decreased to 0.92% for the nine months ended September 30, 2009 from 4.92% for the nine months ended September 30, 2008. The average balance outstanding decreased $630,000, or 12.8%, to $4.3 million for the nine months ended September 30, 2009 as compared to $4.9 million for the nine months ended September 30, 2008.

 

Interest expense on deposits decreased $573,000, or 7.8%, to $6.8 million for the nine months ended September 30, 2009 from $7.4 million for the nine months ended September 30, 2008. The average balance outstanding increased $86.7 million, or 30.7%, to $369.2 million for the nine months ended September 30, 2009 from $282.5 million for the nine months ended September 30, 2008. The            weighted-average rate decreased to 2.46% for the nine months ended September 30, 2009 from 3.49% for the nine months ended September 30, 2008. 

 

Interest expense on fed funds purchased decreased by $12,000, or 92.3%, to $1,000 for the nine months ended September 30, 2009 from $13,000 for the nine months ended September 30, 2008. The average balance outstanding decreased by $402,000, or 69.6%, to $176,000 for the nine months ended September 30, 2009 from $578,000 for the nine months ended September 30, 2008. The            weighted-average rate decreased to 0.97% for the nine months ended September 30, 2009 from 3.10% for the nine months ended September 30, 2008. 

 

Interest expense on advances from the FHLB decreased $394,000, or 17.6%, to $1.8 million for the nine months ended September 30, 2009 from $2.2 million for the nine months ended September 30, 2008. The weighted average cost of funds increased to 3.87% for the nine months ended September 30, 2009 from 3.46% for the nine months ended September 30, 2008. The average balance            outstanding decreased $22.5 million, or 26.1%, to $63.7 million for the nine months ended September 30, 2009 from $86.3 million for the nine months ended September 30, 2008.

 

The provision for loan losses increased by $9.4 million to $10.3 million for the nine months ended September 30, 2009 from $930,000 over the same period in 2008 (see “Analysis of Allowance for Loan Losses” below).

 

Noninterest income increased 29.8%, or $364,000, to $1.6 million for the nine months ended September 30, 2009, from $1.2 million over the same period in 2008. Deposit account fees increased $15,000, or 3.1%, to $497,000 for the nine months ended September 30, 2009 from $482,000 for the same period in 2008. ATM fees increased $25,000, or 9.1%, to $299,000 for the nine months ended            September 30, 2009 from $274,000 for the nine months ended September 30, 2008 due to an increase in fees from increased use of debit cards. Commission income decreased $42,000 to $7,000 for the nine months ended September 30, 2009 from $49,000 for the nine months ended September 30, 2008. Gain on sale of loans increased $287,000, or 205.0%, to 

 

17

 

 

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$427,000 for the nine months ended September 30, 2009 from $140,000 for the nine months ended September 30, 2008 primarily due to one loan that was sold for a gain of $250,000. Gain on sale of other real estate owned increased by $140,000 to $151,000 for the nine months ended September 30, 2009 as compared to $11,000 during the nine months ended September 30, 2008. There were no investment gains or            losses during the nine months ended September 30, 2009 as compared to a $106,000 impairment loss on the Company’s investment in Triangle Capital Corporation for the nine months ended September 30, 2008. Income from bank owned life insurance decreased by $153,000, or 82.7%, to $32,000 for the nine months ended September 30, 2009 from $185,000 for the nine months ended September 30, 2008 due to a decrease in the crediting rate paid by the carriers, as well as surrender charges            incurred during the period due to a change in insurance carriers. Other income decreased $14,000 to $171,000 for the nine months ended September 30, 2009 from $185,000 for the nine months ended September 30, 2008 primarily due declines in income from the Company’s investment in Maryland Title Center LLC, as well as decreases in rental income and miscellaneous fees. 

 

Noninterest expense increased $775,000, or 10.3%, to $8.3 million for the nine month period ended September 30, 2009 from $7.5 million for the nine months ended September 30, 2008. Salaries and employee benefits decreased $87,000, or 1.8%, to $4.7 million for the nine months ended September 30, 2009 from $4.8 million over the same period in 2008 primarily due to declines in            supplemental executive retirement plan expense and bonuses. Equipment and data processing expenses decreased $84,000, or 8.4%, to $921,000 for the nine months ended September 30, 2009 from $1.0 million over the same period in 2008 due to decreased fees from the Company’s data service provider, a decrease in depreciation expense on furniture, fixtures, and equipment, and a decline in small equipment purchases. The FDIC insurance premium expense increased by $421,000, or 182.3%,            to $652,000 for the nine months ended September 30, 2009 from $231,000 for the nine months ended September 30, 2008 partially due to the significant increase in deposits over the period. Additionally, beginning in January 2009, the FDIC doubled the assessment rate for most insured institutions. In addition, the FDIC imposed a special assessment on all FDIC-insured institutions equal to 5 basis points of assets less Tier 1 capital as of June 30, 2009. For the bank, the special            assessment totaled $240,000. Other expenses increased $529,000, or 54.1%, to $1.5 million for the nine months ended September 30, 2009 from $978,000 million for the nine months ended September 30, 2008, primarily as a result of increases in other real estate owned expense due to an increase in the number of properties, as well as valuation adjustments resulting from the unstable real estate market. Legal fees have increased primarily due to increased collection efforts associated            with the increase in past due and other problem loans. 

 

Income tax benefit for the nine month period ended September 30, 2009 was $1.5 million as compared to income tax expense of $1.6 million for the same period in 2008, which equates to effective rates of 39.6% and 38.5% respectively. 

 

**Loans Receivable**

 

The Company’s lending activities are predominantly conducted in Cecil and Harford Counties in the State of Maryland. The following table shows the composition of the loan portfolio (in thousands) at the indicated dates.

 

 

|                                            |   | **September 30,** |    |   |   | **December 31,** |   |
|-------------------------------------------------|--------|-------------------|---------|--------|--------|------------------|--------|
|                                            |   | **2009**          |    |   |   | **2008**         |   |
|                                            |   | **Amount**        |    | **%**  |   |             |   | **Amount** |   | **%** |   |
| Type of Loan                                    |   |              |    |   |   |             |   |   |   |   |   |   |   |
| Real estate loans:                              |   |              |    |   |   |             |   |   |   |   |   |   |   |
| Construction loans                              |   | $                 | 98,043  |   | 22.60  | %                |   |   | $ | 103,407 |   | 25.34 | % |
| One- to four-family residential and home equity |   |              | 132,880 |   | 30.64  |             |   |   |   | 129,581 |   | 31.76 |   |
| Multi-family residential                        |   |              | 6,913   |   | 1.59   |             |   |   |   | 6,852 |   | 1.68 |   |
| Land                                            |   |              | 4,367   |   | 1.01   |             |   |   |   | 4,687 |   | 1.15 |   |
| Commercial                                      |   |              | 166,562 |   | 38.40  |             |   |   |   | 143,126 |   | 35.07 |   |
| Commercial business loans                       |   |              | 20,808  |   | 4.80   |             |   |   |   | 15,995 |   | 3.92 |   |
| Consumer loans                                  |   |              | 4,182   |   | 0.96   |             |   |   |   | 4,415 |   | 1.08 |   |
| Gross loans                                     |   |              | 433,755 |   | 100.00 | %                |   |   |   | 408,063 |   | 100.00 | % |
| Less: allowance for loan losses                 |   |              | (14,071 | )      |   |             |   |   |   | (6,314 | ) |   |   |
| Net loans receivable                            |   | $                 | 419,684 |   |   |             |   |   | $ | 401,749 |   |   |   |

 

 

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Management reviews and identifies loans and investments that require designation as nonperforming assets. Nonperforming assets are: loans accounted for on a non-accrual basis, loans past due by 90 days or more but still accruing, restructured loans, and other real estate (assets acquired in settlement of loans). The increase in nonperforming assets is a result of the consequences            of an unpredictable economy and an unstable financial and real estate market. 

 

The following table sets forth certain information with respect to nonperforming assets.

 

|                                                         |   | **September 30,** |   | **December 31,** |   |
|--------------------------------------------------------------|--------|-------------------|--------|------------------|--------|
| *(Dollars in thousands)*                                     |   | **2009**          |   | **2008**         |   |
| Nonaccrual loans and leases                                  |   | $                 | 28,175 |             | $      | 10,459 |   |
| Loans and leases 90 days or more past due                    |   |              | 0      |             |   | 0 |   |
| Restructured loans and leases                                |   |              | 9,067  |             |   | 0 |   |
| Total nonperforming loans and leases                         |   |              | 37,242 |             |   | 10,459 |   |
| Other real estate owned, net                                 |   |              | 5,268  |             |   | 2,843 |   |
| Total nonperforming assets                                   |   | $                 | 42,510 |             | $      | 13,302 |   |
| Nonperforming loans and leases to total loans                |   |              | 8.59   | %                |   | 2.56 | % |
| Nonperforming assets to total assets                         |   |              | 8.55   |             |   | 2.70 |   |
| Allowance for loan losses to non-performing loans and leases |   |              | 37.78  |             |   | 60.37 |   |

 

 

**Analysis of Allowance for Loan Losses**

 

The Bank records provisions for loan losses in amounts necessary to maintain the allowance for loan losses at the level deemed appropriate. The allowance for loan losses is provided through charges to income in an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible, based upon evaluations of the collectibility of loans            and prior loan loss experience. The allowance is based on careful, continuous review and evaluation of the credit portfolio and ongoing, quarterly assessments of the probable losses inherent in the loan portfolio. The Bank employs a systematic methodology for assessing the appropriateness of the allowance, which includes determination of a specific allowance, a formula allowance, and an unallocated allowance. During the first nine months of 2009, there were no changes in the            Bank’s methodology for assessing the appropriateness of the allowance.

 

Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss may be incurred in an amount different from the amount determined by application of the formula allowance. 

 

The formula allowance is calculated by applying loss factors to corresponding categories of outstanding loans, excluding loans for which specific allocations have been made. Allowances are established for credits that do not have specific allowances according to the application of these credit loss factors to groups of loans based upon (a) their credit risk rating, for loans            categorized as substandard or doubtful either by the Bank in its ongoing reviews or by bank examiners in their periodic examinations, or (b) by type of loans, for other credits without specific allowances. These factors are set by management to reflect its assessment of the relative level of risk inherent in each category of loans, based primarily on historical charge-off experience.

 

The unallocated allowance is based upon management’s evaluation of various conditions that are not directly measured in the determination of the specific and formula allowances. These conditions may include the nature and volume of the loan portfolio, overall portfolio quality, and current economic conditions that may affect the borrowers’ ability to pay. In addition to            these conditions, management has identified land acquisition and development loans, as well as construction speculation loans, as higher risk due to economic factors. Additionally, management has identified commercial business loans as higher risk based on the change in the nature and the volume of the portfolio over the last several periods. Therefore, management has allocated additional reserves to these two pools of loans over and above the specific and formula            allowances.

 

Determining the amount of the allowance for loan losses requires the use of estimates and assumptions, which is permitted under accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates. While management uses available information to estimate losses on loans, future additions to the allowance may be            necessary based on changes in economic conditions. In addition, as noted above, federal and state financial institution examiners, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses, and may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. 

 

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Management determined that the appropriate allowance for loan losses at September 30, 2009 was $14.0 million, (3.24% of total loans), an increase of $7.8 million (122.9%) from the $6.3 million allowance (1.55% of total loans) at December 31, 2008. Annualized net charge-offs for the first nine months of 2009 were 0.81% of average loans, as compared to net charge-offs of 0.05% of            average loans for the year 2008. The provision for loan losses required for the first nine months of 2009 and 2008 was $10.3 million and $930,000, respectively. The increase in the allowance and provision for loan losses is a result of the consequences of an unpredictable economy and an unstable financial and real estate market, which has led to an increase in nonperforming assets and charge-offs during the first nine months of 2009. Additional provisions have been added for several            development loans whose progress has slowed due to the slowdown in home sales. Management is anticipating that developers will have to carry projects for a longer period than anticipated. The Bank has added additional provisions based on the current condition of the economy. A now sustained period of slow home sales, higher unemployment, and increased delinquencies have been taken into consideration when reviewing the methodology. Management has determined that increased provisions            for all of these factors are necessary to reflect the losses within the portfolio as of the balance sheet date. 

 

A summary of activity in the allowance (in thousands) is shown below.

 

|                                             | **Nine Months**        |   |   | **Twelve Months** |   |
|--------------------------------------------------|------------------------|--------|--------|-------------------|--------|
|                                             | **Ended**              |   |   | **Ended**         |   |
|                                             | **September 30,** |   |   | **December 31,**  |   |
|                                             | **2009**               |   |   | **2008**          |   |
|                                             |                   |   |
|                                             |                   |   |   |              |   |   |   |
| Balance at beginning of period                   | $                      | 6,314  |   |              | $      | 3,109 |   |
| Charge-offs:                                     |                   |   |   |              |   |   |   |
| Real estate                                      |                   | (1,211 | )      |              |   | (189 | ) |
| Commercial                                       |                   | (1,903 | )      |              |   | (97 | ) |
| Consumer                                         |                   | (27    | )      |              |   | (42 | ) |
| Total charge-offs                                |                   | (3,141 | )      |              |   | (328 | ) |
| Recoveries:                                      |                   |   |   |              |   |   |   |
| Real estate                                      |                   | 3      |   |              |   | 0 |   |
| Commercial                                       |                   | 606    |   |              |   | 110 |   |
| Consumer                                         |                   | 9      |   |              |   | 18 |   |
| Total recoveries                                 |                   | 618    |   |              |   | 128 |   |
| Net charge-offs                                  |                   | (2,523 | )      |              |   | (200 | ) |
| Provision for loan losses                        |                   | 10,280 |   |              |   | 3,405 |   |
| Balance at end of period                         | $                      | 14,071 |   |              | $      | 6,314 |   |
| Net charge-offs to average loans                 |                   |   |   |              |   |   |   |
| outstanding during the period (annualized)       |                   | 0.81   | %      |              |   | 0.05 | % |
| Allowance for loan losses to loans               |                   | 3.24   |   |              |   | 1.55 |   |
| Allowance for loan losses to nonperforming loans |                   | 37.78  |   |              |   | 60.37 |   |

 

 

20

 

 

----

**Analysis of Deposits**

 

The following table sets forth the dollar amount of deposits (in thousands) in the various types of accounts offered by the Bank at the dates indicated.

 

|                        |   | **Balance at**    |    |         |   | **Balance at**   |   |         |   |
|-----------------------------|--------|-------------------|---------|--------------|--------|------------------|--------|--------------|--------|
|                        |   | **September 30,** |    | **%**        |   | **December 31,** |   | **%**        |   |
|                        |   | **2009**          |    | **Deposits** |   | **2008**         |   | **Deposits** |   |
|                        |   |              |    |
| Regular checking            |   | $                 | 23,477  |         | 6.32   | %                | $      | 19,510       |   | 5.35 | % |
| NOW accounts                |   |              | 25,380  |         | 6.84   |             |   | 20,219       |   | 5.55 |   |
| Passbook                    |   |              | 10,962  |         | 2.95   |             |   | 11,347       |   | 3.11 |   |
| Statement savings           |   |              | 9,730   |         | 2.62   |             |   | 8,550        |   | 2.35 |   |
| Money market                |   |              | 7,894   |         | 2.13   |             |   | 6,122        |   | 1.68 |   |
| Holiday club                |   |              | 283     |         | 0.08   |             |   | 81           |   | 0.02 |   |
| Certificates of Deposit     |   |              | 269,587 |         | 72.62  |             |   | 276,851      |   | 75.94 |   |
| IRA Certificates of Deposit |   |              | 17,928  |         | 4.83   |             |   | 14,757       |   | 4.05 |   |
| Money Market Certificates   |   |              | 5,981   |         | 1.61   |             |   | 7,114        |   | 1.95 |   |
|                        |   | $                 | 371,222 |         | 100.00 | %                | $      | 364,551      |   | 100.00 | % |

 

**Capital Adequacy**

 

Capital adequacy refers to the level of capital required to sustain asset growth and to absorb losses. The Board of Governors of the Federal Reserve System (“Federal Reserve”), which is the Bank’s principal federal regulator, has established requirements for total and tier 1 (core) risk-based capital and tier 1 leverage capital. The following table sets forth            applicable capital ratios of the Bank as of September 30, 2009 and December 31, 2008.

 

|                            |   |       |   |       |   | **Regulatory Minimum** |   |
|---------------------------------|--------|------------|--------|------------|--------|------------------------|--------|
|                            |   | **2009**   |   | **2008**   |   | **Well**               |   | **Adequately** |   |
|                            |   | **Actual** |   | **Actual** |   | **Capitalized**        |   | **Capitalized** |   |
|                            |   |       |   |       |   |                   |   |   |   |
| Total risk-based capital ratio  |   | 13.45%     |   | 14.64%     |   | 10.00%                 |   | 8.00% |   |
| Tier 1 risk-based capital ratio |   | 9.13%      |   | 10.24%     |   | 6.00%                  |   | 4.00% |   |
| Tier 1 leverage ratio           |   | 7.37%      |   | 8.64%      |   | 5.00%                  |   | 4.00% |   |

 

 

As of September 30, 2009 and December 31, 2008, the Bank exceeded all applicable capital requirements to be classified as a well capitalized institution under the rules promulgated by the Board of Governors of the Federal Reserve System. Designation as a well capitalized institution under these regulations does not constitute a recommendation or endorsement by the Bank’s            regulators.

 

| Item 3. | Quantitative and Qualitative Disclosures about Market Risk – |
|---------|--------------------------------------------------------------------|

 

|   | Not Applicable |
|--------|----------------|

 

| Item 4T. | Controls and Procedures – |
|----------|---------------------------------|

 

Cecil Bancorp’s management, under the supervision and with the participation of its Chief Executive Officer and its Chief Financial Officer, evaluated as of the last day of the period covered by this report, the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15 under the Securities Exchange Act of            1934. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There were no significant changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the quarter ended September 30, 2009, that have materially affected, or are reasonably likely to materially affect, the Company’s            internal control over financial reporting.

 

21

 

 

----

PART II.         OTHER INFORMATION

 

|   | Item 1. | Legal Proceedings - |
|--------|---------|---------------------|

|   | Not Applicable |
|--------|----------------|

 

|   | Item 1A. | Risk Factors - |
|--------|----------|----------------|

|   | Not Applicable |
|--------|----------------|

 

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

Not Applicable

 

|   | Item 3. | Defaults Upon Senior Securities - |
|--------|---------|-----------------------------------|

|   | Not Applicable |
|--------|----------------|

 

|   | Item 4. | Submission of Matters to a Vote of Security Holders - |
|--------|---------|-------------------------------------------------------|

|   | Not Applicable |
|--------|----------------|

 

|   | Item 5. | Other Information - |
|--------|---------|---------------------|

|   | Not Applicable |
|--------|----------------|

 

|   | Item 6. | Exhibits - |
|--------|---------|------------|

 

| **Exhibit No.** | **Description**                                                                                                                                                                                                                                              | **Incorporated by Reference to:**                                                                                                                                              |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             | Articles of Incorporation of Cecil Bancorp, Inc.                                                                                                                                                                                                             | Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2008                                                                                               |
| 3.2             | Bylaws of Cecil Bancorp, Inc.                                                                                                                                                                                                                                | Exhibit 3.2 to Annual Report on Form 10-KSB for the year ended December 31, 2000, SEC File No. 0-24926.                                                                        |
| 3.3

      | Articles Supplementary for Fixed Rate Cumulative Perpetual Preferred Stock, Series A                                                                                                                                                                    | Exhibit 3.1 to Current Report on Form 8-K filed December 23, 2008.                                                                                                             |
| 4.1             | Form of Common Stock Certificate                                                                                                                                                                                                                             | Exhibit 4 to Registration Statement on Form S-1 (File No. 33-81374)                                                                                                            |
| 4.2             | Form of Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A                                                                                                                                                                       | Exhibit 4.1 to Current Report on Form 8-K filed December 23, 2008.                                                                                                             |
| 4.3             | Warrant for Purchase of Shares of Common Stock                                                                                                                                                                                                               | Exhibit 4.2 to Current Report on Form 8-K filed December 23, 2008.                                                                                                             |
| 4.4             | Amended and Restated Trust Agreement, dated as of March 23, 2006, among Cecil Bancorp, Inc., as depositor, Wilmington Trust Company, as property and Delaware Trustee, and Charles F. Sposato, Mary B. Halsey and Jennifer Carr, as administrative trustees. | Not filed in accordance with the provisions of Item 601(b)(4)(iii) of Regulation S-K. The Registrant agrees to provide a copy of this document to the Commission upon request. |
| 4.5             | Junior Subordinated Indenture, dated as of March 23, 2006 between Cecil Bancorp, Inc. and Wilmington Trust Company, as Trustee.                                                                                                                              | Not filed in accordance with the provisions of Item 601(b)(4)(iii) of Regulation S-K. The Registrant agrees to provide a copy of this document to the Commission upon request. |
| 4.6             | Guarantee Agreement, dated as of March 23, 2006, between Cecil Bancorp, Inc., as Guarantor, and Wilmington Trust Company, as Guarantee Trustee.                                                                                                              | Not filed in accordance with the provisions of Item 601(b)(4)(iii) of Regulation S-K. The Registrant agrees to provide a copy of this document to the Commission upon request. |

 

 

22

 

 

----

 

| 4.7 | Amended and Restated Declaration of Trust, dated as of November 30, 2006 by and among Wilmington Trust Company, as Delaware and institutional trustee, Cecil Bancorp, Inc., as sponsor, and Charles F. Sposato, Mary B. Halsey and Jennifer Carr, as administrators. | Exhibit 10.3 to Current Report on Form 8-K filed December 4, 2006. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------|
| 4.8 | Indenture, dated as of November 30, 2006, between Cecil Bancorp, Inc. and Wilmington Trust Company, as trustee.                                                                                                                                                      | Exhibit 10.1 to Current Report on Form 8-K filed December 4, 2006. |
| 4.9 | Guarantee Agreement, dated as of November 30, 2006, between Cecil Bancorp, Inc., as Guarantor, and Wilmington Trust Company, as Guarantee Trustee.                                                                                                                   | Exhibit 10.4 to Current Report on Form 8-K filed December 4, 2006. |
| 31  | Rule 13a-14(a)/15d-14(a) Certifications                                                                                                                                                                                                                              |                                                               |
| 32  | 18 U.S.C. Section 1350 Certifications                                                                                                                                                                                                                                |                                                               |

 

 

 

23

 

 

----

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.

 

 

 

|                                               |   | CECIL BANCORP, INC. |
|----------------------------------------------------|--------|---------------------|
|  

 

Date:  November 13, 2009 |   | By:                 | /s/ Mary B. Halsey |
|                                               |   |                | Mary B. Halsey

President and Chief Executive Officer

(Duly Authorized Officer |
|  

 

Date:  November 13, 2009 |   | By:                 | /s/ Robert Lee Whitehead |
|                                               |   |                | Robert Lee Whitehead

Vice President and Chief Financial Officer(Principal Financial and Accounting Officer) |

 

 

24