SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB

| | QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
        OF 1934
| | -------------------------------------------------------------------------------------------------------
| | For
        the quarterly period ended September 30, 2006.                                             

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(State or other jurisdiction ofincorporation or organization) |  | 52-1883546(I.R.S. EmployerIdentification Number) | 
| | --------------------------------------------------------------------- |  | ------------------------------------------------ | 

| |  |  |  | 
| |  |  |  | 

| | 127 North Street, Elkton, Maryland(Address of principal executive office) |  | 21921-5547(Zip Code) | 
| | ------------------------------------------------------------------------- |  | -------------------- | 

Registrants telephone number, including area code: (410) 398-1650

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes          
  No

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

Yes          
  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.

1,839,143






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CECIL BANCORP, INC. AND SUBSIDIARIES

CONTENTS



PAGEPART I.

        

        FINANCIAL INFORMATIONITEM 1.

        

        Financial Statements (unaudited)Consolidated Balance Sheets - September 30, 2006 and December 31, 2005

        3Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2006 and 2005

        4-5Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005

        6Notes to Consolidated Financial Statements

        7-9ITEM 2.

        

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

        10-18ITEM 3.

        

        Controls and Procedures

        18PART II.

        

        OTHER INFORMATION

        19SIGNATURES

        

        

        20CERTIFICATIONS

        

        

        21-24


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PART I. FINANCIAL INFORMATION

CECIL BANCORP, INC. AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)



September 30,2006


      

        December 31,2005(Unaudited)ASSETS:Cash and due from banks


      


      $


      1,347


      


      $


      1,317Interest bearing deposits with banks

        

        

        1,494

        

        

        4,378Investment securities:Securities available-for-sale at fair value

        

        

        2,240

        

        

        2,187Securities held-to-maturity (fair value of $3,692 in 2006 and $3,735 in 2005)

        

        

        3,689

        

        

        3,735Restricted investment securities  at cost

        

        

        2,839

        

        

        2,607Loans receivable

        

        

        281,111

        

        

        235,045Less: allowance for loan losses

        

        

        (1,895

        )

        

        (1,738

        )Net loans receivable

        

        

        279,216

        

        

        233,307Other real estate owned

        

        

        

        

        

        385Premises and equipment  net of accumulated depreciation

        

        

        9,181

        

        

        9,253Accrued interest receivable

        

        

        1,455

        

        

        1,146Goodwill

        

        

        2,182

        

        

        2,182Other intangible assets

        

        

        187

        

        

        154Bank owned life insurance

        

        

        5,867

        

        

        5,030Other assets

        

        

        1,971

        

        

        1,142TOTAL ASSETS

        

        $

        311,668

        

        $

        266,823LIABILITIES:Deposits

        

        $

        229,330

        

        $

        198,207Other liabilities

        

        

        2,599

        

        

        1,760Guaranteed preferred beneficial interest in junior subordinated debentures

        

        

        10,000

        

        

        Advances from Federal Home Loan Bank of Atlanta

        

        

        46,043

        

        

        44,914Total liabilities

        

        

        287,972

        

        

        244,881STOCKHOLDERS EQUITY:Common stock, $.01 par value; authorized 4,000,000 shares, issued and outstanding 1,821,139 shares in 2006 and 1,768,082 shares in 2005

        

        

        18

        

        

        18Additional paid in capital

        

        

        11,466

        

        

        10,578Retained earnings

        

        

        12,238

        

        

        11,372Accumulated other comprehensive loss, net

        

        

        (26

        )

        

        (26

        )Total stockholders equity

        

        

        23,696

        

        

        21,942TOTAL LIABILITIES AND STOCKHOLDERS EQUITY

        

        $

        311,668

        

        $

        266,823


See accompanying notes to consolidated financial statements.

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CECIL
  BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

(dollars in thousands, except per share data)



Three Months Ended September 30,


      

        Nine Months Ended September 30,2006


      

        2005


      

        2006


      

        2005INTEREST INCOME:Interest and fees on loans


      


      $


      5,661


      


      $


      3,822


      


      $


      15,137


      


      $


      10,360Interest on investment securities

        

        

        72

        

        

        51

        

        

        200

        

        

        131Dividends on FHLB and FRB stock

        

        

        43

        

        

        23

        

        

        101

        

        

        72Other interest-earning assets

        

        

        10

        

        

        6

        

        

        34

        

        

        20Total interest income

        

        

        5,786

        

        

        3,902

        

        

        15,472

        

        

        10,583INTEREST EXPENSE:Interest expense on deposits

        

        

        1,910

        

        

        1,103

        

        

        5,362

        

        

        2,833Guaranteed preferred beneficial interest in junior subordinated debentures

        

        

        166

        

        

        

        

        

        345

        

        

        Interest expense on advances from FHLB

        

        

        647

        

        

        422

        

        

        1,402

        

        

        1,045Total interest expense

        

        

        2,723

        

        

        1,525

        

        

        7,109

        

        

        3,878NET INTEREST INCOME

        

        

        3,063

        

        

        2,377

        

        

        8,363

        

        

        6,705PROVISION FOR LOAN LOSSES

        

        

        130

        

        

        110

        

        

        345

        

        

        170NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

        

        

        2,933

        

        

        2,267

        

        

        8,018

        

        

        6,535NONINTEREST INCOME:Checking account fees

        

        

        139

        

        

        118

        

        

        394

        

        

        335ATM fees

        

        

        22

        

        

        23

        

        

        69

        

        

        65Commission income

        

        

        33

        

        

        26

        

        

        53

        

        

        76Gain on sale of loans

        

        

        19

        

        

        13

        

        

        74

        

        

        77Loss on sale of other real estate owned

        

        

        (43

        )

        

        0

        

        

        (43

        )

        

        0Income from bank owned life insurance

        

        

        98

        

        

        98

        

        

        187

        

        

        200Other

        

        

        68

        

        

        52

        

        

        166

        

        

        75Total noninterest income

        

        

        336

        

        

        330

        

        

        900

        

        

        828NONINTEREST EXPENSE:Salaries and employee benefits

        

        

        1,267

        

        

        1,112

        

        

        3,637

        

        

        2,942Occupancy expense

        

        

        147

        

        

        125

        

        

        447

        

        

        334Equipment and data processing expense

        

        

        227

        

        

        209

        

        

        639

        

        

        559Other

        

        

        287

        

        

        241

        

        

        973

        

        

        805Total noninterest expense

        

        

        1,928

        

        

        1,687

        

        

        5,696

        

        

        4,640INCOME BEFORE INCOME TAXES

        

        

        1,341

        

        

        910

        

        

        3,222

        

        

        2,723INCOME TAX EXPENSE

        

        

        487

        

        

        317

        

        

        1,189

        

        

        985NET INCOME

        

        $

        854

        

        $

        593

        

        $

        2,033

        

        $

        1,738


See accompanying notes to consolidated financial statements.

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CECIL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

(dollars in thousands, except per share data)

(Continued)



Three Months Ended September 30,


      

        Nine Months Ended September 30,2006


      

        2005


      

        2006


      

        2005NET INCOME


      


      $


      854


      


      $


      593


      


      $


      2,033


      


      $


      1,738OTHER COMPREHENSIVE INCOMEUnrealized
          gains (losses) on investment securities, net of deferred taxes

        

        

        12

        

        

        (10

        )

        


      

        

        

        (17

        )TOTAL COMPREHENSIVE INCOME

        

        $

        866

        

        $

        583

        

        $

        2,033

        

        $

        1,721Earnings per common share - basic

        

        $

        0.46

        

        $

        0.35

        

        $

        1.11

        

        $

        1.02Earnings per common share - diluted

        

        $

        0.46

        

        $

        0.35

        

        $

        1.10

        

        $

        1.02Dividends declared per common share

        

        $

        0.05

        

        $

        0.05

        

        $

        0.15

        

        $

        0.15


See accompanying notes to consolidated financial statements.

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CECIL
  BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED
  STATEMENTS OF CASH FLOWS (UNAUDITED)

(dollars in thousands)



Nine
          Months Ended September 30,2006
      
      2005CASH
          FLOWS FROM OPERATING ACTIVITIES:Net
          income
      
      $
      2,033
      
      $
      1,738Adjustments
          to reconcile net income to net cash provided by operating activities:Depreciation
          and amortization
      
      
      249
      
      
      229Provision
          for loan losses
      
      
      345
      
      
      170Gain
          on sale of loans
      
      
      (74
      )
      
      (77
      )Loss
          on disposal of premises and equipment
      
      
      1
      
      
      11Loss
          on sale of other real estate owned
      
      
      43
      
      
      Increase
          in cash surrender value of bank owned life insurance
      
      
      (187
      )
      
      (200
      )Excess
          servicing rights
      
      
      (55
      )
      
      (32
      )Reinvested
          dividends on investments
      
      
      (70
      )
      
      (55
      )Origination
          of loans held for sale
      
      
      (4,110
      )
      
      (2,575
      )Proceeds
          from sales of loans held for sale
      
      
      4,141
      
      
      2,625Net
          change in:Accrued
          interest receivable and other assets
      
      
      (836
      )
      
      (95
      )Other
          liabilities
      
      
      537
      
      
      68Net
          cash provided by operating activities
      
      
      2,017
      
      
      1,807CASH
          FLOWS FROM INVESTING ACTIVITIES:Purchases
          of investment securities held-to-maturity
      
      
      (7,328
      )
      
      (7,139
      )Net
          purchases of stock in Federal Home Loan Bank
      
      
      (232
      )
      
      (196
      )Proceeds
          from sales, maturities, calls and principal payments of investment securities
          available-for-sale
      
      
      17
      
      
      23Proceeds
          from maturities, calls and principal payments of investment securities
          held-to-maturity
      
      
      7,500
      
      
      7,000Net
          increase in loans
      
      
      (46,209
      )
      
      (41,567
      )Proceeds
          from sales of other real estate owned
      
      
      341
      
      
      Purchases
          of bank owned life insurance
      
      
      (650
      )
      
      (650
      )Purchases
          of premises and equipment - net
      
      
      (283
      )
      
      (3,151
      )Net
          cash used in investing activities
      
      
      (46,844
      )
      
      (45,680
      )CASH
          FLOWS FROM FINANCING ACTIVITIES:Net
          increase in deposits
      
      
      31,124
      
      
      46,822Net
          increase in guaranteed preferred beneficial interest in junior subordinated
          debentures
      
      
      10,000
      
      
      Proceeds
          from issuance of common stock
      
      
      
      
      
      78Net
          increase in advances from Federal Home Loan Bank
      
      
      1,128
      
      
      2,129Payments
          of cash dividends
      
      
      (279
      )
      
      (245
      )Net
          cash provided by financing activities
      
      
      41,973
      
      
      48,784(DECREASE)
          INCREASE IN CASH AND CASH EQUIVALENTS
      
      
      (2,854
      )
      
      4,911CASH
          AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
      
      
      5,695
      
      
      4,234CASH
          AND CASH EQUIVALENTS AT END OF PERIOD
      
      $
      2,841
      
      $
      9,145Supplemental
          disclosures of cash flows information:Cash
          paid for income taxes
      
      $
      1,885
      
      $
      1,013Cash
          paid for interest
      
      $
      7,137
      
      $
      3,832Real
          estate acquired in satisfaction of loans
      
      $
      
      
      $
      385


See accompanying notes to consolidated financial statements.

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CECIL
  BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

1.

        GENERAL


In the opinion of 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, 2006 and the results of its operations and cash flows for the three and nine months ended September 30, 2006 and 2005. 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-KSB for the year ended December 31, 2005. The results of operations for the three and nine months ended September 30, 2006 are not necessarily indicative of
the results to be expected for the full year.

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, employee benefit plans, and contingencies, among others. Actual results could differ from those estimates.

3.

        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, 2006 and 2005, there were no options excluded from the diluted earnings per share calculation. All earnings per share calculations have been adjusted to give retroactive effect to the 1% stock dividends approved by the Board of Directors on December 20, 2005, March 14, 2006, May 23, 2006, and August 22, 2006.



Three Months Ended September 30,


      

        Nine Months Ended September 30,2006


      

        2005


      

        2006


      

        2005____Basic:Net income available to common stockholders

        

        $

        854,000

        

        $

        593,000

        

        $

        2,033,000

        

        $

        1,738,000Average common shares outstanding

        

        

        1,839,350

        

        

        1,707,623

        

        

        1,839,350

        

        

        1,706,114Basic earnings per common share

        

        $

        0.46

        

        $

        0.35

        

        $

        1.11

        

        $

        1.02Diluted:Net income available to common stockholders

        

        $

        854,000

        

        $

        593,000

        

        $

        2,033,000

        

        $

        1,738,000Average common shares outstanding

        

        

        1,839,350

        

        

        1,707,623

        

        

        1,839,350

        

        

        1,706,114Stock option adjustment

        

        

        2,605

        

        

        4,041

        

        

        2,579

        

        

        4,332Average common shares outstanding  diluted

        

        

        1,841,955

        

        

        1,711,664

        

        

        1,841,929

        

        

        1,710,446Diluted earnings per common share

        

        $

        0.46

        

        $

        0.35

        

        $

        1.10

        

        $

        1.02


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4.

        FAIR VALUE ACCOUNTING FOR STOCK PLANS


The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123(R),Share-Based Payment, under the prospective method on January 1, 2006. Among other things, SFAS 123(R) eliminates the ability to account for stock-based compensation using Accounting Principles Board (APB) No. 25 and requires such transactions to be recognized as compensation cost in the income statement based on their fair value on the date of grant.

Prior to January 1, 2006, the Company accounted for its stock-based compensation plan based on the intrinsic value method set forth in APB Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations. Compensation expense for stock options is generally not recognized if the exercise price of the option equals or exceeds the fair market value of the stock on the date of the grant. The exercise price for all options granted was equal to the market price of the common stock at the date of the grant, and accordingly, no compensation expense related to options was recognized.

The Company has not granted any options during the three and nine months ended September 30, 2006 and 2005. All outstanding options have been fully vested since January 1, 2005.          A summary of the Companys stock option activity, and related information for the periods indicated is as follows:



Nine
          months endedSeptember 30, 2006
      
      Year
          endedDecember 31, 2005Shares
      
      Weighted-AverageExercise Price
      
      Shares
      
      Weighted-AverageExercise PriceOutstanding
          at beginning of period
      
      10,228
      
      $
      10.57
      
      10,228
      
      $
      10.57Granted
      
      
      
      
      
      
      
      
      
      Exercised
      
      
      
      
      
      
      
      
      
      Canceled/expired
      
      (1,668
      )
      
      5.34
      
      
      
      
      Outstanding
          at end of period
      
      8,560
      
      $
      11.58
      
      10,228
      
      $
      10.57Options
          exercisable at end of period
      
      8,560
      
      $
      11.58
      
      10,228
      
      $
      10.57


The following table summarizes information about stock options outstanding at September 30, 2006:



Options Outstandingand ExercisableExercisePrice


      


      NumberOutstanding


      


      Life(Years)5.29


      


      544


      


      0.112.01

        

        8,016

        

        2.5


5.

        GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED DEBENTURES


In March 2006, the Company formed a wholly-owned subsidiary, Cecil Bancorp Capital Trust I (the Trust). On March 23, 2006, the Trust sold $10.0 million of trust preferred securities in a private placement. The Trust used the proceeds to purchase $10.3 million of the Companys 30-year junior subordinated debentures. The trust preferred securities and the junior subordinated debentures bear interest at a fixed rate of 6.51% for five years and then at a variable rate, which resets quarterly, of 3-month LIBOR plus 1.38%. Interest is cumulative and payable quarterly in arrears. The trust preferred securities and the junior subordinated debentures mature March 23, 2036 and are callable at par after five years. The trust preferred securities, classified on the balance sheet as guaranteed preferred beneficial interest in junior subordinated debentures,
qualify as Tier 1 capital for regulatory purposes, subject to applicable limits. The Company used the proceeds to increase the regulatory capital of the Bank and for other corporate purposes.

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6

        RECENT ACCOUNTING PRONOUNCEMENTS


SFAS No. 154, Accounting Changes and Error Corrections, a Replacement of APB Opinion No. 20 and FASB Statement No. 3.  SFAS 154 establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to a newly adopted accounting principle. Previously, most changes in accounting principle were recognized by including the cumulative effect of changing to the new accounting principle in net income of the period of the change. Under SFAS 154, retrospective application requires (i) the cumulative effect of the change to the new accounting principle on periods prior to those presented to be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented, (ii) an offsetting adjustment, if any, to be made to
the opening balance of retained earnings (or other appropriate components of equity) for that period, and (iii) financial statements for each individual prior period presented to be adjusted to reflect the direct period-specific effects of applying the new accounting principle. Special retroactive application rules apply in situations where it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Indirect effects of a change in accounting principle are required to be reported in the period in which the accounting change is made. SFAS 154 carries forward the guidance in APB Opinion 20 Accounting Changes, requiring justification of a change in accounting principle on the basis of preferability. SFAS 154 also carries forward without change the guidance contained in APB Opinion 20 for reporting the correction of an error in previously issued financial statements and for a change in an accounting estimate. SFAS 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS 154 did not significantly impact the Companys financial statements.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, and amendment of SFAS No. 133 and SFAS No. 140. This statement permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. It establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. In addition, SFAS 155 clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133. It also clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. SFAS 155 amends Statement 140 to eliminate the prohibition on a qualifying
special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This Statement is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. The Company is evaluating the impact, if any, of the adoption of this Statement on its financial results.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets.  This Statement amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable, and permits the entities to elect either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of SFAS No. 140 for subsequent measurement. The subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value eliminates the necessity for entities that manage the risks inherent in servicing assets and servicing liabilities with derivatives to qualify for hedge accounting treatment and eliminates
the characterization of declines in fair value as impairments or direct write-downs. This Statement is effective as of the beginning of an entitys first fiscal year that begins after September 15, 2006. The Company is evaluating the impact, if any, of the adoption of this Statement on its financial results.

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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, 2006

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 Federal Bank (Cecil Federal or the Bank). The Company is a bank holding company 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 System and the Federal Home Loan Bank (FHLB) of Atlanta, and is an Equal Housing Lender. Its deposits are insured by the Savings Association Insurance Fund (SAIF) 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.

Cecil Federal conducts its business though its main office in Elkton, Maryland, and branches in Elkton, North East, Rising Sun, Cecilton, Aberdeen, Conowingo, and Havre de Grace, Maryland.

Cecil Federal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. Cecil Federal 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. Cecil Federal offers a full range of brokerage and investment services through a relationship with Community Bankers Securities, LLC.

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.

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Comparison of Financial Condition at September 30, 2006 and December 31, 2005

The Companys assets increased by $44.8 million, or 16.8%, to $311.7 million at September 30, 2006 from $266.8 million at December 31, 2005, primarily as a result of increases in loans receivable, bank-owned life insurance, and other assets. This increase was funded by increases in deposits, the guaranteed preferred beneficial interest in junior subordinated debentures, and advances from the Federal Home Loan Bank of Atlanta, as well as a decrease in cash and cash equivalents. Interest-bearing deposits decreased by $2.9 million to $1.5 million at September 30, 2006 from $4.4 million at December 31, 2005 primarily to fund growth in the loan portfolio. Restricted investment securities, which consist of Federal Home Loan and Federal Reserve Bank stock, increased by $232,000 to $2.8 million at September 30, 2006 from $2.6 million at December 31, 2005 as a result of the
increase in advances from the FHLB.

The loans receivable portfolio increased by $46.1 million, or 19.6%, to $281.1 million at September 30, 2006 from $235.0 million at December 31, 2005, primarily as a result of increased marketing efforts of our business development and loan departments. During the period, we realized a $30.3 million (66.8%) increase in commercial real estate loans, a $7.8 million (9.0%) increase in one-to-four family residential mortgages, and a $6.9 million (10.3%) increase in commercial business loans. The allowance for loan losses increased by $157,000, or 9.0%, to $1.9 million at September 30, 2006 from $1.7 million at December 31, 2005 (see Analysis of Allowance for Loan Losses below).

Other real estate owned decreased by $385,000, or 100%, due to the sale of a property originally acquired during the third quarter of 2005 in satisfaction of a loan receivable. Bank owned life insurance increased $837,000, or 16.6%, to $5.9 million at September 30, 2006 from $5.0 million at December 31, 2005 due to an additional investment of $650,000 during the second quarter of 2006 and an increase of $187,000 in the cash surrender value. Other assets increased $829,000 to $2.0 million at September 30, 2006 from $1.1 million at December 31, 2005 due to the payment of the final capital call for the Companys investment in Triangle Capital Partners, as well as an increase in prepaid income taxes after payments of $1.9 million during the period.

The Companys liabilities increased $43.1 million, or 17.6%, to $288.0 million at September 30, 2006 from $244.9 million at December 31, 2005. Deposits increased $31.1 million, or 15.7%, to $229.3 million at September 30, 2006 from $198.2 million at December 31, 2005. This increase was primarily a result of marketing campaigns and product specials focused on local core funding. Increases of $32.9 million (26.6%) in certificates of deposit, $857,000 (11.1%) in money market certificates, and $734,000 (4.3%) in regular checking accounts, were offset in part by a $2.6 million (19.6%) decline in NOW accounts and a $1.2 million (19.3%) decline in money market accounts. Other liabilities increased $839,000, or 47.7%, to $2.6 million at September 30, 2006 from $1.8 million at December 31, 2005 primarily due to increases in the supplemental executive retirement plan liability,
accrued payroll expense, and dividends payable, partially offset by a decrease in accrued interest on FHLB advances. The $10.0 million in guaranteed preferred beneficial interest in junior subordinated debentures was issued in March 2006 (see note 5 to the consolidated financial statements). Advances from the Federal Home Loan Bank of Atlanta increased $1.1 million, or 2.5%, to $46.0 million at September 30, 2006 from $44.9 million at December 31, 2005 to complement deposits and the junior subordinated debentures in funding the loans receivable portfolio.

The Companys stockholders equity increased by $1.8 million, or 8.0%, to $23.7 million at September 30, 2006 from $21.9 million at December 31, 2005. The increase was primarily the result of net income of $2.0 million, partially offset by the Companys regular dividend of $0.15 per share, or $279,000, for the nine months ended September 30, 2006.

Comparison of Results of Operations for the Three Months Ended September 30, 2006 and 2005

Net income for the three month period ended September 30, 2006 increased $261,000, or 44.0%, to $854,000 as compared to net income of $593,000 for the same period in 2005. This increase was primarily the result of increases in net interest income and noninterest income, partially offset by increases in the provision for loan losses, noninterest expense, and income tax expense. Basic and diluted earnings per share both increased by 31.4% to $0.46 for the third quarter of 2006 from $0.35 over the same period in 2005. The earnings per share calculations have been adjusted to give retroactive effect to the 1% stock dividends approved by the Board of Directors on December 20, 2005, March 14, 2006, May 23, 2006 and August 22, 2006. The annualized return on average assets and annualized return on average equity were 1.12% and 14.60%, respectively, for the three-month period ended
September 30, 2006. This compares to an annualized return on average assets and annualized return on average equity of 0.99% and 12.02%, respectively, for the same period in 2005.

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Net interest income, the Companys primary source of income, increased 28.9%, or $686,000, to $3.1 million for the three months ended September 30, 2006, from $2.4 million over the same period in 2005. The weighted average yield on interest earning assets increased to 8.17% for the three months ended September 30, 2006 from 7.11% for the three months ended September 30, 2005. The weighted average rate paid on interest bearing liabilities increased to 4.15% for the three months ended September 30, 2006 from 3.02% for the three months ended September 30, 2005. The weighted average yield earned and the weighted average rate paid increased due to the increase in general market rates. The weighted average rate paid on interest bearing liabilities has increased more rapidly, as the Company has increased rates on deposits in an attempt to gain market share. As a result, the
interest rate spread and the net interest margin have decreased to 4.02% and 4.32%, respectively, for the quarter ended September 30, 2006 from 4.09% and 4.33%, respectively, for the quarter ended September 30, 2005.

Interest and fees on loans receivable increased by $1.8 million, or 48.1%, to $5.7 million for the three months ended September 30, 2006 from $3.8 million for the three months ended September 30, 2005. The increase is attributable to increases in the average balance outstanding and the weighted-average yield. The average balance outstanding increased by $64.2 million to $272.2 million for the three months ended September 30, 2006 from $208.0 million for the three months ending September 30, 2005. The weighted-average yield increased to 8.32% for the three months ended September 30, 2006 from 7.35% for the three months ended September 30, 2005.

Interest income on investment securities increased $21,000, or 41.2%, to $72,000 for the three months ended September 30, 2006 from $51,000 for the three months ended September 30, 2005. The average balance outstanding increased $48,000 to $5.9 million for the three months ended September 30, 2006 from $5.8 million for the three months ended September 30, 2005. The weighted-average yield increased to 4.89% for the three months ended September 30, 2006 from 3.47% for the three months ended September 30, 2005.

Dividends on Federal Reserve and Federal Home Loan Bank stock increased $20,000, or 87.0%, to $43,000 for the three months ended September 30, 2006 from $23,000 for the three months ended September 30, 2005. The average balance outstanding increased $321,000 to $2.9 million for the three months ended September 30, 2006 from $2.6 million for the three months ended September 30, 2005. The weighted-average yield increased to 5.89% for the three months ended September 30, 2006 from 3.50% for the three months ended September 30, 2005.

Interest income on other earning assets increased $4,000, or 66.7%, to $10,000 for the three months ended September 30, 2006 from $6,000 for the three months ended September 30, 2005. The average balance outstanding decreased $750,000 to $2.4 million for the three months ended September 30, 2006 from $3.2 million for the three months ended September 30, 2005. The weighted-average yield increased to 1.67% for the three months ended September 30, 2006 from 0.81% for the three months ended September 30, 2005.

Interest expense on deposits increased $807,000, or 73.2%, to $1.9 million for the three months ended September 30, 2006 from $1.1 million for the three months ended September 30, 2005. The average balance outstanding on interest bearing deposits increased $47.3 million, or 29.9%, to $205.4 million for the three months ended September 30, 2006 from $158.1 million for the same period in 2005. The weighted-average rate paid on interest bearing deposits increased to 3.72% for the three months ended September 30, 2006 from 2.79% for the three months ended September 30, 2005.

Interest expense on the guaranteed preferred beneficial interest in junior subordinated debentures issued in March 2006 was $166,000. The average balance outstanding for the three months ended September 30, 2006 was $10.0 million and the weighted-average rate was 6.65%.

Interest expense on advances from the FHLB increased $225,000, or 53.3%, to $647,000 for the three months ended September 30, 2006 from $422,000 for the three months ended September 30, 2005. The average balance outstanding increased $3.4 million to $47.1 million for the three months ended September 30, 2006 from $43.7 million for the three months ended September 30, 2005. The weighted average rate increased to 5.49% for the three months ended September 30, 2006 from 3.87% for the three months ended September 30, 2005.

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Noninterest income increased 1.8%, or $6,000, for the three months ended September 30, 2006, over the same period in 2005. Checking account fees increased $21,000, or 17.8%, primarily due to growth in the deposit portfolio. Commission income increased $7,000, or 26.9%, to $33,000 for the three months ended September 30, 2006 from $26,000 for the three months ended September 30, 2005. Gain on sale of loans increased 46.2%, or $6,000, to $19,000 for the three months ended September 30, 2006 as compared to $13,000 over the same period in 2005. A $43,000 loss on sale of other real estate owned was recognized for the three months ended September 30, 2006 as the result of the sale of one property acquired in the third quarter of 2005. Other income increased $16,000 to $68,000 for the three months ended September 30, 2006 from $52,000 for the three months ended September 30, 2005.
This increase is primarily due to an increase in income from the Companys investment in Triangle Capital Partners, partially offset by a decrease in rental income.

Noninterest expense increased $241,000, or 14.3%, for the three months ended September 30, 2006, over the same period in 2005. Salaries and employee benefits increased $155,000, or 13.9%, to $1.3 million for the three months ended September 30, 2006 as compared to $1.1 million over the same period in 2005. This increase is attributable to the hiring of additional employees for the new branches, as well as increased sales and administrative staff, annual merit increases, and an increase in the supplemental executive retirement plan expense. Occupancy expense increased $22,000, or 17.6%, to $147,000 for the three months ended September 30, 2006 from $125,000 for the three months ended September 30, 2005 due to the depreciation of the Aberdeen branch that opened in the fourth quarter of 2005, as well as an increase in utilities expense. Equipment and data processing expenses
increased $18,000, or 8.6%, to $227,000 for the three months ended September 30, 2006 from $209,000 for the three months ended September 30, 2005 due to an increase in fees for the Companys data service provider. Other expenses increased $46,000, or 19.1%, to $287,000 for the three months ended September 30, 2006 from $241,000 for the three months ended September 30, 2005, primarily as a result of increases in legal and accounting fees, loan expenses, and supplies expense, partially offset by a decrease in collection expense.

Income tax expense for the three-month period ended September 30, 2006 and 2005 was $487,000 and $317,000, respectively, which equates to effective rates of 36.3% and 34.8% respectively.

Comparison of Results of Operations for the Nine Months Ended September 30, 2006 and 2005

Net income for the nine month period ended September 30, 2006 increased $295,000, or 17.0%, to $2.0 million, compared to net income of $1.7 million for the same period in 2005. This increase is primarily the result of increases in net interest income and noninterest income, partially offset by increases in the provision for loan losses, noninterest expense and income tax expense. Basic earnings per share increased by 8.8% to $1.11 for the first nine months of 2006 from $1.02 for the same period in 2005. Diluted earnings per share increased by 7.8% to $1.10 for the first nine months of 2006 from $1.02 for the same period in 2005. The earnings per share calculations have been adjusted to give retroactive effect to the 1% stock dividends approved by the Board of Directors on December 20, 2005, March 14, 2006, May 23, 2006 and August 22, 2006. The annualized return on average
assets and annualized return on average equity were 0.95% and 11.88%, respectively, for the nine month period ended September 30, 2006. This compares to an annualized return on average assets and annualized return on average equity of 1.04% and 12.08%, respectively, for the same period in 2005.

Net interest income, the Companys primary source of income, increased 24.7%, or $1.7 million, to $8.4 million for the nine months ended September 30, 2006, from $6.7 million over the same period in 2005. The weighted-average yield on interest earning assets increased to 7.79% for the nine months ended September 30, 2006 from 6.87% for the nine months ended September 30, 2005. The weighted average rate paid on interest bearing liabilities increased to 3.89% for the nine months ended September 30, 2006 from 2.77% for the nine months ended September 30, 2005. The weighted average yield earned and the weighted average rate paid increased due to the increase in general market rates. The weighted average rate paid on interest bearing liabilities increased more rapidly, as the Company has increased rates on deposits in an attempt to gain market share. As a result, the interest
rate spread and the net interest margin decreased to 3.90% and 4.21%, respectively, for the nine-month period ended September 30, 2006 from 4.10% and 4.35%, respectively, for the same period in 2005.

Interest and fees on loans receivable increased by $4.8 million, or 46.1%, to $15.1 million for the nine months ended September 30, 2006 from $10.4 million for the nine months ended September 30, 2005. The average balance outstanding increased $59.4 million, or 30.6%, to $253.6 million for the nine months ended September 30, 2006 from $194.2 million for the nine months ended September 30, 2005. The weighted-average yield increased to 7.96% for the nine months ended September 30, 2006 from 7.11% for the nine months ended September 30, 2005.

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Interest income on investment securities increased $69,000, or 52.7%, to $200,000 for the nine months ended September 30, 2006 from $131,000 for the nine months ended September 30, 2005. The average balance outstanding increased $177,000, or 3.1%, for the nine months ended September 30, 2006 from the nine months ended September 30, 2005. The weighted-average yield increased to 4.53% for the nine months ended September 30, 2006 from 3.05% for the nine months ended September 30, 2005.

Dividends on FHLB and FRB stock increased $29,000 to $101,000 for the nine months ended September 30, 2006 from $72,000 for the same period in 2005. The weighted-average yield increased to 5.66% for the nine months ended September 30, 2006 from 4.10% for the nine months ended September 30, 2005. The average balance outstanding increased $60,000 to $2.4 million for the nine months ended September 30, 2006 from $2.3 million for the nine months ended September 30, 2005.

Interest income on other interest earning assets increased $14,000, or 70.0%, to $34,000 for the nine months ended September 30, 2006 from $20,000 for the same period in 2005. The weighted-average yield increased to 1.60% for the nine months ended September 30, 2006 from 0.87% for the nine months ended September 30, 2005. The average balance outstanding decreased $317,000 to $2.8 million for the nine months ended September 30, 2006 from $3.1 million for the nine months ended September 30, 2005.

Interest expense on deposits increased $2.5 million, or 89.3%, to $5.4 million for the nine months ended September 30, 2006 from $2.8 million for the nine months ended September 30, 2005. The average balance outstanding on interest bearing deposits increased $52.5 million, or 35.5%, to $200.5 million for the nine months ended September 30, 2006 from $148.0 million for the nine months ended September 30, 2005.  The weighted-average rate paid increased to 3.57% for the nine months ended September 30, 2006 from 2.55% for the nine months ended September 30, 2005.

Interest expense on the guaranteed preferred beneficial interest in junior subordinated debentures issued in March 2006 was $345,000 for the nine months ended September 30, 2006. The average balance outstanding for the nine months ended September 30, 2006 was $6.7 million and the weighted-average rate was 6.83%.

Interest expense on advances from the FHLB increased $357,000, or 34.2%, to $1.4 million for the nine months ended September 30, 2006 from $1.0 million for the nine months ended September 30, 2005. The weighted average cost of funds increased to 5.11% for the nine months ended September 30, 2006 from 3.59% for the nine months ended September 30, 2005. The average balance outstanding decreased $2.2 million, or 5.7%, to $36.5 million for the nine months ended September 30, 2006 from $38.8 million for the nine months ended September 30, 2005.

Noninterest income increased $72,000, or 8.7%, to $900,000 for the nine months ended September 30, 2006 from $828,000 for the same period in 2005. Checking account fees increased $59,000, or 17.6%, to $394,000 for the nine months ended September 30, 2006 as compared to $335,000 over the same period in 2005 due to the growth in deposits. Commission income decreased $23,000, or 30.3%, to $53,000 for the nine months ended September 30, 2006 from $76,000 for the nine months ended September 30, 2005. A $43,000 loss on sale of other real estate owned was recognized for the nine months ended September 30, 2006 as the result of the sale of one property acquired in the third quarter of 2005. Income from bank owned life insurance decreased $13,000, or 6.5%, to $187,000 for the nine months ended September 30, 2006 when compared to $200,000 over the same period in 2005 due to a decrease
in the rates being paid by the insurance carriers. Other income increased $91,000, or 121.3%, to $166,000 for the nine months ended September 30, 2006 from $75,000 over the same period in 2005 primarily due to an increase in income from the Companys investment in Triangle Capital Partners.

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Noninterest expense increased $1.1 million, or 22.8%, to $5.7 million for the nine month period ended September 30, 2006 from $4.6 million for the nine months ended September 30, 2005. Salaries and employee benefits increased $695,000, or 23.6%, to $3.6 million for the nine months ended September 30, 2006 from $2.9 million over the same period in 2005. This increase is attributable to the hiring of additional employees for the new branches, as well as increased sales and administrative staff, annual merit increases, and the increase in expense associated with the supplemental executive retirement plan. Occupancy expense increased $113,000, or 33.8%, to $447,000 for the nine months ended September 30, 2006 from $334,000 for the nine months ended September 30, 2005 due to the increased depreciation, maintenance, and utilities expenses for the new branches and the operations
facility that were place in service during the third and fourth quarters of 2005. Equipment and data processing expenses increased $80,000, or 14.3%, to $639,000 for the nine months ended September 30, 2006 from $559,000 over the same period in 2005 due to an increase in depreciation resulting from an increase in furniture and equipment, as well as increased fees from the Companys data service provider. Other expenses increased $168,000, or 20.9%, to $973,000 for the nine months ended September 30, 2006 from $805,000 for the nine months ended September 30, 2005 primarily as a result of increases in legal and accounting fees, loan expenses, real estate and personal property taxes, and scholarships awarded, partially offset by decreases in collection expense and the loss on disposal of premises and equipment.

Income tax expense for the nine month period ended September 30, 2006 and 2005 was $1.2 million and $985,000, which equates to effective rates of 36.9% and 36.2% 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 at the indicated dates.



September
          30,2006
      
      December
          31,2005Amount
      
      %
      
      Amount
      
      %(Dollars
          in thousands)Type
          of LoanReal
          estate loans:Construction
          loans
      
      $
      16,577
      
      5.90
      %
      $
      16,414
      
      6.98
      %One-
          to four-family residential and home equity
      
      
      94,121
      
      33.48
      
      
      86,334
      
      36.73Multi-family
          residential
      
      
      4,510
      
      1.60
      
      
      4,523
      
      1.93Land
      
      
      3,586
      
      1.27
      
      
      3,477
      
      1.48Commercial
      
      
      75,644
      
      26.91
      
      
      45,338
      
      19.29Commercial
          business loans*
      
      
      74,200
      
      26.40
      
      
      67,277
      
      28.62Consumer
          loans:Automobile
          loans
      
      
      1,399
      
      0.50
      
      
      1,265
      
      0.54Deposit
          account loans
      
      
      1,499
      
      0.53
      
      
      1,447
      
      0.61Personal
          loans
      
      
      9,575
      
      3.41
      
      
      8,970
      
      3.82Gross
          loans
      
      
      281,111
      
      100.00
      %
      
      235,045
      
      100.00
      %Less:
          allowance for loan losses
      
      
      (1,895
      )
      
      
      
      (1,738
      )Net
          loans
      
      $
      279,216
      
      
      
      $
      233,307


*

        Commercial business loans above include loans primarily for business purposes that are secured by real estate.


Nonperforming Assets

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

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(Dollars in thousands)


      

        September 30,2006


      

        December 31,2005Non-accrual loans and leases


      


      $


      960


      


      $


      2,818Loans and leases 90 days or more past due

        

        

        18

        

        

        18Restructured loans and leases

        

        

        0

        

        

        0Total nonperforming loans and leases

        

        

        978

        

        

        2,836Other real estate owned, net

        

        

        0

        

        

        385Total nonperforming assets

        

        $

        978

        

        $

        3,221Nonperforming loans and leases to total loans and leases

        

        

        0.35

        %

        

        1.21

        %Nonperforming assets to total assets

        

        

        0.31

        

        

        1.21Allowance for loan losses to nonperforming loans and leases

        

        

        193.76

        

        

        61.28


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 a 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 2006, 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 and leases, 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 the credit risk factors employed by bank examiners at their most recent periodic examination of the Bank. Bank regulatory examinations usually
occur each year. In these examinations, the examiners review the credit portfolio, establish credit risk ratings for loans, identify charge offs, and perform their own calculation of the allowance for loan losses. The use of these credit risk factors based primarily upon periodic examinations is intended to provide a self-correcting mechanism to reduce differences between estimated and actual observed losses.

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 current 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, 2006 was $1.9 million, (0.67% of total loans), an increase of $157,000, or 9.0%, from the $1.7 million allowance (0.74% of total loans) at December 31, 2005. Annualized net charge-offs for the first nine months of 2006 were 0.10% of average loans, as compared to 0.04% of average loans for the year 2005. The provision for loan losses required for the first nine months of 2006 and 2005 was $345,000 and $170,000, respectively.

A summary of activity in the allowance is shown below.



Nine Months EndedSeptember 30, 2006

        

        Twelve Months EndedDecember 31, 2005(In thousands)Balance at beginning of period


      

        $


      1,738


      


      $


      1,189Charge-offs:Residential real estate mortgage loans

        

        

        (35

        )

        

        (5

        )Commercial

        

        

        (121

        )

        

        (29

        )Consumer

        

        

        (81

        )

        

        (86

        )Total charge-offs

        

        

        (237

        )

        

        (120

        )Recoveries:Residential real estate mortgage loans

        

        

        0

        

        

        0Commercial

        

        

        2

        

        

        0Consumer

        

        

        47

        

        

        44Total recoveries

        

        

        49

        

        

        44Net charge-offs

        

        

        (188

        )

        

        (76

        )Provision for loan losses

        

        

        345

        

        

        625Balance at end of period

        

        $

        1,895

        

        $

        1,738Net charge-offs to average loans outstanding during the period (annualized)

        

        

        0.10

        %

        

        0.04

        %Allowance for loan losses to loans

        

        

        0.67

        %

        

        0.74

        %Allowance for loan losses to nonperforming loans

        

        

        193.76

        %

        

        61.28

        %


Analysis of Deposits

The following table sets forth the dollar amount of deposits in the various types of accounts offered by Cecil Federal at the dates indicated.



Balance atSeptember 30,2006


      


      %Deposits


      

        Balance atDecember 31,2005


      


      %Deposits(Dollars in thousands)Regular checking


      


      $


      17,867


      


      7.79


      %


      $


      17,133


      


      8.64


      %NOW accounts

        

        

        10,485

        

        4.57

        

        

        13,039

        

        6.58Passbook

        

        

        11,374

        

        4.96

        

        

        11,361

        

        5.73Statement savings

        

        

        7,414

        

        3.23

        

        

        7,764

        

        3.92Money market

        

        

        5,077

        

        2.21

        

        

        6,295

        

        3.18Holiday club

        

        

        314

        

        0.14

        

        

        59

        

        0.03Certificates of Deposit

        

        

        156,547

        

        68.26

        

        

        123,610

        

        62.36IRA Certificates of Deposit

        

        

        11,664

        

        5.09

        

        

        11,215

        

        5.66Money Market Certificates

        

        

        8,588

        

        3.75

        

        

        7,731

        

        3.90$

        229,330

        

        100.00

        %

        $

        198,207

        

        100.00

        %




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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 Companys principal federal regulator, has established requirements for total and tier 1 (core) risk-based capital and tangible capital. The following table sets forth applicable capital ratios of the Bank as of September 30, 2006 and 2005 and the capital ratios of the Company as of September 30, 2005. As of September 30, 2006, since the Company had total assets less than $500 million, the capital adequacy requirements do not apply on a consolidated basis.





Regulatory Minimums2006Actual


      


      2005
Actual


      


      WellCapitalized


      


      AdequatelyCapitalizedTotal risk-based capital ratio:Consolidated

        

        

        

        9.88

        %

        N/A

        

        8.00

        %The Bank

        

        12.29

        %

        9.74

        %

        10.00

        %

        8.00

        %Tier 1 risk-based capital ratio:Consolidated

        

        

        

        9.20

        %

        N/A

        

        4.00

        %The Bank

        

        8.24

        %

        9.06

        %

        6.00

        %

        4.00

        %Tangible capital ratio:Consolidated

        

        

        

        7.28

        %

        N/A

        

        4.00

        %The Bank

        

        7.05

        %

        7.26

        %

        5.00

        %

        4.00

        %


As of September 30, 2006 and 2005, the Bank exceeded all applicable capital requirements to be classified as a well capitalized and adequately capitalized, respectively, institution under the rules promulgated by the Board of Governors of the Federal Reserve System. Designation under these regulations does not constitute a recommendation or endorsement of the Banks regulators.

Item 3. 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, 2006, that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings -

Not Applicable

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

Participants
    in the Companys 401(k) plan became eligible to invest in the Companys
    common stock through the plan in January 2006. At November 2, 2006, there
    13,228 shares of the Companys common stock held in the plan, with a
    total market value of approximately $252,000. All of these shares were purchased
    by the plan from third parties or issued as a result of stock dividends,
    and no such shares were sold or issued directly by the Company to the plan.
    The purchases of these shares or related plan interests were not registered
    under the Securities Act.

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
          31(a), (b)

        Rule 13a-14(a)/15d-14(a) CertificationExhibit
          32(a), (b)

        18 U.S.C. Section 1350 Certification


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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 hereunto duly authorized.



CECIL
          BANCORP, INC.Date: November 13, 2006
      
      By:
      /s/ Mary B. HalseyMary
          B. HalseyPresident and Chief Executive OfficerDate: November 13, 2006
      
      By:
      /s/ Robert Lee WhiteheadRobert
          Lee WhiteheadVice
          President and Chief Financial Officer


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