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 March 31, 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 definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o Non-accelerated filer  o      Accelerated filer  o            Smaller reporting            companyx

 

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 May 7, 2009, there were 3,689,346 shares of common stock outstanding

 

Page 1

 

 

----

 

CECIL BANCORP, INC. AND SUBSIDIARIES

 

CONTENTS

 

|                              |                                                              | PAGE   |
|-----------------------------------|-------------------------------------------------------------------|--------|
| PART I - FINANCIAL INFORMATION    |                                                              |   |
|                              |                                                              |   |
| Item 1.                 | Financial Statements (unaudited)                                  |   |   |
|                              |                                                              |   |   |
|                              | Consolidated Balance Sheets -                                     |   | 3 |
|                              | March 31, 2009 and December 31, 2008                              |   |   |
|                              |                                                              |   |   |
|                              | Consolidated Statements of Income (Loss) and Comprehensive Income |   | 4-5 |
|                              | for the Three Months Ended March 31, 2009 and 2008)               |   |   |
|                              |                                                              |   |   |
|                              | Consolidated Statements of Cash Flows                             |   | 6 |
|                              | for the Three Months Ended March 31, 2009 and 2008 (Unaudited)    |   |   |
|                              |                                                              |   |   |
|                              | Notes to Consolidated Financial Statements                        |   | 7-9 |
|                              |                                                              |   |   |
| Item 2.                 | Management’s Discussion and Analysis of Financial Condition |   | 10-16 |
|                              | and Results of Operations                                         |   |   |
|                              |                                                              |   |
| Item 3.                 | Quantitative and Qualitative Disclosure About Market Risk         |   | 16 |
|                              |                                                              |   |
| Item 4T.                          | Controls and Procedures                                           |   | 16 |
|                              |                                                              |   |
| PART II – OTHER INFORMATION |                                                              | 17-18  |
|                              |                                                              |   |
| SIGNATURES                        |                                                              | 19     |
|                              |                                                              |   |
| CERTIFICATIONS                    |                                                              | 20-23  |

 

 

Page 2

 

 

----

| PART I. | Financial Information |
|---------|-----------------------|

 

**CECIL BANCORP, INC. AND SUBSIDIARIES**

ITEM 1: FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 

| ASSETS                                                            |   |        |    |         |   |    |   |
|-------------------------------------------------------------------|--------|-------------|---------|--------------|--------|---------|--------|
|                                                              |   | March 31,   |    | December 31, |   |
|                                                              |   | 2009        |    | 2008         |   |
|                                                              |   | (unaudited) |    |         |   |    |
|                                                              |   |        |    |         |   |    |   |
| Cash and due from banks                                           |   | $           | 6,165   |         | $      | 4,627   |   |
| Interest bearing deposits with banks                              |   |        | 20,678  |         |   | 36,793  |   |
| Cash and cash equivalents                                         |   |        | 26,843  |         |   | 41,420  |   |
| Investment securities:                                            |   |        |    |         |   |    |   |
| Securities available-for-sale at fair value                       |   |        | 1,617   |         |   | 11,712  |   |
| Securities held-to-maturity (fair value of $300 in 2009 and 2008) |   |        | 300     |         |   | 300     |   |
| Restricted investment securities – at cost                  |   |        | 4,398   |         |   | 3,918   |   |
| Loans receivable                                                  |   |        | 413,088 |         |   | 408,063 |   |
| Less: Allowance for loan losses                                   |   |        | (8,356  | )            |   | (6,314  | )      |
| Net loans receivable                                              |   |        | 404,732 |         |   | 401,749 |   |
| Other real estate owned                                           |   |        | 3,813   |         |   | 2,843   |   |
| Premises and equipment, net                                       |   |        | 12,026  |         |   | 12,071  |   |
| Accrued interest receivable                                       |   |        | 2,200   |         |   | 2,225   |   |
| Goodwill                                                          |   |        | 2,182   |         |   | 2,182   |   |
| Other intangible assets                                           |   |        | 370     |         |   | 329     |   |
| Bank owned life insurance                                         |   |        | 7,731   |         |   | 7,787   |   |
| Other assets                                                      |   |        | 6,810   |         |   | 5,861   |   |
| TOTAL ASSETS                                                      |   | $           | 473,022 |         | $      | 492,397 |   |
|                                                              |   |        |    |         |   |    |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                        |   |        |    |         |   |    |   |
| LIABILITIES:                                                      |   |        |    |         |   |    |   |
| Deposits                                                          |   | $           | 345,929 |         | $      | 364,551 |   |
| Other liabilities                                                 |   |        | 7,415   |         |   | 6,668   |   |
| Junior subordinated debentures                                    |   |        | 17,000  |         |   | 17,000  |   |
| Advances from Federal Home Loan Bank of Atlanta                   |   |        | 63,786  |         |   | 63,786  |   |
| Total liabilities                                                 |   |        | 434,130 |         |   | 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                     |   |        | 10,818  |         |   | 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                                                 |   |        | 15,866  |         |   | 17,339  |   |
| Accumulated other comprehensive loss                              |   |        | (80     | )            |   | (4      | )      |
| Total stockholders’ equity                                  |   |        | 38,892  |         |   | 40,392  |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                  |   | $           | 473,022 |         | $      | 492,397 |   |

 

See accompanying notes to consolidated financial statements.

 

Page 3

 

----

**CECIL BANCORP, INC. AND SUBSIDIARIES**

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

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(dollars in thousands, except per share data)

 

|                                                |   | 2009   |   | 2008   |   |
|-----------------------------------------------------|--------|--------|--------|--------|--------|
|                                                |   |   |   |   |   |   |   |
| INTEREST INCOME:                                    |   |   |   |   |   |   |   |
| Interest and fees on loans                          |   | $      | 7,229  |   | $      | 7,011 |   |
| Interest on investment securities                   |   |   | 61     |   |   | 71 |   |
| Dividends on FHLB and FRB stock                     |   |   | 3      |   |   | 68 |   |
| Other interest-earning assets                       |   |   | 10     |   |   | 15 |   |
|                                                |   |   |   |   |   |   |   |
| Total interest income                               |   |   | 7,303  |   |   | 7,165 |   |
|                                                |   |   |   |   |   |   |   |
| INTEREST EXPENSE:                                   |   |   |   |   |   |   |   |
| Interest expense on deposits                        |   |   | 2,566  |   |   | 2,588 |   |
| Interest expense on junior subordinated debentures  |   |   | 276    |   |   | 280 |   |
| Interest expense on advances from FHLB              |   |   | 610    |   |   | 696 |   |
|                                                |   |   |   |   |   |   |   |
| Total interest expense                              |   |   | 3,452  |   |   | 3,564 |   |
|                                                |   |   |   |   |   |   |   |
| NET INTEREST INCOME                                 |   |   | 3,851  |   |   | 3,601 |   |
|                                                |   |   |   |   |   |   |   |
| PROVISION FOR LOAN LOSSES                           |   |   | 3,460  |   |   | 325 |   |
|                                                |   |   |   |   |   |   |   |
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |   |   | 391    |   |   | 3,276 |   |
|                                                |   |   |   |   |   |   |   |
| NONINTEREST INCOME:                                 |   |   |   |   |   |   |   |
| Checking account fees                               |   |   | 146    |   |   | 152 |   |
| ATM fees                                            |   |   | 93     |   |   | 83 |   |
| Commission income                                   |   |   | 2      |   |   | 3 |   |
| Gain on sale of loans                               |   |   | 47     |   |   | 44 |   |
| (Loss) income from bank owned life insurance        |        |        | (55    | )      |        | 45 |  |
| Other                                               |   |   | 53     |   |   | 55 |   |
|                                                |   |   |   |   |   |   |   |
| Total noninterest income                            |   |   | 286    |   |   | 382 |   |
|                                                |   |   |   |   |   |   |   |
| NONINTEREST EXPENSE:                                |   |   |   |   |   |   |   |
| Salaries and employee benefits                      |   |   | 1,531  |   |   | 1,520 |   |
| Occupancy expense                                   |   |   | 191    |   |   | 188 |   |
| Equipment and data processing expense               |   |   | 314    |   |   | 318 |   |
| Other                                               |   |   | 496    |   |   | 382 |   |
|                                                |   |   |   |   |   |   |   |
| Total noninterest expense                           |   |   | 2,532  |   |   | 2,408 |   |
|                                                |   |   |   |   |   |   |   |
| NET (LOSS) INCOME BEFORE INCOME TAXES               |   |   | (1,855 | )      |   | 1,250 |   |
|                                                |   |   |   |   |   |   |   |
| INCOME TAX (BENEFIT) EXPENSE                        |   |   | (735   | )      |   | 486 |   |
|                                                |   |   |   |   |   |   |   |
| NET (LOSS) INCOME                                   |   | $      | (1,120 | )      | $      | 764 |   |

 

Page 4

 

----

**CECIL BANCORP, INC. AND SUBSIDIARIES**

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

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(dollars in thousands, except per share data)

 

(Continued)

 

 

|                                               |   | 2009   |   | 2008   |   |
|----------------------------------------------------|--------|--------|--------|--------|--------|
|                                               |   |   |   |   |   |   |   |
| NET (LOSS) INCOME                                  |   | $      | (1,120 | )      | $      | 764 |   |
|                                               |   |   |   |   |   |   |   |
| OTHER COMPREHENSIVE (LOSS) INCOME                  |   |   |   |   |   |   |   |
| Unrealized losses on investment securities,        |   |   |   |   |   |   |   |
| net of deferred taxes                              |   |   | (76    | )      |   | (33 | ) |
|                                               |   |   |   |   |   |   |   |
| TOTAL COMPREHENSIVE (LOSS) INCOME                  |   | $      | (1,196 | )      | $      | 731 |   |
|                                               |   |   |   |   |   |   |   |
|                                               |   |   |   |   |   |   |   |
| NET (LOSS) INCOME                                  |   | $      | (1,120 | )      | $      | 764 |   |
|                                               |   |   |   |   |   |   |   |
| PREFERRED STOCK DIVIDENDS                          |   |   | (260   | )      |   | — |   |
|                                               |   |   |   |   |   |   |   |
| NET (LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS |   | $      | (1,380 | )      | $      | 764 |   |
|                                               |   |   |   |   |   |   |   |
| (Loss) earnings per common share - basic           |   | $      | (0.37  | )      | $      | 0.21 |   |
|                                               |   |   |   |   |   |   |   |
| (Loss) earnings per common share - diluted         |   | $      | (0.37  | )      | $      | 0.21 |   |
|                                               |   |   |   |   |   |   |   |
| Dividends declared per common share                |   | $      | 0.025  |   | $      | 0.025 |   |

 

 

See accompanying notes to consolidated financial statements.

 

 

 

Page 5

 

 

----

**CECIL BANCORP, INC. AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(dollars in thousands)

 

|                                                                              |   | 2009   |    | 2008   |   |
|-----------------------------------------------------------------------------------|--------|--------|---------|--------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                             |   |   |    |   |   |   |   |
| Net (loss) income                                                                 |   | $      | (1,120  | )      | $      | 764 |   |
| Adjustments to reconcile net income to net cash provided by operating activities: |   |   |    |   |   |   |   |
| Depreciation and amortization                                                     |   |   | 124     |   |   | 145 |   |
| Provision for loan losses                                                         |   |   | 3,460   |   |   | 325 |   |
| Gain on sale of loans                                                             |   |   | (47     | )      |   | (44 | ) |
| Decrease (increase) in cash surrender value of bank owned life insurance          |   |   | 55      |   |   | (45 | ) |
| Excess servicing rights                                                           |   |   | (77     | )      |   | (35 | ) |
| Reinvested dividends on investments                                               |   |   | — |   |   | (10 | ) |
| Origination of loans held for sale                                                |   |   | (6,576  | )      |   | (2,600 | ) |
| Proceeds from sales of loans held for sale                                        |   |   | 6,562   |   |   | 2,616 |   |
| Net change in:                                                                    |   |   |    |   |   |   |   |
| Accrued interest receivable and other assets                                      |   |   | (793    | )      |   | 1,815 |   |
| Other liabilities                                                                 |   |   | 748     |   |   | 4,989 |   |
| Net cash provided by operating activities                                         |   |   | 2,336   |   |   | 7,920 |   |
|                                                                              |   |   |    |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                             |   |   |    |   |   |   |   |
| Purchases of investment securities available-for-sale                             |   |   | — |   |   | (2,161 | ) |
| Purchases of investment securities held-to-maturity                               |   |   | (249    | )      |   | (247 | ) |
| Net purchase of restricted investment securities                                  |   |   | (480    | )      |   | (116 | ) |
| Proceeds from sales, maturities, calls and principal payments of                  |   |   |    |   |   |   |   |
| investment securities available-for-sale                                          |   |   | 10,002  |   |   | 3 |   |
| Proceeds from maturities, calls and principal payments of                         |   |   |    |   |   |   |   |
| investment securities held-to-maturity                                            |   |   | 250     |   |   | 2,750 |   |
| Net increase in loans                                                             |   |   | (7,432  | )      |   | (13,064 | ) |
| Purchases of premises and equipment                                               |   |   | (78     | )      |   | (313 | ) |
| Net cash provided by (used in) investing activities                               |   |   | 2,013   |   |   | (13,148 | ) |
|                                                                              |   |   |    |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                             |   |   |    |   |   |   |   |
| Net (decrease) increase in deposits                                               |   |   | (18,622 | )      |   | 11,776 |   |
| Net increase in advances from Federal Home Loan Bank of Atlanta                   |   |   | — |   |   | 430 |   |
| Proceeds from issuance of common stock                                            |   |   | 16      |   |   | — |   |
| Payments of cash dividends                                                        |   |   | (320    | )      |   | (92 | ) |
| Net cash (used in) provided by financing activities                               |   |   | (18,926 | )      |   | 12,114 |   |
|                                                                              |   |   |    |   |   |   |   |
| (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                  |   |   | (14,577 | )      |   | 6,886 |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                  |   |   | 41,420  |   |   | 5,511 |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                        |   | $      | 26,843  |   | $      | 12,397 |   |
|                                                                              |   |   |    |   |   |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:                                |   |   |    |   |   |   |   |
|                                                                              |   |   |    |   |   |   |   |
| Cash paid for income taxes                                                        |   | $      | — |   | $      | 83 |   |
|                                                                              |   |   |    |   |   |   |   |
| Cash paid for interest                                                            |   | $      | 3,681   |   | $      | 3,602 |   |
|                                                                              |   |   |    |   |   |   |   |
| Interest capitalized during the period                                            |   | $      | — |   | $      | 69 |   |
|                                                                              |   |   |    |   |   |   |   |
| Transfer from loans to other real estate owned                                    |   | $      | 1,051   |   | $      | — |   |

 

See accompanying notes to consolidated financial statements.

 

Page 6

 

----

**CECIL BANCORP, INC. AND SUBSIDIARIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

 

|   | 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 March 31, 2009 and the results of its operations and cash flows for the three months ended March 31, 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 months ended March 31, 2009 are not necessarily            indicative of the results to be expected for the full year or for any other period.

 

|   | 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 for 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”) released Staff Positions FAS 107-1 and APB 28-1, FAS 157-4, FAS 115-2 and FAS 124-2, “*Other Than Temporary Impairment.*” 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 will adopt the staff positions effective for the period ending June 30, 2009, but does not anticipate that adoption will            result in a material effect on consolidated 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 quarter. Diluted earnings per share are computed by 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 months ended March 31, 2009, all 273,562 options and warrants were excluded from the diluted earnings per share calculation because their effect was antidilutive, and for the first quarter of 2008, there were no options excluded.

 

Page 7

 

 

----

|                                               |   | Three Months Ended March 31, |       |
|----------------------------------------------------|--------|------------------------------|------------|
|                                               |   | 2009                         |       | 2008 |   |
| Basic:                                             |   |                         |       |   |   |   |   |
| Net (loss) income                                  |   | $                            | (1,120,000 | ) | $ | 764,000 |   |
| Preferred stock dividends                          |   |                         | (260,000   | ) |   | — |   |
| Net (loss) income available to common stockholders |   | $                            | (1,380,000 | ) | $ | 764,000 |   |
|                                               |   |                         |       |   |   |   |   |
| Average common shares outstanding                  |   |                         | 3,688,199  |   |   | 3,678,286 |   |
|                                               |   |                         |       |   |   |   |   |
| Basic (loss) earnings per common share             |   | $                            | (0.37      | ) | $ | 0.21 |   |
|                                               |   |                         |       |   |   |   |   |
| Diluted:                                           |   |                         |       |   |   |   |   |
| Net (loss) income                                  |   | $                            | (1,120,000 | ) | $ | 764,000 |   |
| Preferred stock dividends                          |   |                         | (260,000   | ) |   | — |   |
|                                               |   |                         |       |   |   |   |   |
| Net (loss) income available to common stockholders |   | $                            | (1,380,000 | ) | $ | 764,000 |   |
|                                               |   |                         |       |   |   |   |   |
| Average common shares outstanding                  |   |                         | 3,688,199  |   |   | 3,678,286 |   |
| Stock option adjustment                            |   |                         | —    |   |   | 5,443 |   |
|                                               |   |                         |       |   |   |   |   |
| Average common shares outstanding – diluted  |   |                         | 3,688,199  |   |   | 3,683,729 |   |
|                                               |   |                         |       |   |   |   |   |
| Diluted (loss) earnings per common share           |   | $                            | (0.37      | ) | $ | 0.21 |   |

 

 

| 5. | ACCOUNTING FOR STOCK OPTIONS |
|----|------------------------------|

 

No options were granted or vested during the three months ended March 31, 2009 and 2008. A summary of the Company’s stock option activity, and related information for the periods indicated is as follows:

 

 

|                                 |   | Three months ended |   |           | Year ended        |   |
|--------------------------------------|--------|--------------------|--------|----------------|-------------------|--------|
|                                 |   | March 31, 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                     |   | —            |   |           | —           |   |   | — |   |   | — |   |
|                                 |   |               |   |           |              |   |   |   |   |   |   |   |
| Outstanding at end of period         |   | 12,024             |   | $              | 6.00              |   |   | 12,024 |   | $ | 6.00 |   |
|                                 |   |               |   |           |              |   |   |   |   |   |   |   |
| Options exercisable at end of period |   | 12,024             |   | $              | 6.00              |   |   | 12,024 |   | $ | 6.00 |   |

 

|   | The following table summarizes information about stock options outstanding at March 31, 2009: |
|--------|----------------------------------------------------------------------------------------------------|

 

|     |   | Options Outstanding and Exercisable |   |    |
|----------|--------|-------------------------------------|--------|---------|
| Exercise |   | Number                              |   | Life    |   |   |
| Price    |   | Outstanding                         |   | (Years) |   | Intrinsic Value |
|     |   |                                |   |    |   |   |
| $6.00    |   | 12,024                              |   | 0.06    |   | $0 |

 

Page 8

 

----

6.  ASSETS MEASURED AT FAIR VALUE

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements”. SFAS No. 157 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. SFAS No. 157 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. Lastly, SFAS No. 157 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 March 31, 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    |   | $1,617                                          |   | $1,530 |   | $87 |   | $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 March 31, 2009, the            following table provides 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.

 

 

|                    |   | 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 |   | $  3,813                              |   | $ --  |   | $ -- |   | $3,813 |
| Impaired loans          |   | 11,231                                          |   |    -- |   | -- |   | 11,231 |

 

 

Page 9

 

 

----

**CECIL BANCORP, INC. AND SUBSIDIARIES**

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

***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 bank 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 System 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 it 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.

 

Page 10

 

 

----

**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 March 31, 2009 and December 31, 2008**

The Company’s assets decreased by $19.4 million, or 3.9%, to $473.0 million at March 31, 2009 from $492.4 million at December 31, 2008, primarily as a result of decreases in interest bearing cash and maturities of investment securities available-for-sale, the proceeds of which were used to fund decreases in the deposit portfolio.

 

Cash and cash equivalents decreased by $14.6 million to $26.8 million at March 31, 2009 from $41.4 million at December 31, 2008. Investment securities available-for-sale decreased by $10.1 million, or 86.2%, to $1.6 million at March 31, 2009 from $11.7 million at December 31, 2008 primarily due to the maturity of a FNMA discount note. Restricted investment securities increased by            $480,000, or 12.3%, to $4.4 million at March 31, 2009 from $3.9 million at December 31, 2008 due to the ongoing review by the Federal Reserve Bank and the Federal Home Loan Bank of Atlanta of their investment requirements.

 

The loans receivable portfolio increased by $5.0 million, or 1.2%, to $413.1 million at March 31, 2009 from $408.1 million at December 31, 2008, primarily as a result of growth in commercial real estate loans (up $4.3 million, or 3.0%) and commercial business loans (up $1.8 million, or 11.4%), offset in part by a decline in one to four family residential and home equity loans (down            $995,000, or 0.8%). The allowance for loan losses increased $2.0 million, or 32.3%, 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 the first quarter of 2009. The primary reason for this increase was due to one            participation loan, in which we purchased a 2% stake, for which the lead bank initiated foreclosure proceedings during the first quarter of 2009. Our portion of the principal balance of this loan is approximately $1.8 million. The appraised value of the real estate collateral is approximately $610,000, which is net of anticipated costs to sell, was transferred to other real estate owned and resulted in a charge to the allowance for loan losses of approximately $1.2 million. The lead            bank on this participation has recently been placed into receivership with the FDIC, which is now administering the loan. The Bank has approximately $9.2 million in other loan participations with this institution. The Bank had no investments in the lead bank’s securities or deposits with it in excess of the maximum FDIC insurance amount.

Other real estate owned increased by $970,000, or 34.1%, to $3.8 million at March 31, 2009 from $2.8 million at December 31, 2008 due to the acquisition of properties securing nonperforming loans receivable. Other assets increased by $949,000, or 16.2%, to $6.8 million at March 31, 2009 from $5.9 million at December 31, 2008 primarily as a result of an increase in income taxes            receivable.

The Company’s liabilities decreased $17.9 million, or 3.9%, to $434.1 million at March 31, 2009 from $452.0 million at December 31, 2008. The decrease in deposits of $18.6 million, or 5.1%, to $345.9 million at March 31, 2009 from $364.6 million at December 31, 2008, was mainly due to decreases in certificates of deposit (down $26.3 million, or 9.5%) and money market            certificates (down $413,000, or 5.8%), partially offset by increases in regular checking accounts (up $3.3 million, or 16.7%), IRA certificates of deposit (up $1.5 million, or 9.9%), NOW accounts (up $1.3 million, or 6.4%), statement savings accounts (up $1.1 million, or 13.2%), and money market accounts (up $814,000, or 13.3%). The significant decrease in certificates of deposit was primarily the result of a $29.4 million decline in national market certificates obtained in 2008 to            complement local market deposits in funding loan growth. These certificates were not renewed due to their relatively high cost of funds and our current cash position. Other liabilities increased $747,000, or 11.2%, to $7.4 million at March 31, 2009 from $6.7 million at

 

Page 11

 

 

----

December 31, 2008 primarily due to increases in the amount owed to Money Gram Payment Systems for official checks written and the Supplemental Executive Retirement Plan liability.

The Company’s stockholders’ equity decreased by $1.5 million, or 3.7%, to $38.9 million at March 31, 2009 from $40.4 million December 31, 2008. This decrease is primarily the result of a net loss of $1.1 million, the Company’s regular cash dividend of $0.025 per common share, or $92,000, preferred stock dividends totaling $228,000, and a $76,000 decrease in the            Company’s accumulated other comprehensive income.

**Comparison of Results of Operations for the Three Months Ended March 31, 2009 and 2008**

Net loss for the three-month period ended March 31, 2009 was $1.1 million, a decline of $1.9 million when compared to net income for the same period in 2008 of $764,000. This decrease was primarily the result of increases in the provision for loan losses and noninterest expense and a decrease in noninterest income, partially offset by increases in net interest income and income tax            expense. Net loss available to common stockholders for the three months ended March 31, 2009 was $1.4 million compared to net income available to common stockholders of $764,000 for the three months ended March 31, 2008. Net loss available to common stockholders for the 2009 period reflects $260,000 in dividends on the Series A Preferred Stock in addition to the net loss for the period. Basic and diluted loss per common share were both $0.37 for the three months ended March 31, 2009            as compared to basic and diluted earnings per common share of $0.21 for the three-month period ended March 31, 2008. The annualized return on average assets and annualized return on average equity were -0.92% and -11.05%, respectively, for the three-month period ended March 31, 2009. This compares to an annualized return on average assets and annualized return on average equity of 0.76% and 10.89%, respectively, for the same period in 2008.

Net interest income, the Company’s primary source of income, increased 6.9%, or $250,000, to $3.9 million for the three months ended March 31, 2009, from $3.6 million over the same period in 2008. The increase in net interest income reflects a $138,000 increase in interest income driven primarily by growth in the loan portfolio as well as a $112,000 decline in interest            expense related to the lower interest rate environment. The weighted average yield on interest earning assets decreased to 6.54% for the three months ended March 31, 2009 from 7.83% for the three months ended March 31, 2008. The weighted average rate paid on interest bearing liabilities decreased to 3.16% for the three months ended March 31, 2009 from 3.90% for the three months ended March 31, 2008. The net interest spread decreased to 3.38% from 3.93% and the net interest margin            decreased to 3.45% for the three months ended March 31, 2009 as compared to 3.94% for the three months ended March 31, 2008.

Interest and fees on loans increased by $218,000, or 3.1%, to $7.2 million for the three months ended March 31, 2009 from $7.0 million for the three months ended March 31, 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 $49.3 million, or            13.8%, to $405.3 million for the three months ended March 31, 2009 from $356.1 million for the three months ended March 31, 2008. The weighted-average yield decreased to 7.13% for the three months ended March 31, 2009 from 7.88% for the three months ended March 31, 2008.

Dividends on Federal Reserve and Federal Home Loan Bank stock decreased $65,000, or 95.6%, to $3,000 for the three months ended March 31, 2009 from $68,000 for the three months ended March 31, 2008 primarily due to the discontinuation of dividends by the Federal Home Loan Bank of Atlanta. The average balance outstanding decreased $531,000, or 11.6%, to $4.1 million for the three            months ended March 31, 2009 from $4.6 million for the three months ended March 31, 2008. The weighted-average yield decreased to 0.27% for the three months ended March 31, 2009 from 5.97% for the three months ended March 31, 2008.

Interest on deposits remained steady at $2.6 million for the three months ended March 31, 2009 and 2008. The average balance outstanding increased $88.5 million, or 33.0%, to $356.8 million for the three months ended March 31, 2009 from $268.4 million for the same period in 2008. The weighted-average rate paid on deposits decreased to 2.88% for the three months ended March 31, 2009            from 3.86% for the three months ended March 31, 2008. Interest expense on advances from the Federal Home Loan Bank of Atlanta decreased $86,000, or 12.4%, to $610,000 for the three months ended March 31, 2009 from $696,000 for the three months ended March 31, 2008. The average balance outstanding decreased $16.6 million, or 20.7%, for the period noted above. The weighted average rate increased to 3.82% for the three months ended March 31, 2009 from 3.46% for the three months ended            March 31, 2008.

The provision for loan losses increased by $3.1 million to $3.5 million for the three months ended March 31, 2009 from $325,000 over the same period in 2008 (see “analysis of allowance for loan losses” below). The increase in the provision for loan losses is a result of the consequences of an unpredictable economy and an unstable financial and

 

Page 12

 

 

----

real estate market, which has led to an increase in nonperforming assets and charge-offs during the first quarter of 2009. The primary reason for this increase was due to one participation loan, in which we purchased a 2% stake, for which the lead bank initiated foreclosure proceedings during the first quarter of 2009. Our portion of the principal balance of this loan is approximately $1.8 million.            The appraised value of the real estate collateral is approximately $610,000, which is net of anticipated costs to sell, was transferred to other real estate owned and resulted in a charge to the allowance for loan losses of approximately $1.2 million.

Noninterest income decreased 25.1%, or $96,000, to $286,000 for the three months ended March 31, 2009, from $382,000 over the same period in 2008 due primarily to lower income from bank owned life insurance. Income from bank owned life insurance decreased by $100,000 to -$55,000 for the three months ended March 31, 2009 from $45,000 for the same period in 2008 due to the annual fee            charged by the insurance company at the anniversary date of the policy, which was purchased in the first quarter of 2008. Additionally, the Bank completed a conversion to a new insurance carrier, and was charged a surrender fee by the previous carrier. ATM fees increased $10,000, or 12.1%, to $93,000 for the three months ended March 31, 2009 from $83,000 for the three months ended March 31, 2008.

Noninterest expense increased 5.2%, or $124,000, to $2.5 million for the three months ended March 31, 2009, from $2.4 million over the same period in 2008 primarily due to an increase in other expenses, which increased $114,000, or 29.8%, to $496,000 for the three months ended March 31, 2009 from $382,000 during the same period in 2008. Increases in loan expense and legal fees            relating to nonperforming loan resolution, as well as other real estate owned expenses resulting from write-downs to current appraised values, were the primary drivers of this increase.

Income tax benefit for the three-month period ended March 31, 2009 was $735,000 as compared to expense of $486,000 for the first quarter of 2008, which equates to effective rates of 39.6% and 38.9% 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.

 

|                                                  |   | March 31,              |    |   |   | December 31, |   |
|-------------------------------------------------------|--------|------------------------|---------|--------|--------|--------------|--------|
|                                                  |   | 2009                   |    |   |   | 2008         |   |
|                                                  |   | Amount                 |    | %      |   |         |   | Amount |   | % |   |
|                                                  |   | (Dollars in thousands) |    |
| Type of Loan                                          |   |                   |    |   |   |         |   |   |   |   |   |   |   |
| Real estate loans:                                    |   |                   |    |   |   |         |   |   |   |   |   |   |   |
| Construction loans                                    |   | $                      | 103,721 |   | 25.11  | %            |   |   | $ | 103,407 |   | 25.34 | % |
|  One- to four-family residential and home equity |   |                   | 128,586 |   | 31.13  |         |   |   |   | 129,581 |   | 31.76 |   |
|  Multi-family residential                        |   |                   | 6,831   |   | 1.65   |         |   |   |   | 6,852 |   | 1.68 |   |
| Land                                                  |   |                   | 4,537   |   | 1.10   |         |   |   |   | 4,687 |   | 1.15 |   |
| Commercial                                            |   |                   | 147,426 |   | 35.69  |         |   |   |   | 143,126 |   | 35.07 |   |
|                                                  |   |                   |    |   |   |         |   |   |   |   |   |   |   |
| Commercial business loans                             |   |                   | 17,817  |   | 4.31   |         |   |   |   | 15,995 |   | 3.92 |   |
|                                                  |   |                   |    |   |   |         |   |   |   |   |   |   |   |
| Consumer loans                                        |   |                   | 4,170   |   | 1.01   |         |   |   |   | 4,415 |   | 1.08 |   |
|                                                  |   |                   |    |   |   |         |   |   |   |   |   |   |   |
| Gross loans                                           |   |                   | 413,088 |   | 100.00 | %            |   |   |   | 408,063 |   | 100.00 | % |
|                                                  |   |                   |    |   |   |         |   |   |   |   |   |   |   |
| Less: allowance for loan losses                       |   |                   | (8,356  | )      |   |         |   |   |   | (6,314 | ) |   |   |
|                                                  |   |                   |    |   |   |         |   |   |   |   |   |   |   |
| Net loans receivable                                  |   | $                      | 404,732 |   |   |         |   |   | $ | 401,749 |   |   |   |

 

 

Page 13

 

 

----

Nonperforming Assets

 

Management reviews and identifies loans and investments that require designation as nonperforming assets. Nonperforming assets are: loans accounted for on a nonaccrual basis, loans past due by 90 days or more but still accruing, restructured loans, and other real estate owned (assets acquired in settlement of loans). The following table sets forth certain information with respect            to nonperforming assets.

 

|                                                         |   | March 31, |   | December 31, |   |
|--------------------------------------------------------------|--------|-----------|--------|--------------|--------|
| *(Dollars in thousands)*                                     |        | 2009      |        | 2008         |        |
|                                                         |   |      |   |         |   |   |   |
| Nonaccrual loans and leases                                  |   | $         | 11,231 |         | $      | 10,459 |   |
| Loans and leases 90 days or more past due                    |   |      | 0      |         |   | 0 |   |
| Restructured loans and leases                                |   |      | 0      |         |   | 0 |   |
| Total nonperforming loans and leases                         |   |      | 11,231 |         |   | 10,459 |   |
| Other real estate owned, net                                 |   |      | 3,813  |         |   | 2,843 |   |
| Total nonperforming assets                                   |   | $         | 15,044 |         | $      | 13,302 |   |
| Nonperforming loans and leases to total loans                |   |      | 2.72   | %            |   | 2.56 | % |
| Nonperforming assets to total assets                         |   |      | 3.18   |         |   | 2.70 |   |
| Allowance for loan losses to non-performing loans and leases |   |      | 74.40  |         |   | 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.

 

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,

 

Page 14

 

 

----

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.

 

Management determined that the appropriate allowance for loan losses at March 31, 2009 was $8.4 million, (2.02% of total loans), an increase of $2.0 million from the $6.3 million allowance (1.55% of total loans) at December 31, 2008. Annualized net charge-offs for the first three months of 2009 were 1.40% of average loans, while net charge-offs were 0.05% of average loans for the            year 2008. The provision for loan losses required for the first three months of 2009 and 2008 was $3.5 million and $325,000, 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 quarter of 2009. The primary reason for this increase was due to one participation loan, in            which we purchased a 2% stake, for which the lead bank initiated foreclosure proceedings during the first quarter of 2009. Our portion of the principal balance of this loan is approximately $1.8 million. The appraised value of the real estate collateral is approximately $610,000, which is net of anticipated costs to sell, was transferred to other real estate owned and resulted in a charge to the allowance for loan losses of approximately $1.2 million.

A summary of activity in the allowance is shown below.

 

|                                             | 3 Months               |   |   | 12 Months    |   |
|--------------------------------------------------|------------------------|--------|--------|--------------|--------|
|                                             | Ended                  |   |   | Ended        |   |
|                                             | March 31,              |   |   | December 31, |   |
|                                             | 2009                   |   |   | 2008         |   |
|                                             | (Dollars in thousands) |   |
|                                             |                   |   |   |         |   |   |   |
| Balance at beginning of period                   | $                      | 6,314  |   |         | $      | 3,109 |   |
|                                             |                   |   |   |         |   |   |   |
| Charge-offs:                                     |                   |   |   |         |   |   |   |
| Real estate                                      |                   | (1,386 | )      |         |   | (189 | ) |
| Commercial                                       |                   | (33    | )      |         |   | (97 | ) |
| Consumer                                         |                   | (5     | )      |         |   | (42 | ) |
| Total charge-offs                                |                   | (1,424 | )      |         |   | (328 | ) |
| Recoveries:                                      |                   |   |   |         |   |   |   |
| Real estate                                      |                   | 3      |   |         |   | 0 |   |
| Commercial                                       |                   | 0      |   |         |   | 110 |   |
| Consumer                                         |                   | 3      |   |         |   | 18 |   |
| Total recoveries                                 |                   | 6      |   |         |   | 128 |   |
| Net charge-offs                                  |                   | (1,418 | )      |         |   | (200 | ) |
| Provision for loan losses                        |                   | 3,460  |   |         |   | 3,405 |   |
| Balance at end of period                         | $                      | 8,356  |   |         | $      | 6,314 |   |
| Net charge-offs to average loans                 |                   |   |   |         |   |   |   |
| outstanding during the period (annualized)       |                   | (1.40  | )%     |         |   | (0.05 | )% |
| Allowance for loan losses to loans               |                   | 2.02   |   |         |   | 1.55 |   |
| Allowance for loan losses to nonperforming loans |                   | 74.40  |   |         |   | 60.37 |   |

 

 

Page 15

 

 

----

Analysis of Deposits

 

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

 

|                        |   | Balance at             |    |     |   | Balance at   |   |     |   |
|-----------------------------|--------|------------------------|---------|----------|--------|--------------|--------|----------|--------|
|                        |   | March 31,              |    | %        |   | December 31, |   | %        |   |
|                        |   | 2009                   |    | Deposits |   | 2008         |   | Deposits |   |
|                        |   | (Dollars in thousands) |    |
|                        |   |                   |    |     |   |         |   |     |   |   |   |
| Regular checking            |   | $                      | 22,763  |     | 6.58   | %            | $      | 19,510   |   | 5.35 | % |
| NOW accounts                |   |                   | 21,511  |     | 6.22   |         |   | 20,219   |   | 5.55 |   |
| Passbook                    |   |                   | 11,430  |     | 3.30   |         |   | 11,347   |   | 3.11 |   |
| Statement savings           |   |                   | 9,680   |     | 2.80   |         |   | 8,550    |   | 2.35 |   |
| Money market                |   |                   | 6,936   |     | 2.01   |         |   | 6,122    |   | 1.68 |   |
| Holiday club                |   |                   | 155     |     | 0.04   |         |   | 81       |   | 0.02 |   |
| Certificates of Deposit     |   |                   | 250,538 |     | 72.42  |         |   | 276,851  |   | 75.94 |   |
| IRA Certificates of Deposit |   |                   | 16,215  |     | 4.69   |         |   | 14,757   |   | 4.05 |   |
| Money Market Certificates   |   |                   | 6,701   |     | 1.94   |         |   | 7,114    |   | 1.95 |   |
| Total Deposits              |   | $                      | 345,929 |     | 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 March 31, 2009 and December 31, 2008.

 

|                            |   |   |   |   |   | Regulatory Minimums |   |
|---------------------------------|--------|--------|--------|--------|--------|---------------------|--------|
|                            |   | 2009   |   | 2008   |   | Well                |   | Adequately |   |
|                            |   | Actual |   | Actual |   | Capitalized         |   | Capitalized |   |
|                            |   |   |   |   |   |                |   |   |   |
| Total risk-based capital ratio  |   | 14.20% |   | 14.64% |   | 10.00%              |   | 8.00% |   |
| Tier 1 risk-based capital ratio |   | 9.78%  |   | 10.24% |   | 6.00%               |   | 4.00% |   |
| Tier 1 leverage ratio           |   | 8.09%  |   | 8.64%  |   | 5.00%               |   | 4.00% |   |

 

As of March 31, 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 Exchange Act of 1934) during the quarter ended March 31, 2009, that have materially affected, or are reasonably likely to materially affect, the Company’s            internal control over financial reporting.

 

Page 16

 

 

----

PART II.           Other Information:

 

Item 1. Legal Proceedings -

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

Item 1A.Risk Factors -

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

|   | Item 2. Unregistered Sale 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. |

 

 

Page 17

 

 

----

 

| 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. |
| 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                                                                                                                                                                                                                                |                                                                                                                                                                           |

 

 

Page 18

 

 

----

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:  May 8, 2009 |   | By:                 | /s/ Mary B. Halsey |
|                                         |   |                | Mary B. Halsey

President and Chief Executive Officer

(Duly Authorized Officer |
|  

 

Date:  May 8, 2009 |   | By:                 | /s/ Robert Lee Whitehead |
|                                         |   |                | Robert Lee Whitehead

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

 

 

Page 19