<PAGE>
 
 
                              CECIL BANCORP, INC.


                               ANNUAL REPORT FOR
                                THE YEAR ENDED
                               DECEMBER 31, 1998

<PAGE>
 
                           [CECIL BANCORP LETTERHEAD]



                                 March 22, 1999



To Our Stockholders:

     On behalf of the directors, officers and employees of Cecil Bancorp, Inc.,
and its wholly-owned subsidiaries, Cecil Federal Savings Bank and Columbian
Bank, A Federal Savings Bank, we are pleased to deliver to you, our
shareholders, our annual report.  The past twelve months have been an exciting
time for all of us.  On May 29, 1998, our Company entered into a definitive
agreement to acquire Columbian Bank, A Federal Savings Bank, a locally based
financial institution in Harford County, Maryland.  Located in Harve De Grace,
Columbian was founded in 1893.  On September 30, 1998, Columbian Bank, A Federal
Savings Bank, officially joined our family, expanding our market to the south.
We are pleased with our union, and excited about the enhancements it will bring
to our shareholders and customers.

     The enclosed audited financial statements reflect our operations for the
year ended December 31, 1998.  During that period, total assets increased 8.1%
to $101 million.  Our growth in savings and non-interest bearing deposits
continued, increasing 8.8% to $88 million.  Earnings were impacted by one time
non tax-deductible acquisition expenses of $303,000.

     Affirming our focus of offering new products and services to maintain and
enhance long term profitability, our subsidiary, Cecil Financial Services,
completed its first full year of operations.  Offering alternative investment
services enhances interaction with our existing customers and creates important
new relationships.

     Our efforts to enhance growth and product development are continuous.  We
are pleased to announce our plans for a second location of Columbian Bank, A
Federal Savings Bank, in Havre de Grace on U.S. Route 40, to open in the third
quarter of this year.  This full service branch will serve a rapidly growing
area of Harford County.

     We approach Year 2000 in a state of readiness.  Your company has developed
and implemented plans to limit exposure and target effective communication to
all customers.  As a part of our comprehensive plan, we have upgraded computer
systems and software to ensure Year 2000 compliance, as well as keeping us in
the forefront of information technology.  We look forward to the new millennium.

     The management and Board of Directors wish to thank you for your business,
support and confidence in Cecil Bancorp, Inc.  We encourage you to recommend
Cecil Federal and Columbian Bank, A Federal Savings Bank to your friends,
neighbors and associates.  We pledge our continuing time and energy toward
future success.

Sincerely,



/s/ Bernard L. Siegel              /s/ Mary Beyer Halsey
Bernard L. Siegel                  Mary Beyer Halsey
Chairman of the Board              President and Chief Executive Officer
<PAGE>
 
<TABLE>
<CAPTION>
 
 
Financial Highlights (a)

 
                                                     At December 31,        Change                    
                                                  ------------------   -----------------                             
                                                    1998       1997    Amount    Percent             
                                                  --------   --------  -------   ------- 
                                                 (In thousands, except shares outstanding)

<S>                                          <C>             <C>       <C>       <C> 

Financial Position:
------------------              
 Total assets..............................       $101,224   $ 93,656  $ 7,568     8.1%
 Loans receivable and mortgage-backed
  securities (b)...........................         80,095     77,647    2,448     3.2
 Deposits..................................         87,675     80,596    7,079     8.8
 Stockholders' equity......................         10,118      9,512      606     6.4
 Number of shares outstanding (actual).....        606,494    592,869   13,625     2.3%
 
<CAPTION>  
                                                  For the Year Ended 
                                                     December 31,          Change      
                                                  -------------------  -----------------                 
                                                    1998       1997    Amount    Percent
                                                  --------   --------  ------    -------  
                                                    (In thousands)       (In thousands)
<S>                                               <C>        <C>       <C>       <C> 

Results of Operations:
---------------------                       
 Interest income...........................       $  7,601   $  7,340  $   261     3.6%
 Interest expense..........................          4,111      3,990      121     3.0
 Net interest income.......................          3,490      3,350      140     4.2
 Provision for loan losses.................             90         87        3     3.5
 Net interest income after provision
  for loan losses..........................          3,400      3,263      137     4.2
 Non-interest income.......................            521        455       66    14.5
 Non-interest expense (c)..................          2,924      2,465      459    18.6
 Income taxes..............................            493        524      (31)   (5.9)
 Net earnings..............................            504        729     (225)  (30.9)
 
</TABLE>

-------------------------
(a)  Reflects combined financial position and results of operations of Cecil
     Bancorp, Inc. and Columbian Bank, a Federal Savings Bank at, and for the
     years indicated.
(b)  Includes loans held-for-sale and mortgage servicing rights.
(c)  For the year ended December 31, 1998, includes one-time non-tax deductible
     acquisition expenses of $303,000.

                                       1
<PAGE>
 
Selected Consolidated Financial Information (a)
<TABLE>
<CAPTION>
 
                                      At December 31,           
                                     ----------------- 
                                       1998     1997
                                     -------   ------- 
                                       (In Thousands)

<S>                                  <C>       <C> 
Total amount of:
 Assets..........................    $101,224  $93,656
 Loans receivable, net (b).......      77,185   73,379
 Cash and investment securities..      18,383   13,145
 Mortgage-backed securities......       2,910    4,165
 Savings accounts................      87,675   80,596
 Borrowings......................       1,750    1,750
 Stockholders' Equity............      10,118    9,512

<CAPTION> 
------------------------------------------------------ 
<S>                                  <C>       <C> 
Number of:
 Real estate loans outstanding...       1,489    1,541
 Savings accounts................       9,796    9,399
 Offices   Cecil Federal.........           2        2
           Columbian.............           1        1
 

<CAPTION> 
Consolidated Summary of Operations
 
                                                        At December 31,
                                                        ---------------
                                                         1998     1997
                                                        -------  ------
<S>                                                     <C>      <C>
                                                         (In Thousands)
                                                        
Interest income.......................................   $7,601  $7,340
Interest expense......................................    4,111   3,990
Net interest income before provision                    
 for loan losses......................................    3,490   3,350
Provision for loan losses.............................       90      87
                                                         ------  ------
Net interest income after provision for loan losses...    3,400   3,263
Noninterest income....................................      521     455
Noninterest expense (c)...............................    2,924   2,465
Income before income taxes and cumulative               
 effect of accounting change..........................      997   1,253
Federal income tax expense............................      493     524
                                                         ------  ------
Income before cumulative effect of accounting change..      504     729
Cumulative effect of accounting change................        0       0
                                                         ------  ------
Net income............................................   $  504  $  729
                                                         ======  ======
</TABLE>
-------------------------
(a) Reflects combined financial position and results of operations of Cecil
    Bancorp, Inc. and Columbian Bank, a Federal Savings Bank at, and for the
    years indicated.
(b)  Includes loans held for sale and mortgage-servicing rights.
(c) For the year ended December 31, 1998, includes one-time non-tax deductible
    acquisitions costs of $303,000.

                                       2
<PAGE>
 
<TABLE>
<CAPTION>
Key Operating Ratios (a)
 
                                                    At or for the
                                                Year Ended December 31,
                                                -----------------------
                                                  1998           1997
                                                 ------         ------
                                                    (In Thousands) 
<S>                                              <C>            <C>
Performance Ratios:                                         
 Return on average assets (net income divided               
   by average total assets) (b)................     .51%           .82%
                                                            
 Return on average equity (net income                       
   divided by average equity) (b)..............    5.14           7.88
                                                            
 Equity-to-assets ratio (average equity                     
   divided by average total assets)............   10.00          10.43
                                                            
 Interest rate spread..........................    3.52           3.49
                                                            
 Net interest margin...........................    3.77           3.78
                                                            
 Average interest-earning assets as a                       
  percentage of average interest-bearing                    
  liabilities..................................  105.67         106.37
                                                            
Asset Quality Ratios:                                       
 Nonperforming loans as a percentage                        
   of total loans..............................     .68            .83
                                                            
 Nonperforming assets as a percentage                       
   of total assets.............................     .78           1.64
                                                            
 Net charge-offs to average loans..............     .05            .04
                                                            
 Allowance for loan losses as a                             
  percentage of total loans....................     .52            .48
                                                            
 Allowance for loan losses as a                             
  percentage of non-performing loans...........   76.76%         57.86%
 
</TABLE>
-------------------------
(a)  Reflects combined financial position and results of operations of Cecil
     Bancorp, Inc. and Columbian Bank, a Federal Savings Bank at, and for the
     years indicated.
(b)  For the year ended December 31, 1998, includes one-time non-tax deductible
     acquisition costs of $303,000.

                                       3
<PAGE>
 
                      BUSINESS OF THE COMPANY AND THE BANK

Cecil Bancorp, Inc.

          Cecil Bancorp, Inc. (the "Company") was incorporated under the laws of
the State of Maryland in July 1994 at the direction of the Board of Directors of
Cecil Federal Savings Bank ("Cecil Federal") for the purpose of serving as a
savings institution holding company of Cecil Federal upon the acquisition of all
of the capital stock issued by Cecil Federal in its conversion from mutual to
stock form (the "Conversion").  Substantially all of the Company's assets
consists of the outstanding capital stock of Cecil Federal.  On September 30,
1998, the Company completed its acquisition of Columbian Bank, a Federal Savings
Bank ("Columbian") through the exchange of 1.7021 shares of Company Common Stock
for each outstanding shares of Columbian Common Stock in a transaction valued at
approximately $2.8 million.  The Company holds all of the stock of Cecil Federal
and Columbian and operates them as two separate savings institutions.  Together,
Cecil Federal and Columbian are referred to herein as the "Banks".  The
Company's principal business is the business of Cecil Federal and its wholly
owned subsidiaries, and of Columbian. Therefore, most of the discussion in this
Annual Report relates to the business of the Banks rather than the business of
the Company.

Cecil Federal Savings Bank

          Cecil Federal is a community-oriented financial institution which
commenced operations in 1959 as a Federal mutual savings and loan association.
It converted to a Federal mutual savings bank in January 1993 and, effective
November 10, 1994, Cecil Federal converted from mutual to stock form.  Its
deposits have been federally insured up to applicable limits, and it has been a
member of the Federal Home Loan Bank ("FHLB") system since 1959.  Cecil
Federal's deposits are currently insured by the Savings Association Insurance
Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC") and it is a
member of the FHLB of Atlanta.

          Cecil Federal's primary business is the origination of mortgage loans
secured by single-family residential real estate located primarily in Cecil
County, Maryland, with funds obtained through the attraction of deposits,
primarily certificate accounts with terms of 60 months or less, savings accounts
and transaction accounts.  To a lesser extent, Cecil Federal also makes loans on
commercial and multi-family real estate, construction loans on one- to four-
family residences, home equity loans and land loans.  Cecil Federal also makes
consumer loans including education loans, personal and commercial lines of
credit, automobile loans and loans secured by deposit accounts.  Cecil Federal
purchases mortgage-backed securities and invests in other liquid investment
securities when warranted by the level of excess funds.

          Cecil Federal has two wholly owned subsidiaries, Cecil Service
Corporation and Cecil Financial Services Corporation.  Cecil Service
Corporation's primary business is acting as leasing agent for the North East
Plaza Branch and Cecil Financial Services Corporation's primary business is the
operation, through a partnership with UVEST Investment Services, of a full range
of brokerage and investment services.

          Cecil Federal's main office is located at 127 North Street, Elkton,
Maryland and its phone number is (410) 398-1650.

Columbian Bank, a Federal Savings Bank

          Columbian was originally chartered by the State of Maryland in 1893.
In October 1985, Columbian became a member of the FHLB System and obtained
federal insurance of its deposits.  In January 1989, Columbian converted to a
federally insured, state chartered capital stock institution through the sale
and issuance of 69,140 shares of common stock.  On September 26, 1990, Columbian
changed its name to Columbian Bank, A Federal Savings Bank and became a
federally chartered stock savings bank.  Columbian's deposits are also insured
by the SAIF of the FDIC, and it is a member of the FHLB of Atlanta.

                                       4
<PAGE>
 
          Columbian's primary business is the origination of mortgage loans
secured by single-family residential real estate located primarily in Harford
County, Maryland, with funds obtained through the attraction of deposits,
primarily certificate accounts with terms of 60 months or less and savings
accounts.  To a lesser extent, Columbian also makes loans on commercial and
multi-family real estate, construction loans on one- to four-family residences,
home equity loans and land loans.  Columbian purchases mortgage-backed
securities and invests in other liquid investment securities when warranted by
the level of excess funds.

          Columbian's office is located at 303-307 St. John Street, Havre de
Grace, Maryland, and its phone number is (410) 939-2313.

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

          Cecil Federal's primary business is the origination of mortgage loans
secured by single-family residential real estate located primarily in Cecil
County, Maryland, with funds obtained through the attraction of deposits,
primarily certificate accounts with terms of 60 months or less, savings accounts
and transaction accounts.  To a lesser extent, Cecil Federal also makes loans on
commercial and multi-family real estate, construction loans on one- to four-
family residences, home equity loans and land loans.  Cecil Federal also makes
consumer loans including education loans, personal and commercial lines of
credit, automobile loans and loans secured by deposit accounts.  Although
consumer loans provide Cecil Federal with additional interest income, they also
involve greater risk.  Cecil Federal purchases mortgage-backed securities and
invests in other liquid investment securities when warranted by the level of
excess funds.  Cecil Federal's revenues are derived principally from interest
earned on loans and, to a lesser extent, from interest earned on investments and
mortgage-backed securities.

          The principal business of Columbian is the acceptance of savings
deposits from the general public and the origination of conventional mortgage
loans for the purpose of financing or refinancing one to four family dwellings.
Its income is derived largely from interest and fees in connection with its
lending activities.  Its principal expenses are interest paid on savings
deposits and non-interest expenses.  Columbian's operations are conducted
through its office located at 303-307 St. John Street, Havre de Grace, Maryland.

          The Banks' operations are influenced by general economic conditions
and by policies of financial institution regulatory agencies, including the OTS
and the FDIC.  The Banks' cost of funds are influenced by interest rates on
competing investments and general market interest rates.  Lending activities are
affected by the demand for financing of real estate and other types of loans,
which in turn is affected by the interest rates at which such financing may be
offered.

          The Banks' net interest income is dependent primarily upon the
difference or spread between the average yield earned on loans, investments and
mortgage-backed securities and the average rate paid on deposits and borrowings
(if any), as well as the relative amounts of such assets and liabilities.  The
Banks, like other thrift institutions, are subject to interest rate risk to the
degree that its interest-bearing liabilities mature or reprice at different
times, or on a different basis, than its interest-earning assets.

Year 2000 Issues

          As the Year 2000 approaches, there is growing concern that many
computers and computer systems could malfunction.  Banks, as with many other
industries, could be faced with errors in their account processing, payment
systems, ATM systems, security systems, or virtually any system controlled by a
computer.

                                       5
<PAGE>
 
          The cause is rooted in the programming of the date field within
computer systems and software.  For many years, computer systems were designed
to record only the last two digits of the year in the date field in order to
save costly data storage space.  This programming concept works well while we
are still in the 1900's.  This concept does not work well for the Year 2000, as
that year could be read by a computer to mean 1900.

          Bank regulators and computer system experts are emphasizing systems
and software products be implemented and tested for Year 2000 readiness.  This
task is a monumental undertaking for all parties involved from vendor service
providers, computer systems manufacturers, software providers, and finally the
Banks.  Cecil Federal and Columbian are preparing for the millennium.

          The Banks have prepared an action plan to begin evaluating our systems
and software products. The Banks plan consists of the following:

Problem Awareness: The Banks are aware of the problems that could potentially
-----------------                                                            
arise with the year 2000 problem.  The Banks have analyzed what systems and
software need to be reviewed.

Assessment Phase:  The Banks have made contacts with all its third party vendors
----------------                                                                
to assess exposure to problems. These include those that provide Account & Item
Processing; System Hardware Setup and ATM Software; General Ledger Software; ATM
Transaction Processing; the ATM Service Provider; ATM Software; Financial
Reporting Software; Fed-Line Software; On-Line Bank Service Software; Loan Sales
Software; Loan Documentation Software; HMDA/Geocoding Software; Payroll
Processing; Computer Hardware; Spreadsheet Software; and Word Processing
Software.

          Vendors have been proactive in their response to the Year 2000
problem.  The Banks' vendors have in place or will have in place procedures to
minimize risks associated with the  of the Year 2000 problem by December 31,
1998.

Renovation Phase: Initial steps have been completed to assure compliance with
----------------                                                             
the Year 2000 problem.   A new front-end processing system has been installed in
the third quarter of 1998 at Cecil Federal, and was installed at Columbian prior
to January 31, 1999.  This system is already Year 2000 compliant.  This system
replaces the Banks' previous teller systems which were not compliant.

Validation Phase: The Banks will validate any decision making by thoroughly
----------------                                                           
assessing the systems compatibility with the Year 2000 issues.  Validations will
be recorded and presented to the Board of Directors.  The target date for the
validation phase is March 31, 1999.  The Banks will share testing information
with each other to minimize the amount of testing on the same systems.  Software
and system testing will be done on an ongoing basis through the end of March
1999.

Implementation Phase: The Banks will monitor the implementation of the Year 2000
--------------------                                                            
assessment and report results to the Board of Directors.  The Banks will
continue to stress with their vendors the importance of this project.  The Banks
will keep in continual contact with its vendors until a final solution and
implementation has been completed.  All plans are to be completed as outlined
above.  The implementation phase is to be completed by March 31, 1999.

Contingency Plan: The Banks have prepared a contingency plan that allows for the
----------------                                                                
manual processing of transactions and reporting.  The plan designates the
training and implementation of the manual operation in a worst case scenario.

          The Contingency Plan is being updated in conjunction with our Disaster
Recovery Plan.  The Contingency Plan has been updated and testing on the plan
will take place in the first and second quarters of 1999.

Customer Awareness:   The Banks have also undertaken an effort to reach all
------------------                                                         
business customers via mail to explain how the Year 2000 issue affects their
business.  All businesses need to be aware of the Year 2000 issue and make
attempts to correct any possible problems.

                                       6
<PAGE>
 
          The employees were also made aware of the process and have been
notified regarding the individuals who are responsible for Year 2000 compliance.
A memo was sent to all employees to assist them with their Year 2000 efforts.

Asset and Liability Management

          Key components of a successful asset/liability management strategy are
the monitoring and managing of interest rate sensitivity of both the interest-
earning asset and interest-bearing liability portfolios.

          The Banks have employed various strategies intended to minimize the
adverse effect of interest rate risk on future operations by providing a better
match between the interest rate sensitivity of its assets and liabilities.  In
particular, the Banks' strategies are intended to stabilize net interest income
for the long-term by protecting its interest rate spread against increases in
interest rates.  Such strategies include the origination for portfolio of one-
year, three-year and five-year adjustable-rate mortgage loans secured by one- to
four-family residential real estate and the origination of other loans with
greater interest rate sensitivities than long-term, fixed-rate residential
mortgage loans.  Since the early 1980's the Banks have sought to make their loan
portfolios more interest rate sensitive by originating adjustable rate mortgage
loans for retention in their own portfolios.  As of December 31, 1998,
adjustable rate mortgage loans constituted approximately 41.1% of the Banks'
total loan portfolios.  All fixed-rate mortgage loans are originated according
to Federal Home Loan Mortgage Corporation ("FHLMC") standards for possible sale
in the secondary mortgage market and, depending on market conditions, may be
sold.  The Banks invest excess funds in adjustable-rate or short term (5 years
or less) investments and mortgage-backed securities.

          Asset/liability management in the form of structuring cash instruments
provides greater flexibility to adjust exposure to interest rates.  During
periods of high interest rates, management believes it is prudent to offer
competitive rates on short-term deposits and less competitive rates for long-
term liabilities.  This posture allows the Banks to benefit quickly from
declines in interest rates.  Likewise, offering more competitive rates on long-
term deposits during the low interest rate periods allows the Banks to extend
the repricing and/or maturity of its liabilities thus reducing its exposure to
rising interest rates.

Comparison of Financial Condition at December 31, 1998 and December 31, 1997.

          The Company's assets increased by $7,568,806, or 8.1% to $101,224,415
at December 31, 1998 from $93,655,609 at December 31, 1997.  The Company's
emphasis on expanding the loans receivable portfolio continued.  The loans
receivable portfolio increased by $3,701,981, or 4.8% to $77,184,604 at December
31, 1998 from $73,482,623 at December 31, 1997.  Cash and interest-earning cash
increased as a result of an increase in savings deposits.  The Company's
investments held to maturity decreased by $1,614,034, or 27.6% to $4,228,742 at
December 31, 1998 from $5,842,776 at December 31, 1997.  Investments held for
sale increased $1,106,432 or 37.1% to $4,091,843 at December 31, 1998 from
$2,985,411 at December 31, 1997.  Federal funds sold increased $625,000, or 125%
to $1,125,000 at December 31, 1998 from $500,000 at December 31, 1997.  Mortgage
backed securities held to maturity decreased by $712,551, or 25.8% to $2,046,983
at December 31, 1998 from $2,759,534 at December 31, 1997.  Mortgage backed
securities held for investment decreased by $542,223, or 38.6% to $863,260 at
December 31, 1998 from $1,405,483 at December 31, 1997.  The decreases in the
mortgage backed securities were due to prepayments and maturities.  Plant,
Property, and Equipment increased by $106,533, or 10.6% to $1,112,507 at
December 31, 1998 from $1,005,974 at December 31, 1997.  The increases were
primarily due to the upgrade of equipment as part of Year 2000 plans.

          The Company's liabilities increased $6,963,405, or 8.3% to $91,106,679
at December 31, 1998 from $84,143,274 at December 31, 1997.  During the year
ended December 31, 1998, the Company was able to increase savings deposits as a
result of additional marketing campaigns.  Savings Deposits increased
$7,078,909, or 8.8% to $87,674,802 at December 31, 1998 from $80,595,893 at
December 31, 1997.  Advances from the Federal Home Loan Bank of Atlanta remained
constant at $1,750,000 at December 31, 1998 and at December 31, 1997.  Other
liabilities decreased $56,263, or 8.2% to $629,204 at December 31, 1998 from
$685,467 at December 31, 1997.

                                       7
<PAGE>
 
          The Company's stockholders' equity increased by $605,401, or 6.4% to
$10,117,736 at December 31, 1998 from $9,512,335 at December 31, 1997.  The
increase was primarily due to an increase in retained earnings of $251,619, or
4.8%.  For the year ended December 31, 1998, the Company paid its regular
annualized dividend of $.40 per share.

Results of Operations

          Economic and Market Conditions.  The Banks' results of operations are
          ------------------------------                                       
influenced by the changes in the economic conditions prevailing in the market
area and the general economy.  The Banks concentrate on the traditional thrift
activities, continuing to emphasize one-to-four family residential lending
within its market area.  The Banks' philosophy for funding loans is to rely on
deposits from its local market area rather than borrowing from outside sources,
although the Banks do borrow funds as required to fund lending needs.

          During 1998, stable economic conditions prevailed in the Banks' market
areas.  Federal Reserve fiscal policy was left virtually unchanged, leaving a
span of steady interest rates, both on savings and loan deposits.  Demand for
fixed-rate mortgages were constant, although refinancings were down.  As the
Banks expanded their outreach program, demand for small business and home equity
loans increased.  The volume of savings deposits increased, as the Banks focused
on expanding their demand deposit base.

          Net Income. Net income decreased $223,985, or 30.7% to $504,543 for
          ----------                                                         
the year ended December 31, 1998, from $728,528 for the same period in 1997.
The decrease is a direct result of one-time non-tax deductible acquisition
expenses of $303,000.  The annualized return on average assets and annualized
return on average equity were .51% and 5.14% respectively, for the year ended
December 31, 1998.  This compares to an annualized return on average assets and
the annualized return on average equity of 0.82% and 7.88%, respectively for the
same period in 1997.

          Net Interest Income. Net interest income, the Company's primary source
          -------------------                                                   
of income, increased $140,564, or 4.2% to $3,490,610 for the year ended December
31, 1998, from $3,350,046 for the year ended December 31, 1997.  The weighted
average yield on all interest earning assets decreased from 8.28% for the year
ended December 31, 1997, to 8.21% for the year ended December 31, 1998.  The
weighted average rate paid on interest bearing liabilities decreased from 4.79%
for the year ended December 31, 1997 to 4.69% for the year ended December 31,
1998.

          Interest on loans receivable increased by $306,440, or 4.9% to
$6,549,552 for the year ended December 31, 1998 from $6,243,112 for the year
ended December 31, 1997.  The increase is attributable to an increase in the
average balance outstanding, offset by a slight decrease in average yield.  The
weighted average yield decreased from 8.71% for the year ended December 31, 1997
to 8.59% for the year ended December 31, 1998.

          Interest on mortgage-backed securities decreased $75,403, or 25.4% to
$221,093 for the year ended December 31, 1998 from $296,496 for the year ended
December 31, 1997.  The decrease is a result of a decrease in the average
balance offset by an increase in the weighted average yield.   The Banks have
historically invested in mortgage-backed securities to supplement their lending
efforts and maintain compliance with certain regulatory requirements.

          Interest on investment securities decreased $26,275, or 5.0% to
$495,721 for the year ended December 31, 1998 from $521,996 for the year ended
December 31, 1997.  The decrease is a result of a decrease in the weighted
average yield.  Interest on other investment securities increased $56,738, or
20.4% to $334,969 for the year ended December 31, 1998 from $278,231 for the
year ended December 31, 1997 as a result of an increase in both the weighted
average yield and the average balance outstanding.  Other investments primarily
are short term liquidity accounts with variable rates.

          Interest paid on savings deposits increased $179,403, or 4.7% to
$4,002,772 for the year ended December 31, 1998 from $3,823,369 for the year
ended December 31, 1997.  The increase was the result of an increase in the
average balance outstanding, and a decrease in average cost of funds.  Interest
expense paid on borrowings decreased $58,467, 

                                       8
<PAGE>
 
or 35.1% to $107,953 for the year ended December 31, 1998 from $166,420 for the
year ended December 31, 1997. The decrease was a result of a decrease in the
average cost of funds and the average balance outstanding.

          Provision for Loan Losses. Provisions for loan losses increased
          -------------------------                                      
$3,000, or 3.4% to $90,000 for the year ended December 31, 1998 from $87,000 for
the year ended December 31, 1997.  The provision was increased in connection
with management's ongoing analysis of the loan portfolio.  Loan loss reserves
are based upon management's consideration of current and anticipated economic
conditions which may affect the ability of borrowers to repay loans.  Management
also reviews individual loans for which full collectibility may not be
reasonably assured and considers, among other matters, the risk inherent in the
Banks' loan portfolio, and the estimated net realized value of the underlying
collateral.  The evaluation process is ongoing and results in variations in the
Banks' provision for loan losses in various periods.

          Noninterest income.  Noninterest income increased $65,659, or 14.4% to
          -------------------                                                   
$520,765 for the year ended December 31, 1998 from $455,106 for the year ended
December 31, 1997.  Loan servicing fees increased 21.1%, up $11,425 for the year
ended December 31, 1998 over the same period in 1997.  This was a result of the
increase in balances of the servicing portfolio.  Gains on sale of loans
increased $21,793, or 46.5% to $68,698 for the year ended December 31, 1998 from
$46,905 for the year ended December 31, 1997.  The increase was attributable to
an increase in volumes sold and premiums payable.  Other fees decreased $15,585
or 13.2% to $102,775 for the year ended December 31, 1998 from $118,360 for the
year ended December 31, 1997.   Commission income on alternative investment
products increased $58,157, or 358.4% to $74,386 for the year ended December 31,
1998 from $16,229 for the year ended December 31, 1997.  The increase was
attributable to a full year's commission in 1998 versus three months of
commission in 1997.

          Noninterest Expense.  Noninterest expense increased $458,314, or 18.6%
          --------------------                                                  
to $2,923,572 for the year ended December 31, 1998 from $2,465,258 for the year
ended December 31, 1997.  The Company experienced an increase in compensation
and benefits of $197,897, or 15.0% to $1,518,833 for the year ended December 31,
1998 from $1,320,936 for the year ended December 31, 1997.  The increase can be
attributable to stock option expense, increased personnel and annual merit
increases.  Equipment and data processing expense increased $43,239, or 19.4% to
$265,751 for the year ended December 31, 1998 from $222,512 for the year ended
December 31, 1997.  The increase can be attributed to expenses related to system
updates for Year 2000 compliance.  The Company's SAIF premium increased $2,828,
or 3.5% to $83,492 for the year ended December 31, 1998 as compared to $80,664
for the year ended December 31, 1997.  Other expenses  decreased $88,125, or
12.8% to $602,011 for the year ended December 31, 1998 from $690,136 for the
year ended December 31, 1997.  The decrease is attributable to a decrease in
advertising & promotion expense, loan expense, stationery & office supplies,
postage, meeting expense, and charitable contributions.  One-time non-tax
deductible acquisition expenses of $302,501 attributed to the increase in
noninterest expenses for the year ended December 31, 1998.

          Income Taxes.  Income tax expense for the year ended December 31, 1998
          -------------                                                         
and December 31, 1997 was $493,260 and $524,366, respectively, which equates to
effective rates of 49.4% and 41.8%, respectively.  The increase was a result of
acquisition expenses of $302,501 that are not tax deductible.

                                       9
<PAGE>
 
Average Balances, Interest and Average Yields

          The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated.  Such yields and costs
are derived by dividing income or expense by the average monthly balance of
assets or liabilities, respectively, for the periods presented.  Average
balances are derived from month-end balances.  Management does not believe that
the use of month-end balances instead of daily balances has caused any material
difference in the information presented.
<TABLE>
<CAPTION>
 
                                                                Year Ended December 31,
                                                --------------------------------------------------------
                                                             1998                        1997
                                                -----------------------------  -------------------------
                                                                     Average                     Average
                                                Average               Yield/   Average            Yield/
                                                Balance   Interest     Cost    Balance  Interest   Cost
                                                --------  ---------  --------  -------  --------  ------
                                                                 (Dollars in thousands)
<S>                                             <C>       <C>        <C>       <C>      <C>       <C>
Interest-earning assets:
   Loans receivables (1)......................  $76,209    $ 6,549      8.59%  $71,707   $ 6,243   8.71%
   Investment securities......................    7,616        496      6.51     7,312       522   7.14
   Mortgage-backed securities.................    3,511        221      6.30     4,975       296   5.96
   Other interest-earning assets..............    5,197        335      6.45     4,627       278   6.01
                                                -------    -------             -------   -------
     Total interest-earning assets............   92,533      7,601      8.21    88,621     7,339
                                                             -----                         -----
Noninterest-earning assets....................    5,704                          4,864
                                                -------                        -------
     Total assets.............................  $98,237                        $93,485
                                                =======                        =======
 
Interest-bearing liabilities:
  Advances from FHLB..........................    2,021        108      5.34     2,608       166   6.38
  Deposits....................................   84,577      3,995      4.72    79,768     3,815   4.78
  Advances from borrowers for taxes
    and insurance.............................      970          8       .83       941         8    .85
                                                -------    -------             -------   -------
     Total interest-bearing liabilities.......   87,568      4,111      4.69    83,317     3,989
                                                           -------                       -------
Non-interest-bearing liabilities..............      846                            929
                                                -------                        -------
     Total liabilities........................   88,414                         84,246
Retained earnings.............................    9,823                          9,239
                                                -------                        -------
     Total liabilities and retained earnings..  $98,237                        $93,485
                                                =======                        =======
Net interest income...........................             $ 3,490                       $ 3,350
                                                           =======                       =======
Interest rate spread..........................                          3.52%                      3.49%
                                                                       =====                      =====
Net yield on interest-earning assets..........                          3.77%                      3.78%
                                                                     =======                    =======
Ratio of average interest-earning assets                                              
  to average interest-bearing liabilities.....                        105.67%                    106.37%
                                                                     =======                    =======
</TABLE>
-------------------------
(1)  Includes loans held-for-sale.

                                       10
<PAGE>
 
Rate/Volume Analysis

          The table below sets forth certain information regarding changes in
interest income and interest expense of the Banks for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); (ii) changes in rates (change in
rate multiplied by old volume) and (iii) changes in both rate and volume
(changes in rate multiplied by the changes in volume).  Dollars are in
thousands.
<TABLE>
<CAPTION>
 
                                            Year Ended December 31,
                                        -------------------------------
                                          1998        vs.     1997
                                        -------------------------------
                                               Increase (Decrease)
                                                     Due to
                                        -------------------------------
                                                          Rate/
                                        Volume    Rate    Volume  Total
                                        ------    -----   ------  -----
                                                  (In thousands)
<S>                                      <C>     <C>      <C>     <C>
Interest income:
 Loans receivable (1)..................   $394    $ (85)   $ (3)  $306
 Mortgage-backed securities............    (87)      17      (5)   (75)
 Investment securities.................     22      (46)     (2)   (26)
 Other interest-earning assets.........     34       20       3     57
                                          ----    -----    ----   ----
   Total interest-earning assets.......    363      (94)     (7)   262

Interest expense:
 Advances from FHLB....................    (37)     (27)      6    (58)
Deposits...............................    230      (48)     (2)   180
 Advances from borrowers for
  taxes and insurance..................     --       --      --     --
                                          ----    -----    ----   ----
   Total interest-bearing liabilities..    193      (75)      4    122
                                          ----    -----    ----   ----
Change in net interest income..........   $170    $ (19)   $(11)  $140
                                          ====    =====    ====   ====
</TABLE>

--------------------
(1)     Includes loans held for sale.


Liquidity and Capital Resources

          The Banks' principal sources of funds are cash, receipts from
deposits, loan repayments by borrowers, proceeds from maturing investments,
advances (when utilized) from the FHLB and net earnings.  The Banks have an
agreement with the FHLB of Atlanta to provide cash advances, should the need for
additional funds be required.

          For regulatory purposes, liquidity is measured as a ratio of cash and
certain investments to withdrawable deposits and short-term borrowings.  The
minimum level of liquidity required by regulation is presently 4%. The Banks=
liquidity ratio at December 31, 1998, was approximately 17.88%.  The Banks
maintain a higher level of liquidity than required by regulation as a matter of
management philosophy in order to more closely match interest-sensitive assets
with interest-sensitive liabilities.

          Commitments to originate mortgage loans are legally binding agreements
to lend to the Banks' customers.  Commitments at December 31, 1998 to originate
adjustable-rate and fixed-rate mortgage loans were approximately $3,263,200,
expiring in 60 days or less.  The Banks believe liquidity is adequate to fund
its future commitments.

          The Banks have $40.2 million in certificates due within one year and
$30.6 million in other deposits without specific maturity at December 31, 1998.
Management estimates that most of the deposits will be retained or replaced by
new deposits.

                                       11
<PAGE>
 
Impact of Inflation

          The consolidated financial statements and related data presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation.  The primary
impact of inflation on the operations of the Banks are reflected in increased
operating costs.  Unlike most industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary in nature.  As a result,
interest rates, generally, have a more significant impact on a financial
institution's performance than does inflation.  Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.  In the current interest rate environment, liquidity and the
maturity structure of the Banks= assets and liabilities are critical to the
maintenance of acceptable performance levels.

Impact of Accounting Pronouncements

          Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities.  In June 1996, the FASB issued SFAS 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" which was adopted by the Company effective January 1, 1997.
This Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control.  It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings.  Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have been
extinguished.  The financial-components approach focuses on the assets and
liabilities that exist after the transfer.  Many of these assets and liabilities
are components of financial assets that existed prior to the transfer.  If the
transfer does not meet the criteria for a sale, the transfer is accounted for as
a secured borrowing with a pledge of collateral.  The adoption of SFAS 125 did
not have a material impact on the Company's consolidated financial statements.

          Earnings Per Share.  Effective December 31, 1997, the Company adopted
SFAS 128, "Earnings Per Share". This Statement establishes standards for
computing and presenting earnings per share ("EPS") and applies to entities with
publicly held common stock or potential common stock.  This Statement simplifies
the standards for computing earnings per share previously found in APB Opinion
No. 15, "Earnings Per Share", and makes them comparable to international EPS
standards.  It replaces the presentation of primary EPS with a presentation of
basic EPS, requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures, and
requires a reconciliation of the numerator and the denominator of the basic EPS
calculation to the numerator and the denominator of the diluted EPS calculation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period.  Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.  This statement is effective for
periods ending after December 15, 1997, and requires restatement of all prior
periods presented.

          Disclosure of Capital Structure.  Effective December 31, 1998 the
Company adopted SFAS No.  129, "Disclosure of Information About Capital
Structure."  This statement consolidates existing guidance and requires entities
(public and non-public) to disclose certain information about the entity=s
capital structure.  It contains no change in disclosure requirements for
entities such as the Company that were previously subject to the requirements of
Opinions 10 - "Omnibus Opinion - 1966" and 15 - "Earnings Per Share" and
Statement 47 - "Disclosure of Long-Term Obligations."  Accordingly, no new
reporting requirements have been imposed on the Company.

          Reporting Comprehensive Income.  Effective for the years ended
December 31, 1998 the Company adopted SFAS No.  130, "Reporting Comprehensive
Income," which requires reporting of "Comprehensive income" and its components
in financial statements.  "Comprehensive income" includes net income and other
items of comprehensive income, such as unrealized gains and losses on available-
for-sale securities and minimum pension liability adjustments, 

                                       12
<PAGE>
 
which are excluded from net income. This statement was effective for periods
beginning after December 15, 1997 and required the restatement of all prior
periods presented.

          Disclosure About Segments of an Enterprise and Related Information.
Effective for the year ended December 31, 1998 the Company adopted SFAS No.  131
"Disclosure About Segments of an Enterprise and Related Information" which
supersedes SFAS No.  14 "Financial Reporting for Segments of a Business
Enterprise."  SFAS No.  131 established standards for the way that public
enterprises report information about operating segments in financial statements
issued to the public.  It also establishes standards for disclosures regarding
products and services, geographic areas and major customers.  The adoption of
SFAS No.  131 did not have a material impact on the Company=s consolidated
financial statements.

          Employers' Disclosure about Pensions and Other Post-retirement
Benefits.  In February 1998, the FASB issued SFAS No.  132, "Employers=
Disclosure about Pensions and Other Post-retirement Benefits"  which revises
employers' disclosure about pension and other post-retirement benefit plans.
SFAS No.  132 is effective for financial statements for the periods beginning
after December 31, 1997, and requires comparative information for earlier years
to be restated.  This standard currently does not apply to the Company.

          Accounting for Derivative Instruments and Hedging Activities.  During
the second quarter of 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities, " which
will be effective for the Company's fiscal year 2000.  This statement
establishes accounting and reporting standards requiring that every derivative
instruments, including certain derivative instrument imbedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value.  The Statement also requires that changes in the
derivative=s fair value be recognized in earnings unless specific hedge
accounting criteria are met.  The Company is currently assessing the impact of
this new Statement on its consolidated financial position, liquidity, and
results of operations.

                       CONSOLIDATED FINANCIAL STATEMENTS

                               TABLE OF CONTENTS
                               -----------------
<TABLE>
<CAPTION>
 
                                                             PAGE
<S>                                                          <C>
 
          Independent Auditors' Reports                       14
 
          Consolidated Statements of Financial Condition      16
 
          Consolidated Statements of Income                   18
 
          Consolidated Statements of  Stockholders' Equity    20
 
          Consolidated Statements of Cash Flows               21
 
          Notes to Consolidated Financial Statements          23
</TABLE>

                                       13
<PAGE>
 
                                                             2002 W 14th Street
[SIMON MASTER & SIDLOW LETTERHEAD APPEARS HERE]            Wilmington, DE 19806
                                              
                                                                 (302) 652-3480
                                                             Fax (302) 656-8778
BOARD OF DIRECTORS AND STOCKHOLDERS
CECIL BANCORP, INC. AND SUBSIDIARIES
ELKTON, MARYLAND



                          Independent Auditors' Report
                          ----------------------------

        We have audited the accompanying consolidated statements of financial
condition of CECIL BANCORP, INC. AND SUBSIDIARIES as of December 31, 1998 and
1997 and the related consolidated statements of income and comprehensive income,
stockholders' equity and cash flows for the years then ended.  These financial
statements are the responsibility of the Corporation's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.

        We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis for our
opinion.

        In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial condition of CECIL
BANCORP, INC. AND SUBSIDIARIES as of December 31, 1998 and 1997 and the results
of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.

        We previously audited and reported upon the consolidated statement of
financial condition of CECIL BANCORP, INC. AND SUBSIDIARIES as of December 31,
1997 and the related consolidated statements of income, stockholders' equity and
cash flows for the year then ended, prior to their restatement for the 1998
pooling of interests.  The contribution of CECIL BANCORP, INC. AND SUBSIDIARIES
to total assets, interest income and net income represented $63,660,230,
$5,018,366, and $565,666 of the respective restated totals.  Separate financial
statements of Columbian Bank, a Federal Savings Bank included in the 1997
restated consolidated statement of financial position, and consolidated
statements of income, stockholders' equity, and cash flows were examined and
reported upon separately by other auditors.  We also audited the combination of
the accompanying consolidated balance sheet and consolidated statements of
income, retained earnings, and cash flows for the year ended December 31, 1997,
after restatement of the 1998 pooling of interests.  In our opinion, such
consolidated statements have been properly compiled on the basis described in
Note 19 to the consolidated financial statements.


                                             /s/ Simon, Master & Sidlow, PA

January 27, 1999

                                      14
<PAGE>
 
                           Anderson Associates, LLP
                         Certified Public Accountants
                                7621 Fitch Lane
                           Baltimore, Maryland 21236
                                 410-882-8050


                         INDEPENDENT AUDITOR'S REPORT
                         ----------------------------

Board of Directors
Columbian Bank, A Federal Savings Bank
Havre de Grace, Maryland

        We have audited the accompanying statements of financial condition of 
Columbian Bank, A Federal Savings Bank as of December 31, 1997 and 1996, and the
related statements of operations, stockholders' equity and cash flows for each 
of the two years in the two year period ended December 31, 1997. These financial
statements are the responsibility of the Bank's management. Our responsibility 
is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting 
the amounts and disclosures in the financial statements. An audit also includes 
assessing the accounting principles used and significant estimates made by 
management, as well as evaluating the overall financial statement presentation. 
We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present 
fairly, in all material respects, the financial position of Columbian Bank, A 
Federal Savings Bank at December 31, 1997 and 1996, and the results of its 
operations and cash flows for each of the two years in the two year period ended
December 31, 1997 in conformity with generally accepted accounting principles.


                                              /s/ Anderson Associates LLP
 
March 11, 1998
Baltimore, Maryland


                                      15

<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

                CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                ----------------------------------------------


                                    ASSETS
                                    ------

<TABLE>
<CAPTION>
 
                                                               December 31,
                                                              --------------
                                                          1998             1997
                                                       ---------         --------
                                                                            (1)
<S>                                                      <C>            <C>
Cash                                                     $  2,725,430   $ 1,297,546
Cash - Interest bearing                                     6,211,760     2,519,230
Federal funds sold                                          1,125,000       500,000
Investment securities
        Securities held-to-maturity (estimated
          market value of $4,232,699 in 1998 and
          $5,839,453 in 1997) (Note 3)                      4,228,742     5,842,776
        Securities available-for-sale at estimated
          market value (Note 3)                             4,091,843     2,985,411
Mortgage-backed securities
        Securities held-to-maturity (estimated
           market value of $2,044,194 in 1998 and
           $2,770,778 in 1997) (Note 4)                     2,046,983     2,759,534
        Securities available-for-sale at estimated
           market value (Note 4)                              863,260     1,405,483
Loans held for sale (estimated market value
        of $2,581,475 in 1998 and $1,380,439 in 1997)       2,515,151     1,362,969
Loans receivable, net (Note 5)                             74,545,912    72,016,049
Real estate owned                                             187,742       380,481
Office properties, equipment and leasehold
        improvements at cost, less accumulated
        depreciation and amortization (Note 6)              1,112,507     1,005,974
Stock in Federal Home Loan Bank of
        Atlanta - at cost (Note 7)                            672,300       652,700
Accrued interest receivable (Note 8)                          597,922       662,992
Mortgage servicing rights                                     123,541       103,605
Prepaid expenses                                               50,040        37,455
Deferred taxes (Note 11)                                      114,891        52,869
Other assets                                                   11,391        70,535
                                                         ------------   -----------
 
           TOTAL ASSETS                                  $101,224,415   $93,655,609
                                                         ============   ===========
</TABLE>

(1)  Restated due to pooling of interest transaction
      completed September 30, 1998


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

                          16                        
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

                CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                ----------------------------------------------


                     LIABILITIES AND STOCKHOLDERS' EQUITY
                     ------------------------------------
<TABLE>
<CAPTION>
                                                              December 31,
                                                      -----------------------------
                                                           1998           1997
                                                      --------------  -------------
                                                                           (1)
<S>                                                   <C>             <C>
LIABILITIES
        Savings deposits (Note 9)                      $ 87,674,802    $80,595,893
        Advance payments by borrowers for
           property taxes and insurance                     821,625        842,358
        Employee stock ownership debt                       231,048        269,556
        Other liabilities                                   629,204        685,467
        Advances from Federal Home Loan Bank
           of Atlanta (Note 10)                           1,750,000      1,750,000
                                                       ------------    -----------
 
           TOTAL LIABILITIES                             91,106,679     84,143,274
                                                       ------------    -----------
COMMITMENTS
 
STOCKHOLDERS' EQUITY
        Common stock, $.01 par value
           Authorized:  4,000,000 shares
           Issued and outstanding:  606,494 shares
             in 1998 and 592,869 shares in 1997               6,065          5,929
        Additional paid in capital                        4,863,511      4,561,520
        Employee stock ownership debt                      (231,048)      (269,556)
        Deferred compensation - Management
           Recognition Plan                                 (80,676)      (118,361)
        Retained earnings, substantially
           restricted                                     5,543,960      5,292,341
        Accumulated other comprehensive income net
           of deferred taxes of $8,584 and $7,528
           in 1998 and 1997, respectively                    15,924         40,462
                                                       ------------    -----------
 
           TOTAL STOCKHOLDERS' EQUITY                    10,117,736      9,512,335
                                                       ------------    -----------
           TOTAL LIABILITIES AND
             STOCKHOLDERS' EQUITY                      $101,224,415    $93,655,609
                                                       ============    ===========
</TABLE>

(1)  Restated due to pooling of interest transaction
      completed September 30, 1998


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

                                      17
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

          CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
          ----------------------------------------------------------

<TABLE>
<CAPTION>
                                                    Year ended December 31,
                                                  -------------------------
                                                    1998            1997
                                                  --------        --------
<S>                                              <C>            <C>
INTEREST INCOME                                                      (1)
        Loans receivable                           $6,549,552    $6,243,112
        Mortgage-backed securities                    221,093       296,496
        Investment securities                         495,721       521,996
        Other interest-earning assets                 334,969       278,231
                                                   ----------    ----------
           Total interest income                    7,601,335     7,339,835
                                                   ----------    ----------
INTEREST EXPENSE
        Interest expense on deposits                4,002,772     3,823,369
        Borrowing                                     107,953       166,420   
                                                    ---------     ---------
           Total interest expense                   4,110,725     3,989,789
                                                   ----------    ----------                           
           Net interest income                      3,490,610     3,350,046
        Provision for loan losses                      90,000        87,000
                                                   ----------    ----------
           Net interest income after provision
             for loan losses                        3,400,610     3,263,046
                                                   ----------    ----------
NONINTEREST INCOME (LOSS)
        Loan service charges                           65,641        54,216
        Dividends on FHLB stock                        49,042        42,857
        Gain on sale of loans                          68,698        46,905
        Gain on sale of office properties
           and equipment                                             44,769
        Commission income                              74,386        16,229
        Checking account fees                         160,223       131,770
        Other                                         102,775       118,360
                                                   ----------    ----------
           Total noninterest income                   520,765       455,106
                                                   ----------    ----------
NONINTEREST EXPENSE
        Compensation and benefits                   1,518,833     1,320,936
        Occupancy expense                             150,984       151,010
        Equipment and data processing expense         265,751       222,512
        SAIF deposit insurance premium                 83,492        80,664
        Merger expense                                302,501
        Other                                         602,011       690,136
                                                   ----------    ----------
           Total noninterest expense                2,923,572     2,465,258
                                                   ----------    ----------
 
           Income before income taxes                 997,803     1,252,894
                                                   ----------    ----------
INCOME TAXES (Note 11)
        Current                                       551,662       531,318
        Deferred                                     ( 58,402)       (6,952)
           Total income taxes                         493,260       524,366
                                                    ----------    ----------
NET INCOME                                         $  504,543    $  728,528
                                                   ==========    ==========
</TABLE>

(1)  Restated due to pooling of interest transaction
      completed September 30, 1998

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

                                      18
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

          CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
          ----------------------------------------------------------

                                  (Continued)

<TABLE>
<CAPTION>
                                                        Year ended December 31,
                                                       -------------------------
                                                         1998           1997
                                                      ----------     ----------
                                                                           (1)
<S>                                                  <C>           <C>
NET INCOME                                            $ 504,543         $728,528
 
OTHER COMPREHENSIVE INCOME (LOSS)
 Unrealized gains (losses) on investment
  securities, net of deferred taxes of
  $1,556 and $1,435 in 1998 and 1997,
  respectively                                          (24,538)          19,741
                                                      ---------         --------
 
TOTAL COMPREHENSIVE INCOME                            $ 480,005         $748,269
                                                      =========         ========
 

Earnings per common share and
        common share equivalent                       $     .88         $   1.30
                                                      =========         ========

Earnings per common share -
        assuming full dilution                        $     .87         $   1.28
                                                      =========         ========
</TABLE>

(1)  Restated due to pooling of interest transaction
      completed September 30, 1998

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

                                      19
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
          ----------------------------------------------------------

                    YEARS ENDED DECEMBER 31, 1998 AND 1997
                    --------------------------------------
<TABLE>
<CAPTION>
                                                                         Deferred
                                                           Employee     Compensation-               Accumulated
                                                             Stock      Management                  Other               Total
                                  Common     Paid-in      Ownership     Recognition     Retained    Comprehensive    Stockholders'
                                   Stock     Capital         Plan         Plan          Earnings    Income              Equity
                                  -------  ------------  ------------  ------------   ------------  --------------  --------------
<S>                               <C>        <C>           <C>           <C>           <C>           <C>            <C>
BALANCE AT
     DECEMBER 31, 1996 (1)         $5,871   $4,472,547   $  (308,064)  $  (156,047)   $ 4,882,346    $  20,721      $ 8,917,374
Change in net unrealized
     gain on securities
     available-for-sale                                                                                 19,741           19,741
Cash dividends paid                                                                      (298,133)                     (298,133)
Repayment of ESOP debt                                        38,508                                                     38,508
Release of ESOP shares                          38,508                                                                   38,508
Net income                                                                                728,528                       728,528
Deferred compensation
     amortization                                                           37,686                                       37,686
Stock option exercised                 23       23,602                                                                   23,625
Stock dividend                         35       20,365                                    (20,400)
Release of vested
     MRP shares                                  6,498                                                                    6,498
                                   ------   ----------   -----------   -----------    -----------    ---------      -----------
BALANCE AT
     DECEMBER 31, 1997 (1)          5,929    4,561,520      (269,556)     (118,361)     5,292,341       40,462        9,512,335
Change in net unrealized
     gain on securities
     available-for-sale                                                                                (24,538)         (24,538)
Cash dividends paid                                                                      (213,767)                     (213,767)
Stock dividends paid                   22       40,460                                    (39,157)                        1,325
Repayment of ESOP debt                                        38,508                                                     38,508
Release of ESOP shares                          38,508                                                                   38,508
Net income                                                                                504,543                       504,543
Deferred compensation
     amortization                                                           37,685                                       37,685
Stock options exercised               114      201,049                                                                  201,163
Cash in lieu of fractional
     shares paid at pooling of
     interest transaction                       (1,417)                                                                  (1,417)
Release of vested
     MRP shares                                 23,391                                                                   23,391
                                   ------   ----------   -----------   -----------    -----------    ---------      -----------
BALANCE AT
     DECEMBER 31, 1998             $6,065   $4,863,511   $  (231,048)  $   (80,676)   $ 5,543,960    $  15,924      $10,117,736
                                   ======   ==========   ===========   ===========    ===========    =========      ===========
</TABLE>

(1) Restated due to pooling of interest transaction completed September 30, 1998

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

                                      20
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     -------------------------------------
<TABLE>
<CAPTION>
                                                                           Year ended December 31,
                                                                          ------------------------
                                                                         1998                 1997
                                                                      ----------           ----------
<S>                                                                  <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES                                                           (1)
        Interest and fees received on loans
           and investments                                           $   8,072,285      $   7,606,523
        Cash paid to suppliers and employees                            (2,664,015)        (2,343,345)
        Proceeds from sale of loans                                      2,850,271          3,010,289
        Origination of loans held for sale                              (4,350,500)        (2,833,100)
        Interest paid                                                   (4,110,725)        (3,984,599)
        Income taxes paid                                                 (665,933)          (304,073)
                                                                     -------------      -------------
           NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES               (868,617)         1,151,695
                                                                     -------------      -------------
 
CASH FLOWS FROM INVESTING ACTIVITIES
        Proceeds from sale and maturities of
           investment securities                                         7,899,844          8,390,651
        Proceeds from maturities of
           mortgage-backed securities                                    1,463,209          1,134,361
        Purchases of investment securities                              (7,379,454)        (7,934,136)
        Purchases of mortgage-backed securities                           (219,678)
        Loans originated                                               (30,383,814)       (21,186,239)
        Principal collected on loans                                    28,180,696         17,616,540
        Purchases of office properties, equipment
           and leasehold improvements                                     (205,317)          (207,366)
        Proceeds from sale of office properties,
           equipment, and leasehold improvements                                              129,295
        Proceeds from sale of real estate owned                            426,902            188,378
        Purchase of real estate owned                                     (234,163)          (171,229)
        Purchase of stock in Federal Home Loan
           Bank of Atlanta                                                 (19,600)           (15,200)
                                                                     -------------      -------------
            NET CASH USED BY INVESTING ACTIVITIES                         (471,375)        (2,054,945)
                                                                     -------------      -------------
 
CASH FLOWS FROM FINANCING ACTIVITIES
        Net increase (decrease) in demand deposits,
           NOW accounts, and savings accounts                           67,432,105         31,077,447
        Proceeds from sales of certificates                              8,991,415          7,992,543
        Payments of maturing certificates of deposits                  (69,344,611)       (34,603,911)
        Decrease in advance payments by borrowers
           for property taxes and insurance                                (20,733)           (45,513)
        Proceeds from issuance of common stock                             202,489             23,626
        Repayments to Federal Home Loan
           Bank of Atlanta                                                                 (2,750,000)
        Dividends paid                                                    (213,767)          (298,133)
        Unearned ESOP compensation decrease                                 38,508             38,508
                                                                     -------------      -------------
            NET CASH PROVIDED BY FINANCING ACTIVITIES                    7,085,406          1,434,567
                                                                     -------------      -------------
 
NET INCREASE IN CASH AND CASH EQUIVALENTS                                5,745,414            531,317
 
CASH AND CASH EQUIVALENTS
        BEGINNING OF YEAR                                                4,316,776          3,785,459
                                                                     -------------      -------------
        END OF YEAR                                                  $  10,062,190      $   4,316,776
                                                                     =============      =============
</TABLE>

(1)  Restated due to pooling of interest transactions
      completed September 30, 1998

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


                                      21
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     -------------------------------------

                                  (Continued)
<TABLE>
<CAPTION>
                                                                   Year ended December 31,
                                                               -------------------------------
                                                                   1998              1997
                                                                ---------          ---------
                                                                                      (1)
<S>                                                         <C>                  <C>
RECONCILIATION OF NET INCOME TO NET CASH
        PROVIDED (USED) BY OPERATING ACTIVITIES
 
Net Income                                                   $   504,543          $   728,528
 
Adjustments to reconcile net income to
        net cash provided (used) by operating
        activities:
           Gain on sale of office properties,
             equipment, and leasehold
             improvements                                                             (44,769)
           Depreciation                                           98,783               77,263
           Provision for loan losses                              90,000               87,000
           Amortization of investment
             security premiums                                     4,808                1,651
           Net amortization of deferred loan fees                                      (1,016)
           Stock dividends                                       (31,059)             (30,655)
           Increase (decrease) in accrued
             interest receivable                                  65,070              (29,663)
           (Increase) decrease in deferred
             taxes                                               (61,854)              61,525
           Increase in mortgage servicing rights                 (19,936)             (43,028)
           (Increase) decrease in prepaid
             expenses                                            (12,585)               5,423
           (Increase) decrease in other assets                    59,144              (24,229)
           Increase (decrease) in other liabilities              (56,263)             189,198
           (Increase) decrease in loans held
             for sale                                         (1,568,927)             130,284
           Distribution from MRP Trust                            61,076               44,183
           Cash paid in lieu of fractional
             shares                                               (1,417)
                                                             -----------          -----------     
                                                              (1,373,160)             423,167
                                                             -----------          -----------
 
                                                             $  (868,617)         $ 1,151,695
                                                             ===========          ===========      
 </TABLE>

(1)  Restated due to pooling of interest transactions
      completed September 30, 1998


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

                                      22
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

                    YEARS ENDED DECEMBER 31, 1998 AND 1997
                    --------------------------------------


1.      SUMMARY OF SIGNIFICANT ORGANIZATION AND ACCOUNTING POLICIES

        a. Organization and Principles of Consolidation -- On September 30,
           --------------------------------------------                    
             1998, the Corporation merged with Columbian Bank, a Federal Savings
             Bank ("Columbian") in a transaction accounted for as a pooling of
             interest. All financial information includes the financial position
             and results of operations of Columbian for all periods presented
             prior to the date of the merger (See Note 19).

             Cecil Bancorp, Inc. (the Corporation) is a savings and loan holding
             company, and is the parent company of Cecil Federal Savings Bank
             ("Cecil") and Columbian (the Banks). Cecil and Columbian operate as
             separate entities. The consolidated financial statements include
             the accounts of the Corporation, the Banks, and Cecil's wholly
             owned subsidiaries, Cecil Service Corporation and Cecil Financial
             Services Corporation.

             The Banks are members of the Federal Home Loan Bank System (FHLB)
             and are subject to regulation by the Office of Thrift Supervision
             (OTS), a division of the U.S. Government Department of Treasury. As
             members of this System, the Banks maintain a required investment in
             capital stock of the FHLB. The Banks maintain insurance on savings
             deposits within certain limitations as members of the Savings
             Association Insurance Fund (SAIF) which is administered by the
             Federal Deposit Insurance Corporation (FDIC). Regulatory reserve
             requirements, federal income tax requirements and related
             restrictions of retained earnings are discussed in Notes 11, 12 and
             13.

        b. Cash and Cash Equivalents -- For purposes of reporting cash flows,
           -------------------------                                         
             cash and cash equivalents include cash on hand, amounts due from
             banks and federal funds sold. Generally, federal funds are
             purchased and sold for one-day periods.

        c. Investment Securities -- Regulations require the Banks to maintain,
           ---------------------                                              
             in cash and U.S. Government and other approved securities, an
             amount equal to 4% of savings accounts (net of loans on savings
             accounts) plus short-term borrowings. In addition, short-term
             assets must constitute at least 1% of net withdrawable savings and
             short-term borrowings.

             The Corporation carries certain investments at amortized cost,
             which are not adjusted to the lower of cost or market because
             management has the ability and intent to hold them to maturity.
             Gains and losses on sales of these securities are recognized when
             realized and are shown in the consolidated statements of
             operations.

             The Corporation also classifies certain investments as available
             for sale because these securities are not intended to be held to
             maturity. Such securities are carried at fair value. Unrealized
             gains and losses, net of tax, on securities available-for-sale are
             recognized as direct increases or decreases in accumulated other
             comprehensive income.


                                      23
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

                    YEARS ENDED DECEMBER 31, 1998 AND 1997
                    --------------------------------------

                                  (Continued)


1.      SUMMARY OF SIGNIFICANT ORGANIZATION AND ACCOUNTING POLICIES (Continued)

        d. Allowance for Loan Losses -- A provision for loan losses is 
           -------------------------                                    
             charged to operations based on management's evaluation of the
             potential loss in its portfolio. Such evaluation, which
             includes a review of all loans of which full collectibility may
             not be reasonably assured, considers among other matters the
             estimated market value of the underlying collateral.

        e. Property and Equipment -- Depreciation of office buildings and
           ----------------------                                        
             equipment is accumulated on the straight-line method over the
             estimated useful lives of the related assets. Estimated lives
             are 50 years for buildings and three to fifteen years for
             equipment. Leasehold improvements are amortized on the straight
             line method over the remaining terms of the related leases or
             over their estimated useful lives, whichever is shorter.

             Maintenance and repairs are charged to expense as incurred and
             improvements are capitalized. The cost and accumulated
             depreciation relating to premises and equipment retired or
             otherwise disposed of are eliminated from the accounts and any
             resulting gains and losses are credited or charged to income.

        f. Mortgage Loan Interest Income -- The Corporation provides an
           -----------------------------                               
             allowance for uncollectible interest on all accrued interest
             related to loans 90 days or more delinquent. This allowance is
             netted against accrued interest receivable for financial
             statement disclosure. Such interest ultimately collected is
             credited to income in the period of recovery.

        g. Loans Held for Sale -- Mortgage loans originated and held for 
           ------------------- 
             sale in the secondary market are carried at the lower of cost
             or market value determined on an aggregate basis. Gains and
             losses on the sale of loans held for sale are determined using
             the specific identification method.

        h. Income Taxes -- Deferred taxes on income result from the 
           ------------   
             recognition of the income tax effect of temporary differences
             in reporting transactions for financial and tax purposes. Such
             temporary differences relate primarily to deferred loan fees,
             interest received in advance, accrued compensation to
             directors, and the recapture of a special bad debt deduction
             (See Note 11).

             The Corporation and the Banks along with the subsidiaries file
             consolidated Federal tax returns.

                                      24
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

                    YEARS ENDED DECEMBER 31, 1998 AND 1997
                    --------------------------------------

                                  (Continued)



1.      SUMMARY OF SIGNIFICANT ORGANIZATION AND ACCOUNTING POLICIES (Continued)

        i.  Real Estate Owned -- Real estate properties acquired through, or in
            -----------------                                                  
                 lieu of, loan foreclosure are to be sold and are initially
                 recorded at fair value at the date of foreclosure. Costs
                 relating to development and improvement of property are
                 capitalized, whereas costs related to the holding of property
                 are expensed.

                 Valuations are periodically performed by management, and an
                 allowance for losses is established by a charge to operations
                 if the carrying value of a property exceeds its estimated net
                 realizable value.

        j.  Mortgage-backed Securities -- Mortgage-backed securities represent
            --------------------------                                        

                 participating interests in pools of long-term first mortgage
                 loans originated and serviced by issuers of the securities.
                 Mortgage-backed securities are carried at unpaid principal
                 balances, adjusted for unamortized premiums and unearned
                 discounts. Premiums and discounts are amortized using the
                 interest method over the remaining period to contractual
                 maturity, adjusted for anticipated prepayments. Certain
                 mortgage-backed securities are not adjusted to the lower of
                 cost or market because management intends and has the ability
                 to hold them to maturity. Should any be sold, cost of
                 securities sold is determined using the specific identification
                 method.

                 The Corporation also classifies certain mortgage-backed
                 securities as available for sale because these securities are
                 not intended to be held to maturity. Such securities are
                 carried at fair value. Unrealized gains and losses, net of tax,
                 on securities available for sale are recognized as direct
                 increases or decreases in accumulated other comprehensive
                 income.

        k.  Loan Origination Fees -- Loan commitment fees and loan fees for
            ---------------------                                          
                 originating loans are accounted for in accordance with
                 Statement of Financial Accounting Standards No. 91, "Accounting
                 for Nonrefundable Fees and Costs Associated with Originating
                 and Acquiring Loans and Initial Direct Costs of Leases" (SFAS
                 91), which requires that certain direct costs associated with
                 the loan originating process be netted against originating fees
                 received, with the net resulting amount amortized over the
                 contractual lives of the loan on the level-yield method as an
                 adjustment to the loan's yield.



                                      25
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

                    YEARS ENDED DECEMBER 31, 1998 AND 1997
                    --------------------------------------

                                  (Continued)



1.      SUMMARY OF SIGNIFICANT ORGANIZATION AND ACCOUNTING POLICIES (Continued)

        l.  Use of Estimates -- The preparation of financial statements in
            ----------------                                              
                 conformity with generally accepted accounting principles
                 requires management to make estimates and assumptions that
                 affect the reported amounts of assets and liabilities and
                 disclosure of contingent assets and liabilities at the date of
                 the financial statements and the reported amounts of revenue
                 and expenses during the reporting period. Actual results could
                 differ from those estimates.

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

        m.  Loan Servicing -- The cost of mortgage servicing rights is amortized
            --------------                                                      
                 in proportion to, and over the period of, estimated net
                 servicing revenue. Impairment of mortgage servicing rights is
                 assessed based on the fair value of those rights. Fair values
                 are estimated using discounted cash flows based on a current
                 market interest rate. The amount of impairment recognized is
                 the amount by which the capitalized mortgage servicing rights
                 exceed their fair value.

                 When participating interests in loans sold have an average
                 contractual interest rate, adjusted for normal servicing fees,
                 that differs from the agreed yield to the purchaser, gains or
                 losses are recognized equal to the present value of such
                 differential over the estimated remaining life of such loans.
                 The resulting "excess servicing receivable" or "deferred
                 servicing revenue" is amortized over the estimated life using a
                 method approximating the interest method.

                 Quoted market prices are not available for the excess servicing
                 receivables. Thus, the excess servicing receivables and the
                 amortization thereon are periodically evaluated in relation to
                 estimated future servicing revenue, taking into consideration
                 changes in interest rates, current repayment rates, and
                 expected future cash flows. The Corporation evaluates the
                 carrying value of the excess servicing receivables by
                 estimating the future servicing income of the excess servicing
                 receivables based on management's best estimate of remaining
                 loan lives and discounted at the original discount rate.

        n.  Advertising Expense -- Advertising costs are expensed as incurred.
            -------------------                                               

                 Advertising costs were $44,543 and $37,340 for the years ended
                 December 31, 1998 and 1997, respectively. The Corporation did
                 not have costs related to direct response advertising campaigns
                 during the years ended December 31, 1998 and 1997.


                                      26
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

                    YEARS ENDED DECEMBER 31, 1998 AND 1997
                    --------------------------------------

                                  (Continued)



1.      SUMMARY OF SIGNIFICANT ORGANIZATION AND ACCOUNTING POLICIES (Continued)

        o.  Segment Information -- The Corporation is in one business segment,
            -------------------                                               
                 the savings and loan banking business, and follows the
                 requirements of SFAS 131 "Disclosures about Segments of an
                 Enterprise and Related Information".

        p.  Other Matters - The Corporation has established a company-wide task
            -------------                                                      
                 force to review all computer-based systems and applications and
                 develop a company-wide action plan for the century date change
                 for the year 2000. The Corporation's goal is to have all
                 systems and applications compliant with the century change by
                 March 31, 1999. Preliminary cost estimates have not been
                 finalized, but remediation efforts will be expensed. None of
                 these costs is anticipated to have a material impact on the
                 Corporation's results in any one period. In addition, the
                 Corporation could possibly be affected by the century change to
                 the extent other entities not affiliated with it are
                 unsuccessful in addressing this issue on a timely basis.

        q.  Reclassification of 1997 Financial Statements -- Certain
            ---------------------------------------------           
                 reclassifications have been made to the 1997 figures to conform
                 with current year presentation.


2.      ADOPTION OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

        In June 1996, the FASB issued SFAS 125, "Accounting for Transfers and
            Servicing of Financial Assets and Extinguishment of Liabilities"
            which was adopted by the Corporation effective January 1, 1997. This
            Statement provides accounting and reporting standards for transfers
            and servicing of financial assets and extinguishments of liabilities
            based on consistent application of a financial-components approach
            that focuses on control. It distinguishes transfers of financial
            assets that are sales from transfers that are secured borrowings.
            Under the financial-components approach, after a transfer of
            financial assets, an entity recognizes all financial and servicing
            assets it controls and liabilities it has incurred and derecognizes
            financial assets it no longer controls and liabilities that have
            been extinguished. The financial-components approach focuses on the
            assets and liabilities that exist after the transfer. Many of these
            assets and liabilities are components of financial assets that
            existed prior to the transfer. If the transfer does not meet the
            criteria for a sale, the transfer is accounted for as a secured
            borrowing with a pledge of collateral. The adoption of SFAS 125 did
            not have a material impact on the Corporation's consolidated
            financial statements.
                                      27
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

                    YEARS ENDED DECEMBER 31, 1998 AND 1997
                    --------------------------------------

                                  (Continued)


2.      ADOPTION OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)

        Effective December 31, 1997, the Corporation adopted SFAS 128, "Earnings
            Per Share". This Statement establishes standards for computing and
            presenting earnings per share ("EPS") and applies to entities with
            publicly held common stock or potential common stock. This Statement
            simplifies the standards for computing earnings per share previously
            found in APB Opinion No. 15, "Earnings Per Share", and makes them
            comparable to international EPS standards. It replaces the
            presentation of primary EPS with a presentation of basic EPS,
            requires dual presentation of basic and diluted EPS on the face of
            the income statement for all entities with complex capital
            structures, and requires a reconciliation of the numerator and the
            denominator of the basic EPS calculation to the numerator and the
            denominator of the diluted EPS calculation. Basic EPS excludes
            dilution and is computed by dividing income available to common
            stockholders by the weighted average number of common shares
            outstanding during the period. Diluted EPS reflects the potential
            dilution that could occur if securities or other contracts to issue
            common stock were exercised or converted into common stock or
            resulted in the issuance of common stock that then shared in the
            earnings of the entity. This statement is effective for periods
            ending after December 15, 1997, and requires restatement of all
            prior periods presented.

        Effective December 31, 1998 the Corporation adopted SFAS No. 129,
            "Disclosure of Information about Capital Structure." This statement
            consolidates existing guidance and requires entities (public and
            non-public) to disclose certain information about the entity's
            capital structure. It contains no change in disclosure requirements
            for entities such as the Corporation that were previously subject to
            the requirements of Opinions 10 - "Omnibus Opinion - 1966" and 15 -
            "Earnings Per Share" and Statement 47 - "Disclosure of Long-Term
            Obligations." Accordingly, no new reporting requirements have been
            imposed on the Corporation.

        Effective for the year ended December 31, 1998 the Corporation adopted
            SFAS No. 130, "Reporting Comprehensive Income," which requires
            reporting of "comprehensive income" and its components in financial
            statements. "Comprehensive income" includes net income and other
            items of comprehensive income, such as unrealized gains and losses
            on available-for-sale securities and minimum pension liability
            adjustments, which are excluded from net income. This statement was
            effective for periods beginning after December 15, 1997 and required
            the restatement of all prior periods presented.

        Effective for the year ended December 31, 1998 the Corporation adopted
            SFAS No. 131 "Disclosure About Segments of an Enterprise and Related
            Information" which supersedes SFAS No. 14 "Financial Reporting for
            Segments of a Business Enterprise". SFAS No. 131 established
            standards for the way that public enterprises report information
            about operating segments in financial statements issued to the
            public. It also establishes standards for disclosures regarding
            products and services, geographic areas and major customers. The
            adoption of SFAS No. 131 did not have a material impact on the
            Corporation's consolidated financial statements.

                                      28
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

                 YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                 --------------------------------------------

                                  (Continued)


2.      ADOPTION OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)

        In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosure
            about Pensions and Other Post-retirement Benefits", which revises
            employers' disclosure about pension and other post-retirement
            benefit plans. SFAS No. 132 is effective for financial statements
            for the periods beginning after December 31, 1997, and requires
            comparative information for earlier years to be restated. This
            standard currently does not apply to the Corporation.

        During the second quarter of 1998, the Financial Accounting Standards
            Board issued SFAS No. 133, AAccounting for Derivative Instruments
            and Hedging Activities,@ which will be effective for the Company's
            fiscal year 2000. This statement establishes accounting and
            reporting standards requiring that every derivative instrument,
            including certain derivative instrument imbedded in other contracts,
            be recorded in the balance sheet as either an asset or liability
            measured at its fair value. The Statement also requires that changes
            in the derivative's fair value be recognized in earnings unless
            specific hedge accounting criteria are met. The Company is currently
            assessing the impact of this new Statement on its consolidated
            financial position, liquidity, and results of operations.

3.      INVESTMENT SECURITIES
 
        Investment securities have been classified in the statements of
            financial position according to management's intent.

        The amortized costs and estimated market values of investment securities
            held-to-maturity as of December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                            Gross       Gross     Estimated
                              Amortized   Unrealized  Unrealized    Market
                                 Cost       Gains       Losses      Value
                              ----------  ----------  ----------  ----------
                                              December 31, 1998
                             -------------------------------------------------
<S>                           <C>         <C>         <C>         <C>
  U.S. Treasury Securities
   and obligations of U.S.
   government and Federal
   Agencies                   $4,228,742  $    7,689  $    3,732  $4,232,699
                              ==========  ==========  ==========  ==========
 
<CAPTION>
                                              December 31, 1997
                             -------------------------------------------------
<S>                           <C>         <C>         <C>         <C>
  U.S. Treasury Securities
   and obligations of U.S.
   government and Federal
   Agencies                   $5,842,776  $    1,291  $    4,614  $5,839,453
                              ==========  ==========  ==========  ==========
</TABLE>

                                      29
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

                    YEARS ENDED DECEMBER 31, 1998 AND 1997
                    --------------------------------------

                                  (Continued)


3.      INVESTMENT SECURITIES (Continued)

        The amortized costs and estimated market values of investment securities
            available-for-sale as of December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                    Gross       Gross     Estimated
                                      Amortized   Unrealized  Unrealized    Market
                                         Cost       Gains       Losses      Value
                                      ----------  ----------  ----------  ----------
                                                     December 31, 1998
                                      ----------------------------------------------
<S>                                   <C>         <C>         <C>         <C>
  U.S. Treasury Securities
          and obligations of
          U.S. Government and
          Federal Agencies            $2,000,000     $19,516  $           $2,019,516
  Mutual Funds                         2,071,899       2,691       2,263   2,072,327
                                      ----------     -------  ----------  ----------
                                      $4,071,899     $22,207  $    2,263  $4,091,843
                                      ==========     =======  ==========  ==========
 <CAPTION> 
                                                       December 31, 1997
                                      ----------------------------------------------
<S>                                   <C>         <C>         <C>         <C>
U.S. Treasury Securities
  and obligations of 
  U.S. Government and
  Federal Agencies                    $2,000,000     $35,315  $           $2,035,315
Mutual Funds                             949,999         803         706     950,096
                                      ----------     -------  ----------  ----------
                                      $2,949,999     $36,118  $      706  $2,985,411
                                      ==========     =======  ==========  ==========
</TABLE>

        The amortized cost and estimated market value of debt securities at
            December 31, 1998, by contractual maturity, are shown below.
            Expected maturities will differ from contractual maturities because
            borrowers may have the right to call or prepay obligations with or
            without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                                 Estimated
                                            Amortized             Market
                                               Cost               Value
                                            ----------          ----------
<S>                                         <C>                 <C>
              Due in one year or less       $3,003,652          $3,009,375
              Due from five to ten years     2,724,638           2,746,120
              Due beyond ten years             500,452             496,720
                                            ----------          ----------
                                            $6,228,742          $6,252,215
                                            ==========          ==========
</TABLE>

        Investment securities carried at approximately $3,003,662 at December
            31, 1998, were pledged to secure public deposits.

        No gross gains or losses were realized during the years ended December
            31, 1998 and 1997.

                                      30
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

                    YEARS ENDED DECEMBER 31, 1998 AND 1997
                    --------------------------------------

                                  (Continued)


4.      MORTGAGE BACKED SECURITIES

        Mortgage-backed securities have been classified in the statements of
            financial position according to management's intent.

        The amortized costs and estimated market values for mortgage-backed
            securities held-to-maturity as of December 31, 1998 and 1997 are
            as follows:

<TABLE>
<CAPTION>
 
                                   Gross       Gross     Estimated
                     Amortized   Unrealized  Unrealized    Market
                        Cost       Gains       Losses      Value
                     ----------  ----------  ----------  ----------
                                     December 31, 1998
                     ----------------------------------------------
<S>                  <C>         <C>         <C>         <C>
            GNMA     $  729,674     $ 2,294     $        $  731,968
            FHLMC     1,009,480       1,329       3,235   1,007,574
            FNMA        307,829       1,077       4,254     304,652
                     ----------     -------     -------  ----------
                     $2,046,983     $ 4,700     $ 7,489  $2,044,194
                     ==========     =======     =======  ==========

<CAPTION> 
                                     December 31, 1997
                     ----------------------------------------------            
<S>                  <C>         <C>         <C>         <C>
            GNMA     $1,019,533     $26,156     $        $1,045,689
            FHLMC     1,316,456                   9,073   1,307,383
            FNMA        423,545       1,638       7,477     417,706
                     ----------     -------     -------  ----------
                     $2,759,534     $27,794     $16,550  $2,770,778
                     ==========     =======     =======  ==========
</TABLE>

        The amortized costs and estimated market values for mortgage-backed
            securities available-for-sale as of December 31, 1998 and 1997 are
            as follows:

<TABLE>
<CAPTION>
                                                 Gross       Gross     Estimated
                                   Amortized   Unrealized  Unrealized    Market
                                      Cost       Gains       Losses      Value
                                   ----------  ----------  ----------  ----------
<S>                                <C>         <C>         <C>         <C>
        As of December 31, 1998
            FHLMC                  $  857,261  $    5,999  $           $  863,260
                                   ==========  ==========  ==========  ==========
        As of December 31, 1997
            FHLMC                  $1,390,245  $   15,238  $           $1,405,483
                                   ==========  ==========  ==========  ==========
</TABLE>

        Certain mortgage-backed securities are subject to significant prepayment
            risks. In periods of declining interest rates mortgages may be
            repaid more rapidly than anticipated resulting in greater
            amortization of premiums and reduced yields. In addition, the
            Corporation may be unable to reinvest at an interest rate comparable
            to the rate on the prepaying mortgage-backed security. In contrast,
            in periods of increasing interest rates, market values of mortgage-
            backed securities will decline.


                                      31
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

                    YEARS ENDED DECEMBER 31, 1998 AND 1997
                    --------------------------------------

                                  (Continued)



4.      MORTGAGE-BACKED SECURITIES (Continued)

        Mortgage-backed securities carried at $854,578 at December 31, 1998,
            were pledged to secure public deposits.

5.      LOANS RECEIVABLE

        The Corporation's lending activities are predominantly conducted in
            Cecil and Harford Counties in the State of Maryland. The ability and
            willingness of loan borrowers to honor their repayment commitments
            is generally dependent on the health of the real estate economic
            sector in the borrowers geographic area and the general economy.

        A summary of loans receivable follows:

<TABLE>
<CAPTION>
 
                                             1998           1997
                                         -------------  -------------
<S>                                      <C>            <C>
        First mortgage loans
            1-4 Dwelling units           $ 59,756,198   $ 56,002,532
            5 or more                         868,614      1,065,865
            Non-Residential                 2,458,561      2,470,091
            Land                            2,303,437      3,457,105
            Construction                    5,533,125      4,789,381
                                         ------------   ------------
                                           70,919,935     67,784,974
        Other loans
            Home equity loans               1,991,622      2,557,345
            Commercial loans                2,051,627      1,621,686
            Home improvement loans             14,818          9,000
            Consumer loans                  4,180,088      2,611,650
            Loans on savings deposits         910,010        711,124
            Education                          60,642         75,654
                                         ------------   ------------
                                           80,128,742     75,371,433
        Less:
            Undisbursed proceeds on
              loans in process             (2,402,632)    (1,394,100)
            Deferred loan fees               (262,738)      (244,774)
            Loans held for sale            (2,515,151)    (1,362,969)
            Allowance for loan losses        (402,309)      (353,541)
                                         -------------  ------------
                                         $ 74,545,912   $ 72,016,049
                                         ============   ============
</TABLE>

        The Bank serviced loans for others in the approximate amount of
            $18,324,000 and $20,792,260 in 1998 and 1997, respectively.

                                      32
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)



5.   LOANS RECEIVABLE (Continued)
 
An analysis of the allowance for loan losses for the years ended December 31,
1998 and 1997 is as follows:

<TABLE> 
<CAPTION>  
                                              1998       1997
                                           ---------  ---------
<S>                                        <C>        <C>  
Balance at beginning of period             $ 353,541  $ 297,691
Provision charged to operations               90,000     87,000
Charge-offs, net                             (41,232)   (31,150)
                                           ---------  --------- 
  Balance at end of period                 $ 402,309  $ 353,541
                                           =========  =========
</TABLE>

Commercial and commercial real estate loans are considered impaired when
it is probable that the Corporation will not collect all amounts due in
accordance with the contractual terms of the loan. Except for certain
restructured loans, impaired loans are loans that are on nonaccrual status.
Loans that are returned to accrual status are no longer considered to be
impaired.

        The allowance for loan losses includes impairment reserves related to
loans that are identified as impaired, which are based on discounted cash flows
using the loan's effective interest rate, or the fair value of the collateral
for collateral-dependent loans, or the observable market price of the impaired
loan. When foreclosure is probable, impairment is measured based on the fair
value of the collateral. Loans that experience insignificant payment delays
(less than 60 days) and insignificant shortfalls in payment amounts (less than
10%) generally are not classified as impaired. Restructured loans are reported
as impaired in the year of restructuring. Thereafter, such loans may be removed
from the impaired loan disclosure if the loans were paying a market rate of
interest at the time of restructuring and are performing in accordance with
their renegotiated terms. A loan is classified as an insubstance foreclosure
when the Corporation has taken possession of the collateral, regardless of
whether formal foreclosure proceedings take place.

The Corporation had no impaired loans at December 31, 1998 and 1997.

At December 31, 1998, the Bank had outstanding commitments to originate
loans as follows:

                  Fixed Rate         Variable Rate
                  (6.00%-8.50%)     (7.00%-8 1/8%)       Total
                  -------------     --------------     ----------

First mortgages    $2,734,500          $528,700        $3,263,200
                   ==========          ========        ==========

                                       33
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)



6.   OFFICE PROPERTIES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Office properties, equipment and leasehold improvements are summarized
by major classifications as follows:

<TABLE>
<CAPTION>
 
                                        1998       1997
                                     ----------  ---------
<S>                                  <C>         <C>
 
Land                                 $  271,333   $  264,973
Buildings and improvements              644,387      644,387
Furniture, fixtures and equipment       625,612      584,902
Leasehold improvements                  231,288      225,493
                                     ----------   ----------
                                      1,772,620    1,719,755
Accumulated depreciation                660,113      713,781
                                     ----------   ----------
                                     $1,112,507   $1,005,974
                                     ==========   ==========
</TABLE>

Depreciation expense for the years ended December 31, 1998 and 1997 was $98,783
and $77,263, respectively.

Leasehold improvements relate to office space for Cecil's branch office and
lending office. The branch office is being leased under the terms of an
operating lease with renewal options for two successive five year terms which
expire in May 2005. The lending office is being leased under the terms of an
operating lease which expires in May 2000, with renewal options for three
successive five year terms. Land is being leased for the operation of two
Automatic Teller Machines under the terms of operating leases which expire
through July 2002, with renewal options for three successive three year terms.
Annual rental on these leases was $41,580 and $39,750 in 1998 and 1997,
respectively.

The following is a schedule by years of future rental payments required
under the operating leases for the remaining non-cancelable terms:
<TABLE>
 
<S>                              <C>
Year ending December 31, 1999     $ 40,950
                         2000       30,450
                         2001       21,050
                         2002       19,050
                         2003       17,850
                   Thereafter       23,800
                                  --------
                                  $153,150
                                  ========
</TABLE>

                                       34
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)



7.   FEDERAL HOME LOAN BANK STOCK

Investment in stock of the Federal Home Loan Bank is required of every 
federally-insured savings bank. The Banks must own capital stock in an amount
equal to the greater of 1% of their residential mortgages and mortgage-backed
securities, or 3/10th of 1% of total assets. No ready market exists for the bank
stock, and it has no quoted market value.

8.   ACCRUED INTEREST RECEIVABLE
 
Accrued interest receivable at December 31, 1998 and 1997, consists of the
following:

<TABLE> 
<CAPTION> 
 
                                                   1998               1997
                                                 --------           --------
<S>                                              <C>                <C>  
  Loans receivable                               $492,246           $519,989
  Mortgage-backed securities                        6,360             22,631
  Investment securities                            99,316            120,372
                                                 --------           --------
                                                 $597,922           $662,992
                                                 ========           ========
</TABLE>

9.   SAVINGS DEPOSITS
 
The following is a summary of savings deposits as of December 31:
<TABLE>
<CAPTION>
                                    1998                    1997
                         ------------------------  ------------------------
                                       Weighted                  Weighted  
                                       Average                   Average   
                           Amount        Rate        Amount        Rate    
                         -----------  -----------  -----------  -----------
<S>                      <C>          <C>          <C>          <C>
N.O.W. and Money
 Market accounts         $ 9,841,890       2.1534  $ 8,631,006       2.3547
Savings accounts          18,061,028       3.1010   16,083,532       3.5172
Term certificates         57,078,485       5.7330   54,842,201       5.9076
Checking accounts          2,693,399                 1,039,154
                         -----------               -----------
                         $87,674,802               $80,595,893
                         ===========               ===========
</TABLE>

                                       35
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)


9.   SAVINGS DEPOSITS (Continued)

A summary of certificate accounts by maturity as of December 31, 1998
follows:
<TABLE>
 
              <S>                       <C>
              Under 12 months           $40,236,825
              12 months to 24 months     10,545,101
              24 months to 36 months      1,947,868
              Over 36 months              4,348,691
                                        -----------
                                        $57,078,485
                                        ===========
</TABLE>

Eligible savings accounts are insured up to $100,000 by the Savings
Association Insurance Fund.

Savings deposits include certificates of deposit in denominations of $100,000
or more aggregating $22,018,496 and $15,825,910 as of December 31, 1998
and 1997.

The bank held deposits of approximately $2,168,574 for related parties at
December 31, 1998.

10.  ADVANCES FROM FEDERAL HOME LOAN BANK

At December 31, 1998, short-term advances consist of the following:

              Maturity     Interest
                Date         Rate      December 31, 1998
              --------     -------     -----------------
              12/20/99       5.93%        $1,750,000

Wholly owned first mortgage loans on 1-4 dwelling units with unpaid principal
balances of approximately $36,467,000 were pledged to the FHLB as collateral on
advances.

11.  INCOME TAXES

In August 1996, the provisions repealing the then current thrift bad debt rules
were passed by Congress. The new rules eliminate the 8% of taxable income method
for deducting additions to the tax bad debt reserves for all thrifts for tax
years beginning after December 31, 1995. These rules also require that all
thrift institutions recapture all or a portion of their tax bad debt reserves
added since the base year (last taxable year beginning before January 1, 1988).
The Corporation has previously recorded a deferred tax liability equal to the
tax bad debt recapture and as such, the new rules will have no effect on net
income or federal income tax expense.

                                       36
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)



11.  INCOME TAXES (Continued)

        The unrecaptured base year reserves will not be subject to recapture as
long as the Corporation continues to carry on the business of banking. In
addition, the balance of the pre-1998 tax bad debt reserves continue to be
subject to provisions of present law that require recapture in the case of
certain excess distributions to stockholders. For federal income tax purposes,
the Corporation has designated $551,280 of net worth as a reserve for tax bad
debts on loans. The use of this amount for purposes other than to absorb losses
on loans would result in taxable income and financial statement tax expense at
the then current tax rate.

The components of income tax expense were as follows for the years ended
December 31:
<TABLE>
<CAPTION>
 
 
                                        1998          1997
                                    ------------  ------------
<S>                                 <C>           <C>
Current:
  Federal at 34%                      $438,045      $428,611
  State                                113,617       102,707
 
Deferred (benefit) expense             (58,402)       (6,952)
                                      --------      --------  
    Total                             $493,260      $524,366
                                      ========      ========
</TABLE>

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, are
presented below:
<TABLE>
<CAPTION>
 
                                        1998          1997
                                    ------------  ------------
<S>                                 <C>           <C>
Deferred tax assets:
  Deferred loan origination fees        $ 52,552      $ 51,968
  Loan loss allowance                    155,372       134,504
  Reserve for uncollected interest        11,265        16,573
  Tax basis of foreclosed real estate
   in excess of book                      16,655        16,168
  Deferred compensation                  101,701        79,281
  Interest collected in advance            8,673         6,897
  Other                                                  7,205
                                        --------      --------
 
    Total gross deferred tax assets      346,218       312,596
                                        --------      --------
 
</TABLE>

                                       37
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)

11.  INCOME TAXES (Continued)
<TABLE> 
<CAPTION> 
                                                     1998      1997
                                                   --------  --------
<S>                                                <C>       <C>  
Deferred tax liabilities:
  FHLB Stock dividends                             $ 27,691  $ 26,880
  Tax reserves for bad debts                        115,507   139,601
  Mortgage servicing rights                          47,712    40,012
  Tax accumulated depreciation in
   excess of book                                    30,398    33,673
  Net unrealized appreciation on
   available for sale securities                     10,019    19,561
                                                   --------  --------
 
    Total gross deferred tax liabilities            231,327   259,727
                                                   --------  --------
 
Net deferred tax assets                            $114,891  $ 52,869
                                                   ========  ========
 
</TABLE>

        At December 31, 1998 and 1997, there is no valuation allowance
maintained against the deferred tax assets. The Corporation expects to fully
realize the benefit of the deferred tax assets.

12.  RETAINED EARNINGS

Retained earnings are restricted by regulatory requirements and federal income
tax requirements.

In connection with the insurance of savings accounts by SAIF, the Banks are
required to meet certain capital requirements based on computations prescribed
by OTS (see Note 13).

Payment of dividends on the common stock of the Corporation will be subject to
the availability of funds from dividend distributions of the Banks, which are
subject to various restrictions. Under regulations of the OTS, the Banks are not
permitted to pay dividends on their common stock if their regulatory capital is
reduced below the amount required for the "liquidation account" or the capital
requirements imposed by FIRREA and the OTS. Since the banks meet the fully
phased-in capital requirements under FIRREA, they may pay a cash dividend on
their capital stock up to the higher of (i) 100% of their net income to date
during the calendar year plus an amount not to exceed 50% of their surplus
capital ratio at the beginning of the calendar year or (ii) 75% of their net
income over the most recent four quarter period.

                                       38
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)



13.  REGULATORY CAPITAL MATTERS
 
The Banks are subject to various regulatory capital requirements administered by
their primary federal regulator, the Office of Thrift Supervision (OTS). Failure
to meet the minimum regulatory capital requirements can initiate certain
mandatory, and possible additional discretionary actions by regulators, that if
undertaken, could have direct material effect on the Banks and the consolidated
financial statements. Under the regulatory capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Banks must meet specific
capital guidelines involving quantitative measures of the Banks' assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Banks' capital amounts and classification under the
prompt corrective action guidelines are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios of: total risk-based
capital and Tier I capital risk-weighted assets (as defined in the regulations),
Tier I capital to adjusted total assets (as defined), and tangible capital to
adjusted total assets (as defined). Management believes, as of December 31,
1998, that the Banks meet all the capital adequacy requirements to which it is
subject.

As of December 31, 1998, the most recent notification from the OTS, the Banks
were categorized as well capitalized under the regulatory framework for prompt
corrective action. To remain categorized as well capitalized, the Bank will have
to maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as disclosed in the following table. There are no events or conditions
since the most recent notification that management believes have changed the
Banks' prompt corrective action category.

                                       39
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)


13.  REGULATORY CAPITAL MATTERS (Continued)

The following tables illustrate the actual and required amounts and ratios for
the Corporation and the Banks as set forth by the Federal Deposit Insurance
Corporation (FDIC) and the OTS at the dates indicated.


<TABLE> 
<CAPTION> 
 
CECIL
-----
                                                                                   To Be Well Capitalized       
                                                                                        under Prompt            
                                                                                     Corrective Action          
                                   Actual                                               Provisions              
                               --------------                               ----------------------------------- 
                               Amount  Ratio                                Amount                        Ratio 
                               ------  ------                               ------                        -----  
                               (in thousands)                                         (in thousands)            
<S>                            <C>     <C>         <C>                      <C>      <C>                  <C>    
As of December 31, 1998          
 Total risk-based capital                           [greater than or                  [greater than or 
  (to risk-weighted assets)    $8,144  18.37%       equal to symbol]        $4,433    equal to symbol]    10.0%
                             
 Tier I capital                                     [greater than or                  [greater than or  
  (to risk-weighted assets)     7,921  17.87%       equal to symbol]         2,660    equal to symbol]     6.0%
                             
 Tier I capital                                     [greater than or                  [greater than or 
  (to adjusted total assets)    7,921  11.09%       equal to symbol]         3,571    equal to symbol]     5.0%

 Tangible capital                                   [greater than or                  [greater than or 
  (to adjusted total assets)    7,921  11.09%       equal to symbol]        $1,071    equal to symbol]     1.5%

As of December 31, 1997
 Total risk-based capital                           [greater than or                  [greater than or 
  (to risk-weighted assets)    $7,326  18.08%       equal to symbol]        $4,052    equal to symbol]    10.0%

 Tier I capital                                     [greater than or                  [greater than or 
  (to risk-weighted assets)     7,150  17.65%       equal to symbol]         2,431    equal to symbol]     6.0%

 Tier I capital                                     [greater than or                  [greater than or 
  (to adjusted total assets)    7,150  11.23%       equal to symbol]         3,183    equal to symbol]     5.0%

 Tangible capital                                   [greater than or                  [greater than or 
  (to adjusted total assets)    7,160  11.25%       equal to symbol]           955    equal to symbol]     1.5%

<CAPTION> 
 
COLUMBIAN
---------
                                                                                   To Be Well Capitalized       
                                                                                        under Prompt            
                                                                                     Corrective Action          
                                   Actual                                               Provisions              
                               --------------                               ----------------------------------- 
                               Amount  Ratio                                Amount                        Ratio 
                               ------  ------                               ------                        -----  
                               (in thousands)                                         (in thousands)            
<S>                            <C>     <C>         <C>                      <C>      <C>                  <C>    
As of December 31, 1998    
  Total risk-based capital                          [greater than or                  [greater than or 
   (to risk-weighted assets)   $2,185  15.05%       equal to symbol]        $1,452    equal to symbol]    10.0%
                                                     
  Tier I capital                                    [greater than or                  [greater than or 
   (to risk-weighted assets)    2,082  14.34%       equal to symbol]           872    equal to symbol]     6.0%

  Tier I capital                                    [greater than or                  [greater than or 
   (to adjusted total assets)   2,082   6.98%       equal to symbol]         1,491    equal to symbol]     5.0%
                                                                
  Tangible capital                                  [greater than or                  [greater than or 
   (to adjusted total assets)   2,082   6.98%       equal to symbol]           447    equal to symbol]     1.5%

</TABLE>

                                       40
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)


13.  REGULATORY CAPITAL MATTERS (Continued)
<TABLE>
<CAPTION>
 
COLUMBIAN (Continued)
---------------------
                                                                                   To Be Well Capitalized       
                                                                                        under Prompt            
                                                                                     Corrective Action          
                                   Actual                                               Provisions              
                               --------------                               ----------------------------------- 
                               Amount  Ratio                                Amount                        Ratio 
                               ------  ------                               ------                        -----  
                               (in thousands)                                         (in thousands)            
<S>                            <C>     <C>                                  <C>                           <C>    
As of December 31, 1997                                            
  Total risk-based capital                          [greater than or                  [greater than or 
   (to risk-weighted assets)   $2,094  15.41%       equal to symbol]        $1,359    equal to symbol]    10.0%
                                                 
  Tier I capital                                    [greater than or                  [greater than or 
   (to risk-weighted assets)    1,991  14.65%       equal to symbol]           815    equal to symbol]     6.0%
                                                                                                           
  Tier I capital                                    [greater than or                  [greater than or 
   (to adjusted total assets)   1,991   6.64%       equal to symbol]         1,499    equal to symbol]     5.0%
                                                                                                           
  Tangible capital                                  [greater than or                  [greater than or 
   (to adjusted total assets)   1,991   6.64%       equal to symbol]           450    equal to symbol]     1.5%
 
</TABLE>

14.  OFFICER, DIRECTOR, AND EMPLOYEE PLANS

        a.  Employee Stock Ownership Plan -- In conjunction with the plan of
            -----------------------------                                   
conversion, the Board of Directors approved a contributory Employee Stock
Ownership Plan (ESOP) for employees who have attained age 21 and completed one
year of service with the Corporation or its subsidiaries, effective January 1,
1994. The ESOP acquired 38,508 shares of common stock in November 1994 for
$385,080 financed by a loan from the Corporation. Shares acquired with such loan
proceeds are to be held in a suspense account for allocation among the
participants as the loan is repaid. The loan agreement is secured by a pledge of
the common stock owned by the ESOP and purchased with the proceeds of the loan.
The outstanding loan balance is included as a liability in the accompanying
consolidated statements of financial condition, and the Corporation's obligation
related to the ESOP debt is reflected as a reduction in stockholders' equity.
The loan is to be paid in annual installments of $38,508 plus interest at prime
plus 1% (8.75% at December 31, 1998) over a ten year period. Payments began on
December 31, 1995. The Banks contribute sufficient cash funds to the ESOP to
repay the loan, plus such other amounts as the Corporation's Board of Directors
may determine in its discretion.

                                       41
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)



14.  OFFICER, DIRECTOR, AND EMPLOYEE PLANS (Continued)

        a.  Employee Stock Ownership Plan (Continued)
            -----------------------------            

Contributions to the ESOP and shares released from the suspense account are to
be allocated among participants on the basis of their annual wages subject to
federal income tax withholding, plus any amounts withheld under a plan qualified
under Sections 125 or 401(k) of the Code and sponsored by the Corporation.
Participants must be employed at least 1,000 hours in a calendar year in order
to receive an allocation. Forfeitures will be reallocated to participants on the
same basis as other contributions. Dividends paid on allocated shares are
expected to be used to repay the ESOP loan, credited to participant accounts
within the ESOP, or paid to participants; dividends on unallocated shares are
expected to be used to repay the ESOP loan. The Corporation is to administer the
ESOP.

The Corporation accounts for its ESOP in accordance with Statement of Position
93-6. Accordingly, the debt of the ESOP is recorded as debt and shares pledged
as collateral are reported as unearned ESOP shares, a reduction of stockholders'
equity. As shares are released from collateral, the Banks record compensation
expense in an amount equal to the fair value of the shares, and the shares
become outstanding for earnings per share computations. Compensation expense is
also recognized for Corporation dividends on unallocated shares paid or added to
participant accounts. Compensation expense is reduced by the amount of the
annual interest paid by the ESOP to service the loan issued to acquire the
shares of stock. ESOP compensation expense was $24,445 and $43,751 in 1998 and
1997, respectively. The ESOP shares as of December 31, 1998 were as follows:
<TABLE>
<S>                                                    <C>
                    Shares released for allocation        15,403
                    Unreleased shares                     23,105
                                                        --------
                       Total ESOP shares                  38,508
                                                        ========
 
                    Fair value of unreleased shares
                       at December 31, 1998             $542,968
                                                        ========
 
</TABLE>

                                       42
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)


14.  OFFICER, DIRECTOR, AND EMPLOYEE PLANS (Continued)

        b.  Stock-based Compensation Plans
            ------------------------------

During 1995, the Corporation formed a Management Recognition Plan ("MRP"), which
was authorized to acquire 4% of the shares of common stock issued on the date of
reorganization. The total shares authorized are to be awarded to directors and
to employees in key management positions in order to provide them with a
proprietary interest in the Corporation in a manner designed to encourage such
employees to remain with the Corporation.

The Corporation contributed funds in the amount of $263,351 to the MRP to enable
it to acquire the shares of stock that will be required to fund the MRP (18,174
shares). The number of shares awarded for the year ended December 31, 1995 was
17,507. Awards under the MRP are earned and non-forfeitable by a participant at
the rate of one-fifth per year of service.

The $263,351 contributed to the MRP is being amortized to compensation expense
as the plan participants become vested in those shares. Compensation expense in
connection with the MRP was $66,383 and $50,627 in 1998 and 1997, respectively.
The unamortized cost, which is comparable to deferred compensation, is reflected
as a reduction of stockholders' equity.
<TABLE>
<CAPTION>
 
The following table summarizes information about the management recognition
plan at December 31:
                                             1998        1997
                                            ------      ------
<S>                                         <C>         <C>  
Outstanding shares at beginning of year      7,796      10,395
Vested and paid shares                      (2,599)     (2,599)
                                            ------      ------ 
Outstanding shares at end of year            5,197       7,796
                                            ======      ======
</TABLE>

The Corporation adopted stock option plans in 1992 and 1995 for the benefit of
directors, selected officers, and other key employees. The Plans provide for the
granting of options for the common shares of the Corporation at the fair market
value at the time the options are granted. The term of each option awarded is to
be determined by a committee of the Board of Directors, but shall not exceed ten
years. The term of an option shall not exceed five years for employees owning
more than 10% of the outstanding common stock at the time the option is granted.
Discretionary stock appreciation rights may be granted in conjunction with, or
independently of, any options granted under the Plans. Upon exercise of a stock
appreciation right, the related option, or portion thereof, is cancelled.

                                       43
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)


14.  OFFICER, DIRECTOR, AND EMPLOYEE PLANS (Continued)

        b.  Stock-based Compensation Plans (Continued)
            ------------------------------            

In accordance with the stock option plans a total of 57,838 shares of unissued
common stock are reserved for issuance pursuant to incentive stock options. The
number of shares reserved for the option plans did not change in 1998, except
for the effect of the pooling of interest transaction and the stock dividend.

The Company's 1995 Stock Option Plan (Five-Year Options) has authorized the
grant of options to management personnel for up to 44,519 shares of the
Company's common stock. All options granted have 10 year terms and vest ratably
over their respective terms.

The number of shares and the exercise prices in the following table have been
retroactively restated for the 1998 and 1997 stock dividends.

A summary of the Corporation's stock option activity, and related information
for the year ended December 31 is as follows:

<TABLE>
<CAPTION>
 
                                                     1998                            1997
                                     ------------------------------------  -------------------------
                                                        Weighted-Average            Weighted-Average  
                                          Shares         Exercise Price     Shares   Exercise Price
                                     -----------------  -----------------  --------  ---------------
              <S>                    <C>                <C>                <C>       <C>
              Outstanding at
                beginning of year              43,249            $  9.86    43,864          $  9.86
              Granted                                                        1,787             6.87
              Exercised                       (10,045)             (5.85)   (2,402)           (7.63)
                                              -------            -------    ------          -------
              Outstanding at
                end of year                    33,204            $ 11.07    43,249          $  9.86
                                              =======            =======   =======          =======
              Options exercisable
                at year end                    20,204                       23,758
                                              =======                      =======
 
</TABLE>

                                       44
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)


14.  OFFICER, DIRECTOR, AND EMPLOYEE PLANS (Continued)

        b.  Stock-based Compensation Plans (Continued)
            ------------------------------            

The per share weighted average fair value of stock options granted during 1998
and 1997 was 6.60 and 5.90, respectively, on the date of the grants using the
Black Scholes option-pricing model as a valuation technique with the following
average assumptions: 3% expected dividend yield, 5.9 and 6.2 risk-free interest
rate, and expected life, 7.25 years and 8.25 years; and expected volatility, 21%
and 20% respectively.

For financial statement purposes, the Corporation measures the compensation
costs of its stock option plans under Accounting Principles Board (APB) Opinion
No. 25 whereby, no compensation cost is recorded if, at the grant date, the
exercise price of the options is equal to the fair market value of the
Corporation's common stock. Had the Corporation determined cost based on the
fair value at the grant date for its stock options under FASB Statement No. 123,
Accounting for Stock-Based Compensation, the Company's net income and earnings
per share for the years ended December 31, 1998 and 1997 would have been reduced
to the proforma amounts indicated below.
<TABLE>
<CAPTION>
 
 
                                                 Earnings per Share
                                                 ------------------
                                 Net income        Basic   Diluted
                             ------------------    ------  -------
<S>                          <C>                   <C>     <C>
        December 31, 1998
            As reported           $504,543          $ .88    $ .87
            Pro forma              493,276            .86      .85
                                                   
        December 31, 1997                          
            As reported           $728,528          $1.30    $1.28
            Pro forma              714,356           1.27     1.26
</TABLE>

The pro forma amounts reflect only stock options granted in 1997 and subsequent
years. Therefore, the full impact of calculating the cost for stock options
under Statement No. 123 is not reflected in the pro forma amounts presented
above because the cost for options granted prior to January 1, 1997 is not
considered under the requirements of Statement No. 123.

                                       45
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)



14.  OFFICER, DIRECTOR, AND EMPLOYEE PLANS (Continued)

        c.  Retirement Plan for Non-Employee Directors -- Effective January 1,
            ------------------------------------------                        
1995 the Corporation adopted a Retirement Plan for Non-Employee Directors. Under
this plan, each participating director would receive monthly benefits for the
ten-year period following termination of service on the Board, in an amount
equal to the product of his or her "Benefit Percentage," his or her "Vested
Percentage," and $500. A director's "Benefit Percentage" is based on his or her
overall years of service on the Board of Directors of the Corporation, and
increases in increments of 20% from 0% for less than five years of service, to
20% for five to nine years of service, to 40% for 10 to 14 years of service, to
60% for 15 to 19 years of service, to 80% for 20 to 24 years of service, and to
100% for 25 or more years of service.

A director's "Vested Percentage" is based on his or her full years of service as
a non-employee Director after January 1, 1995 and increases in increments of 10%
per year, from 10% for one full year of service after January 1, 1995, up to
100% for ten or more full years of service after January 1, 1995. In the event
that a director dies before collecting benefits under this plan, the director's
surviving spouse will be eligible to receive 50% of the benefits the director
would have received.

The Directors' Plan is unfunded. All benefits will be paid from the
Corporation's general assets. The Corporation recognizes annual compensation
expense as the benefits become vested. The amount of compensation expense
incurred by the Corporation in connection with the plan for the years ended
December 31, 1998 and 1997 was $42,000 per year.

                                       46
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)



15.  PENSION PLAN

Cecil has a defined contribution pension plan covering all full-time employees
who meet certain eligibility requirements as to age and length of service. The
plan is funded by annual employer contributions determined at the rate of 10% of
compensation of eligible employees. Pension costs charged to operations in 1998
and 1997 amounted to $56,145 and $57,768, respectively.

Columbian has in effect a profit sharing plan for full-time employees who have
completed one full year of service. The Plan allows for annual contributions of
up to 15% of its payroll. The Plan does not provide for employee contributions.
Each participant in the plan becomes fully vested after five consecutive years
of service under the Plan and upon retirement receives the contributions on
behalf of the participant and the earnings thereon. Contributions charged to
operations in 1998 and 1997 amounted to $4,750 and $5,750, respectively.


16.  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Bank is party to financial instruments with off-balance-sheet risk.

The following commitments are outstanding as of December 31:
<TABLE>
<CAPTION>
 
                                             1998        1997
                                          ----------  ----------
<S>                                       <C>         <C>
 
              Unfunded lines of credit    $3,397,707  $2,890,000
              Loan commitments             3,263,200   1,576,000
                                          ----------  ----------
                                          $6,600,907  $4,466,000
                                          ==========  ==========
 
</TABLE>
The Corporation's exposure to credit loss in the event of non-performance by the
other party to these instruments is represented by the contractual amount of the
instrument. The Corporation uses the same credit policies in granting such loan
commitments as it does for on-balance sheet instruments. The Corporation
generally requires collateral to support such financial instruments with credit
risk, which generally consists of the right to receive a first mortgage on
improved or unimproved real estate when performance under the contract occurs
(see Note 5).

                                       47
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)



16.  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued)

The Corporation invests funds in the form of certificates of deposit at the
Federal Home Loan Bank. In addition, the Corporation maintains cash accounts at
the Federal Home Loan Bank and three local banks. Balances reflected on the
local bank's statements exceed the $100,000 insurance limit by varying amounts
throughout the year. The Corporation controls this risk by monitoring the
financial condition of the local banks. The Federal Home Loan Bank is an
instrumentality of the U.S. Government.


17.  EARNINGS PER SHARE

During 1998 and 1997, options to acquire 20,204 and 23,758 shares, respectively
of the Corporation's stock were vested and exercisable (see Note 14). The
options expire through May 2006.

Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
The weighted average number of shares of common stock outstanding was 570,504
and 559,365 in 1998 and 1997, respectively.

Diluted earnings per common share were determined on the assumption that the
options were exercised on May 31, 1997 and May 31, 1996 (the date they became
vested). The number of common shares was increased by the number of shares
issuable on the exercise options when the market price of the common stock
exceeds the exercise price of the options. This increase in the number of common
shares was reduced by the number of common shares that are assumed to have been
purchased with the proceeds from the exercise of the options; those purchases
were assumed to have been made at the year-end price of $23.50 and $20 at
December 31, 1998 and 1997, respectively. The weighted average number of shares
of common stock outstanding for computation of diluted earnings per common share
was 578,018 and 568,540 in 1998 and 1997, respectively.

The following table is a reconciliation of the numerators and denominators of
basic and diluted earnings per share computations for the years ended 
December 31:

                                       48
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)



17.  EARNINGS PER SHARE (Continued)
<TABLE>
<CAPTION>
 
 
                                                 1998
                                 -------------------------------------
                                   Income        Shares      Per-Share
                                 (Numerator)  (Denominator)   Amount
                                 -----------  -------------  ---------
<S>                              <C>          <C>            <C>
 
Basic EPS
        Net income                 $504,543        570,504       $ .88
 
Effect of dilutive securities
        Stock options                                7,514        (.01)
                                 ----------   ------------   ---------
 
Diluted EPS
        Net income                 $504,543        578,018       $ .87
                                 ==========   ============   =========
 
<CAPTION>
 
 
                                                 1997
                                 -------------------------------------
                                   Income        Shares      Per-Share
                                 (Numerator)  (Denominator)   Amount
                                 -----------  -------------  ---------
<S>                              <C>          <C>            <C> 

Basic EPS
        Net income                 $728,528        559,365       $1.30
 
Effect of dilutive securities
        Stock options                                9,175        (.02)
                                 ----------   ------------   ---------
 
Diluted EPS
        Net income                 $728,528        568,540       $1.28
                                 ==========   ============   =========
 
</TABLE>

18.  FAIR VALUE OF FINANCIAL INSTRUMENTS

In December 1991, the FASB issued SFAS No. 107 "Disclosure about Fair Value of
Financial Instruments" which requires that the Corporation disclose estimated
fair values for both its on and off-balance-sheet financial instruments. The
following methods and assumptions were used to estimate the fair value of the
Corporation's financial instruments. Changes in estimates and assumptions could
have a significant impact on these fair values.

Cash and Cash Equivalent
------------------------

The fair values of cash and cash equivalents approximates their carrying values.

                                       49
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)
                                        


18.  FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Securities
----------

The fair values of investment securities, securities available for sale and
securities to be held to maturity are based on quoted market prices, where
available. If a quoted market price is not available, fair value is estimated
using quoted market prices of comparable instruments.

Loans Receivable and Loans Held for Sale
----------------------------------------

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

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

Investment in Stock of FHLB
---------------------------

The fair value of the Corporation's investment in stock of the FHLB approximates
its carrying value.

Savings Deposits
----------------

The fair values of passbook accounts, NOW accounts, demand deposit accounts and
variable rate money market accounts approximates their carrying values. The fair
values of fixed rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently offered for deposits
of similar remaining maturities.

Employee Stock Ownership Plan Debt
----------------------------------

The fair value of the Corporation's employee stock ownership plan debt is
estimated using a discounted cash flow analysis based on current market rates
for debt with similar terms and remaining maturity.

                                       50
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)
                                        


18.  FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
 
The estimated fair values of financial instruments at December 31, 1998 are as
follows:

<TABLE>                                                                    
<CAPTION>                                                                  
                                                                Estimated
                                                Carrying           Fair    
                                                 Value            Value    
                                               -----------     ----------- 
<S>                                            <C>             <C>          
Financial assets
    Cash and cash equivalents                  $10,062,190     $10,062,190
    Investment securities
      Held to maturity                           4,228,742       4,232,699
      Available for sale                         4,091,843       4,091,843
    Mortgage-backed securities
      Held to maturity                           2,046,983       2,044,194
      Available for sale                           863,260         863,260
    Loans held for sale                          2,515,151       2,581,475
    Loans receivable                            74,545,912      77,002,747
    Investment in stock of FHLB                    672,300         672,300
Financial liabilities                                      
    Savings deposits                            87,674,802      88,089,804
    Employee stock ownership plan debt             231,048         231,048

</TABLE> 
The estimated fair values of financial instruments at December 31, 1997 are as
    follows:

<TABLE>                                                                    
<CAPTION>                                                                  
                                                                Estimated 
                                                Carrying           Fair    
                                                 Value            Value    
                                               -----------     ----------- 
<S>                                            <C>             <C>          

Financial assets
    Cash and cash equivalents                  $ 4,316,776  $ 4,316,776
    Investment securities
      Held to maturity                           5,842,776    5,839,453
      Available for sale                         2,985,411    2,985,411
    Mortgage-backed securities
      Held to maturity                           2,759,534    2,770,778
      Available for sale                         1,405,483    1,405,483
    Loans held for sale                          1,362,969    1,380,439
    Loans receivable                            72,016,049   72,612,581
    Investment in stock of FHLB                    652,700      652,700
Financial liabilities
    Savings deposits                            80,595,893   80,642,074
    Employee stock ownership plan debt             269,556      269,556
 
</TABLE>

                                       51
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)



19.  MERGER

In September 1998, the Corporation issued 128,155 shares of its common stock for
all outstanding common stock of Columbian. Columbian shareholders received
1.7021 shares of the Corporation's common stock for each share of Columbian
common stock. The merger qualified as a tax-free reorganization and was
accounted for as a pooling of interest. Accordingly, the Corporation's
consolidated financial statements were restated for all periods prior to the
business combination to include the results of operations, financial position
and cash flows of Columbian. No adjustments were necessary to conform
Columbian's methods of accounting to the methods used by the Corporation. There
were no significant intercompany transactions prior to consummation of the
merger. The costs associated with the merger totaled $302,501 in 1998.

The results of operations previously reported by the separate companies and the
combined amounts presented in the accompanying consolidated financial statements
are summarized below:
<TABLE>
<CAPTION>
 
                             Through     Year ended    Year ended
                           September 30, December 31,  December 31,
                               1998          1998         1997
                           ------------  ------------  ----------
<S>                        <C>           <C>           <C> 
Interest income:
    Cecil Bancorp, Inc.      $4,010,179    $5,407,586  $5,018,366
    Columbian                 1,683,419     2,193,749   2,321,469
                             ----------    ----------  ----------
                                        
      Combined               $5,693,598    $7,601,335  $7,339,835
                             ==========    ==========  ==========
                                        
Net income (loss):                      
    Cecil Bancorp, Inc.      $  322,664    $  417,331  $  565,666
    Columbian                    69,715        87,212     162,862
                             ----------    ----------  ----------
                                        
      Combined               $  392,379    $  504,543  $  728,528
                             ==========    ==========  ==========
 
</TABLE>
        There were no other changes in stockholders' equity prior to
consummation of the merger in 1998 that were material to the financial position
of the Corporation.

                                       52
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)



20.  CECIL BANCORP, INC. - HOLDING COMPANY ONLY FINANCIAL INFORMATION

The following condensed statement of financial position as of December 31, 1998
and 1997 and condensed statements of income and cash flows for the years then
ended for Cecil Bancorp, Inc. should be read in conjunction with the
consolidated financial statements and notes thereto. 1997 amounts have been
restated due to the pooling of interest transaction completed September 30,
1998.


                       Statements of Financial Condition
<TABLE> 
<CAPTION> 
                                    Assets
                                                            December 31,
                                                       -----------------------
                                                          1998         1997
                                                       -----------  ----------
<S>                                                    <C>          <C> 
                               
Cash                                                   $   246,293  $  516,087
Investment in Subsidiary Banks                          10,016,055   9,167,080
Deferred taxes                                              12,114      11,956
Prepaid expenses                                           149,579      74,442
                                                       -----------  ----------
                                                       $10,424,041  $9,769,565
                                                       ===========  ==========

<CAPTION> 

                     Liabilities and Stockholders' Equity



<S>                                                    <C>          <C> 
Other Liabilities                                      $    91,181  $   28,136
Employee stock ownership debt                              231,048     269,556
                                                       -----------  ----------
                                                           322,229     297,692
                                                       -----------  ----------

Stockholders' Equity
   Common stock, $.01 par value
      Authorized:  4,000,000 shares
      Issued and outstanding:  606,494 shares
       in 1998 and 592,869 shares in 1997                    6,065       5,929
   Additional paid in capital                            4,863,511   4,561,520
Employee stock ownership debt                             (231,048)   (269,556)
Deferred Compensation Management
  Recognition Plan                                         (80,676)   (118,361)
Retained earnings                                        5,543,960   5,292,341
                                                       -----------  ----------

        Total stockholders' equity                      10,101,812   9,471,873
                                                       -----------  ----------

        Total liabilities and stockholders' equity     $10,424,041  $9,769,565
                                                       ===========  ==========
</TABLE>

                                       53
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                     --------------------------------------

                                  (Continued)



20.  CECIL BANCORP, INC. - HOLDING COMPANY ONLY FINANCIAL INFORMATION 
    (Continued)
<TABLE>
<CAPTION>
 
                             Statements of Income

                                               Year ended December 31,
                                               -----------------------
                                                   1998        1997   
                                               ----------   --------- 
<S>                                            <C>          <C>        
Equity in earnings of Subsidiary Banks          $ 861,022   $ 767,080

Operating expenses
   Compensation and benefits                      190,768      43,979
   Merger expenses                                210,003
   Other                                           31,003      22,488
                                                ---------  ----------  
                                                  431,774      66,467
                                                ---------  ----------

Net income before income taxes                    429,248     700,613

Income taxes
   Current                                        (75,137)    (24,078)
   Deferred                                          (158)     (3,837)
                                                ---------  ---------- 
                                                  (75,295)    (27,915)
                                                ---------  ---------- 
Net income                                      $ 504,543  $  728,528
                                                =========  ==========

<CAPTION> 
                           Statements of Cash Flows

                                               Year ended December 31,
                                               -----------------------
                                                   1998        1997   
                                               ----------   --------- 
<S>                                            <C>          <C>        

Cash flows from operating activities
   Cash paid to suppliers and employees         $(179,611)  $ (21,402)
   Dividends received from Subsidiary Banks                   500,000
                                                ---------   ---------
Net cash provided by operating activities        (179,611)    478,598

Cash flows from financing activities
   Proceeds from sale of common stock              58,807      14,626
   Unearned ESOP compensation decrease             38,508      38,508
   Dividends paid                                (186,081)   (276,641)
   Cash in lieu of fractional share                (1,417)
                                                ---------  ----------  
Net cash used by financing activities             (90,183)   (223,507)
                                                ---------  ----------  
Net increase (decrease) in cash                  (269,794)    255,091

Cash
    Beginning of year                             516,087     260,996
                                                ---------   ---------

    End of year                                 $ 246,293   $ 516,087
                                                =========   =========
</TABLE>

                                       54
<PAGE>
 
                        MARKET AND DIVIDEND INFORMATION

Trading in the Common Stock

          The Company's common stock is listed over-the-counter through the
National Daily Quotation System "Pink Sheets" published by the National
Quotation Bureau, Inc.  There are currently 607,731 shares of the common stock
outstanding and approximately 687 holders of record of the common stock (not
including shares held in "street name") as of March 15, 1999.

          The following table sets forth certain information as to the range of
the high and low bid prices for the Company's common stock for the calendar
quarters indicated and since the common stock's issuance on November 10, 1994.
<TABLE>
<CAPTION>
 
                    High Bid (1) Low Bid (1)  Dividends Paid
                    -----------  ----------   --------------
<S>                 <C>          <C>          <C>   
 Fiscal 1994:
  Fourth Quarter       $10.25      $10.00        none
                                               
 Fiscal 1995:                                  
  First Quarter         10.75       10.00        $.08
  Second Quarter        11.00       11.00         .16  (2)
  Third Quarter         11.50       11.00         .24  (3)
  Fourth Quarter        14.50       14.25         .08
                                               
 Fiscal 1996:                                  
  First Quarter         15.00       14.50         .10  (4)
  Second Quarter        15.00       15.00         .08
  Third Quarter         15.75       15.00         .08
  Fourth Quarter        15.75       15.00         .30  (5)
                                               
 Fiscal 1997:                                  
  First Quarter         16.00       16.00         .10
  Second Quarter        18.75       17.00         .10
  Third Quarter         17.75       17.50         .10
  Fourth Quarter        20.00       18.25         .33  (6)
                                               
 Fiscal 1998:                                  
  First Quarter         22.25       22.00         .10
  Second Quarter        20.00       19.50         .10
  Third Quarter         24.25       24.00         .10
  Fourth Quarter        25.50       23.75         .10
 
</TABLE>
-------------------------
(1)  Quotations reflect inter-dealer price, without retail mark-up, mark-down or
     commissions, and may not represent actual transactions.
(2)  Includes special dividend of $.08 per share.
(3)  Includes special dividend of $.16 per share.
(4)  Includes special dividend of $.02 per share.
(5)  Includes special dividend of $.20 per share.
(6)  Includes special dividend of $.23 per share.

                                       55
<PAGE>
 
Dividend Restrictions

          Under regulations of the OTS, the Banks are not permitted to pay
dividends on its capital stock if its regulatory capital would thereby be
reduced below regulatory capital requirements, or the amount then required for
the liquidation account established for the benefit of certain depositors of the
Banks at the time of its conversion to stock form. In addition, savings
institution subsidiaries of savings and loan holding companies such as the
Company are required to give the OTS 30 days' prior notice of any proposed
declaration of dividends to the holding company.

          Federal regulations impose additional limitations on the payment of
dividends and other capital distributions (including stock repurchases and cash
mergers) by the Banks.  Under these regulations, a savings institution such as
the Banks that, immediately prior to, and on a pro forma basis after giving
effect to, a proposed capital distribution, has total capital (as defined by OTS
regulation) that is equal to or greater than the amount of its fully phased-in
capital requirements (a "Tier 1 Association") is generally permitted without OTS
approval, after notice, to make capital distributions during a calendar year in
the amount of (i) up to 100% of its net earnings to date during the calendar
year plus an amount that would reduce by one-half the amount by which its
capital-to-assets ratio exceeded its fully phased-in capital requirement to
assets ratio at the beginning of the calendar year, or (ii) 75% of its net
income for the previous four quarters.  In addition to the foregoing, earnings
of the Banks appropriated to bad debt reserves and deducted for federal income
tax purposes are not available for payment of cash dividends or other
distributions to the Company without payment of taxes at the then current tax
rate by the Banks on the amount of earnings removed from the reserves for such
distributions.

          Although the Company is not subject to these restrictions, the
Company's primary source of funds for payment of dividends, in addition to the
50% of the net proceeds retained from the conversion to stock form, are
dividends from the Banks.  The Company intends to make full use of this
favorable tax treatment afforded to the Banks and Company and does not
contemplate use of any earnings of the Banks in a manner which would limit the
Banks' bad debt deduction or create federal tax liabilities.

                                       56
<PAGE>
 
                              BOARD OF DIRECTORS
 
                              CECIL BANCORP, INC.
                          ---------------------------

<TABLE>
<S>                          <C>            <C>                     <C>
 
Benard L. Siegel             Michael J.     Doris P. Scott          William F.
Chairman of the Board        Scibinico      Director                Burkley
                             Treasurer                              Vice
                             and Director                           President
                                                                    and Director
 
 
Mary B. Halsey               Thomas L.      Howard B. Tome          Howard J.
President, C.E.O. and        Foard          Director                Neff
 Director                    Secretary                              Director
                             and Director
 
 
                             Donald F.      Robert L. Johnson
                             Angert         Director
                             Director
 
<CAPTION>  
                                                     COLUMBIAN BANK, 
  CECIL FEDERAL SAVINGS BANK                     A FEDERAL SAVINGS BANK
 ----------------------------                   ------------------------
                      
<S>                          <C>            <C>                     <C>
 
Bernard L. Siegel            Michael J.     Donald F. Angert        Kathleen
Chairman of the Board        Scibinico      Chairman of the Board   Guzzo
                             Treasurer      President and Director  Vice
                             and Director                           President
                                                                    and
                                                                    Director
 
 
Mary B. Halsey               William F.     Robert L. Johnson       Laurie
President, C.E.O. and        Burkley        Secretary-Treasurer     Thoner
 Director                    Vice           and                     Director
                             President and  Director
                             Director
 
 
Thomas L. Foard              Howard J.      Wilbur B. Pearce        William K.
Secretary and Director       Neff           Director                Brendle
                             Director                               Director
 
 
Doris P. Scott               Howard B.      Arthur L. Gilbert
Director                     Tome           Director
                             Director
 
 
Donald F. Angert
Director
 
<CAPTION> 
                               OFFICE LOCATIONS
<S>                             <C>                             <C>  
Main Office of Cecil Federal:   Branch Office of Cecil Federal: Office of Columbian:
127 North Street                108 North East Plaza            303-307 St. John Street
Elkton, Maryland 21921-5547     North East, Maryland 21901      Havre de Grace, Maryland  21078
 

<CAPTION> 

                              GENERAL INFORMATION

<S>                                    <C>                                  <C>
Independent Public Accountants         Annual Meeting                       Annual Report on Form 10-KSB
Simon, Master & Sidlow, P.A.           The 1999 Annual Meeting of           A copy of the Company's Annual
Certified Public Accountants           Stockholders will be held at         Report on Form 10-KSB for the
                                       Bentleys, Elkton, Maryland           fiscal year ended December 31, 1998
General Counsel                        On Wednesday, April 21,              as filed with the Securities and
William B. Calvert, Esq.               1999 at 9:00 a.m.                    Exchange Commission will be
101 Courthouse Plaza                                                        furnished without charge to
Elkton, Maryland  21921                                                     stockholders as of the record date
                                                                            for the 1999 Annual Meeting upon
Special Counsel                                                             written request to Mary B. Halsey,
Housley Kantarian & Bronstein, P.C.                                         127 North Street, P.O. Box 568,
1220 19th Street, N.W.  Suite 700                                           Elkton, MD  21922-0568
Washington, D.C.  20036
</TABLE>

                                       57