<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549
                   
                         ----------------------------

                                  FORM 10-KSB


[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

     For the fiscal year ended December 31, 1997


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

     For the transition period from ________ to ________

                        Commission File Number: 0-24926

                              CECIL BANCORP, INC.
                ----------------------------------------------
                (Name of Small Business Issuer in its Charter)

               Maryland                              52-1883546
    ----------------------------------        ----------------------
    (State or Other Jurisdiction of             (I.R.S. Employer
    Incorporation or Organization)              Identification No.)

   127 North Street, Elkton, Maryland                21921-5547
----------------------------------------      ----------------------
(Address of Principal Executive Offices)             (Zip Code)

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

     Securities registered pursuant to Section 12(b) of the Exchange Act:
                                Not applicable
                                --------------

     Securities registered pursuant to Section 12(g) of the Exchange Act:
                    Common Stock, par value $.01 per share
                    --------------------------------------
                               (Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.    [X]

As of March 10, 1998, the registrant had 470,182 shares of Common Stock issued
and outstanding.  The aggregate market value of shares held by nonaffiliates on
such date was $9,400,329 based on the closing sale price of $23.50 per share of
the Registrant's Common Stock on March 10, 1998.  For purposes of this
calculation, it is assumed that the 70,167 shares held by directors and officers
of the Registrant, are shares held by affiliates.

Transitional small business disclosure format (check one):   Yes        No   X
                                                                 -----     -----


                      DOCUMENT INCORPORATED BY REFERENCE

1.   Portions of the Annual Report to Stockholders for the year ended December
     31, 1997 (the "Annual Report").  (Parts I and II).
2.   Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting
     of Stockholders (the "Proxy Statement").  (Part III)
<PAGE>
 
                                    PART I

ITEM 1.  DESCRIPTION OF BUSINESS
--------------------------------

GENERAL

     CECIL BANCORP, INC.  Cecil Bancorp, Inc. (the "Company") was incorporated
under the laws of the State of Maryland in July 1994.  On November 10, 1994,
Cecil Federal Savings Bank ("Cecil Federal" or the "Bank") converted from mutual
to stock form and reorganized into the holding company form of ownership as a
wholly owned subsidiary of the Company.  As a result of the conversion and
reorganization, the Company issued and sold 481,361 shares of its common stock
at a price of $10.00 per share to its depositors, borrowers, stock benefit plans
and the public, thereby recognizing net proceeds of $4,315,057.  The Company's
common stock is registered with the Securities and Exchange Commission ("SEC")
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").  The
Company is classified as a unitary savings institution holding company subject
to regulation by the Office of Thrift Supervision ("OTS") of the Department of
the Treasury.

     The Company's main office and telephone number are the same as Cecil
Federal's (see below).  At December 31, 1997, the Company had total assets of
$63.7 million and stockholders' equity of $7.4 million, on a consolidated basis.

     The Company is primarily engaged in the business of directing, planning and
coordinating the business activities of Cecil Federal.  Accordingly, the
information set forth in this report, including financial statements and related
data, relates primarily to the Bank and its subsidiaries.  In the future, the
Company may become an operating company or acquire or organize other operating
subsidiaries, including other financial institutions.  Currently, the Company
does not maintain offices separate from those of Cecil Federal or employ any
persons other than its officers who are not separately compensated for such
service.

     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, with the sale and issuance of 100,000 shares of its Common
Stock to the Company.  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 FDIC and it is a member of the FHLB
of Atlanta.

     Cecil Federal's primary business, as conducted through its two offices
located in Elkton and North East, Maryland, 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.

     The Bank has two wholly owned subsidiaries, Cecil Service Corporation and
Northeastern Service Corporation.  Cecil Service Corporation's primary business
is leasing agent for the North East Plaza Branch and Northeastern Service
Corporation's primary business is insurance agent for mortgage life and
disability insurance for Cecil Federal's mortgage loan customers.

                                       1
<PAGE>
 
     Cecil Federal's business strategy is to operate as an independent
community-oriented savings bank dedicated to residential mortgage lending, and,
to a lesser extent, construction and consumer lending, funded primarily by
retail deposits.   Cecil Federal has sought to implement this strategy by (1)
emphasizing residential mortgage lending through the origination of adjustable-
rate mortgage loans; (2) investing in adjustable-rate and short-term liquid
investments; (3) reducing interest rate risk exposure by better matching asset
and liability maturities and rates; (4) maintaining asset quality; (5)
containing operating expenses; and (6) maintaining a high level of capital
combined with moderate growth.

     At December 31, 1997, Cecil Federal had total assets of $63.7 million,
deposits of $53.0 million, net loans receivable of $54.7 million, cash and
investment securities of $5.4 million and retained earnings of $7.4 million.
Cecil Federal's tangible capital to assets ratio at December 31, 1997 was 11.2%.
Cecil Federal exceeds all current regulatory capital requirements.

MARKET AREA

     Cecil Federal's home office is located in the town of Elkton, Maryland,
which is in Cecil County.  Cecil Federal operates one full service branch office
in North East, Maryland, which is also in Cecil County.  Cecil Federal considers
Cecil County to be its primary market area as substantially all of its lending
and deposit gathering functions are performed within Cecil County.

     Cecil Federal attracts deposits through two full service offices in Cecil
County, Maryland each with drive-through facilities.  Cecil Federal's main
office in Elkton has served as Cecil Federal's largest single source of
deposits.  Elkton is the County seat and has a population of 9,800.  Elkton is a
center for commerce and industry, education and health care for the County.
Cecil Federal's full service branch is located in the North East Shopping Plaza
in North East.  North East has a population of 1,913 and is geographically
located in the center of Cecil County.  The population of Cecil County was
71,347 as of the 1990 census.

     Major employers in Cecil County are Perry Point Veterans Hospital, medical
services; W.L. Gore & Associates, GORE-TEX fabric products; Union Hospital,
medical services; Thiokol Corporation; Blue Chip Products, automotive products;
Terumo Medical, medical products; as well as State, County and Local
Governments.

     Cecil County is located in the extreme northeast of the Chesapeake Bay, at
the crux of four states - Maryland, Delaware, Pennsylvania and New Jersey.
Elkton is located about 50 miles from Philadelphia and Baltimore.  One-fifth of
the U.S. population resides within 300 miles of the County.  Interstate I-95,
the main north-south East Coast artery, bisects the County.  In addition, the
four lane U.S. 40 parallels the Interstate.  Cecil County has over 200 miles of
waterfront between 5 rivers and the Chesapeake Bay.

LENDING ACTIVITIES

     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.   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.

                                       2
<PAGE>
 
ANALYSIS OF LOAN AND MORTGAGE-BACKED SECURITIES PORTFOLIO

     Set forth below is selected data relating to the composition of Cecil
Federal's loan and mortgage-backed securities portfolio by type of loan and type
of security at the dates indicated.  At December 31, 1997, Cecil Federal had no
concentrations of loans exceeding 10% of total loans other than as disclosed
below.
<TABLE>
<CAPTION>
 
                                                                                At December 31,
                                            ----------------------------------------------------------------------------------------

                                                  1997              1996              1995              1994              1993
                                            ----------------  ----------------  ----------------  ----------------  ----------------

                                            Amount      %     Amount      %     Amount      %     Amount      %     Amount      %
                                            -------  -------  -------  -------  -------  -------  -------  -------  -------  -------

                                                                             (Dollars in thousands)
<S>                                         <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Type of Loan
------------
Real estate loans:
  Construction loans (1)..................  $ 3,134    5.89%  $ 2,920    5.87%  $   867    1.87%  $ 1,132    2.89%  $ 1,517    4.40%

  One- to four-family residential (2)(3)..   42,840   80.51    41,800   83.97    40,273   86.64    33,421   85.30    30,325   87.94
  Multi-family residential................    1,066    2.00       100     .20       103     .22       106     .27       109     .32
  Land....................................    1,390    2.61     1,569    3.15     2,070    4.45     2,081    5.31       832    2.41
  Commercial..............................    2,470    4.64     2,675    5.37     1,635    3.52     1,347    3.44       831    2.41
 
Commercial business loans.................    1,621    3.05       695    1.40       613    1.32       439    1.12       289     .84
 
Consumer loans:
  Automobile loans........................      819    1.54       655    1.32       569    1.22       291     .74        64     .19
  Education loans.........................       75     .14        87     .17        85     .18        60     .15        50     .14
  Savings account loans...................      542    1.02       632    1.27       604    1.30       543    1.39       582    1.69
  Home improvement loans..................        9     .02        12     .02        23     .05        48     .12        34     .10
  Personal loans..........................    1,775    3.33     1,769    3.56     1,542    3.32     1,100    2.81       695    2.02
                                            -------  ------   -------  ------   -------  ------   -------  ------   -------  ------
      Subtotal loans......................   55,741  104.75    52,914  106.30    48,384  104.09    40,568  103.54    35,328  102.46
Less:
  Loans held for sale.....................    1,363   (2.56)    1,708    3.43       671    1.44
  Loans in process........................      893   (1.68)    1,260    2.53       945    2.03     1,102    2.81       624    1.82
  Discounts and other.....................      100    (.19)       48     .10       172     .37       179     .46       130     .38
  Loan loss reserve.......................      174    (.32)      118     .24       114     .25       106     .27        89     .26
                                            -------  ------   -------  ------   -------  ------   -------  ------   -------  ------
     Total loans..........................   53,211  100.00%   49,780  100.00%   46,482  100.00%  $39,181  100.00%  $34,485  100.00%

                                            =======  ======   =======  ======   =======  ======   =======  ======   =======  ======
Mortgage-backed securities................  $ 1,817           $ 2,165           $   872           $ 1,026           $   545
                                            =======           =======           =======           =======           =======
     Total loans and mortgage-backed
       securities.........................  $55,028           $51,945           $47,354           $40,207           $35,030
                                            =======           =======           =======           =======           =======
-------------------------
</TABLE>
(1)  All construction loans were for residential properties.
(2)  Includes home equity loans.
(3)  Includes loans held for sale.

                                       3
<PAGE>
 
     ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING.  The primary emphasis
of Cecil Federal's lending activity is the origination of conventional mortgage
loans on one- to four-family residential dwellings.  Most loans are originated
in amounts up to $150,000, on single-family properties located in Cecil
Federal's primary market area of Cecil County, Maryland.  As of December 31,
1997, loans on one- to four-family residential properties accounted for
approximately 80.51% of Cecil Federal's loan portfolio.  Cecil Federal makes
conventional mortgage loans, as well as loans guaranteed by the Farmers' Home
Association ("FmHA") and loans originated under the Maryland Community
Development Administration ("CDA") loan program.

     Cecil Federal's mortgage loan originations are generally for terms of 15,
20 and 30 years, amortized on a monthly basis with interest and principal due
each month.  Residential real estate loans often remain outstanding for
significantly shorter periods than their contractual terms as borrowers may
refinance or prepay loans at their option, without penalty.  Conventional
residential mortgage loans granted by Cecil Federal customarily contain "due-on-
sale" clauses which permit Cecil Federal to accelerate the indebtedness of the
loan upon transfer of ownership of the mortgaged property.

     Cecil Federal uses standard Federal Home Loan Mortgage Corporation
("FHLMC") documents, to allow for the sale of loans in the secondary mortgage
market.  Cecil Federal's lending policies generally limit the maximum loan-to-
value ratio on mortgage loans secured by owner-occupied properties to 90% of the
lesser of the appraised value or purchase price of the property, with the
condition that private mortgage insurance is required on loans with a loan-to-
value ratio in excess of 80%.  Loans originated under FmHA and CDA programs have
loan-to-value ratios of up to 100% due to the guarantees provided by those
agencies.  The substantial majority of loans in Cecil Federal's loan portfolio
have loan-to-value ratios of 80% or less.

     Cecil Federal, since the early 1980s, has offered adjustable-rate mortgage
loans with terms of up to 30 years.  Adjustable-rate loans offered by Cecil
Federal include loans which reprice every one, three or five years and provide
for an interest rate which is based on the interest rate paid on U.S. Treasury
securities of a corresponding term.  Cecil Federal also offers a loan product
which provides for a fixed interest rate for the first ten years, and then
converts to a one year adjustable rate loan.

     Cecil Federal retains all adjustable-rate mortgages it originates, which
are designed to reduce Cecil Federal's exposure to changes in interest rates.
Cecil Federal's adjustable rate mortgages include caps on increases or decreases
of 2% per year, and 6% over the life of the loan.  The retention of adjustable-
rate mortgage loans in Cecil Federal's loan portfolio helps reduce Cecil
Federal's exposure to increases in interest rates.  However, there are
unquantifiable credit risks resulting from potential increased costs to the
borrower as a result of repricing of adjustable-rate mortgage loans.  It is
possible that during periods of rising interest rates, the risk of default on
adjustable-rate mortgage loans may increase due to the upward adjustment of
interest cost to the borrower.

     Cecil Federal also originates conventional fixed-rate mortgages with terms
of 15, 20 or 30 years.  Cecil Federal has originated all fixed-rate mortgage
loans in recent years for sale in the secondary mortgage market, and a
substantial majority of all fixed-rate loans originated since 1990 have been
sold, primarily to the Federal Home Loan Mortgage Corporation ("FHLMC"), with
servicing retained by Cecil Federal.  Management assesses its fixed rate loan
originations on an ongoing basis to determine whether the Bank's portfolio
position warrants the loans being sold or held in the Bank's portfolio.

     During the year ended December 31, 1997, Cecil Federal originated $5.5
million in adjustable-rate mortgage loans and $2.2 million in fixed-rate
mortgage loans (of which $1.7 million of fixed-rate mortgage loans were sold in
the secondary mortgage market).  Approximately 19.70% of all loan originations
during 1997 were refinancings of loans already in Cecil Federal's loan
portfolio.  At December 31, 1997, Cecil Federal's loan portfolio included $35.3
million in adjustable rate one- to four-family residential mortgages or 66.35%
of Cecil Federal's loan portfolio, and $7.5 million in fixed rate one- to four-
family residential loans or 14.10% of Cecil Federal's portfolio.

                                       4
<PAGE>
 
     Cecil Federal also offers second mortgage loans.  These loans are secured
by a junior lien on residential real estate.  The total of first and second
liens may not exceed an 80% loan to value ratio.  Loans have terms of 5, 10 and
15 years and have fixed rates.  As of December 31, 1997, Cecil Federal had $4.1
million outstanding in second mortgage loans.

     During the first quarter of 1995, Cecil Federal began offering home equity
lines of credit.   These loans are secured by a junior lien on residential real
estate.  Customers are approved for a line of credit which provides for an
interest rate which varies monthly and customers pay 2% of the balance per
month.  At December 31, 1997, Cecil Federal had $1.0 million in outstanding home
equity loans.

     CONSTRUCTION LENDING.  Cecil Federal's construction lending has primarily
involved lending to individuals for construction of single-family residences,
although Cecil Federal does lend to builders, and has, on occasion, loaned funds
for the construction of commercial properties and multi-family real estate.  All
loans for the construction of speculative sale homes have a loan value ratio of
not more than 75%.  Substantially all construction loans originated convert to a
permanent loan.   Cecil Federal has financed the construction of non-residential
properties on a case by case basis.  At December 31, 1997, the loan portfolio
included $3.1 million in loans secured by properties under construction.

     A substantial majority of Cecil Federal's construction loans (except loans
to builders) are structured to convert to permanent loans upon completion of
construction, and usually have an initial construction loan term of six months
prior to converting to a permanent loan.  Cecil Federal originated $0.7 million
in construction loans during the year ended December 31, 1997.  Loan proceeds
are disbursed during the construction phase according to a draw schedule based
on the stage of completion.  Construction projects are inspected by Cecil
Federal's officers.  Construction loans are underwritten on the basis of the
estimated value of the property as completed and loan-to-value ratios must
conform to the requirements for the permanent loan.

     LAND LOANS.  Cecil Federal also, from time to time, originates loans
secured by raw land.  Land loans originated to individuals have a term of up to
10 years and interest rates adjust every one, three or five years.  Land loans
originated to developers have terms of up to three years.  All land loans have a
loan-to-value ratio not exceeding 75%.  In September 1997, Cecil Federal
originated its largest loan for $725,000, which is secured by raw land.  This
loan is for a one-year term with a 56% loan to value ratio.  This loan is to an
experienced developer of residential building lots.  In June 1997, Cecil Federal
committed to a $500,000 participation with Susquehanna Bank for the property
known as Beacon Point.  The loan has a two-year term, with a 15% loan to value
ratio.  This project is a joint venture between two experienced residential
building lot developers.  Both loans were current as of December 31, 1997.
Cecil Federal may expand its lending on raw land, as market conditions allow, to
qualified borrowers, experienced in the development and sale of raw land.  At
December 31, 1997 Cecil Federal had $1.3 million in land loans outstanding, or
2.61% of Cecil Federal's loan portfolio.

     RISKS OF CONSTRUCTION LENDING AND LAND LOANS.  Loans involving construction
financing and loans on raw land have a higher level of risk than loans for the
purchase of existing homes since collateral values, land values, development
costs and construction costs can only be estimated at the time the loan is
approved.  Cecil Federal has sought to minimize its risk in construction lending
and in lending for the purchase of raw land by offering such financing primarily
to builders and developers to whom Cecil Federal has loaned funds in the past
and to persons who intend to occupy the completed structure.  The Bank also
limits construction lending and loans on raw land to the Cecil County market
area, with which management is familiar.  All construction loans and loans on
raw land in Cecil Federal's loan portfolio were performing according to their
terms at December 31, 1997.

                                       5
<PAGE>
 
     MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING.  Cecil Federal's permanent
multi-family and commercial real estate loans are secured by improved property
such as office buildings, apartment buildings and retail establishments which
are located in Cecil Federal's primary market area.  At December 31, 1997, loans
secured by multi-family (i.e., more than four units) totaled $1,066,000, or
2.00%, of Cecil Federal's total loan portfolio and loans secured by commercial
properties constituted approximately $2.4 million, or 4.64%, of Cecil Federal's
total loan portfolio.

     Multi-family and commercial real estate loans generally have terms of 20
years, and provide for interest rate adjustments every one, three or five years.
Multi-family and commercial mortgages are generally made in amounts not
exceeding 75% of the lesser of the appraised value or purchase price of the
property.  All of Cecil Federal's multi-family and commercial property loans
require regular payments of principal and interest.

     Loans secured by multi-family and commercial real estate generally are
larger and involve greater risks than one- to four-family residential mortgage
loans.  Because payments on loans secured by such properties are often dependent
on successful operation or management of the properties, repayment of such loans
may be subject to a greater extent to adverse conditions in the real estate
market or the economy.  Cecil Federal seeks to minimize these risks in a variety
of ways, including limiting the size and loan-to-value ratios of its multi-
family and commercial real estate loans and, restricting such loans to its
primary market area.

     COMMERCIAL BUSINESS LOANS.  Cecil Federal offers commercial business loans
and both secured and unsecured loans and letters of credit, or lines of credit
for businesses located in its primary market area.  Most business loans have a
six month term, while lines of credit can remain open for longer periods.  All
owners, partners and officers must sign the loan agreement.  The security for a
business loan depends on the amount borrowed, the business involved and the
strength of the borrower's firm and position.  At December 31, 1997 Cecil
Federal had $1,621,000 outstanding in commercial business loans.

     Commercial business lending entails significant risk, as the payments on
such loans may depend upon the successful operation or management of the
business involved.  Although Cecil Federal attempts to limit its risk of loss on
such loans by limiting the amount and the term, and by requiring personal
guarantees of principals of the business (when additional guarantees are deemed
necessary by management and such guarantees are allowed by regulation), the risk
of loss on commercial business loans is substantially greater than the risk of
loss from residential real estate lending.

     CONSUMER LENDING.  Consumer loans comprise the second largest category of
loans outstanding for Cecil Federal.  Cecil Federal's consumer loans consist of
automobile loans, savings account loans, education loans and home improvement
loans and other consumer loans.  At December 31, 1997, the consumer loan
portfolio totaled $3.2 million, or 6.05%, of total loans.  Consumer loans are
generally offered for terms of up to five years at fixed interest rates.
Management expects to continue to promote consumer loans as part of its strategy
to provide a wide range of personal financial services to its customers and as a
means to increase the yield on Cecil Federal's loan portfolio.

     Cecil Federal makes loans for automobiles and recreational vehicles, both
new and used, directly to the borrowers.  The loans can be for up to 100% of the
purchase price or the retail value listed by the National Automobile Dealers
Association.  The terms of the loans are determined by the age and condition of
the collateral.  Collision insurance policies are required on all these loans,
unless the borrower has substantial other assets and income.  At December 31,
1997, the total amount of automobile loans was $819,000.

     Cecil Federal makes savings account loans for up to 90% of the amount of
the depositor's savings account balance.  The maximum amount of the loan takes
into consideration the amount of interest due.  The term of the loan is either
interest due monthly on demand, or a term loan not to exceed 5 years.  The
interest rate is 2% higher than the rate being paid on the savings account.

                                       6
<PAGE>
 
     Cecil Federal's education loans are made to existing deposit customers, in
amounts of up to $10,000, and are paid out over four years, with $2,500
disbursed per year.  Interest is payable annually until the student leaves
school and amortization over an eight year period then begins.

     Cecil Federal also makes other consumer loans, which may or may not be
secured.  The term of the loans usually depends on the collateral.  Unsecured
loans usually do not exceed $100,000 and have a term of no longer than 12
months.  At December 31, 1997, the total amount of other consumer loans (which
consist of personal loans) was $1,775,000.

     Consumer loans are generally originated at higher interest rates than
residential mortgage loans but also tend to have a higher risk than residential
loans due to the loan being unsecured or secured by rapidly depreciable assets.
Despite these risks, Cecil Federal's level of consumer loan delinquencies
generally has been low.  No assurance can be given, however, that Cecil
Federal's delinquency rate on consumer loans will continue to remain low in the
future.

     MORTGAGE-BACKED SECURITIES.  Due to reduced opportunities for loan
originations in Cecil Federal's market area and pursuant to its asset/liability
management strategy, Cecil Federal has invested excess funds in mortgage-backed
securities.  At December 31, 1997, the total investment in mortgage-backed
securities was $1,817,000.  In April 1994, Cecil Federal purchased $750,000 in
fixed-rate FHLMC participation certificates with a maturity of 5 years, an
estimated life of 3 years, yielding approximately 6.0%.  In September 1996, the
Bank also purchased $1,750,000 in fixed-rate participation certificates with a
maturity of 5 years, an estimated life of 3 years, yielding approximately 6.82%.

     Prepayments in Cecil Federal's mortgage-backed securities portfolio may be
affected by declining and rising interest rate environments.  In a low and
falling interest rate environment, prepayments would be expected to increase.
In such an event, Cecil Federal's fixed-rate securities purchased at a premium
price could result in actual yields that are lower than anticipated yields.
Additionally, the increased principal payments received may be subject to
reinvestment at lower rates.  Conversely, in a period of rising rates,
prepayments would be expected to decrease, which would make less principal
available for reinvestment at higher rates.  Cecil Federal has historically
invested in mortgage-backed securities as an alternative investment to
supplement its lending efforts and maintain compliance with certain regulatory
requirements.  See "Regulation -- Qualified Thrift Lender Test."  Further, under
the OTS's risk-based capital requirement, FHLMC mortgage-backed securities have
a risk weight of 20%, in contrast to the 50% risk weight carried by one- to
four-family performing residential loans.  See "Regulation of the Bank --
Regulatory Capital Requirements."  Mortgage-backed securities may also be used
as collateral for borrowings and through repayments, as a source of liquidity.
Further, since they have relatively short terms, Cecil Federal's mortgage-backed
securities are helpful in limiting Cecil Federal's interest rate risk.  Cecil
Federal's mortgage-backed securities purchases decreased in recent months in
response to increased loan demand.

                                       7
<PAGE>
 
LOAN MATURITY SCHEDULE

     The following table sets forth certain information at December 31, 1997
regarding the dollar amount of loans maturing in Cecil Federal's portfolio based
on their contractual terms to maturity, including scheduled repayments of
principal.  Demand loans, loans having no stated schedule of repayments and no
stated maturity, and overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
                                                                                                                                  
                                                           Due after       Due after         Due after                           
                                 Due during the year       3 through       5 through        10 through     Due after 15         
                                 ending December 31,     5 years after   10 years after   15 years after   years after          
                               ----------------------    December 31,     December 31,     December 31,    December 31,    
                                1998    1999    2000         1997             1997             1997            1997        Total
                               ------  ------  ------    -------------   --------------   --------------   ------------   -------
                                                         (In thousands)                                                  
<S>                            <C>     <C>     <C>       <C>             <C>              <C>              <C>            <C>
                                                                                                                          
Real estate mortgage (1)(2)    $  400  $  794  $ 188        $  836           $4,357           $5,490          $35,701     $47,766
Real estate construction (1)..  2,734     400     --            --               --               --               --       3,134
Consumer and commercial    
 business.................      2,321     481    629         1,120              290               --               --       4,841
                               ------  ------  -----        ------           ------           ------          -------     -------
    Total..................    $5,455  $1,675  $ 817        $1,956           $4,647           $5,490          $35,701     $55,741
                               ======  ======  =====        ======           ======          =======         ========     =======
 
-------------------------
</TABLE>
(1)  Loans are not net of loans in process and discounts.
(2)  Includes loans held for sale.



     The next table sets forth at December 31, 1997, the dollar amount of all
loans due after December 31, 1997 which have predetermined interest rates and
have floating or adjustable interest rates.
<TABLE>
<CAPTION>
 
                            Predetermined    Floating or
                                Rates      Adjustable Rates
                            -------------  ----------------
                                   (In thousands)
<S>                           <C>             <C>  
Real estate mortgage......      $ 9,705         $38,061
Real estate construction..        3,134              --
Consumer and commercial                         
 business.................        3,391           1,450
                                -------         -------
  Total...................      $16,230         $39,511
                                =======         =======
</TABLE>

                                       8
<PAGE>
 
     LOAN SOLICITATION AND PROCESSING.  Upon receipt of a loan application from
a prospective borrower, a credit report and verifications are ordered to verify
specific information relating to the loan applicant's employment, income and
credit standing.  An appraisal of the real estate intended to secure the
proposed loan is undertaken by a qualified fee appraiser approved by Cecil
Federal.  The Board of Directors of Cecil Federal has the responsibility and
authority for general supervision over the lending policies of Cecil Federal.
The Board has established written lending policies for Cecil Federal and has
delegated to its Loan Committee the authority to approve all loans of up to
$200,000.  Secured loans of up to $50,000 and unsecured loans of up to $25,000
may be approved by Chief Executive Officer Mary Halsey or Chief Operating
Officer Brian Hale.  Secured loans of up to $25,000 and unsecured loans of up to
$15,000 may be approved by Vice President Feltman.  Assistant Secretary
Slijepcevic may approve secured loans of up to $25,000 and unsecured loans up to
$5,000.  Branch managers may approve secured loans up to $10,000 and unsecured
loans up to $2,500.  The Loan Committee consists of Chief Executive Officer
Halsey, Senior Vice President Hale, Vice President Feltman, two or three
directors and the chairman of the Appraisal Committee.  All loans over $200,000
must be approved by the full Board of Directors.  Interest rates on approved
loans are subject to change if the loan is not funded within 60 days after
approval, unless a written commitment has been made for a longer period.  It has
been management's experience that substantially all approved loans are funded.

     The aggregate amount of loans which a federal institution may make on the
security of liens on non-residential real property may not exceed 400% of the
institution's capital as determined under the capital standards mandated by
FIRREA.  In addition, FIRREA authorizes the Director of OTS to permit federal
savings institutions to exceed the 400% of capital limit in certain
circumstances.  This restriction has not had a material impact on Cecil
Federal's operations.

     With certain limited exceptions, the maximum amount the Bank may lend to
any borrower (including certain related entities of the borrower) at any one
time may not exceed 15% of the unimpaired capital and surplus of the
institution, plus an additional 10% of unimpaired capital and surplus for loans
fully secured by readily marketable collateral.  The Home Owners' Loan Act
("HOLA") additionally authorizes savings institutions to make loans to one
borrower, for any purpose, in an amount not to exceed $500,000 or, by order of
the Director of the OTS, in an amount not to exceed the lesser of $30,000,000 or
30% of unimpaired capital and surplus to develop residential housing, provided
(i) the purchase price of each single-family dwelling in the development does
not exceed $500,000, (ii) the savings institution is in compliance with the
fully phased-in capital requirements, (iii) the loans comply with applicable
loan-to-value requirements, and (iv) the aggregate amount of loans made under
this authority does not exceed 150% of unimpaired capital and surplus.  HOLA
also authorizes loans to any one borrower to finance sales of real property
acquired in satisfaction of debts in an amount up to 50% of unimpaired capital
and surplus.  Loans-to-one-borrower limits do not apply to purchase money notes
taken from the purchaser of real property acquired by the institution in
satisfaction of debts previously contracted if no new funds are advanced to the
borrower and the savings association is not placed in a more detrimental
position as the result of such sale.  Under these limits, at December 31, 1997,
Cecil Federal's loans-to-one borrower cannot exceed $1,102,850.  At December 31,
1997, the largest amount loaned or committed to one borrower by Cecil Federal
was $1,159,400 which was in compliance with the Bank's loan to one borrower
limit at that time.  This amount consisted of 19 single family dwellings and one
non-residential property.  At December 31, 1997, the second largest loan or
committed to one borrower was $986,400.  This amount consisted of 13 single
family dwellings and one non-residential property.

     LOAN ORIGINATIONS AND SALES.  Loan originations are derived from a number
of sources.  Residential mortgage loan originations primarily come from walk-in
customers and referrals by realtors, depositors and borrowers.  Applications are
taken at both offices, but are processed in Cecil Federal's main office, and
submitted for approval, as noted above.

     Cecil Federal has not purchased loans in the secondary mortgage market.
All fixed-rate loans are originated according to FHLMC guidelines and, depending
on market conditions, may be sold to FHLMC after origination.  Cecil Federal
retains servicing on all loans sold.

                                       9
<PAGE>
 
     Set forth below is a table showing Cecil Federal's loan and origination,
purchase and sale activity for the periods indicated.
<TABLE>
<CAPTION>
                                Year Ended December 31,
                               -------------------------
                                1997     1996     1995
                               -------  -------  -------
<S>                            <C>      <C>      <C>
                                     (In thousands)
Loans originated:
 Real estate loans:
  Construction loans.........  $   708  $ 2,083  $   669
  One- to four-family........   13,511   14,674   14,324
  Multi-family...............      350       --       --
  Non-residential and other..    2,486    1,627      958
 Consumer loans..............    2,435    2,774    2,403
 Commercial loans............    1,330      135      715
                               -------  -------  -------
  Total loans originated.....  $20,820  $21,293  $19,069
                               =======  =======  =======
 
Loans sold:
 Whole loans.................  $ 3,040  $ 4,103  $ 1,046
                               -------  -------  -------
  Total loans sold...........  $ 3,040  $ 4,103  $ 1,046
                               =======  =======  =======
 
</TABLE>

     INTEREST RATES AND LOAN FEES.  Interest rates charged by Cecil Federal on
mortgage loans are primarily determined by competitive loan rates offered in its
market area.  Mortgage loan interest rates reflect factors such as general
market interest rate levels, the supply of money available to the financial
institutions industry and the demand for such loans.  These factors are in turn
affected by general economic conditions, the monetary policies of the Federal
government, including the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"), and general supply of money in the economy.

     In addition to interest earned on loans, Cecil Federal receives fees in
connection with loan commitments and originations, loan modifications, late
payments and for miscellaneous services related to its loans.  Income from these
activities varies from period to period with the volume and type of loans
originated, which in turn is dependent on prevailing mortgage interest rates and
their effect on the demand for loans in the markets served by Cecil Federal.
Cecil Federal also receives servicing fees of .25% to .375% of the loan amount
of the loans that it services.  At December 31, 1997, Cecil Federal was
servicing $18.8 million in loans for other financial institutions.  For the
years ended December 31, 1997, 1996 and 1995 Cecil Federal recognized servicing
income of $42,100, $37,700 and $36,000, respectively, and total fee income of
$184,000, $188,000 and $157,000, respectively.

     NON-PERFORMING LOANS AND OTHER PROBLEM ASSETS.  Management reviews Cecil
Federal's portfolio on a regular basis.  Cecil Federal's collection procedures
provide that when a loan becomes 10 days past due a written notification of the
late payment is sent.  When the loan is past due 30 days, the borrower is
contacted by telephone, and payment is requested.  After 45 days past due, a
property inspection and customer visit takes place.  If payment is not received
by the time the loan is 90 days past due, the loan is placed on non-accrual
status, the borrower is contacted again, and efforts are made to formulate an
affirmative plan to cure the delinquency.  After a loan becomes past due 60
days, Cecil Federal also provides a final notice that it will initiate legal
proceedings in 30 days, after which foreclosure procedures commence.  Loans are
charged-off when management concludes that they are uncollectible.

     Real estate acquired by Cecil Federal as a result of foreclosure is
classified as real estate owned until such time as it is sold.  When such
property is acquired, it is recorded at the lower of its unpaid principal
balance or fair value.  Any required write-down of the loan to its fair value
upon foreclosure is charged against the allowance for losses.  Past OTS
examinations of general reserves have resulted in them being "minimally
adequate."  In response, Cecil Federal, based on Management's evaluation of the
composition of its loan portfolio, is currently increasing its reserves to
provide a more adequate reserve against future possible losses and
delinquencies.

                                       10
<PAGE>
 
     The following table sets forth information with respect to Cecil Federal's
non-performing assets at the dates indicated.  At the dates shown, Cecil
Federal, had no restructured loans within the meaning of Statement of Financial
Accounting Standards No. 15.
<TABLE>
<CAPTION>
 
                                                                     At December 31,
                                                   ---------------------------------------------------
                                                     1997       1996       1995       1994      1993
                                                   ---------  ---------  ---------  --------  --------
                                                                  (Dollars in thousands)
<S>                                                <C>        <C>        <C>        <C>       <C> 
Loans accounted for on a non-accrual basis: (1)
 Residential real estate.........................  $579,632   $260,060   $216,063   $14,896   $47,511
 Consumer........................................        --         --         --        --        --
                                                   --------   --------   --------   -------   -------
  Total..........................................  $579,632   $260,060   $216,063   $14,896   $47,511
                                                   ========   ========   ========   =======   =======
 
Accruing loans which are contractually past
 due 90 days or more:
 Residential real estate.........................  $100,596   $     --   $     --   $    --   $    --
 Consumer........................................    22,836         --         --        --       555
                                                   --------   --------   --------   -------   -------
  Total..........................................  $123,432   $     --   $     --   $    --   $   555
                                                   ========   ========   ========   =======   =======
  Total of nonaccrual and 90 days past
   due loans.....................................  $703,064   $260,060   $216,063   $14,896   $48,066
                                                   ========   ========   ========   =======   =======
 
Percentage of total loans........................      1.32%       .50%       .46%      .04%      .14%
                                                   ========   ========   ========   =======   =======
 
Other non-performing assets......................  $171,229   $     --   $ 73,000   $73,000   $73,000
                                                   ========   ========   ========   =======   =======
-------------------------
</TABLE>
(1)  Non-accrual status denotes loans on which, in the opinion of management,
     the collection of additional interest is unlikely.  Payments received on a
     non-accrual loan are either applied to the outstanding principal balance or
     recorded as interest income, depending on assessment of the collectibility
     of the loan.


     Except as discussed below, at December 31, 1997, Cecil Federal did not have
any loans which were not currently classified as non-accrual, 90 days past due
or restructured but where known information about possible credit problems of
borrowers caused management to have serious concerns as to the ability of the
borrowers to comply with present loan repayment terms and would result in
disclosure as non-accrual, 90 days past due or restructured.

     At December 31, 1997, Cecil Federal's nonaccruing loans and accruing loans
more than 90 days past due totaled $703,064, which consisted of 13 single-family
residential properties.  During the year ended December 31, 1997, gross interest
income of $31,541 would have been recorded on loans accounted for on a non-
accrual basis if such loans had been current throughout the respective period.
Four of the existing delinquent single-family residential properties, totaling
$328,000, are currently in bankruptcy.

     ASSET CLASSIFICATION AND ALLOWANCE FOR LOAN LOSSES.  Federal regulations
require savings associations to review their assets on a regular basis and to
classify them as "substandard," "doubtful" or "loss," if warranted.  Assets
classified as substandard or doubtful require the institution to establish
general and specific allowances for loan losses.  If an asset or portion thereof
is classified loss, the insured institution must either establish a specified
allowance in the amount of the portion of the asset classified loss, or charge
off such amount.  An asset which does not currently warrant classification, but
which possesses weaknesses or deficiencies deserving close attention, is
required to be designated as "special mention."  Currently, general loss
allowances established to cover losses related to assets classified substandard
or doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses do not qualify as regulatory
capital.  See "Regulation of the Bank -- Regulatory Capital Requirements."

                                       11
<PAGE>
 
     In originating loans, Cecil Federal recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan.   General allowances are made pursuant to
management's assessment of the risk in Cecil Federal's loan portfolio as a
whole.  Specific allowances are provided for individual loans when ultimate
collection is considered questionable by management after reviewing the status
of loans which are contractually past due and considering the net realizable
value of the security for the loan.  Management continues to actively monitor
Cecil Federal's asset quality and to charge off loans against the allowance for
loan losses when appropriate, or to provide specific loss reserves when
necessary.  Based on these factors, Cecil Federal contributes to its general
loan loss reserve as it considers necessary.  Although management believes it
uses the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions vary from the assumptions used in making the initial determinations.

     In December 1993 the banking regulatory agencies, including the OTS,
adopted a policy statement regarding maintenance of an adequate allowance for
loan and lease losses and an effective loan review system.  This policy includes
an arithmetic formula for checking the reasonableness of an institution's
allowance for loan loss estimate compared to the average loss experience of the
industry as a whole.  Examiners will review an institution's allowance for loan
losses and compare it against the sum of (i) 50% of the portfolio that is
classified doubtful; (ii) 15% of the portfolio that is classified as
substandard; and (iii) for the portions of the portfolio that have not been
classified (including those loans designated as special mention), estimated
credit losses over the upcoming twelve months given the facts and circumstances
as of the evaluation date.  This amount is considered neither a "floor" nor a
"safe harbor" of the level of allowance for loan losses an institution should
maintain, but examiners will view a shortfall relative to the amount as an
indication that they should review management's policy on allocating these
allowances to determine whether it is reasonable based on all relevant factors.

     The following table sets forth an analysis of Cecil Federal's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
 
                                                    Years Ended December 31,
                                             --------------------------------------
                                              1997    1996    1994    1994    1993
                                             ------  ------  ------  ------  ------
                                                     (Dollars in thousands)
<S>                                          <C>     <C>     <C>     <C>     <C>
 
Balance at beginning of period.............  $ 118   $ 114   $ 106   $  89   $  67
                                             -----   -----   -----   -----   -----
 
Loans charged-off:
  Residential real estate mortgage loans...      7      --      --      --      --
  Consumer.................................     49     119      32      25       9
                                             -----   -----   -----   -----   -----
Total charge-offs..........................     56     119      32      25       9
                                             -----   -----   -----   -----   -----
 
Recoveries:
  Residential real estate mortgage loans...     --      --      --      --      --
  Consumer.................................     25      20       5       8       3
                                             -----   -----   -----   -----   -----
 
Total recoveries...........................     25      20       5       8       3
                                             -----   -----   -----   -----   -----
 
Net loans charged-off......................     31      99      27      17       6
                                             -----   -----   -----   -----   -----
 
Provision for loan losses..................     87     103      35      34      28
                                             -----   -----   -----   -----   -----
Balance at end of period...................  $ 174   $ 118   $ 114   $ 106   $  89
                                             =====   =====   =====   =====   =====
 
Ratio of net charge-offs to average loans
  outstanding during the period............    .06%    .04%    .06%    .04%    .02%
                                             =====   =====   =====   =====   =====
</TABLE>

                                       12
<PAGE>
 
     The following table allocates the allowance for loan losses by loan
category at the dates indicated.  The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
 
 
                                                                           At December 31,
                                     --------------------------------------------------------------------------------------------
                                            1997               1996               1995               1994             1993
                                     -----------------  -----------------  -----------------  ----------------  -----------------
                                      Amount      %      Amount      %      Amount      %      Amount      %     Amount      %
                                     --------  -------  --------  -------  --------  -------  --------  -------  -------  -------
                                                                        (Dollars in thousands)
<S>                                  <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>      <C>
Type of Loan:
-------------
Real estate loans:
  Construction loans...............  $  7,100    5.89%  $  8,000    5.87%  $     --    1.87%  $     --    2.89%  $    --    4.40%
  One- to four-family residential..    63,000   80.51     31,200   83.97     85,500   86.64     79,500   85.30    66,750   87.94
  Multi-family residential.........     4,000    2.00         --     .20         --     .22         --     .27        --     .32
  Land.............................    10,200    2.61      7,000    3.15         --    4.45         --    5.31        --    2.41
  Commercial.......................    18,400    4.64      8,000    5.37         --    3.52         --    3.44        --    2.41
 
Commercial loans...................    24,200    3.05      9,000    1.40         --    1.32         --    1.12        --     .84
 
Automobiles........................        --    1.54         --    1.32         --    1.22         --     .74        --     .19
Education loans....................        --     .14         --     .17         --     .18         --     .15        --     .14
Savings account loans..............        --    1.02         --    1.27         --    1.30         --    1.39        --    1.69
Home improvement loans.............        --     .02         --     .02         --     .05         --     .12        --     .10
Personal loans.....................    47,100    3.33     54,800    3.56     28,500    3.32     26,500    2.81    22,250    2.82
                                     --------  ------   --------  ------   --------  ------   --------  ------   -------  ------
                                      174,000  104.75    118,000  106.30    114,000  104.09    106,000  103.54    89,000  102.46
 
Less:
  Loans held for sale..............        --   (2.56)        --    3.43         --    1.44
  Loans in process.................        --   (1.68)        --    2.53         --    2.03         --    2.81        --    1.82
    Discounts and other............        --    (.19)        --     .10         --     .37         --     .46        --     .38
  Loan loss reserve................        --    (.32)        --     .24         --     .25         --     .27        --     .26
                                     --------  ------   --------  ------   --------  ------   --------  ------   -------  ------
Total allowance for loan losses....  $174,000  100.00%  $118,000  100.00%  $114,000  100.00%  $106,000  100.00%  $89,000  100.00%
                                     ========  ======   ========  ======   ========  ======   ========  ======   =======  ======
</TABLE>

                                       13
<PAGE>
 
     INVESTMENT ACTIVITIES.  Cecil Federal is required under federal regulations
to maintain a minimum amount of liquid assets, which can be invested in
specified short-term securities, and is also permitted to make certain other
investments.  See "Regulation."  It has generally been Cecil Federal's policy to
maintain a liquidity portfolio substantially in excess of the amount required to
satisfy regulatory requirements.  Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives, Management's judgment as
to the attractiveness of the yields then available in relation to other
opportunities, its expectations of the level of yield that will be available in
the future and its projections as to the short term demand for funds to be used
in Cecil Federal's loan origination and other activities.

     The general objectives of Cecil Federal's investment policy are to (i)
maintain liquidity levels sufficient to meet the operating needs of Cecil
Federal and applicable regulatory requirements, (ii) minimize interest rate risk
by managing the repricing characteristics of Cecil Federal's assets and
liabilities, (iii) reduce credit risk by investing primarily in U.S. Treasury
and agency securities and (iv) absorb excess liquidity when loan demand is low
and/or deposit growth is high.   Cecil Federal's investment activities are
conducted by senior management (specifically Chief Executive Officer Halsey and
supervised by the Board of Directors.  Investments are governed by an investment
policy adopted by the Board, which currently provides for maintenance of an
investment portfolio for the purposes of providing earnings, ensuring a minimum
liquidity reserve and facilitating Cecil Federal's asset/liability management
objectives (e.g., limiting the weighted average terms to maturity or repricing
of Cecil Federal's interest-earning assets).  In accordance with the policy,
management has primarily invested in U.S. Treasury, government and agency
securities and mutual funds.

     Cecil Federal carries its investments at cost as adjusted for discounts and
unamortized premiums.  Cecil Federal's intention is to hold all investments to
maturity and Cecil Federal does not currently foresee any conditions that would
require any sales of its investments.  For additional information, see Notes 3
and 5 of Notes to Consolidated Financial Statements.

     The following table sets forth the carrying value of Cecil Federal's
investment securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
 
                                              At December 31,
                                              ---------------
                                                   1997           1996        1995
                                              ---------------  ----------  ----------
<S>                                           <C>              <C>         <C>
 
Investment securities:
  U.S. government and agency securities.....       $2,997,516  $2,490,069  $2,000,015
  Other.....................................          528,043     496,358     247,724
                                                   ----------  ----------  ----------
    Total investment securities.............        3,525,559   2,986,427   2,247,739
Federal funds sold..........................               --          --     100,000
Interest-earning deposits and certificates
 of deposit.................................          880,809     502,207   1,036,527
FHLB stock..................................          438,100     422,900     422,900
                                                   ----------  ----------  ----------
     Total investments......................       $4,844,468  $3,911,534  $3,850,166
                                                   ==========  ==========  ==========
</TABLE>

                                       14
<PAGE>
 
     The following table sets forth the scheduled maturities, carrying values,
market values and average yields for Cecil Federal's investment portfolio at
December 31, 1997.
<TABLE>
<CAPTION>
 
 
                                                      
                                        
                            
                             One Year or Less  One to Five Years  Five to Ten Years  More than Ten Years  Total Investment Portfolio

                             ----------------  -----------------  -----------------  -------------------  --------------------------

                             Carrying Average  Carrying  Average  Carrying  Average  Carrying   Average   Carrying  Market  Average
                              Value    Yield    Value     Yield    Value     Yield    Value      Yield     Value    Value    Yield
                             -------- -------  --------  -------  --------  -------  --------   -------   --------  ------  -------
                                                                     (Dollars in thousands)
<S>                          <C>      <C>      <C>       <C>      <C>       <C>      <C>        <C>       <C>       <C>     <C>
Securities available for
 sale (1):
  U.S. government and
   agency securities........ $     --      --%  $    --       --%  $    --       --%  $    --           --%  $  --  $   --       --%

  Other.....................      528    5.80                                                                  528     525     5.80
 Interest-earning deposits
  and certificates of 
  deposits..................       --      --        --       --        --       --        --        --         --      --       --
 FHLB stock................        --      --        --       --        --       --        --        --         --      --       --
                               ------           -------            -------            -------               ------  ------ 
    Total....................  $  528    5.80%  $    --       --   $    --       --   $    --        --     $  528  $  525     5.80%

                               ======    ====   =======            =======            =======               ======  ======     ==== 

 
Securities held to
 maturity (1):
  U.S. government and
   agency securities........   $2,998    5.72%  $    --       --   $    --       --   $    --        --     $2,998  $2,997     5.72
  Other.....................       --      --        --       --        --       --        --        --         --      --       --
  Interest-earning deposits
   and certificates of 
   deposits.................      881    8.57        --       --        --       --        --        --        881     881     8.57
  FHLB stock................      438    7.13        --       --        --       --        --        --        438     438     7.13
                               ------           -------            -------            -------               ------  ------ 
    Total....................  $4,317    5.75   $    --       --   $    --       --   $    --        --     $4,317  $4,316     5.75
                               ======           =======            =======            =======               ======  ======      
</TABLE>

                                       15
<PAGE>
 
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS

     GENERAL.  Deposits are the primary source of Cecil Federal's funds for
lending and other investment purposes.  In addition to deposits, Cecil Federal
derives funds from loan principal repayments and interest payments and maturing
investment securities.  Loan repayments and interest payments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions.  Borrowings
may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources, or on a longer term basis for general
business purposes.  Cecil Federal primarily utilizes advances from the Federal
Home Loan Bank of Atlanta for borrowings.

     DEPOSITS.  Deposits are attracted principally from within Cecil Federal's
primary market area through the offering of a variety of deposit instruments,
including savings accounts and certificates of deposit ranging in term from 91
days to 60 months, as well as regular checking, NOW, passbook and money market
deposit accounts.  Deposit account terms vary, principally on the basis of the
minimum balance required, the time periods the funds must remain on deposit and
the interest rate.  Cecil Federal also offers individual retirement accounts
("IRAs").

     Cecil Federal's policies are designed primarily to attract deposits from
local residents.  Cecil Federal does not accept deposits from brokers due to the
volatility and rate sensitivity of such deposits.  Interest rates paid, maturity
terms, service fees and withdrawal penalties are established by Cecil Federal on
a periodic basis.  Determination of rates and terms are predicated upon funds
acquisition and liquidity requirements, rates paid by competitors, growth goals
and federal regulations.

                                       16
<PAGE>
 
     The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by Cecil Federal between the dates
indicated.
<TABLE>
<CAPTION>
                                                   Increase                                Increase
                                                  (Decrease)                              (Decrease)
                         Balance at                  From        Balance at                  From        Balance at
                        December 31,      %      December 31,   December 31,      %      December 31,   December 31,      %
                            1997      Deposits       1996           1996      Deposits       1995           1995      Deposits
                        ------------  ---------  -------------  ------------  ---------  -------------  ------------  ---------
                                                                (Dollars in thousands)
<S>                     <C>           <C>        <C>            <C>           <C>        <C>            <C>           <C>
 
Regular checking......       $ 1,434      2.68%        $  515        $   919      1.92%        $  232        $   687      1.53%
NOW accounts..........         5,038      9.41          1,209          3,829      8.03            152          3,677      8.20
Passbook..............         8,102     15.13           (699)         8,801     18.46           (663)         9,464     21.10
Statement savings.....         1,274      2.38             25          1,249      2.62            641            608      1.36
Commercial checking...            58       .11             33             25       .05              2             23       .05
Money market..........         2,649      4.95             31          2,618      5.49           (408)         3,026      6.75
Christmas club........            79       .15             (1)            80       .17             10             70       .15
91 day CD.............         6,224     11.62          1,904          4,320      9.06          1,497          2,823      6.29
6 month CD............         4,919      9.19            915          4,004      8.40          1,271          2,733      6.09
1 year CD.............         5,656     11.12            691          5,265     11.04           (461)         5,726     12.77
18 month CD...........         2,447      4.57            446          2,001      4.20           (280)         2,281      5.09
30 month CD...........         2,499      4.67            238          2,261      4.74            (22)         2,283      5.09
42 month CD...........            52       .10           (125)           177       .37              7            170       .38
60 month CD...........         4,225      7.89            246          3,979      8.35            274          3,705      8.26
18 month IRA CD.......         7,520     14.05            508          7,012     14.71            (74)         7,086     15.80
14 month variable CD..         1,061      1.98            (78)         1,139      2.39            649            490      1.09
                             -------    ------         ------        -------    ------         ------        -------    ------
                             $53,537    100.00%        $5,858        $47,679    100.00%        $2,827        $44,852    100.00%
                             =======    ======         ======        =======    ======         ======        =======    ======
</TABLE>

                                       17
<PAGE>
 
SAVINGS PORTFOLIO

   Savings deposits in Cecil Federal at December 31, 1997 were represented by
the various types of savings programs described below.
<TABLE>
<CAPTION>
     Interest       Minimum                                 Minimum            Percentage of
      Rate *        Term               Category             Amount   Balances  Total Savings
----------------  ---------  -----------------------------  -------  --------  --------------
                                                                  (In thousands) 
<S>               <C>        <C>                            <C>      <C>       <C>
 
   0 %            None       Regular checking               $    50   $ 1,434           2.68%
 1.98             None       NOW Accounts                        50     5,038           9.41
 3.00             None       Statement Savings                   10     1,274           2.38
 3.00             None       Passbook Accounts                   10     8,102          15.13
 3.00             None       Money Market Deposit Accounts    2,500     2,649           4.95
 3.00             1 year     Club Accounts                        1        79            .15
 
                             Certificates of Deposit
                             -----------------------------
 
 4.00             91 days    91-day certificate                 500     6,224          11.62
 5.55             14 month   Variable Rate/Fixed Term        10,000     1,061           1.98
 5.25             12-month   Fixed-Term, Fixed-Rate             500     5,956          11.12
 5.59             30-month   Fixed-Term, Fixed-Rate             500     2,499           4.67
 5.45             18-month   Fixed-Term, Fixed-Rate             500     2,447           4.57
 5.65             60-month   Fixed-Term, Fixed-Rate             500     4,225           7.89
 5.45             18-month   18-Month IRA Accounts              500     7,520          14.05
 5.12             182 days   6-month Money Market               500     4,919           9.19
 5.50             42 months  Fixed-Term, Fixed-Rate             500        52            .10
                                                                      -------         ------
                                                                      $53,537         100.00%
                                                                      =======         ======
 
-------------------------
</TABLE>
*    Represents weighted average interest rate.



TIME DEPOSITS BY RATES

     The following table sets forth the time deposits in Cecil Federal
classified by rates at the dates indicated.
<TABLE>
<CAPTION>
 
                        At December 31,
                   -------------------------
                     1997     1996     1995
                   -------  -------  -------
                         (In thousands)
<S>                <C>      <C>      <C> 
2 -  3.99% (1)...  $    79  $   242  $   261
4 -  5.99%.......   27,513   25,163   16,868
6 -  7.99%.......    7,390    4,833   10,226
8 -  9.99% (2)...       --       --       12
                   -------  -------  -------
                   $34,982  $30,238  $27,367
                   =======  =======  =======
 
-------------------------
</TABLE>
(1)  Includes Club Accounts.
(2)  There are no officers or directors of Cecil Federal earning over 8% on
     their deposits.

                                       18
<PAGE>
 
TIME DEPOSIT MATURITY SCHEDULE

     The following table sets forth the amount and maturities of time deposits
at December 31, 1997.
<TABLE>
<CAPTION>
 
                                          Amount Due
                       ------------------------------------------------
                       Less Than                        After
Rate                   One Year  1-2 Years  2-3 Years  3 Years   Total
---------------------  --------  ---------  ---------  -------  -------
                                        (In thousands)
<S>                    <C>       <C>        <C>        <C>      <C>
 
     2 -  3.99% (1)..   $    79     $   --     $   --     $ --  $    79
     4 -  5.99%......    22,209      4,177        586      541   27,513
     6 -  7.99%......     5,159      1,157        838      236    7,390
                        -------     ------     ------     ----  -------
                        $27,447     $5,334     $1,424     $777  $34,982
                        =======     ======     ======     ====  =======
-------------------------
</TABLE>
(1)  Includes Club Accounts.


     The following table indicates the amount of Cecil Federal's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1997.
<TABLE>
<CAPTION>
 
                                  Certificates
Maturity Period                   of Deposits
---------------                  -------------
                                 (In thousands)
<S>                              <C> 
Three months or less............       $2,718
Over three through six months...        3,457
Over six through twelve months..        1,951
Over twelve months..............          645
                                       ------
 Total..........................       $8,771
                                       ======
</TABLE>


SAVINGS DEPOSIT ACTIVITY

     The following table sets forth the savings activities of Cecil Federal for
the periods indicated.
<TABLE>
<CAPTION>
 
                                                      Year Ended December 31,
                                                     --------------------------
                                                       1997     1996     1995
                                                     --------  -------  -------
<S>                                                  <C>       <C>      <C>
                                                           (In thousands)
 
Deposits...........................................  $114,667  $92,077  $72,700
Withdrawals........................................   111,302   91,349   75,528
                                                     --------  -------  -------
  Net increase (decrease) before interest credited.     3,365      728    2,828
Interest credited..................................     2,493    2,099    1,826
                                                     --------  -------  -------
  Net increase (decrease) in savings deposits......  $  5,858  $ 2,827  $ 4,654
                                                     ========  =======  =======
 
</TABLE>

     Management attributes the increase in deposits (prior to interest credited)
for the year ended December 31, 1997 to increased marketing of existing products
to current customers, and the addition of several new savings products.

                                       19
<PAGE>
 
     BORROWINGS.  Savings deposits historically have been the primary source of
funds for Cecil Federal's lending and investment activities and for its general
business activities.  Cecil Federal is authorized, however, to use advances from
the FHLB of Atlanta to supplement its supply of lendable funds and to meet
deposit withdrawal requirements.  Advances from the FHLB typically would be
secured by Cecil Federal's stock in the FHLB and a portion of Cecil Federal's
mortgage loans.  Cecil Federal utilized short-term advances from FHLB during the
year.

     The FHLB of Atlanta functions as a central reserve bank providing credit
for savings institutions and certain other member financial institutions.  As a
member, Cecil Federal is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met.

SUBSIDIARY ACTIVITIES

     As a federally chartered savings bank, Cecil Federal may invest up to 2% of
its assets in subsidiaries, with an additional investment of 1% of assets where
such investment serves primarily community, inner-city, and community
development purposes.  Under such limitations, as of December 31, 1997, Cecil
Federal was authorized to invest up to approximately $1.9 million in the stock
of or in the loans to subsidiaries.  In addition, institutions meeting
regulatory capital requirements and certain other tests may invest up to 50% of
their regulatory capital in conforming first mortgage loans to subsidiaries.  At
December 31, 1997, Cecil Federal had $62,900 invested in its subsidiaries.

     Cecil Federal's wholly owned subsidiaries, Cecil Service Corporation and
Cecil Financial Services Corporation were each established in 1971.  Cecil
Service Corporation's primary business is leasing agent for the North East Plaza
Branch.  The dollar amount invested in this business activity was $34,200 for
1997.   On September 1, 1997, Cecil Financial Services, a service corporation of
Cecil Federal Savings Bank, began offering a full range of brokerage and
investment services in all our branches, through a partnership with UVEST
Investment Services.

     With this expansion, Cecil Federal will now offer convenience in servicing
customer needs.  Roger L. Owens, CLU, was hired as an investment representative.
He will provide comprehensive investment products tailored to meet current and
future individual financial needs.

     The Company has partnered in this venture with UVEST Investment Services, a
registered broker-dealer and member of both the National Association of
Securities Dealers and the Securities Investment Protection Corporation (SIPC).
Headquartered in Charlotte, North Carolina, UVEST has been providing bank-based
investment services through the Southeast since 1982.  The dollar amount
invested in this business activity was $28,700 for 1997.

     SAIF-insured savings institutions are required to give the FDIC and the
Director of the OTS 30 days' prior notice before establishing or acquiring a new
subsidiary, or commencing any new activity through an existing subsidiary.  Both
the FDIC and the Director of the OTS have authority to order termination of
subsidiary activities determined to pose a risk to the safety or soundness of
the institution.  In addition, recently adopted capital requirements require
savings institutions to deduct the amount of their investments in and extensions
of credit to subsidiaries engaged in activities not permissible to national
banks from capital in determining regulatory capital compliance.  See
"Regulation of the Bank -- Regulatory Capital Requirements."

COMPETITION

     Cecil Federal experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans.
Direct competition for savings deposits comes from other savings institutions,
credit unions, regional bank holding companies and commercial banks located in
its primary market area.  Significant competition for the Bank's other deposit
products and services comes from money market mutual funds, brokerage

                                       20
<PAGE>
 
firms, insurance companies and retail stores.  The primary factors in competing
for loans are interest rates and loan origination fees and the range of services
offered by various financial institutions.  Competition for origination of real
estate loans normally comes from other savings institutions, commercial banks,
mortgage bankers, mortgage brokers and insurance companies.

     Cecil Federal is one of 8 financial institutions with offices in Cecil
County, Maryland.  Cecil Federal's primary competition comes from those
institutions as well as numerous additional regional commercial banks and thrift
institutions, which have branch offices near Cecil Federal's market area.  Many
of these financial institutions have financial resources substantially greater
than Cecil Federal.

     Cecil Federal is able to compete effectively in its primary market area by
offering competitive interest rates and loan fees, and a wide variety of deposit
products and by emphasizing personal customer service and cultivating
relationships with the local businesses.  Management believes that, as a result
of Cecil Federal's commitment to competitive pricing, varied products and
personal service, Cecil Federal has developed a solid base of core deposits and
Cecil Federal's loan origination activities are an asset to the community.

REGULATION OF THE BANK

     As a federally chartered savings institution, Cecil Federal is subject to
extensive regulation by the OTS.  The lending activities and other investments
of Cecil Federal must comply with various federal regulatory requirements.  The
OTS periodically examines the Bank for compliance with various regulatory
requirements.  The FDIC also has the authority to conduct special examinations
of the Bank because its deposits are insured by the SAIF.  The Bank must file
reports with OTS describing its activities and financial condition.  The Bank is
also subject to certain reserve requirements promulgated by the Federal Reserve
Board.  This supervision and regulation is intended primarily for the protection
of depositors.  As a savings institution holding company, the Company is subject
to OTS regulation, examination, supervision and reporting requirements.  Certain
of these regulatory requirements are referred to below or appear elsewhere
herein.

     Regulatory Capital Requirements.  Under OTS capital standards, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3% of adjusted total assets and "total" capital
(a combination of core and "supplementary" capital) equal to 8% of risk-weighted
assets.  Regulatory tangible, core and total capital are not calculated in
accordance with generally accepted accounting principles.  The OTS regulation
defines core capital as common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill," less intangible assets other than certain qualifying supervisory
goodwill and certain mortgage servicing rights.  At December 31, 1997, Cecil
Federal had no qualifying supervisory goodwill or mortgage servicing rights.
Tangible capital is the same as core capital, except it excludes qualifying
supervisory goodwill and other intangible assets other than certain mortgage
servicing rights.

     The OTS capital rule requires that core and tangible capital be further
reduced by an amount equal to a savings institution's debt and equity
investments in any subsidiary engaged in activities not permissible for national
banks, other than a subsidiary engaged in activities undertaken as agent for
customers or in mortgage banking activities and certain subsidiary depository
institutions or their holding companies ("nonincludable subsidiary").  At
December 31, 1997, Cecil Federal had no investments in or extensions of credit
to subsidiaries engaged in activities not permissible for national banks.

     Adjusted total assets are a savings association's total assets as
determined under generally accepted accounting principles adjusted for certain
goodwill amounts and increased by a pro rated portion of the assets of
subsidiaries in which the savings association holds a minority interest and
which are not engaged in activities for which the capital rules require
deduction of its debt and equity investments.  Adjusted total assets are reduced
by the amount of assets that have 

                                       21
<PAGE>
 
been deducted from capital, the portion of the savings association's investments
in subsidiaries that must be deducted from capital under the capital rules and,
for purposes of the core capital requirement, qualifying supervisory goodwill.

     In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings association's core capital.  Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings association's general
loss allowances.  Total core and supplementary capital are reduced by the amount
of capital instruments held by other depository institutions pursuant to
reciprocal arrangements and by the amount of the savings association's high
loan-to-value ratio land loans and non-residential construction loans and equity
investments other than those deducted from core and tangible capital.  At
December 31, 1997, the Bank had no high ratio land or nonresidential
construction loans and had no equity investments for which OTS regulations
require deduction from total capital.

     The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each on-balance-sheet asset and the credit-
equivalent amount of each off-balance-sheet item after being multiplied by an
assigned risk weight.  Under the OTS risk-weighting system, cash and securities
backed by the full faith and credit of the U.S. Government are given a 0% risk
weight.  Mortgage-backed securities issued, or fully guaranteed as to principal
and interest, by the FNMA or FHLMC are assigned a 20% risk weight.  One- to
four-family first mortgages not more than 90 days past due with loan-to-value
ratios under 80%, multi-family mortgages (maximum 36 dwelling units) with loan-
to-value ratios under 80% and average annual occupancy rates over 80%, and
certain qualifying loans for the construction of one- to four-family residences
pre-sold to home purchasers are assigned a risk weight of 50%.  Consumer loans,
commercial loans, non-qualifying mortgage loans, most commercial real estate
loans, repossessed assets and assets more than 90 days past due, as well as all
other assets not specifically categorized, are assigned a risk weight of 100%.
The portion of equity investments not deducted from core or supplementary
capital is assigned a 100% risk-weight.  OTS capital regulations require savings
institutions to maintain minimum total capital, consisting of core capital plus
supplemental capital, equal to 8.0% of risk-weighted assets.

     The table below presents the Bank's capital position relative to its
various regulatory capital requirements at December 31, 1997.
<TABLE>
<CAPTION>
                                                                 Percent of
                                                        Amount   Assets (1)
                                                        ------  ------------
                                                      (Dollars in thousands)
                                         
<S>                                                     <C>     <C> 
      Tangible capital................................  $7,150      11.23%
      Tangible capital requirement....................     955       1.50
                                                        ------      -----
        Excess........................................  $6,195       9.73%
                                                        ======      =====
                                         
      Core capital....................................  $7,150      11.23%
      Core capital requirement........................   1,910       3.00
                                                        ------      -----
        Excess........................................  $5,240       8.23%
                                                        ======      =====

      Total capital (i.e., core and 
       supplementary capital).........................  $7,326      18.08%
      Risk-based capital requirement..................   3,241       8.00
                                                        ------      -----
        Excess........................................  $4,085      10.08%
                                                        ======      =====
-------------------------
</TABLE>
(1)  Based upon adjusted total assets for purposes of the tangible core capital
     requirements, and risk-weighted assets for purposes of the risk-based
     capital requirements.

                                       22
<PAGE>
 
     OTS risk-based capital rules require savings institutions with more than a
"normal" level of interest rate risk to maintain additional total capital.  A
savings institution's interest rate risk is measured in terms of the sensitivity
of its "net portfolio value" to changes in interest rates.  Net portfolio value
is defined, generally, as the present value of expected cash inflows from
existing assets and off-balance sheet contracts less the present value of
expected cash outflows from existing liabilities.  A savings institution is
considered to have a "normal" level of interest rate risk exposure if the
decline in its net portfolio value after an immediate 200 basis point increase
or decrease in market interest rates (whichever results in the greater decline)
is less than two percent of the current estimated economic value of its assets.
A savings institution with a greater than normal interest rate risk is required
to deduct from total capital, for purposes of calculating its risk-based capital
requirement, an amount (the "interest rate risk component") equal to one-half
the difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets.

     The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS.  The amount of the interest rate risk component, if any, to
be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier.  Institutions
with less than $300 million in assets and a risk-based capital ratio above 12%,
like the Bank, generally are exempt from filing the interest rate risk schedule
with their Thrift Financial Reports.  However, the OTS will require any exempt
institution that it determines may have a high level of interest rate risk
exposure to file such schedule on a quarterly basis and may be subject to an
additional capital requirement based upon its level of interest rate risk as
compared to its peers.  Based upon calculations as of December 31, 1997, Cecil
Federal is not required to deduct an interest-rate risk capital component from
total capital.

     In addition to requiring generally applicable capital standards for savings
associations, the Director of OTS is authorized to establish the minimum level
of capital for a savings association at such amount or at such ratio of capital-
to-assets as the Director determines to be necessary or appropriate for such
association in light of the particular circumstances of the association.  Such
circumstances would include a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk and certain risks
arising from non-traditional activities.  The Director of OTS may treat the
failure of any savings association to maintain capital at or above such level as
an unsafe or unsound practice and may issue a directive requiring any savings
association which fails to maintain capital at or above the minimum level
required by the Director to submit and adhere to a plan for increasing capital.
Such an order may be enforced in the same manner as an order issued by the FDIC.

     Prompt Corrective Regulatory Action.  Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements.  All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements.  An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized" institution) may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses.  The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan.  A
"significantly undercapitalized" institution, as well as any undercapitalized
institution that did not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution.  Any company controlling the
institution could also be required to divest the institution or the institution
could be required to divest subsidiaries.  The senior executive officers of a
significantly undercapitalized 

                                       23
<PAGE>
 
institution may not receive bonuses or increases in compensation without prior
approval and the institution is prohibited from making payments of principal or
interest on its subordinated debt. In their discretion, the federal banking
regulators may also impose the foregoing sanctions on an undercapitalized
institution if the regulators determine that such actions are necessary to carry
out the purposes of the prompt corrective action provisions. If an institution's
ratio of tangible capital to total assets falls below a "critical capital
level," the institution will be subject to conservatorship or receivership
within 90 days unless periodic determinations are made that forbearance from
such action would better protect the deposit insurance fund. Unless appropriate
findings and certifications are made by the appropriate federal bank regulatory
agencies, a critically undercapitalized institution must be placed in
receivership if it remains critically undercapitalized on average during the
calendar quarter beginning 270 days after the date it became critically
undercapitalized.

     The federal banking regulators, including the OTS, have adopted uniform
regulations implementing the prompt corrective action provisions of FDICIA.
Under such regulations, the federal banking regulators measure a depository
institution's capital adequacy on the basis of the institution's total risk-
based capital ratio (the ratio of its total capital to risk-weighted assets),
Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted
assets) and leverage ratio (the ratio of its core capital to adjusted total
assets).  Under the regulations, a savings institution that is not subject to an
order or written directive to meet or maintain a specific capital level is
deemed "well capitalized" if it also has: (i) a total risk-based capital ratio
of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater;
and (iii) a leverage ratio of 5.0% or greater.  An "adequately capitalized"
savings institution is an institution that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater;
(ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage
ratio of 4.0% or greater (or 3.0% or greater if the institution has a composite
1 CAMEL rating).  An "undercapitalized" savings institution is an institution
that has (i) a total risk-based capital ratio less than 8.0%; or (ii) a Tier 1
risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less
than 4.0% (or 3.0% if the institution has a composite 1 CAMEL rating).  A
"significantly undercapitalized" savings institution is defined as an
institution that has: (i) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage
ratio of less than 3.0%.  A "critically undercapitalized" savings institution is
defined as an institution that has a ratio of "tangible equity" to total assets
of less than 2.0%.  Tangible equity is defined as core capital plus cumulative
perpetual preferred stock (and related surplus) less all intangibles other than
qualifying supervisory goodwill and certain purchased mortgage servicing rights.
The OTS may reclassify a well capitalized savings institution as adequately
capitalized and may require an adequately capitalized or undercapitalized
institution to comply with the supervisory actions applicable to institutions in
the next lower capital category if the OTS determines, after notice and an
opportunity for a hearing, that the institution is in an unsafe or unsound
condition or that the institution has received and not corrected a less-than-
satisfactory rating for any CAMEL rating category.  Cecil Federal is classified
as well capitalized under the prompt corrective action regulations.

                                       24
<PAGE>
 
     The table below presents the Bank's capital position at December 31, 1997
relative to its various minimum regulatory capital requirements under the prompt
corrective regulations.
<TABLE>
<CAPTION>
 
                                                     Percent of
                                                 Amount  Assets (1)
                                                 ------  ----------
                                               (Dollars in thousands)
<S>                                              <C>     <C> 
       Tangible equity.........................  $7,150      11.23%
       Tangible equity requirement.............     955       1.50
                                                 ------      -----
         Excess................................  $6,195       9.73%
                                                 ======      =====
 
       Tier 1 or leverage capital..............  $7,150      11.23%
       Tier 1 or leverage capital requirement..   1,910       3.00
                                                 ------      -----
         Excess................................  $5,240       8.24%
                                                 ======      =====
 
       Tier 1 risk-based capital...............  $7,150      11.23%
       Tier 1 risk-based capital requirement...   2,547       4.00
                                                 ------      -----
         Excess................................  $4,603       7.23%
                                                 ======      =====
 
       Risk-based capital......................  $7,326      18.08%
       Risk-based capital requirement..........   3,241       8.00
                                                 ------      -----
         Excess................................  $4,085      10.08%
                                                 ======      =====
 
-------------------------
</TABLE>
(1)  Based upon adjusted total assets for purposes of the tangible equity and
     Tier 1 or leverage capital requirements, and risk-weighted assets for
     purposes of the Tier 1 risk-based and risk-based capital requirements.


     Safety and Soundness Standards.  Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority.  On July 10, 1995, the federal
banking agencies, including the OTS and the Federal Reserve Board, released
Interagency Guidelines Establishing Standards for Safety and Soundness and
published a final rule establishing deadlines for submission and review of
safety and soundness compliance plans.  The final rule and the guidelines went
into effect on August 9, 1995.  The guidelines require depository institutions
to maintain internal controls and information systems and internal audit systems
that are appropriate for the size, nature and scope of the institution's
business.  The guidelines also establish certain basic standards for loan
documentation, credit underwriting, interest rate risk exposure, and asset
growth.  The guidelines further provide that depository institutions should
maintain safeguards to prevent the payment of compensation, fees and benefits
that are excessive or that could lead to material financial loss, and should
take into account factors such as comparable compensation practices at
comparable institutions.  If the appropriate federal banking agency determines
that a depository institution is not in compliance with the safety and soundness
guidelines, it may require the institution to submit an acceptable plan to
achieve compliance with the guidelines.  A depository institution must submit an
acceptable compliance plan to its primary federal regulator within 30 days of
receipt of a request for such a plan.  Failure to submit or implement a
compliance plan may subject the institution to regulatory sanctions.  Management
believes that the Bank already meets substantially all the standards adopted in
the interagency guidelines, and therefore does not believe that implementation
of these regulatory standards will materially affect the operations of the Bank.

     Additionally under FDICIA, as amended by the CDRI Act, the federal banking
agencies are required to establish standards relating to the asset quality and
earnings that the agencies determine to be appropriate.  On July 10, 1995, the
federal banking agencies, including the OTS and the Federal Reserve Board,
issued proposed guidelines relating to asset quality and earnings.  Under the
proposed guidelines, an FDIC insured depository institution should

                                       25
<PAGE>
 
maintain systems, commensurate with its size and the nature and scope of its
operations, to identify problem assets and prevent deterioration in those assets
as well as to evaluate and monitor earnings and ensure that earnings are
sufficient to maintain adequate capital and reserves.  Management believes that
the asset quality and earnings standards, in the form proposed by the banking
agencies, would not have a material effect on the operations of the Bank.

     Liquidity Requirements.  Cecil Federal is required to maintain average
daily balances of liquid assets (cash, certain time deposits, bankers'
acceptances, highly rated corporate debt and commercial paper, securities of
certain mutual funds, and specified United States government, state or federal
agency obligations) equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable savings deposits plus short-
term borrowings.  Monetary penalties may be imposed for failure to meet
liquidity requirements.  The average daily liquidity and short-term liquidity
ratios of the Bank at December 31, 1997 were 11.29% and 13.33%, respectively,
substantially all of which qualified as short-term liquidity.   A substantial
sustained decline in savings deposits could adversely affect the Bank's
liquidity which could result in restricted operations and additional borrowings
from the FHLB.

     Deposit Insurance.  The Bank is required to pay assessments based on a
percent of its insured deposits to the FDIC for insurance of its deposits by the
SAIF.  Under the Federal Deposit Insurance Act, the FDIC is required to set
semi-annual assessments for SAIF-insured institutions at a level necessary to
maintain the designated reserve ratio of the SAIF at 1.25% of estimated insured
deposits or at a higher percentage of estimated insured amounts that the FDIC
determines to be justified for that year by circumstances indicating a
significant risk of substantial future losses to the SAIF.

     Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations.  Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as in the prompt
corrective action regulations.  See "-- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund.  Subgroup A consists of financially sound institutions with only
a few minor weaknesses.  Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.

     The Bank's savings deposits are insured by the SAIF, which is administered
by the FDIC. The FDIC also administers the BIF, which has the same designated
reserve ratio as the SAIF. On August 8, 1995, the FDIC lowered the deposit
insurance assessment rate for most commercial banks and other depository
institutions with deposits insured by the BIF to a range of from 0.31% of
insured deposits for undercapitalized BIF-insured institutions to 0.04% of
deposits for well-capitalized institutions, which constitute over 90% of BIF-
insured institutions.

     For the past several semi-annual periods, institutions with SAIF-assessable
deposits, like the Bank, have been required to pay higher deposit insurance
premiums than institutions with deposits insured by the BIF.  In order to
recapitalize the SAIF and address the premium disparity, the recently-enacted
Deposit Insurance Funds Act of 1996 authorized the FDIC to impose a one-time
special assessment on institutions with SAIF-assessable deposits based on the
amount determined by the FDIC to be necessary to increase the reserve levels of
the SAIF to the designated reserve ratio of 1.25% of insured deposits.
Institutions were assessed at the rate of 65.7 basis points based on the amount
of

                                       26
<PAGE>
 
their SAIF-assessable deposits as of March 31, 1995.  As a result of the special
assessment the Bank incurred a pre-tax expense of $270,000 during the quarter
ended September 30, 1996 and the year ended December 31, 1997.

     The FDIC has adopted a new assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings have been reduced to zero and institutions in the
lowest risk assessment classification are assessed at the rate of 0.27% of
insured deposits.  Until December 31, 1999, however, SAIF-insured institutions,
will be required to pay assessments to the FDIC at the rate of 6.5 basis points
to help fund interest payments on certain bonds issued by the Financing
Corporation ("FICO") an agency of the federal government established to finance
takeovers of insolvent thrifts.  During this period, BIF members will be
assessed for these obligations at the rate of 1.3 basis points.  After December
31, 1999, both BIF and SAIF members will be assessed at the same rate for FICO
payments.

     Each depository institution participating in a SAIF-to-BIF conversion
transaction is required to pay an exit fee to SAIF equal to 0.90% of the
deposits transferred and an entrance fee to BIF based on the current reserve
ratio of the BIF. A savings institution is not prohibited from adopting a
commercial bank or savings bank charter if the resulting bank remains a SAIF
member.

     Qualified Thrift Lender Test.  A savings institution that does not meet the
Qualified Thrift Lender ("QTL") test must either convert to a bank charter or
comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for a national
bank; (ii) the branching powers of the institution shall be restricted to those
of a national bank; (iii) the institution shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the institution shall
be subject to the rules regarding payment of dividends by a national bank.  Upon
the expiration of three years from the date the institution ceases to be a QTL,
it must cease any activity and not retain any investment not permissible for a
national bank and immediately repay any outstanding FHLB advances (subject to
safety and soundness considerations).

     To qualify as a QTL, a savings institution must either qualify as a
"domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio assets" in Qualified Thrift Investments.
Portfolio assets are defined as total assets less intangibles, property used by
a savings institution in its business and liquidity investments in an amount not
exceeding 20% of assets.  Qualified Thrift Investments consist of (i) loans,
equity positions or securities related to domestic, residential real estate or
manufactured housing and educational, small business and credit card loans; and
(ii) subject to an aggregate 20% of portfolio assets limit, shares of stock in
the FHLMC and the FNMA, loans for personal, family, household purposes, 50% of
the dollar amount of residential mortgage loans originated and sold within 90
days of origination, and 200% of an institution's investments in loans to
finance "starter homes" and loans for construction, development or improvement
of housing and community service facilities or for financing small businesses in
"credit-needy" areas.  In order to maintain QTL status, the savings institution
must maintain a weekly average percentage of Qualified Thrift Investments to
portfolio assets equal to 65% on a monthly average basis in nine out of 12
months.  A savings institution that fails to maintain QTL status will be
permitted to requalify once, and if it fails the QTL test a second time, it will
become immediately subject to all penalties as if all time limits on such
penalties had expired. Failure to qualifying as a QTL results in a number of
sanctions, including the imposition of certain operating restrictions imposed on
national banks and a restriction on obtaining additional advances from the FHLB
system.  Upon failure to qualify as a QTL for two years, a savings institution
must convert to a commercial bank.

                                       27
<PAGE>
 
     At December 31, 1997, approximately 95.69% of the Bank's assets were
invested in Qualified Thrift Investments, which was in excess of the percentage
required to qualify the Bank under the QTL test.

     Limits on Loans to One Borrower.  Savings institutions generally are
subject to the lending limits applicable to national banks.  With certain
limited exceptions, a savings institution's loans and extensions of credit
outstanding to any borrower (including certain related entities of the borrower)
at any one time shall not exceed 15% of the unimpaired capital and surplus of
the institution.  A savings institution may lend an additional amount, equal to
10% of unimpaired capital and surplus, if such loan is fully secured by readily
marketable collateral.  Savings institutions are additionally authorized to make
loans to one borrower, for any purpose, in an amount not to exceed $500,000 or,
by order of the Director of OTS, in an amount not to exceed the lesser of
$30,000,000 or 30% of unimpaired capital and surplus to develop residential
housing, provided:  (i) the purchase price of each single-family dwelling in the
development does not exceed $500,000; (ii) the savings institution is in
compliance with its fully phased-in capital requirements; (iii) the loans comply
with applicable loan-to-value requirements, and; (iv) the aggregate amount of
loans made under this authority does not exceed 150% of unimpaired capital and
surplus.  The lending limits generally do not apply to purchase money mortgage
notes taken from the purchaser of real property acquired by the savings
institution in satisfaction of debts previously contracted if no new funds are
advanced to the borrower and the institution is not placed in a more detrimental
position as a result of the sale.  Certain types of loans are excepted from the
lending limits, including loans secured by savings deposits.  The loans-to-one
borrower limits have not had a significant impact on the operations of the Bank.
The Bank has no lending relationships in excess of applicable loans-to-one
borrower limits.  At December 31, 1997, the Bank's regulatory loan-to-one-
borrower limit was $1,102,850, and the Bank did not have any lending
relationships in excess of this limit.

     Dividend Restrictions.  Under regulations of the OTS, Cecil Federal may not
pay dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the Bank at the time of its conversion
to stock form.  In addition, savings institution subsidiaries of savings and
loan holding companies 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 Cecil Federal.  Under these regulations, a savings institution 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 Institution") is generally permitted without OTS
approval, after notice, to make capital distributions during a calendar year in
the amount of up to the greater of (i) 100% of its net income 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.  A savings institution with total capital
in excess of current minimum capital requirements but not in excess of the fully
phased-in requirements (a "Tier 2 Institution") is permitted to make capital
distributions without OTS approval of between up to 75% of its net income for
the previous four quarters, less dividends already paid for such period.  A
savings institution that fails to meet current minimum capital requirements (a
"Tier 3 Institution") is prohibited from making any capital distributions
without the prior approval of the OTS.  Tier 1 Institutions that have been
notified by the OTS that they are in need of more than normal supervision will
be treated as either a Tier 2 or Tier 3 Institution.  Unless the OTS determines
that the Bank is an institution requiring more than normal supervision, the Bank
expects to be authorized to pay dividends in accordance with the provisions of
the OTS regulations discussed above as a Tier 1 Institution.

     Under the OTS' prompt corrective action regulations, the Bank is also
prohibited from making any capital distributions if after making the
distribution, the Bank would have: (i) a total risk-based capital ratio of less
than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0%.  The OTS, after consultation with the FDIC,
however, may permit an otherwise prohibited stock repurchase if made in
connection with

                                       28
<PAGE>
 
the issuance of additional shares in an equivalent amount and the repurchase
will reduce the institution's financial obligations or otherwise improve the
institution's financial condition.

     In addition to the foregoing, earnings of Cecil Federal appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions.  See "Taxation."

     Federal Home Loan Bank System.  The FHLB System consists of 12 district
FHLBs subject to supervision and regulation by the Federal Housing Finance Board
("FHFB").  The FHLBs provide a central credit facility primarily for member
institutions.  As a member of the FHLB of Atlanta, the Bank is required to
acquire and hold shares of capital stock in the FHLB of Atlanta in an amount at
least equal to 1% of the aggregate unpaid principal of its home mortgage loans,
home purchase contracts, and similar obligations at the beginning of each year,
or 1/20 of its advances (borrowings) from the FHLB of Atlanta, whichever is
greater.  Cecil Federal was in compliance with this requirement with investment
in FHLB of Atlanta stock at December 31, 1997, of $438,100.  The FHLB of Atlanta
serves as a reserve or central bank for its member institutions within its
assigned district.  It is funded primarily from proceeds derived from the sale
of consolidated obligations of the FHLB System.  It offers advances to members
in accordance with policies and procedures established by the FHFB and the Board
of Directors of the FHLB of Atlanta.  Long-term advances may only be made for
the purpose of providing funds for residential housing finance.  Cecil Federal
utilized short term advances from the FHLB of Atlanta during the year.

     Federal Reserve System.  Pursuant to regulations of the Federal Reserve
Board, all FDIC-insured depository institutions must maintain average daily
reserves equal to 3% on the first $47.8 million of transaction accounts, plus
10% on all remaining transaction accounts.  This percentage is subject to
adjustment by the Federal Reserve Board.  Because required reserves must be
maintained in the form of vault cash or in a noninterest bearing account at a
Federal Reserve Bank, the effect of the reserve requirement is to reduce the
amount of the institution's interest-earning assets.  At December 31, 1997, the
Bank met its reserve requirements.

REGULATION OF THE COMPANY

     The Company is registered as a savings and loan holding company with the
OTS and subject to OTS regulations, examinations, supervision and reporting
requirements.  As a subsidiary of a savings and loan holding company, the Bank
is subject to certain restrictions in its dealings with the Company and
affiliates thereof.

     Activities Restrictions.  The Board of Directors of the Company presently
operates the Company as a unitary savings and loan holding company.  There are
generally no restrictions on the activities of a unitary savings and loan
holding company.  However, if the Director of OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings association, the Director of
OTS may impose such restrictions as deemed necessary to address such risk and
limiting (i) payment of dividends by the savings association, (ii) transactions
between the savings association and its affiliates, and (iii) any activities of
the savings association that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
association.  Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet the QTL test,
then such unitary holding company shall also presently become subject to the
activities restrictions applicable to multiple holding companies and unless the
savings association requalifies as a Qualified Thrift Lender within one year
thereafter, register as, and become subject to, the restrictions applicable to a
bank holding company.

     If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where

                                       29
<PAGE>
 
each subsidiary savings association meets the QTL test, the activities of the
Company and any of its subsidiaries (other than the Bank or other subsidiary
savings institutions) would thereafter be subject to further restrictions.
Among other things, no multiple savings and loan holding company or subsidiary
thereof which is not a savings association shall commence or continue for a
limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof, any business activity, upon prior notice to, and
no objection by the OTS, other than (i) furnishing or performing management
services for a subsidiary savings association, (ii) conducting an insurance
agency or escrow business, (iii) holding, managing, or liquidating assets owned
by or acquired from a subsidiary savings institution, (iv) holding or managing
properties used or occupied by a subsidiary savings institution, (v) acting as
trustee under deeds of trust, (vi) those activities previously directly
authorized by the FSLIC by regulation as of March 5, 1987 to be engaged in by
multiple holding companies or (vii) those activities authorized by the Federal
Reserve Board as permissible for bank holding companies, unless the Director of
OTS by regulation prohibits or limits such activities for savings and loan
holding companies.  Those activities described in (vii) above must also be
approved by the Director of OTS prior to being engaged in by a multiple holding
company.

     Transactions with Affiliates.  Transactions between savings associations
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act.  An affiliate of a savings association is any company or entity which
controls, is controlled by or is under common control with the savings
association.  In a holding company context, the parent holding company of a
savings association (such as the Company) and any companies which are controlled
by such parent holding company are affiliates of the savings association.
Generally, Sections 23A and 23B (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the institution or subsidiary as those provided to a non-
affiliate.  The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions.  In addition to the restrictions imposed by Sections 23A and 23B,
no savings association may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings association.  Section 106 of the Bank
Holding Company Act ("BHCA") which also applies to the Bank prohibits the Bank
from extending credit to or offering any other services, or fixing or varying
the consideration for such extension of credit or service, on the condition that
the customer obtain some additional service from the institution or certain of
its affiliates or not obtain services of a competitor of the institution,
subject to certain exceptions.

     Savings associations are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders.  Under Section 22(h), loans to an
executive officer and to a greater than 10% stockholder of a savings association
and certain affiliated entities of either, may not exceed, together with all
other outstanding loans to such person and affiliated entities the association's
loan to one borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus and an additional 10% of such capital and surplus
for loans fully secured by certain readily marketable collateral).  Section
22(h) also prohibits loans, above amounts prescribed by the appropriate federal
banking agency, to directors, executive officers and greater than 10%
stockholders of a savings association, and their respective affiliates, unless
such loan is approved in advance by a majority of the board of directors of the
association with any "interested" director not participating in the voting.  The
Federal Reserve Board has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval if required, as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000).  Further, the Federal Reserve Board pursuant to
Section 22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons.  Section 22(h) also generally prohibits a
depository institution from paying the overdrafts of any of its executive
officers or directors.

     Section 22(g) of the Federal Reserve Act requires that loans to executive
officers of depository institutions not be made on terms more favorable than
those afforded to other borrowers, requires approval for such extensions of
credit

                                       30
<PAGE>
 
by the board of directors of the institution, and imposes reporting requirements
for and additional restrictions on the type, amount and terms of credits to such
officers.  In addition, Section 106 of the BHCA prohibits extensions of credit
to executive officers, directors, and greater than 10% stockholders of a
depository institution by any other institution which has a correspondent
banking relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.

     Restrictions on Acquisitions.  Savings and loan holding companies are
generally prohibited from acquiring, without prior approval of the Director of
OTS, (i) control of any other savings association or savings and loan holding
company or substantially all the assets thereof or (ii) more than 5% of the
voting shares of a savings association or holding company thereof which is not a
subsidiary.  Except with the prior approval of the Director of OTS, no director
or officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock, may also acquire
control of any savings association, other than a subsidiary savings association,
or of any other savings and loan holding company.

     The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if:  (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).

     The OTS regulations permit federal associations to branch in any state or
states of the United States and its territories.  Except in supervisory cases or
when interstate branching is otherwise permitted by state law or other statutory
provision, a federal association may only establish an out-of-state branch under
such OTS regulation if (i) the federal association qualifies as a Qualified
Thrift Lender or a "domestic building and loan association" under (S)7701(a)(19)
of the Internal Revenue Code of 1986, as amended (the "Code") and the total
assets attributable to all branches of the association in the state would
qualify such branches taken as a whole for treatment as a Qualified Thrift
Lender or for treatment as a domestic building and loan association and (ii)
such branch would not result in (a) formation of a prohibited multi-state
multiple savings and loan holding company or (b) a violation of certain
statutory restrictions on branching by savings association subsidiaries of
banking holding companies.  Federal associations generally may not establish new
branches unless the association meets or exceeds minimum regulatory capital
requirements.  The OTS will also consider the association's record of compliance
with the Community Reinvestment Act of 1977 in connection with any branch
application.

     The BHCA specifically authorizes the Federal Reserve Board to approve an
application by a bank holding company to acquire control of any savings
association.  Pursuant to rules promulgated by the Federal Reserve Board,
owning, controlling or operating a savings association is a permissible activity
for bank holding companies, if the savings association engages only in deposit-
taking activities and lending and other activities that are permissible for bank
holding companies.

     A bank holding company that controls a savings association may merge or
consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board.  The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings association plus an annual growth increment.
In addition, the transaction must comply with the restrictions on interstate
acquisitions of commercial banks under the BHCA.

                                       31
<PAGE>
 
TAXATION

     General.  The Company and its subsidiaries file a consolidated federal
income tax return on a fiscal year basis.  Consolidated returns have the effect
of eliminating intercompany distributions, including dividends, from the
computation of consolidated taxable income for the taxable year in which the
distributions occur.

     Thrift institutions are subject to the provisions of the Code in the same
general manner as other corporations.  Prior to recent legislation, institutions
such as Cecil Federal which met certain definitional tests and other conditions
prescribed by the Code benefitted from certain favorable provisions regarding
their deductions from taxable income for annual additions to their bad debt
reserve.  For purposes of the bad debt reserve deduction, loans were separated
into "qualifying real property loans," which generally are loans secured by
interests in certain real property, and nonqualifying loans, which are all other
loans.  The bad debt reserve deduction with respect to nonqualifying loans was
based on actual loss experience, however, the amount of the bad debt reserve
deduction with respect to qualifying real property loans could be based upon
actual loss experience (the "experience method") or a percentage of taxable
income determined without regard to such deduction (the "percentage of taxable
income method").  Legislation recently signed by the President repealed the
percentage of taxable income method of calculating the bad debt reserve.  Cecil
Federal historically has elected to use the percentage of taxable income method.

     Earnings appropriated to an institution's bad debt reserve and claimed as a
tax deduction were not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount was included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.

     Beginning with the first taxable year beginning after December 31, 1995,
savings institutions, such as the Bank, will be treated the same as commercial
banks.  Institutions with $500 million or more in assets will only be able to
take a tax deduction when a loan is actually charged off.  Institutions with
less than $500 million in assets will still be permitted to make deductible bad
debt additions to reserves, but only using the experience method.

     The Bank's federal income tax returns have not been examined since 1991.
For further information regarding federal income taxes, see Note 10 of the Notes
to Consolidated Financial Statements in the Annual Report.

     Under provisions of the Revenue Reconciliation Act of 1993 ("RRA"), enacted
on August 10, 1993, the maximum federal corporate income tax rate was increased
from 34% to 35% for taxable income over $10.0 million, with a 3% surtax imposed
on taxable income over $15.0 million.  Also under provisions of RRA, a separate
depreciation calculation requirement has been eliminated in the determination of
adjusted current earnings for purposes of determining alternative minimum
taxable income, rules relating to payment of estimated corporate income taxes
were revised, and certain acquired intangible assets such as goodwill and
customer-based intangibles were allowed a 15-year amortization period.
Beginning with tax years ending on or after January 1, 1993, RRA also provides
that securities dealers must use mark-to-market accounting and generally reflect
changes in value during the year or upon sale as taxable gains or losses.  The
IRS has indicated that financial institutions which originate and sell loans
will be subject to the rule.

     STATE INCOME TAXATION.  The State of Maryland imposes an income tax of
approximately 7% on income measured substantially the same as federally taxable
income.  The Bank's state income tax returns have not been audited during the
past five fiscal years.  For additional information, see Note 10 of the Notes to
Consolidated Financial Statements in the Annual Report.

                                       32
<PAGE>
 
EMPLOYEES

     Cecil Federal had 21 full-time employees and two part-time employees as of
December 31, 1997, none of whom was represented by a collective bargaining
agreement.  Cecil Federal believes that it enjoys excellent relations with its
personnel.


ITEM 2.  DESCRIPTION OF PROPERTY
--------------------------------

     The following table sets forth the location and certain additional
information regarding Cecil Federal's offices at December 31, 1997.  Cecil
Federal owns the Elkton office and currently leases the North East office.
<TABLE>
<CAPTION>
 
                          Year     Square
                         Opened    Footage   Deposits    Net Book Value
                        ---------  -------  -----------  --------------
<S>                     <C>        <C>      <C>          <C>
MAIN OFFICE:
127 North Street
Elkton, Maryland         1969        3,500  $41,202,453        $297,166
 
LOAN CENTER
135 North Street
Elkton, MD  21922        1995 (2)    3,000           --          78,032
 
BRANCH OFFICE:
108 North East Plaza
North East, Maryland     1975 (1)    2,000   12,334,520          49,996
                                            -----------  --------------
                                            $53,536,973        $425,194
                                            ===========  ==============
-------------
</TABLE>
(1)  Original lease signed 11/74 for 20 years with five year renewals.
     Currently paying $1,365 per month.  A lease extension was signed 1/16/95
     for 10 years with 5 year renewals.
(2)  Original lease signed 5/23/95 for five years with three successive five
     year renewals.  Currently paying $1,700 per month.


ITEM 3.  LEGAL PROCEEDINGS
--------------------------

     There are currently no pending legal proceedings to which Cecil Federal is
a party or to which any of its property is subject, although from time to time
Cecil Federal is involved in routine legal proceedings occurring in the ordinary
course of business.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------

     No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997.



                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-----------------------------------------------------------------

     The information contained under the section captioned "Market and Dividend
Information" in the Annual Report is incorporated herein by reference.

                                       33
<PAGE>
 
ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------------------------------------------------------------------

     The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Annual
Report is incorporated herein by reference.


ITEM 7.  FINANCIAL STATEMENTS
-----------------------------

     The Independent Auditor's Report and Related Consolidated Financial
Statements and Notes thereto contained in the Annual Report are incorporated
herein by reference.


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------

     Not applicable.



                                   PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
-------------------------------------------------

     Information concerning the directors and executive officers of the Company
is incorporated herein by reference to the section captioned "Proposal I --
Election of Directors" in the Proxy Statement.

     Based solely on a review of reports of beneficial ownership filed on Forms
3, 4 and 5, there were no delinquent filers of such reports for the fiscal year
ended December 31, 1997.


ITEM 10.  EXECUTIVE COMPENSATION
--------------------------------

     The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors -- Executive
Compensation" in the Proxy Statement.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------

     (a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
         -----------------------------------------------

         Information required by this item is incorporated herein by reference
         to the section captioned "Voting Securities and Principal Holders 
         Thereof" in the Proxy Statement.

     (b) SECURITY OWNERSHIP OF MANAGEMENT
         --------------------------------

         Information required by this item is incorporated herein by reference
         to the sections captioned "Voting Securities and Principal Holders 
         Thereof" and "Proposal I -- Election of Directors."

                                       34
<PAGE>
 
     (c)  CHANGES IN CONTROL
          ------------------

          Management of the Company knows of no arrangements, including any
          pledge by any person of securities of the Company, the operation of
          which may at a subsequent date result in a change in control of the
          registrant.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------

     The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors -- Transactions
with Management" in the Proxy Statement.


ITEM 13.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
-------------------------------------------------------------------------

     (a)  DOCUMENTS FILED AS PART OF THIS REPORT
          --------------------------------------

     (1)  FINANCIAL STATEMENTS.  The following financial statements contained in
          --------------------                                                  
the Annual Report, Exhibit 13 hereto, are incorporated herein by reference.

          Independent Auditors' Report

          Consolidated Statements of Financial Condition as of December 31, 1997
          and 1996

          Consolidated Statements of Operations for the Years Ended December 31,
          1997, 1996 and 1995

          Consolidated Statements of Shareholders' Equity for the Years Ended
          December 31, 1997, 1996 and 1995

          Consolidated Statements of Cash Flows for the Years Ended December 31,
          1997, 1996 and 1995

          Notes to Consolidated Financial Statements.

     (2)  FINANCIAL STATEMENT SCHEDULES.  All schedules for which provision is
          -----------------------------                                       
made in the applicable accounting regulations of the SEC are omitted because of
the absence of conditions under which they are required or because the required
information is included in the consolidated financial statements and related
notes thereto.

     (3)  EXHIBITS.  The following is a list of exhibits filed as part of this
          --------                                                            
Annual Report on Form 10-KSB with an index to their location in the sequentially
numbered copy of this Annual Report on Form 10-KSB.

       No.   Description
       ---   -----------

       3.1   Articles of Incorporation of Cecil Bancorp, Inc. *

       3.2   Bylaws of Cecil Bancorp, Inc. *

       4     Form of Common Stock Certificate *

      10.2   Employment Agreement between Cecil Bancorp, Inc., Cecil Federal
             Savings Bank and Mary Halsey *

                                       35
<PAGE>
 
      10.3   Cecil Bancorp, Inc. Stock Option and Incentive Plan **

      10.4   Cecil Bancorp, Inc. Management Recognition Plan **
           
      10.5   Cecil Federal Savings Bank Retirement Plan for Non-Employee
             Directors ***
           
      13     Annual Report to Stockholders for the year ended December 31, 1997
           
      21     Subsidiaries
           
      23     Independent Auditor's Consent
           
      27     Financial Data Schedule
-----------------------
*    Incorporated by reference to the Company's Registration Statement on Form
     S-1 (File No. 33-81374).
**   Incorporated by reference to the Company's Proxy Statement for its Annual
     Meeting of May 25, 1995 (File No. 0-24926).
***  Incorporated by reference to the Company's Annual Report on Form 10-KSB for
     the fiscal year ended December 31, 1994 (File No. 0-24926).

     (b)  No reports on Form 8-K were filed during the last quarter of the
fiscal year covered by this report.

                                       36
<PAGE>
 
                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                       CECIL BANCORP, INC.

Date:    March 17, 1998                By: /s/ Mary B. Halsey
                                           -------------------------------------
                                           Mary B. Halsey
                                           President and Chief Executive Officer
                                           (Duly Authorized Representative)


     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
 
<S>                                                    <C> 
By: /s/ Mary B. Halsey                                 Date:  March 17, 1998
    -------------------------------------
    Mary B. Halsey
    President and Chief Executive Officer
    (Principal Executive Officer)
 
By: /s/ Mary B. Halsey                                 Date:  March 17, 1998
    -------------------------------------
    Mary B. Halsey
    President and Chief Executive Officer
    (Principal Financial and Accounting Officer)
 
By: /s/ Bernard L. Siegel                              Date:  March 17, 1998
    -------------------------------------
    Bernard L. Siegel
    Chairman of the Board
 
By: /s/ Thomas L. Foard                                Date:  March 17, 1998
    -------------------------------------
    Thomas L. Foard
    Secretary and Director
 
By: /s/ William F. Burkley                             Date:  March 17, 1998
    -------------------------------------
    William F. Burkley
    Director
 
By: /s/ Howard J. Neff                                 Date:  March 17, 1998
    -------------------------------------
    Howard J. Neff
    Director
 
By: /s/ Michael J. Scibinico                           Date:  March 17, 1998
    -------------------------------------
    Michael J. Scibinico
    Director
 
By: /s/ Doris P. Scott                                 Date:  March 17, 1998
    -------------------------------------
    Doris P. Scott
    Director
 
By: /s/ Howard B. Tome                                 Date:  March 17, 1998
    -------------------------------------
    Howard B. Tome
    Director
</TABLE>

     

                                       37
<PAGE>
 
                               INDEX TO EXHIBITS



Exhibit   DESCRIPTION
-------   -----------


  3.1     Articles of Incorporation of Cecil Bancorp, Inc. *
  
  3.2     Bylaws of Cecil Bancorp, Inc. *
  
  4       Form of Common Stock Certificate *
  
 10.2     Employment Agreement between Cecil Bancorp, Inc., Cecil Federal
          Savings Bank and Mary Halsey*
  
 10.3     Cecil Bancorp, Inc. Stock Option and Incentive Plan **
  
 10.4     Cecil Bancorp, Inc. Management Recognition Plan **
  
 10.5     Cecil Federal Savings Bank Retirement Plan for Non-Employee
          Directors ***
  
 13       Annual Report to Stockholders for the year ended December 31, 1997
  
 21       Subsidiaries

 23       Independent Auditor's Consent

 27       Financial Data Schedule



-------------------------
*    Incorporated by reference to the Company's Registration Statement on Form
     S-1 (File No. 33-40132).
**   Incorporated by reference to the Company's Proxy Statement for its Annual
     Meeting of May 25, 1995
     (File No. 0-24926).
***  Incorporated by reference to the Company's Annual Report on Form 10-KSB for
     the fiscal year ended December 31, 1994 (File No. 0-24926).

                                       1