<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 [FEE REQUIRED]

     For the fiscal year ended December 31, 1996


[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

     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 17, 1997, the aggregate market value of the 469,358 shares of Common
Stock of the registrant issued and outstanding held by nonaffiliates on such
date was approximately $6.4 million based on the closing sales price of $16.00
per share of the Registrant's Common Stock on March 17, 1997.  For purposes of
this calculation, it is assumed that the 69,226 shares held by directors and
officers of the Registrant are shares held by affiliates.

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

                      DOCUMENTS INCORPORATED BY REFERENCE

     1.   Portions of the Proxy Statement for the Registrant's 1997 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, 1996, the Company had total assets of
$60.3 million and stockholders' equity of $7.1 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.

     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

                                       1
<PAGE>
 
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, 1996, Cecil Federal had total assets of $60.3 million,
deposits of $47.7 million, net loans receivable of $49.8 million, cash and
investment securities of $5.0 million and retained earnings of $7.1 million.
Cecil Federal's tangible capital to assets ratio at December 31, 1996 was 11.7%.
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, 1996, Cecil Federal had no
concentrations of loans exceeding 10% of total loans other than as disclosed
below.

<TABLE>
<CAPTION>
                                                                                At December 31,
                                            ----------------------------------------------------------------------------------------
                                                  1996              1995              1994              1993              1992
                                            ----------------  ----------------  ----------------  ----------------  ----------------
                                            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)..................  $ 2,920    5.87%  $   867    1.87%  $ 1,132    2.89%  $ 1,517    4.40%  $ 1,089    3.25%

  One- to four-family residential (2)(3)..   41,800   83.97    40,273   86.64    33,421   85.30    30,325   87.94    29,391   87.65
  Multi-family residential................      100     .20       103     .22       106     .27       109     .32       111     .33
  Land....................................    1,569    3.15     2,070    4.45     2,081    5.31       832    2.41       784    2.34
  Commercial..............................    2,675    5.37     1,635    3.52     1,347    3.44       831    2.41     1,049    3.13
 
Commercial business loans.................      695    1.40       613    1.32       439    1.12       289     .84       315     .94
 
Consumer loans:
  Automobile loans........................      655    1.32       569    1.22       291     .74        64     .19       177     .53
  Education loans.........................       87     .17        85     .18        60     .15        50     .14        48     .14
  Savings account loans...................      632    1.27       604    1.30       543    1.39       582    1.69       639    1.91
  Home improvement loans..................       12     .02        23     .05        48     .12        34     .10        21     .06
  Personal loans..........................    1,769    3.56     1,542    3.32     1,100    2.81       695    2.02       747    2.23
                                            -------  ------   -------  ------   -------  ------   -------  ------   -------  ------
      Subtotal loans......................   52,914  106.30    48,384  104.09    40,568  103.54    35,328  102.46    34,371  102.51


Less:
  Loans held for sale.....................    1,708    3.43       671    1.44
  Loans in process........................    1,260    2.53       945    2.03     1,102    2.81       624    1.82       629    1.88
  Discounts and other.....................       48     .10       172     .37       179     .46       130     .38       141     .42
  Loan loss reserve.......................      118     .24       114     .25       106     .27        89     .26        67     .21
                                            -------  ------   -------  ------   -------  ------   -------  ------   -------  ------
     Total loans..........................   49,780  100.00%   46,482  100.00%  $39,181  100.00%  $34,485  100.00%  $33,534  100.00%
                                            =======  ======   =======  ======   =======  ======   =======  ======   =======  ======
 
Mortgage-backed securities................  $ 2,165           $   872           $ 1,026           $   545           $   966
                                            =======           =======           =======           =======           =======
     Total loans and mortgage-backed
       securities.........................  $51,945           $47,354           $40,207           $35,030           $34,500
                                            =======           =======           =======           =======           =======
</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,
1996, loans on one- to four-family residential properties accounted for
approximately 83.97% 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, 1996, Cecil Federal originated $10.7
million in adjustable-rate mortgage loans and $4.0 million in fixed-rate
mortgage loans (of which $2.6 million of fixed-rate mortgage loans were sold in
the secondary mortgage market).  Approximately 39% of all loan originations
during 1996 were refinancings of loans already in Cecil Federal's loan
portfolio.  At December 31, 1996, Cecil Federal's loan portfolio included $33.0
million in adjustable rate one- to four-family residential mortgages or 66.29%
of Cecil Federal's loan portfolio, and $8.8 million in fixed rate one-to four-
family residential loans or 17.68% 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, 1996, Cecil Federal had $3.1
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, 1996, Cecil Federal had $.9 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, 1996, the loan portfolio
included $2.9 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 $2.1 million
in construction loans during the year ended December 31, 1996. 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 December 1994, Cecil Federal
originated a loan for $675,000, Cecil Federal's largest loan, which is secured
by raw land. The loan is a 2 year loan, adjustable annually, with a 55% loan to
value ratio. This loan was made to a group of local business persons
(experienced in real estate development) who are developing the land into
residential building lots. Additionally, in March 1994 Cecil Federal originated
a loan for $500,000, which is secured by raw land. The loan is a three year
loan, adjustable annually, with a 65% loan to value ratio. This loan was made to
a borrower with whom Cecil Federal has dealt for many years, and who has a
significant amount of experience in developing residential building lots for
subsequent sale. Both loans were current as of December 31, 1996. 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,
1996 Cecil Federal had $1.6 million in land loans outstanding, or 3.15% 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, 1996.

     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, 1996, loans
secured by

                                       5
<PAGE>
 
multi-family (i.e., more than four units) totaled $100,000, or .2%, of Cecil
Federal's total loan portfolio and loans secured by commercial properties
constituted approximately $2.7 million, or 5.37%, 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, 1996 Cecil
Federal had $695,000 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, 1996, the consumer loan
portfolio totaled $3.2 million, or 6.34%, 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,
1996, the total amount of automobile loans was $655,000.

     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.

     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.

                                       6
<PAGE>
 
     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, 1996, the total amount of other consumer loans (which
consist of personal loans) was $1,769,000.

     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, 1996, the total investment in mortgage-backed
securities was $2,165,000. 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 -- 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, 1996
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 ending             3 through            5 through          10 through   
                                          December 31,                 5 years after        10 years after     15 years after  
                             --------------------------------------  December 31, 1996    December 31, 1996   December 31, 1996
                                 1997         1998         1999      
                             ------------  -----------  -----------  -----------------    -----------------  -----------------
                                                                       (In thousands)                                     
<S>                          <C>           <C>          <C>          <C>                  <C>                <C>
Real estate mortgage (1)(2)     $1,927       $  775       $1,028           $3,457               $5,910            $12,779
Real estate construction                                                                                                 
 (1).......................      2,117          803           --               --                   --                 --
Consumer and commercial                                                                                                  
  business.................      2,075          814          541              420                   --                 --
                                ------       ------       ------           ------               ------            -------
    Total..................     $6,119       $2,392       $1,569           $3,877               $5,910            $12,779
                                ======       ======       ======           ======               ======            =======

<CAPTION> 
                                      Due after 15                  
                                      years after                  
                                   December 31, 1996       Total   
                                   -----------------       -----   
<S>                                <C>                    <C>      
Real estate mortgage (1)(2)                $20,268        $46,144  
Real estate construction                                           
 (1).......................                     --          2,920  
Consumer and commercial                                            
  business.................                     --          3,850  
                                           -------        -------  
    Total..................                $20,268        $52,914  
                                           =======        =======   
</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, 1996, the dollar amount of all
loans due after December 31, 1996 which have predetermined interest rates and
have floating or adjustable interest rates.

<TABLE>
<CAPTION>
                            Predetermined    Floating or
                                Rates      Adjustable Rates
                            -------------  ----------------
<S>                         <C>            <C>
                                    (In thousands)
 
Real estate mortgage......     $ 8,800           $37,344
Real estate construction..       1,919             1,001
Consumer and commercial       
 business.................       2,905               945
                               -------           -------
  Total...................     $13,624           $39,290
                               =======           =======
</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, Cecil Federal's loans-
to-one borrower cannot exceed $1,078,050.  At December 31, 1996, the largest
amount loaned or committed to one borrower by Cecil Federal was $347,718.  This
amount consisted of one single-family dwelling with an appraised value of
$550,000.  At December 31, 1996, the second largest loan or committed to one
borrower was $346,727.  This amount consisted of one single-family dwelling with
an appraised value of $595,000.

     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,
                                             ----------------------------
                                                 1996    1995     1994
                                                 ----    ----     ----  
                                                    (In thousands)
<S>                                            <C>      <C>      <C>
Loans originated:
 Real estate loans:
  Construction loans.........                  $ 2,083  $   669  $ 1,332
  One- to four-family........                   14,674   14,324    8,927
  Multi-family...............                       --       --       --
  Non-residential and other..                    1,627      958    2,376
 Consumer loans..............                    2,774    2,403    1,519
 Commercial loans............                      135      715      200
                                               -------  -------  -------
  Total loans originated.....                  $21,293  $19,069  $14,354
                                               =======  =======  =======
 
Loans sold:
 Whole loans.................                  $ 2,572  $ 1,046  $ 1,680
                                               -------  -------  -------
  Total loans sold...........                  $ 2,572  $ 1,046  $ 1,680
                                               =======  =======  =======
</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, 1996, Cecil Federal was servicing
$16.8 million in loans for other financial institutions. For the years ended
December 31, 1996, 1995 and 1994 Cecil Federal recognized servicing income of
$39,600, $36,000 and $33,400, respectively, and total fee income of $186,500,
$157,000 and $147,000, 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,

                                       10
<PAGE>
 
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.

     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,
                                                   --------------------------------------------------
                                                     1996       1995       1994      1993      1992
                                                   ---------  ---------  --------  --------  --------
                                                                  (Dollars in thousands) 
<S>                                                <C>        <C>        <C>       <C>       <C>
Loans accounted for on a non-accrual basis: (1)
 Residential real estate.........................  $260,060   $216,063   $14,896   $47,511   $54,985
 Consumer........................................        --         --        --        --        --
                                                   --------   --------   -------   -------   -------
  Total..........................................  $260,060   $216,063   $14,896   $47,511   $54,985
                                                   ========   ========   =======   =======   =======
 
Accruing loans which are contractually past
 due 90 days or more:
 Residential real estate.........................  $     --   $     --   $    --   $    --   $    --
 Consumer........................................        --         --        --       555        --
                                                   --------   --------   -------   -------   -------
  Total..........................................  $     --   $     --   $    --   $   555   $    --
                                                   ========   ========   =======   =======   =======
  Total of nonaccrual and 90 days past
   due loans.....................................  $260,060   $216,063   $14,896   $48,066   $54,985
                                                   ========   ========   =======   =======   =======
 
Percentage of total loans........................       .50%       .46%      .04%      .14%      .16%
                                                   ========   ========   =======   =======   =======
 
Other non-performing assets......................  $     --   $ 73,000   $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, 1996, 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, 1996, Cecil Federal's nonaccruing loans and accruing loans
more than 90 days past due totaled $260,060, which consisted of six single-
family residential properties.  During the year ended December 31, 1996, gross
interest income of $26,976 would have been recorded on loans accounted for on a
non-accrual basis if such loans had been current throughout the respective
period.

     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

                                       11
<PAGE>
 
specific valuation allowances for loan losses do not qualify as regulatory
capital. See "Regulation -- Regulatory Capital Requirements."

     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.

                                       12
<PAGE>
 
     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,
                                            --------------------------------------
                                             1996    1995    1994    1993    1992
                                            ------  ------  ------  ------  ------
                                                    (Dollars in thousands)
<S>                                         <C>     <C>     <C>     <C>     <C>
 
Balance at beginning of period............  $ 114   $ 106   $  89   $  67   $  30
                                            -----   -----   -----   -----   -----
 
Loans charged-off:
  Residential real estate mortgage loans..     --      --      --      --      --
  Consumer................................    119      32      25       9       3
                                            -----   -----   -----   -----   -----
Total charge-offs.........................    119      32      25       9       3
                                            -----   -----   -----   -----   -----
 
Recoveries:
  Residential real estate mortgage loans..     --      --      --      --      --
  Consumer................................     20       5       8       3       7
                                            -----   -----   -----   -----   -----
 
Total recoveries..........................     20       5       8       3       7
                                            -----   -----   -----   -----   -----
 
Net loans charged-off.....................     99      27      17       6      (4)
                                            -----   -----   -----   -----   -----
 
Provision for loan losses.................    103      35      34      28      33
                                            -----   -----   -----   -----   -----
Balance at end of period..................  $ 118   $ 114   $ 106   $  89   $  67
                                            =====   =====   =====   =====   =====
 
Ratio of net charge-offs to average
  loans outstanding during the period.....    .04%    .06%    .04%    .02%     --%
                                            =====   =====   =====   =====   =====
</TABLE>

                                       13
<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,
                                     -------------------------------------------------------------------------------------------
                                            1996               1995              1994              1993             1992
                                     -----------------  -----------------  -----------------  ----------------  ----------------
                                      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...............  $  8,000    5.87%  $     --    1.87%   $    --    2.89%  $    --    4.40%  $    --    3.25%
  One- to four-family residential..    31,200   83.97     85,500   86.64     79,500   85.30    66,750   87.94    50,250   87.65
  Multi-family residential.........        --     .20         --     .22         --     .27        --     .32        --     .33
  Land.............................     7,000    3.15         --    4.45         --    5.31        --    2.41              2.34
  Commercial.......................     8,000    5.37         --    3.52         --    3.44        --    2.41        --    3.13
 
Commercial loans...................     9,000    1.40         --    1.32         --    1.12        --     .84        --     .94
 
Automobiles........................        --    1.32         --    1.22         --     .74        --     .19        --     .53
Education loans....................        --     .17         --     .18         --     .15        --     .14        --     .14
Savings account loans..............        --    1.27         --    1.30         --    1.39        --    1.69        --    1.91
Home improvement loans.............        --     .02         --     .05         --     .12        --     .10        --     .06
Personal loans.....................    54,800    3.56     28,500    3.32     26,500    2.81    22,250    2.82    16,750    2.23
                                     --------  ------   --------  ------   --------  ------   -------  ------   -------  ------
                                      118,000  106.30    114,000  104.09    106,000  103.54    89,000  102.46    67,000  102.51
 
Less:
  Loans held for sale..............        --    3.43         --    1.44
  Loans in process.................        --    2.53         --    2.03         --    2.81        --    1.82        --    1.88
  Discounts and other..............        --     .10         --     .37         --     .46        --     .38        --     .42
  Loan loss reserve................        --     .24         --     .25         --     .27        --     .26        --     .21
                                     --------  ------   --------  ------   --------  ------   -------  ------   -------  ------
Total allowance for loan losses....  $118,000  100.00%  $114,000  100.00%  $106,000  100.00%  $89,000  100.00%  $67,000  100.00%
                                     ========  ======   ========  ======   ========  ======   =======  ======   =======  ======
</TABLE>

                                       14
<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.

     In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS 115).  This statement addresses
the accounting and reporting for investment securities having readily
determinable fair values and for all investments in debt securities.  SFAS 115
requires that investment and mortgage-backed securities are classified as
follows:

     .    Debt securities that the Corporation has the positive intent and
          ability to hold to maturity are classified as held-to-maturity
          securities and reported at amortized cost.

     .    Debt and equity securities that are bought and held principally for
          the purpose of selling them in the near term are classified as trading
          securities and reported at fair value, with unrealized gains and
          losses included in earnings.

     .    Debt and equity securities not classified as either held-to-maturity
          securities or trading securities are classified as available-for-sale
          securities and reported at fair value, with unrealized gains and
          losses excluded from earnings and reported in a separate component of
          stockholders' equity.

SFAS 115 is effective for fiscal years beginning after December 15, 1993.  This
statement may create more volatility in the Bank's stockholders' equity as well
as that of many other institutions.

     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 1
and 4 of Notes to Consolidated Financial Statements.

                                       15
<PAGE>
 
     The following table sets forth the carrying value of Cecil Federal's
investment securities portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                         At December 31,
                                              -----------------------------------------------
                                                   1996             1995           1994    
                                                   ----             ----           ----    
<S>                                           <C>                <C>            <C>        
Investment securities:                                                                     
  U.S. government and agency securities.....       $2,490,069    $2,000,015     $3,470,332 
  Other.....................................          496,358       247,724        229,165 
                                                   ----------    ----------     ---------- 
    Total investment securities.............        2,986,427     2,247,739      3,699,497 
Federal funds sold..........................               --       100,000        650,000 
Interest-earning deposits and certificates                                                 
  of deposit................................          502,207     1,036,527      1,103,265 
FHLB stock..................................          422,900       422,900        422,900 
                                                   ----------    ----------     ---------- 
     Total investments......................       $3,911,534    $3,850,166     $5,875,662 
                                                   ==========    ==========     ==========  
</TABLE>

                                       16
<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, 1996.

<TABLE>
<CAPTION>
                                        One Year or Less    One to Five Years     Five to Ten Years     More than Ten Years
                                        ----------------    -----------------     -----------------     -------------------
                                       Carrying   Average   Carrying  Average     Carrying  Average      Carrying  Average
                                        Value      Yield     Value     Yield       Value     Yield        Value     Yield
                                      --------    -------   -------    ------      -------   ------       --------  -------
                                                                                            (Dollars in thousands)
<S>                                   <C>         <C>       <C>       <C>         <C>       <C>          <C>       <C>
Securities available for
 sale (1):
 U.S. government and
  agency securities...............    $  496,358     5.85%  $     --       -- %   $     --       -- %    $     --       -- %
 Other............................            --       --         --       --           --       --            --       --
 Interest-earning deposits and
  certificates of deposits........            --       --         --       --           --       --            --       --
 FHLB stock.......................            --       --         --       --           --       --            --       --
                                      ----------            --------              --------               --------
  Total...........................    $  496,358     5.85   $     --       --     $     --       --      $     --       --
                                      ==========            ========              ========               ========

Securities held to
 maturity (1):
 U.S. government and
  agency securities...............    $2,490,069     5.27   $     --       --     $     --       --      $     --       --
 Other............................            --       --         --       --           --       --            --       --
 Interest-earning deposits and
  certificates of deposits........       502,207     5.01         --       --           --       --            --       --
 FHLB stock.......................            --       --         --       --      422,900     7.25            --       --
                                      ----------            --------              --------               --------
  Total...........................    $2,992,276     5.22   $     --       --     $422,900     7.25      $     --       --
                                      ==========            ========              ========               ========

<CAPTION>
                                          Total Investment Portfolio
                                        -------------------------------
                                          Carrying    Market    Average
                                           Value      Value      Yield
                                          --------  ----------  --------
<S>...............................        <C>       <C>         <C>
Securities available for
 sale (1):
 U.S. government and
  agency securities...............        $     --  $  496,358     5.85%
 Other............................              --          --       --
 Interest-earning deposits and
  certificates of deposits........              --          --       --
 FHLB stock.......................              --          --       --
                                          --------  ----------
  Total...........................        $     --  $  496,358     5.85%
                                          ========  ==========

Securities held to
 maturity (1):
 U.S. government and
  agency securities...............        $     --  $2,490,069     5.27
 Other............................              --          --       --
 Interest-earning deposits and
  certificates of deposits........              --     502,207     5.01
 FHLB stock.......................              --     422,900     7.25
                                          --------  ----------
  Total...........................        $     --  $3,415,176     5.48
                                          ========  ==========
</TABLE>

_____________________
(1)  In connection with its adoption of SFAS No. 115, "Accounting for Certain
     Investments in Debt and Equity Securities," on January 1, 1994, the Bank
     classified $496,358 in mutual funds as available for sale.  There was no
     aggregate impact on retained earnings due to the adoption of SFAS No. 115.

                                      17

<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.

                                      18
<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,      %
                            1996      Deposits       1995           1995      Deposits       1994           1994      Deposits
                        ------------  ---------  -------------  ------------  ---------  -------------  ------------  ---------
                                                                (Dollars in thousands)
<S>                     <C>           <C>        <C>            <C>           <C>        <C>            <C>           <C>
Regular checking......       $   919      1.92%        $  232        $   687      1.53%       $  (184)       $   871       2.2%
NOW accounts..........         3,829      8.03            152          3,677      8.20            249          3,428       8.5
Passbook..............         8,801     18.46           (663)         9,464     21.10         (2,314)        11,778      29.3
Statement savings.....         1,249      2.62            641            608      1.36            608
Commercial checking...            25       .05              2             23       .05             23
Money market..........         2,618      5.49           (408)         3,026      6.75           (157)         3,183       7.9
Christmas club........            80       .17             10             70       .15             (9)            79        .2
91 day CD.............         4,320      9.06          1,497          2,823      6.29          2,662            161        .4
6 month CD............         4,004      8.40          1,271          2,733      6.09            418          2,315       5.8
1 year CD.............         5,265     11.04           (461)         5,726     12.77          1,169          4,557      11.3
18 month CD...........         2,001      4.20           (280)         2,281      5.09            860          1,421       3.5
30 month CD...........         2,261      4.74            (22)         2,283      5.09            245          2,038       5.1
42 month CD...........           177       .37              7            170       .38            (79)           249        .6
60 month CD...........         3,979      8.35            274          3,705      8.26            450          3,255       8.1
18 month IRA CD.......         7,012     14.71            (74)         7,086     15.80            223          6,863      17.1
14 month variable CD..         1,139      2.39            649            490      1.09            490             --        --
                             -------     -----         ------        -------    ------        -------        -------     -----
                             $47,679     100.0%        $2,827        $44,852    100.00%       $ 4,654        $40,198     100.0%
                             =======     =====         ======        =======    ======        =======        =======     =====
</TABLE>

                                       19
<PAGE>
 
SAVINGS PORTFOLIO

   Savings deposits in Cecil Federal at December 31, 1996 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>                      
 -- %             None        Regular checking                   $    50      $   944           1.97%      
1.98              None        NOW Accounts                            50        3,829           8.03       
3.00              None        Statement Savings                       10        1,249           2.62       
3.00              None        Passbook Accounts                       10        8,801          18.46       
3.00              None        Money Market Deposit Accounts        2,500        2,618           5.49       
3.00              1 year      Club Accounts                            1           80            .17       
                                                                                                           
                              Certificates of Deposit                                                      
                              -----------------------------                                                
                                                                                                           
4.00              91 days     91-day certificate                     500        4,320           9.06       
5.42              14 month    Variable Rate/Fixed Term            10,000        1,139           2.39       
5.25              12-month    Fixed-Term, Fixed-Rate                 500        5,265          11.04       
5.45              30-month    Fixed-Term, Fixed-Rate                 500        2,261           4.74       
5.30              18-month    Fixed-Term, Fixed-Rate                 500        2,001           4.20       
5.62              60-month    Fixed-Term, Fixed-Rate                 500        3,979           8.35       
5.15              18-month    18-Month IRA Accounts                  500        7,012          14.71       
5.00              182 days    6-month Money Market                   500        4,004           8.40       
5.50              42 months   Fixed-Term, Fixed-Rate                 500          177            .37       
                                                                              $47,679          100.0%      
                                                                              =======          =====        
</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,                  
                               ------------------------------------
                                  1996        1995           1994    
                               ---------     -------        -------  
                                         (In thousands)   
<S>                            <C>           <C>            <C>   
2 -  3.99% (1)..............     $   242     $   261        $ 4,875  
4 -  5.99%..................      25,163      16,868         14,866  
6 -  7.99%..................       4,833      10,226          1,120  
8 -  9.99% (2)..............          --          12            167  
                                 -------     -------        -------  
                                 $30,238     $27,367        $20,938  
                                 =======     =======        =======   
</TABLE>  

____________________
(1)  Includes Club Accounts.
(2)  There are no officers or directors of Cecil Federal earning over 8% on
     their deposits.

                                      20

                            
<PAGE>
 
TIME DEPOSIT MATURITY SCHEDULE

     The following table sets forth the amount and maturities of time deposits
at December 31, 1996.

<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)...    $   242       $   --     $   --      $   --    $   242    
   4 -  5.99% ......     18,059        5,493      1,012         599     25,163    
   6 -  7.99% ......      3,574          276        250         733      4,833    
                        -------       ------     ------      ------    -------    
                        $21,875       $5,769     $1,262      $1,332    $30,238    
                        =======       ======     ======      ======    =======     
</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,
1996.

<TABLE>
<CAPTION>
                                              Certificates
     Maturity Period                          of Deposits 
     ---------------                          ----------- 
                                             (In thousands)
     <S>                                     <C>          
     Three months or less............               $2,773
     Over three through six months...                2,474
     Over six through twelve months..                  568
     Over twelve months..............                1,209
                                                    ------
      Total..........................               $7,024
                                                    ====== 
</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,
                                                           -------------------------------------
                                                              1996          1995         1994
                                                              ----          ----         ----
                                                                       (In thousands)
<S>                                                           <C>           <C>          <C>  
Deposits...........................................            $92,077       $72,700      $89,410           
Withdrawals........................................             91,349        75,528       91,873           
                                                               -------       -------      -------           
 Net increase (decrease) before interest credited..                728         2,828       (2,463)          
Interest credited..................................              2,099         1,826        1,549           
                                                               -------       -------      -------           
 Net increase (decrease) in savings deposits.......            $ 2,827       $ 4,654      $  (914)          
                                                               =======       =======      =======            
</TABLE>

     Management attributes the increase in deposits (prior to interest credited)
for the year ended December 31, 1996 to increased marketing of existing products
to current customers, and the addition of several new savings products.

                                      21

<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 association, 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, 1996,
Cecil Federal was authorized to invest up to approximately $1.8 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, 1996, Cecil Federal had $55,400 invested in its subsidiaries.

     Cecil Federal's wholly owned subsidiaries, Cecil Service Corporation and
Northeastern Service Corporation were each established in 1971. Cecil Service
Corporation's primary business is leasing agent for the North East Plaza Branch.
The dollar amount resulting from this business activity was $17,980 for 1996.
Northeastern Service Corporation's primary business is insurance agent for
mortgage life and disability insurance for Cecil Federal's mortgage loan
customers. The dollar amount resulting from this business activity was $7,091
for 1996.

     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 -- 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 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.

                                      22

<PAGE>
 
     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, 1996, 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, 1996, 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 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 

                                      23

<PAGE>
 
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, 1996, 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, 1996.

<TABLE>
<CAPTION>
                                                                                    Percent of  
                                                                 Amount             Assets (1) 
                                                                 ------             ---------- 
                                                                   (Dollars in thousands)      
     <S>                                                         <C>                <C>       
     Tangible capital......................................      $7,056               11.71%   
     Tangible capital requirement..........................         904                1.50    
                                                                 ------               -----    
       Excess..............................................      $6,091               10.21%   
                                                                 ======               =====    
                                                                                               
     Core capital..........................................      $6,995               11.61%   
     Core capital requirement..............................       1,808                3.00    
                                                                 ------               -----    
       Excess..............................................      $5,187                8.61%   
                                                                 ======               =====    
                                                                                               
     Total capital (i.e., core and supplementary capital)..      $7,113               18.71%   
     Risk-based capital requirement........................       3,042                8.00    
                                                                 ------               -----    
       Excess..............................................      $4,171               10.71%   
                                                                 ======               =====     
</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.

     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.

                                      24

<PAGE>
 
     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, 1996, 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 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.

                                      25

<PAGE>
 
     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.

     The table below presents the Bank's capital position at December 31,
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.........................  $7,056          11.71%
       Tangible equity requirement.............     904           1.50
                                                 ------          -----
         Excess................................  $6,091          10.21%
                                                 ======          =====
                                                                      
       Tier 1 or leverage capital..............  $6,995          11.61%
       Tier 1 or leverage capital requirement..   1,808           3.00
                                                 ------          -----
         Excess................................  $5,187           8.61%
                                                 ======          =====
                                                                      
       Tier 1 risk-based capital...............  $6,995          11.61%
       Tier 1 risk-based capital requirement...   2,410           4.00
                                                 ------          -----
         Excess................................  $4,585           7.61%
                                                 ======          =====
                                                                      
       Risk-based capital......................  $7,113          18.71%
       Risk-based capital requirement..........   3,042           8.00
                                                 ------          -----
         Excess................................  $4,171          10.71%
                                                 ======          ===== 
</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.

                                      26

<PAGE>
 
     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 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 5%) of its net withdrawable savings deposits plus short-
term borrowings. The Bank is also required to maintain average daily balances of
short-term liquid assets at a specified percentage (currently 1%) of the total
of its net withdrawable savings accounts and borrowings payable in one year or
less. 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, 1996 were 10.87% and 15.63%, 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

                                      27

<PAGE>
 
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 assessment rate currently ranges from 0.23% of deposits for
well capitalized institutions in Subgroup A to 0.31% of deposits for
undercapitalized institutions in Subgroup C. 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. The amendment creates a substantial disparity in
the deposit insurance premiums paid by BIF and SAIF members and could place 
SAIF-insured savings institutions at a significant competitive disadvantage to
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 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, 1996.

     The FDIC has proposed a new assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings would be reduced to zero and institutions in the
lowest risk assessment classification will be 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.

     SAIF members are generally prohibited from converting to BIF, also
administered by the FDIC, or merging with or transferring assets to a BIF member
before the date on which the SAIF first meets or exceeds the designated reserve
ratio of 1.25% of insured deposits. The FDIC, however, may approve such a
transaction in the case of a SAIF member in default or if the transaction
involves an insubstantial portion of the deposits of each participant. In
addition, mergers, transfers of assets and assumptions of liabilities may be
approved by the appropriate bank regulator so long as deposit insurance premiums
continue to be paid to the SAIF for deposits attributable to the SAIF members
plus an adjustment for the annual rate of growth of deposits in the surviving
bank without regard to subsequent acquisitions. 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.

                                      28

<PAGE>
 
     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.

     At December 31, 1996, approximately 95.63% 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, 1996, the Bank's regulatory loan-to-one-
borrower limit was $1,078,050, and the Bank did not have any lending
relationships in excess of this limit.

                                      29

<PAGE>
 
     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 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, 1996, of $422,900. 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 $49.3 million of transaction accounts, plus

                                      30

<PAGE>
 
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, 1996, 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 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

                                       31
<PAGE>
 
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 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-

                                       32
<PAGE>
 
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.

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.

                                       33
<PAGE>
 
     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 11 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 11 of the Notes to
Consolidated Financial Statements in the Annual Report.

EMPLOYEES

     Cecil Federal had 20 full-time employees and three part-time employees as
of December 31, 1996, none of whom was represented by a collective bargaining
agreement.  Cecil Federal believes that it enjoys excellent relations with its
personnel.

                                       34
<PAGE>
 
ITEM 2.  DESCRIPTION OF PROPERTY
--------------------------------

     The following table sets forth the location and certain additional
information regarding Cecil Federal's offices at December 31, 1996.  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  $36,261,101       $239,638
                                                                      
LOAN CENTER                                                           
135 North Street                                                      
Elkton, MD  21922           1995 (2) 3,000           --         81,717
                                                                      
BRANCH OFFICE:                                                        
108 North East Plaza                                                  
North East, Maryland        1975 (1) 2,000   11,417,737         37,950
                                            -----------       --------
                                            $47,678,838       $359,305
                                            ===========       ======== 
</TABLE>

________________
(1)  Original lease signed 11/74 for 20 years with five year renewals.
     Currently paying $1,312.50 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 1996.


                                    PART II

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

     The Company's common stock is listed over-the-counter through the National
Daily Quotation System "Pink Sheets" published by the National Quotation Bureau,
Inc.  There are currently 469,358 shares of the common stock outstanding and
approximately 611 holders of record of the common stock (not including shares
held in "street name") as of March 3, 1997.

                                       35
<PAGE>
 
     The following table sets forth certain information as to the range of the
high and low bid prices for the Company's common stock for the calendar quarters
indicated and since the common stock's issuance on November 10, 1994.

<TABLE>
<CAPTION>
                           HIGH BID (1)  LOW BID (1)  DIVIDENDS PAID
                           -----------------------------------------
       <S>                 <C>           <C>          <C>
       FISCAL 1994:
         Fourth Quarter       $10.25       $10.00         none
                                                        
       FISCAL 1995:                                     
         First Quarter         10.75        10.00         $.08
         Second Quarter        11.00        11.00          .16  (2)
         Third Quarter         11.50        11.00          .24  (3)
         Fourth Quarter        14.50        14.25          .08
                                                        
       FISCAL 1996:                                     
         First Quarter         15.00        14.50          .10  (4)
         Second Quarter        15.00        15.00          .08
         Third Quarter         15.75        15.00          .08
         Fourth Quarter        15.75        15.00          .30  (5)
</TABLE>

____________________
(1)  Quotations reflect inter-dealer price, without retail mark-up, mark-down or
     commissions, and may not represent actual transactions.
(2)  Includes special dividend of $.08 per share.
(3)  Includes special dividend of $.16 per share.
(4)  Includes special dividend of $.02 per share.
(5)  Includes special dividend of $.20 per share.


DIVIDEND RESTRICTIONS

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

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

     Although the Company is not subject to these restrictions, the Company's
primary source of funds for payment of dividends, in addition to the 50% of the
net proceeds retained from the conversion to stock form, are dividends from the
Bank. The Company intends to make full use of this favorable tax treatment
afforded to the Bank

                                       36
<PAGE>
 
and Company and does not contemplate use of any earnings of the Bank in a manner
which would limit the Bank's bad debt deduction or create federal tax
liabilities.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------------------------------------------------------------------

GENERAL

     Cecil Federal's primary business is the origination of mortgage loans
secured by single-family residential real estate located primarily in Cecil
County, Maryland, with funds obtained through the attraction of deposits,
primarily certificate accounts with terms of 60 months or less, savings accounts
and transaction accounts.  To a lesser extent, Cecil Federal also makes loans on
commercial and multi-family real estate, construction loans on one- to four-
family residences, home equity loans and land loans.  Cecil Federal also makes
consumer loans including education loans, personal and commercial lines of
credit, automobile loans and loans secured by deposit accounts.  Although
consumer loans provide Cecil Federal with additional interest income, they also
involve greater risk.  Cecil Federal purchases mortgage-backed securities and
invests in other liquid investment securities when warranted by the level of
excess funds.  Cecil Federal's revenues are derived principally from interest
earned on loans and, to a lesser extent, from interest earned on investments and
mortgage-backed securities.  Cecil Federal's operations are influenced by
general economic conditions and by policies of financial institution regulatory
agencies, including the OTS and the FDIC.  Cecil Federal's cost of funds is
influenced by interest rates on competing investments and general market
interest rates.  Lending activities are affected by the demand for financing of
real estate and other types of loans, which in turn is affected by the interest
rates at which such financing may be offered.

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

ASSET AND LIABILITY MANAGEMENT

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

     Cecil Federal has employed various strategies intended to minimize the
adverse effect of interest rate risk on future operations by providing a better
match between the interest rate sensitivity of its assets and liabilities.  In
particular, Cecil Federal's strategies are intended to stabilize net interest
income for the long-term by protecting its interest rate spread against
increases in interest rates.  Such strategies include the origination for
portfolio of one-year, three-year and five-year adjustable-rate mortgage loans
secured by one- to four-family residential real estate and the origination of
other loans with greater interest rate sensitivities than long-term, fixed-rate
residential mortgage loans.  Since the early 1980's Cecil Federal has sought to
make its loan portfolio more interest rate sensitive by originating adjustable
rate mortgage loans for retention in its own portfolio.  As of December 31,
1996, adjustable rate mortgage loans constituted approximately 72.8% of Cecil
Federal's total loan portfolio.  All fixed-rate mortgage loans are originated
according to Federal Home Loan Mortgage Corporation ("FHLMC") standards for
possible sale in the secondary mortgage market and, depending on market
conditions, may be sold.  Cecil Federal invests excess funds in adjustable-rate
or short term (5 years or less) investments and mortgage-backed securities.

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

                                       37
<PAGE>
 
COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995

RECAPITALIZATION OF THE SAVINGS ASSOCIATION INSURANCE FUND

     On September 30, 1996, Congress enacted and President Clinton signed the
Omnibus Consolidated Appropriations Act.  Among the law's many provisions is one
which ends the deposit insurance premium disparity by fully funding the Savings
Association Insurance Fund ("SAIF").  The bill provided for a one-time special
assessment, estimated to be 65.7 basis points for an institution's deposit base
as of March 31, 1995.  As a result of this action, full pro rata sharing of the
Financing Corporation ("FICO") debt service would begin no later than January 1,
2000.  Until full pro rata FICO sharing is in place, FICO premiums for the Bank
Insurance Fund ("BIF") and SAIF will 6.48 basis points, respectively, beginning
January 1, 1997.  Total premiums will be the sum of the FICO premium and any
regular insurance assessment, which is currently zero for BIF institutions in
the lowest risk category.  Management anticipates paying the lowest premiums and
future earnings will be effected by the decrease in deposit insurance expense.

FINANCIAL CONDITION

     Total assets at December 31, 1996 increased $6,272,451 or 11.6% to
$60,263,623 from $53,991,172 at December 31, 1995.  The increase was primarily
the result of an increase in loans receivable, mortgage-backed securities and
loans held for sale.  Total liabilities increased $6,249,874 or 13.3% to
$53,210,537 at December 31, 1996 from $46,960,663 at December 31, 1995.  This
increase was a result of an increase in savings deposits, escrows and also
advances from the Federal Home Loan Bank of Atlanta.  Stockholders' equity
increased $22,577, even including a dividend payment of $0.56 per share during
the year ended December 1996.

     Cash increased $562,398 or 50.4% to $1,678,415 at December 31, 1996 from
$1,116,017 at December 31, 1995, mainly as a result of increased cash items.
Interest-bearing cash decreased 55.8% at December 31, 1996 over the balance at
December 31, 1995, as a result of a large volume of cash items not available for
investment.  Investment securities also experienced an increase over the same
period.  Additional investments in short-term government issues were purchased
during the year for liquidity purposes.  Mortgage-backed securities held-for-
investment decreased slightly as a result of the maturity of a five-year FHLMC
balloon certificate.  The Bank purchased a FHLMC PC Gold, five-year balloon
certificate in the amount of $1,750,000 during the month of September, 1996.
This investment was placed in the held-for-sale portfolio.

     Loans receivable increased $3,297,934 or 7.1% to $49,779,988 at December
31, 1996 from $46,482,054 at December 31, 1995.  The loans-for-sale portfolio
increased $1,036,283 or 154.3% to $1,707,883 at December 31, 1996 from $671,600
at December 31, 1995.  The increase was the result of an increase in loan volume
and a favorable fixed-rate interest rate environment.  Loans will be sold as
necessary to fund portfolio needs.

     Total savings deposits increased $2,715,570 or 6.1% to $47,365,022 at
December 31, 1996 from $44,469,452 at December 31, 1995.  Increases are
attributable to cross selling and marketing plans.  Increases in the Bank's
outstanding advances from the Federal Home Loan Bank of Atlanta were the result
of the purchase of a FHLMC PC Gold, five-year balloon, placed in the held-for-
sale portfolio, and direct funding of increased loan demand.  The outstanding
balance increased by $3,250,000 or 260% to $4,500,000 at December 31, 1996 from
$1,250,000 at December 31, 1995.

     During the year ended December 31, 1996, the Company completed a 5%
purchase program of Cecil Bancorp, Inc. stock.  As of December 31, 1996, the
Company had purchased 24,037 shares of Cecil Bancorp, Inc. stock, which shares
were retired.

                                       38
<PAGE>
 
RESULTS OF OPERATIONS

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

     During 1996, stable economic conditions prevailed in Cecil Federal's market
area.  Federal Reserve fiscal policy was left virtually unchanged, leaving a
span of steady interest rates, both on savings and loan deposits.  Demand for
fixed-rate mortgages were constant, although refinancings were down.  As the
Bank expanded its outreach program, demand for small business and home equity
loans increased.  The volume of savings deposits increased, as the bank focused
on expanding its demand deposit base.

     Net Income.  Net income for the year ended December 31, 1996 decreased
     ----------                                                            
$2,241 or 0.6% to $314,909, compared to net income for the same period in 1995.
Return on average assets and return on average equity were 0.54% and 4.50%
respectively, for the year ended December 31, 1996.  This compares to a return
on average assets and return on average equity of 0.82% and 5.60%, respectively,
for the same period in 1995.

     The Company suffered a decrease in net income due to the one-time
assessment of $270,000 (tax effected, $166,000) to replenish the SAIF.  Without
the assessment, earnings would have increased by 51.6% to $480,909 for the year
ended December 31, 1996 as compared to $317,150 for the year ended December 31,
1995.  Return on average assets and return on average equity, net of the SAIF
assessment would have been 0.83% and 6.88% respectively, for the year ended
December 31, 1996 as compared to 0.82% and 5.60% respectively, for the same
period in 1995.  Recapitalization of the SAIF will enable the Company to
experience a savings on deposit insurance, from 23 cents per thousand of
deposits, to 6.8 cents per thousand of deposits.

     Net Interest Income.  Net interest income, the Bank's primary source of
     -------------------                                                    
income, increased 14.8% up $311,769 for the year ended December 31, 1996, over
the same period in 1995.  The weighted average yield on interest-earning assets
increased from 8.16% for the year ended December 31, 1995 to 8.32% for the year
ended December 31, 1996.  The weighted average rate paid on interest-bearing
liabilities increased from 4.28% for the year ended December 31, 1995 to 4.42%
for the year ended December 31, 1996.

     Interest on loans receivable increased by $603,992 or 16.3%, from
$3,697,693 for the year ended December 31, 1995 to $4,301,685 for the year ended
December 31, 1996.  The increase is attributable to an increase in the average
balance outstanding of $5,806,000.  The weighted average yield increased from
8.36% for the year ended December 31, 1995 to 8.60% for the year ended December
31, 1996.

     Interest on mortgage-backed securities increased $44,178 or 66.9%, from
$66,017 for the year ended December 31, 1995 to $110,195 for the year ended
December 31, 1996.  The increase was the result of an increase in the average
outstanding balance.  The Bank purchased a FHLMC Gold, five-year balloon, in the
amount of $1,750,000, near the end of September 1996.

     Interest on investment securities decreased $3,525 or 2.6% from $135,950
for the year ended December 31, 1995 to $132,425 for the year ended December 31,
1996.  The average balance increased slightly, but was offset by a decrease in
the average yield.

     Interest on other investments increased $36,026 or 48.1% from $74,960 for
the year ended December 31, 1995 to $110,986 for the year ended December 31,
1996.  The average balance outstanding increased $567,000 and the average yield
decreased from 6.47% for the year ended December 31, 1995 to 6.43% for the year
ended December 31, 1996.

                                       39
<PAGE>
 
     Interest on savings deposits increased $275,225, or 15.1% from $1,826,163
for the year ended December 31, 1995 to $2,101,368 for the year ended December
31, 1996. The average balance outstanding increased $5,112,000 during the 1996
fiscal year. The weighted average rate paid on deposits increased from 4.31% for
the year ended December 31, 1995 to 4.43% for the year ended December 31, 1996.
Interest expense paid on borrowings increased $93,677, or 229.1% from $40,890
for the year ended December 31, 1995 to $134,567 for the year ended December 31,
1996. Increases are attributable to an increase in the average balance
outstanding of $1,561,000, and an increase in the average cost of funds of
0.90%.

     Provision for Loan Losses.  Provisions for loan losses were increased by
     -------------------------                                               
$67,500 or 192.9% from $35,000 for the year ended December 31, 1995 to $102,500
for the year ended December 31, 1996.  The Bank reported a voluntary increase in
general reserves as a result of the re-assessment of reserve balances needed to
provide for increased exposure in outstanding loan categories other than one-to-
four residential loans.

     Noninterest Income.  Noninterest income increased $80,883 or 34.5% to
     ------------------                                                   
$315,640 for the year ended December 31, 1996 from $234,757 for the same period
in 1995.  Loan servicing fees increased 25.6%, up $6,141 for the year ended
December 31, 1996 over the same period in 1995.  This was a result of the
increased balances in the loan servicing portfolio.  Gains on sale of loans was
up $68,129 for the year ended December 31, 1996 over the same period in 1995, as
a result of re-entering the secondary market to sell fixed-rate loans.  Other
fees increased 4.2% up $6,820 for the year ended December 31, 1996 over the same
period in 1995.  Increases was primarily attributable to increases in fee
income, from service charges and the addition of two new ATM machines.

     Noninterest Expense.  Noninterest expense increased $221,968 or 12.4% to
     -------------------                                                     
$2,015,866 for the year ended December 31, 1996 from $1,793,898 for the year
ended December 31, 1995.  Compensation and benefits decreased 2.4%, down $24,372
for the year ended December 31, 1996 over the same period in 1995.  Decreases
were a result of compensation expenses associated with former President Gary A.
Brown, that were recognized during 1995, and did not occur during 1996.
Occupancy expenses increased 21.9%, up $18,062 for the year ended December 31,
1996, over the same period in 1995.  Snow removal during the winter months and
the lease expense for the additional office space rented for the loan
department, commencing in September 1995 were the major contributors to the
increase.  Equipment and data processing expenses increased 27.2% for the year
ended December 31, 1996, over the same period in 1995.  This increase can be
attributable to new hardware and software for the loan department.  During the
quarter ended September 30, 1996, $270,000, the one-time charge to recapitalize
the SAIF was incurred.  The SAIF deposit premium increased 253.2%, up $281,010
for the year ended December 31, 1996, over the same period in 1995.  The Bank
anticipates paying the lowest premium for FDIC/SAIF insurance among savings
institutions during 1997, being 6.48 cents per thousand of deposits.  Other
expenses decreased by 18.1% for the year ended December 31, 1996 over the same
period in 1995, as a result of cost cutting efforts and decreased service charge
fees from correspondent banks savings, and decreased legal expenses.

     Income Taxes.  Income tax expense for the year ended December 31, 1996 and
     ------------                                                              
1995 was $301,701 and $196,276, respectively, which equates to effective rates
of 48.9% and 38.2%, respectively.  Deferred taxes increased due to mortgage
servicing rights, provisions for loan losses and employee benefit plans.

COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1995 AND 1994

FINANCIAL CONDITION

     The Company's total assets increased by $6,474,323, or 13.6%, from
$47,516,849 at December 31, 1994 to $53,991,172 at December 31, 1995, primarily
due to growth in the Bank's loan portfolio.

     The Bank experienced significant growth in its loan portfolio throughout
the year.  Loans increased from $39,180,666 at December 31, 1994 to $46,482,054
at December 31, 1995, an increase of $7,301,388, or 18.6%.  The Bank's real
estate loan originations increased significantly in most loan categories, with
the largest increases in one- to four-family residential loans.  Consumer
lending balances also increased.

                                       40
<PAGE>
 
     As of December 31, 1995, Cecil Federal had one single family residence
which is held as real estate owned.  The property was rented as of December 31,
1995.  The value of the property has remained at $73,000.  Cecil Federal has a
market evaluation performed yearly to establish the value of real estate owned.

     Cecil Federal holds securities for liquidity purposes in both the held-for-
sale and held-to-maturity portfolios.  During 1995 the balance of the held-to-
maturity portfolio decreased approximately 42.1%.  This decrease was a result of
the maturity of securities that were not reinvested due to the maturity of
securities that were not reinvested due to the Bank's need to fund growth in its
loan portfolio.  Both cash and interest-bearing cash decreased as a result of
the same demand.  Mortgage-backed securities outstanding decreased 15.0% during
1995, the Bank did not purchase any additional mortgage-backed securities during
1995.

     In July of 1995, management decided to re-enter the secondary mortgage
market by selling certain of the loans it originated.  This decision was based
upon the Bank's liquidity ratios, asset/liability management policies, loan
demand and customers' preferences for the fixed rate mortgage product.  From
July 1, 1995 through December 31, 1995, the Bank originated and sold $1,046,300
in fixed-rate loans.  Cecil Federal maintains all servicing upon the sale of the
loans.

     Cecil Federal's deposits increased by $5,149,378, or 13.0%, from
$39,500,074 at December 31, 1994 to $44,649,452 at December 31, 1995.  The
increase was due to increased marketing efforts by the Bank, primarily to its
own customer base.  Due to increased loan demand in 1995, the Bank, as
conditions allowed, also secured $1,250,000 in advances from the Federal Home
Loan Bank of Atlanta, which advances remained outstanding at December 31, 1995.

RESULTS OF OPERATIONS

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

     During 1995, stable economic conditions existed in Cecil Federal's market
area.  Federal Reserve fiscal policy has driven short-term and long-term rates
lower than those of 1994.  As a result, Cecil Federal saw renewed demand in
fixed-rate mortgages as well as home equity loan products.  Short-term and long-
term deposit rates tightened during the last two quarters of 1995.

     Net Income.  Cecil Federal's net income increased by $2,899, or 0.9%, from
     ----------                                                                
$314,251 for the year ended 1994 to $317,150 for the year ended 1995.  The
earnings of Cecil Federal depend primarily on its level of net interest income,
which is the difference between interest earning assets and the interest paid on
interest-bearing liabilities.

     Net Interest Income.  Net interest income increased by $446,405, or 26.9%,
     -------------------                                                       
from $1,661,063 for the year ended 1994 to $2,107,567 for the year ended 1995.
The weighted annual yield on all interest-earning assets increased from 7.30%
for the year ended December 31, 1994 to 8.16% for the year ended December 31,
1995.  The weighted average rate paid on interest-bearing liabilities increased
from 3.69% for the year ended December 31, 1994, to 4.28% for the year ended
December 31, 1995.  This resulted in the Bank's interest rate spread increasing
to 3.88% for 1995, compared to 3.61% for 1994.

     Interest on loans receivable increased $824,868, or 28.7%, from $2,872,825
for the year ended 1994 to $3,697,693 for the year ended 1995.  Interest on
loans receivable increased as a result of an increase in portfolio volume and
portfolio yield.  Interest on mortgage-backed securities increased only slightly
during 1995.

                                       41
<PAGE>
 
     Interest on investment securities decreased $43,029, or 24.0%, from
$178,979 for the year ended 1994 to $135,950 for the year ended 1995.  The
weighted average rate increased from 3.98% at year end 1994 to 5.70% at year end
1995.  Offsetting the increase in rate was a decrease in the average outstanding
balance of $2,109,000 for the year ended 1995.  Investments experienced a
decline due to funding needs for new loan originations.

     Interest on other investments (primarily earnings on monies held in federal
funds and daily time accounts) decreased $25,964, or 25.7%, from $100,924 for
the year ended 1994 to $74,960 for the year ended 1995.  This decrease was due
primarily to a decrease in the average balance outstanding, which was not offset
by the increase in the average yield.

     Interest paid on savings deposits increased $277,097, or 17.9%, from
$1,549,066 for 1994 to $1,826,163 for 1995.  The increase was a result of an
increase in the average balance of 13.0% as a result of general growth and an
increase of 0.6% in the rate paid.  Interest was also paid on advances secured
from the Federal Home Loan Bank of Atlanta.  The amount paid during 1995 was
$41,000.

     Provision for Loan Losses.  Provision for loan losses of $35,000 were
     -------------------------                                            
recognized for the year ended 1995 as compared to $34,500 for the year ended
1994.  Reserves were increased in connection with management's ongoing analysis
of the loan portfolio.  Loan loss reserves are based upon management's
consideration of current and anticipated economic conditions which may affect
the ability of borrowers to repay loans.  Management also reviews individual
loans for which full collectibility may not be reasonably assured and considers,
among other matters, the risk inherent in Cecil Federal's loan portfolio and the
estimated net realizable value of the underlying collateral.  This evaluation
process in ongoing and results in variations of Cecil Federal's provision for
loan losses in various periods.

     Noninterest Income.  Noninterest income increased $11,908, or 5.3%, from
     ------------------                                                      
$222,849 for 1994 to $234,757 for 1995.  Dividends received from investments in
the Federal Home Loan Bank of Atlanta Stock increased $5,000 and other income
increased $25,000.  Gains on the sale of loans decreased as a result of the Bank
re-entering the secondary mortgage loan market only during the last half of
1995.

     Noninterest Expense.  Noninterest expense increased by $460,238, or 34.5%,
     -------------------                                                       
from $1,333,660 for the year ended 1994 to $1,793,898 for the year ended 1995.
Management submits to the Board of Directors an annual budget which includes all
operating expenses.  These expenses are monitored on an ongoing basis to assure
adherence to the budget.

     Compensation and benefits increased $228,059 or 29.6% from $769,454 for the
year ended 1994 to $997,513 for the year ended 1995.  Increases were due to an
accelerated recognition of costs related to various Company benefit plans, and
from the recognition of certain expenses caused by the disability and subsequent
resignation of the former president of the Company and the Bank during 1995.
Occupancy expenses increased as a result of the bank leasing an additional
location to house the expansion of its loan department in June of 1995.  Other
expenses increased primarily as a result of non-recurring legal expenses due to
the company's establishment of compensation and benefit plans, and related to
the change in the Company's management during the year.

     Income Taxes.  Income taxes decreased $5,225, or 2.6%, from $201,501 during
     ------------                                                               
the year ended 1994 to $196,276 during the year ended 1995, due to a decline in
income.

                                       42
<PAGE>
 
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS

     The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated.  Such yields and costs
are derived by dividing income or expense by the average monthly balance of
assets or liabilities, respectively, for the periods presented.  Average
balances are derived from month-end balances.  Management does not believe that
the use of month-end balances instead of daily balances has caused any material
difference in the information presented.

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                           ------------------------------------------------------------------------------------
                                                       1996                          1995                       1994
                                           ---------------------------  ---------------------------  --------------------------
                                                               Average                      Average                     Average
                                           Average             Yield/   Average             Yield/   Average            Yield/
                                           Balance  Interest    Cost    Balance  Interest    Cost    Balance  Interest   Cost
                                           -------  --------  --------  -------  --------  --------  -------  --------  -------
                                                                          (Dollars in thousands)
<S>                                        <C>      <C>       <C>       <C>      <C>       <C>       <C>      <C>       <C>
Interest-earning assets:
   Loans receivables (1).................  $50,049    $4,302     8.60%  $44,243    $3,698     8.36%  $35,948    $2,873    7.99%
   Investment securities.................    2,557       132     5.16     2,387       136     5.70     4,496       179    3.98
   Mortgage-backed securities............    1,646       110     6.68       948        66     6.97       943        65    6.89
   Other interest-earning assets.........    1,726       111     6.43     1,159        75     6.47     2,710       101    3.73
                                           -------    ------            -------    ------            -------    ------
     Total interest-earning assets.......   55,978     4,655     8.32    48,737     3,975     8.16    44,097     3,218    7.30
                                                      ------                       ------                       ------
Noninterest-earning assets...............    1,944                        2,116                        2,170
                                           -------                      -------                      -------
     Total assets........................  $57,922                      $50,853                      $46,267
                                           =======                      =======                      =======
 
Interest-bearing liabilities:
  Advances from FHLB.....................    2,443       126     5.16       792        34     4.26        --        --      --
  Deposits...............................   47,481     2,102     4.43    42,369     1,826     4.31    41,726     1,549    3.71
  Advances from borrowers for taxes
    and insurance........................      677         8     1.18       474         7     1.51       419         8    1.91
                                           -------    ------            -------    ------            -------    ------
     Total interest-bearing liabilities..   50,601     2,236     4.42    43,635     1,867     4.28    42,145     1,557    3.69
                                                      ------                       ------                       ------
Non-interest-bearing liabilities.........      328                          217                          200
                                           -------                      -------                      -------
     Total liabilities...................   50,929                       43,852                       42,345
Retained earnings........................    6,993                        7,001                        3,922
                                           -------                      -------                      -------
     Total liabilities and retained
       earnings..........................  $57,922                      $50,853                      $46,267
                                           =======                      =======                      =======
Net interest income......................             $2,419                       $2,108                       $1,661
                                                      ======                       ======                       ======
Interest rate spread.....................                        3.90%                        3.88%                       3.61%
                                                               ======                       ======                      ======
Net yield on interest-earning assets.....                        4.32%                        4.33%                       3.77%
                                                               ======                       ======                      ======
Ratio of average interest-earning
  assets to average interest-bearing
  liabilities............................                      110.63%                      111.69%                     104.23%
                                                               ======                       ======                      ======
</TABLE>

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

                                       43
<PAGE>
 
RATE/VOLUME ANALYSIS

     The table below sets forth certain information regarding changes in
interest income and interest expense of Cecil Federal for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); (ii) changes in rates (change in
rate multiplied by old volume) and (iii) changes in both rate and volume
(changes in rate multiplied by the changes in volume).  Dollars are in
thousands.

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                       ---------------------------------------------------------------------------
                                               1996        vs.      1995           1995           vs.       1994
                                       ---------------------------------------  ----------------------------------
                                                 Increase (Decrease)                    Increase (Decrease)
                                                       Due to                                 Due to
                                       ---------------------------------------  ----------------------------------
                                                             Rate/                                  Rate/
                                        Volume      Rate    Volume     Total     Volume     Rate   Volume   Total
                                       ---------  --------  -------  ---------  ---------  ------  -------  ------
                                                                     (In thousands)
<S>                                    <C>        <C>       <C>      <C>        <C>        <C>     <C>      <C>
Interest income:
  Loans receivable (1)...............      $ 484     $106    $  14      $ 604       $662    $133    $  30    $825
  Mortgage-backed securities.........         48       (2)      (2)        44         --       1       --       1
  Investment securities..............          8      (13)       1         (4)       (84)     77      (36)    (43)
  Other interest-earning assets......         37       (1)      --         36        (58)     74      (42)    (26)
                                           -----     ----    -----      -----       ----    ----    -----    ----
     Total interest-earning assets...        577       90       13        680        520     285      (48)    757
 
Interest expense:
  Advances from FHLB.................         70        7       15         92         34      --       --      34
  Deposits...........................        220       50        6        276         24     250        3     277
  Advances from borrowers for taxes
     and insurance...................          3       (1)      (1)         1          1      (2)      --      (1)
                                           -----     ----    -----      -----       ----    ----    -----    ----
     Total interest-bearing
       liabilities...................        293       56       20        369         59     248        3     310
                                           -----     ----    -----      -----       ----    ----    -----    ----
Change in net interest income........      $ 284     $ 34    $  (7)     $ 311       $461    $ 37    $ (51)   $447
                                           =====     ====    =====      =====       ====    ====    =====    ====
 </TABLE> 

___________________________________
(1)     Includes loans held for sale.


LIQUIDITY AND CAPITAL RESOURCES

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

     For regulatory purposes, liquidity is measured as a ratio of cash and
certain investments to withdrawable deposits and short-term borrowings.  The
minimum level of liquidity required by regulation is presently 5%.  Cecil
Federal's liquidity ratio at December 31, 1996, was approximately 15.6%.  Cecil
Federal maintains a higher level of liquidity than required by regulation as a
matter of management philosophy in order to more closely match interest-
sensitive assets with interest-sensitive liabilities.

     Commitments to originate mortgage loans are legally binding agreements to
lend to Cecil Federal's customers.  Commitments at December 31, 1996 to
originate adjustable-rate and fixed-rate mortgage loans were approximately
$665,000, expiring in 60 days or less.  Cecil Federal believes its liquidity is
adequate to fund its future commitments.

                                       44
<PAGE>
 
     Cecil Federal has $21.9 million in certificates due within one year and
$17.5 million in other deposits without specific maturity at December 31, 1996.
Management estimates that most of the deposits will be retained or replaced by
new deposits.

IMPACT OF INFLATION

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

IMPACT OF ACCOUNTING PRONOUNCEMENTS

     Accounting for Mortgage Servicing Rights.  In May 1995, the FASB also
issued SFAS No. 122 "Accounting for Mortgage Servicing Rights" which is
effective for fiscal years beginning after December 15, 1995.  Earlier
application is permitted.  The statement will make the income realization and
asset recognition of mortgage servicing rights (MSRs) more consistent between
organizations that conduct mortgage banking activities.  This statement provides
guidance for the recognition of mortgage servicing rights as an asset and the
measurement of impairment for those rights.

     SFAS 122 applies to mortgage banking activities in which a mortgage loan is
originated or purchased then sold, with the right to service the loan retained
by the mortgage banking entity.  The Statement amends SFAS 65, which only
provided for the recognition of purchased mortgage servicing rights (PMSRs).
Cecil Federal will adopt the provisions of SFAS No. 122 on January 1, 1996.  The
implementation of SFAS No. 122 will not materially affect the financial
condition or results of operations of Cecil Federal.

     Accounting for Impairment of a Loan.  In May 1993, the FASB also issued
SFAS No. 114 "Accounting by Creditors for Impairment of a Loan", which is
effective for fiscal years beginning after December 15, 1994.  Earlier
application is permitted.  The statement addresses the accounting by creditors
for impairment of certain loans.  It is generally applicable for all loans
except large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment including residential mortgage loans and consumer
installment loans.  It also applies to all loans that are restructured in a
trouble debt restructuring involving a modification of terms.  However, if a
loan that was restructured in a troubled debt restructuring involving a
modification of terms before the effective date of this Statement is not
impaired based on the terms specified by the restructuring agreement, a creditor
may continue to account for the loan in accordance with the provisions of SFAS
No. 15, "Accounting for Troubled Debt Restructurings," prior to its amendment by
this statement.

     SFAS No. 114 requires that impaired loans be measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate, or at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent.  A loan is considered impaired
when, based on current information and events, it is probable that a creditor
will be unable to collect all amounts due according to the contractual terms of
the loan agreement.  Effective January 1, 1995 Cecil Federal has adopted the
provisions of SFAS No. 114.  The implementation of SFAS No. 114 does not
materially affect the financial condition or results of operations of Cecil
Federal.

                                       45
<PAGE>
 
     Accounting for ESOP.  The Accounting Standards Division of the American
Institute of Certified Public Accountants approved Statement of Position ("SOP")
93-6, "Employers' Accounting for Employee Stock Ownership Plans," which is
effective for fiscal years beginning after December 15, 1993 and applies to
shares of capital stock of sponsoring employers acquired by ESOPs after December
31, 1992 that had not been committed to be released as of January 1, 1992.  SOP
93-6 will, among other things, change the measure of compensation recorded by
employers from the cost of ESOP shares to the fair value of ESOP shares. To the
extent that the fair value of Cecil Federal's ESOP shares, committed to be
released directly to compensate employees, differs from the cost of such shares,
compensation expenses and a related charge or credit to additional paid-in
capital will be reported in the Company's consolidated financial statements.

     Fair Value of Financial Instruments.  In December 1991, the FASB issued
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," which is
applicable to financial statements of entities with total assets in excess of
$150 million for fiscal years ending after December 15, 1992 and to financial
statements of entities with total assets less than $150 million for fiscal years
ending after December 15, 1994 (i.e., the fiscal year ending December 31, 1995
for Cecil Federal).  SFAS No. 107 requires the disclosure of (i) fair value of
financial instruments (both on- and off-balance sheet) for which it is
practicable to estimate that value and (ii) the methods and significant
assumptions used to estimate fair value.  The statement excludes certain
financial instruments from the disclosure requirements and does not prohibit the
separate voluntary disclosure of the estimated fair value of non-financial
intangible and tangible assets and non-financial liabilities.  Because the
statement requires only disclosure of fair value, without recognition of any
changes in Cecil Federal's financial statements, there is no impact on Cecil
Federal's financial condition or its results of operations.

     Accounting for Stock-Based Compensation.  In November 1995, the FASB issued
Statement of Financial Accounting Standards No. 123 "Accounting for Awards of
Stock-Based Compensation to Employees" ("SFAS No. 123").  SFAS No. 123 is
effective for years beginning after December 15, 1995.  Earlier application is
permitted.  The Statement defines a fair value based method of accounting for an
employee stock option or similar equity instrument and encourages all entities
to adopt that method of accounting for an employee stock option or similar
equity instrument and encourages all entities to adopt that method of accounting
for all of their employee stock compensation plans.  However, it also allows an
entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25.
"Accounting for Stock Issued to Employees" ("Opinion 25").  Under the fair value
based method, compensation cost is measured at the grant date based on the value
of the award and is recognized over the service period, which is usually the
vesting period.   Under the intrinsic value based method, compensation cost is
the excess, if any, of the quoted market price of the stock at the grant date or
other measurement date over the amount an employee must pay to acquire the
stock.  Most fixed stock option plans -- the most common type of stock
compensation plan -- have no intrinsic value at grant date, and under Opinion 25
no compensation cost is recognized for them.  Compensation cost is recognized
for other types of stock based compensation plans under Opinion 25, including
plans with variable, usually performance-based, features.  This Statement
requires that an employer's financial statements include certain disclosures
about stock-based employee compensation arrangements regardless of the method
used to account for them.  The Company intends to continue using the intrinsic
value method and will provide the pro forma disclosures about its stock-based
employee compensation plans in its 1996 financial statements, as required by
SFAS No. 123.

                                       46
<PAGE>
 
ITEM 7.  FINANCIAL STATEMENTS
-----------------------------



                     CECIL BANCORP, INC. AND SUBSIDIARIES



                              REPORT ON AUDITS OF

                       CONSOLIDATED FINANCIAL STATEMENTS

                    YEARS ENDED DECEMBER 31, 1996 AND 1995

                                       47
<PAGE>
 
                                   CONTENTS
                                   --------

<TABLE>
<CAPTION>
                                                                        PAGE 
<S>                                                                     <C>  
FINANCIAL STATEMENTS                                                         
                                                                             
            Independent Auditors' Report                                  49 
                                                                             
            Consolidated Statements of Financial Condition                50 
                                                                             
            Consolidated Statements of Income                             52 
                                                                             
            Consolidated Statements of Changes in                            
               Stockholders' Equity                                       53 
                                                                             
            Consolidated Statements of Cash Flows                         54 
                                                                             
            Notes to Consolidated Financial Statements                    56  
</TABLE>

                                      48
<PAGE>
 
BOARD OF DIRECTORS AND STOCKHOLDERS
CECIL BANCORP, INC. AND SUBSIDIARIES
ELKTON, MARYLAND



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


          We have audited the accompanying consolidated statements of financial
condition of CECIL BANCORP, INC. AND SUBSIDIARIES as of December 31, 1996 and
1995 and the related consolidated statements of income, stockholders' equity and
cash flows for each of the years in the three year period ended December 31,
1996. These financial statements are the responsibility of the Corporation's
management.  Our responsibility is to express an opinion on these financial
statements based on our audits.

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

          In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial condition of CECIL
BANCORP, INC. AND SUBSIDIARIES as of December 31, 1996 and 1995 and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.


                                         Simon, Master & Sidlow, P.A.



January 16, 1997

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

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



                                    ASSETS
                                    ------

<TABLE>
<CAPTION>
                                                           December 31,
                                                    --------------------------
                                                       1996            1995
                                                    -----------     ----------
<S>                                                <C>             <C>
Cash                                               $ 1,678,415     $ 1,116,017
Cash - Interest bearing                                502,207       1,136,527
Investment securities
    Securities held-to-maturity (estimated
     market value of $2,489,174 in 1996 and
     $2,024,859 in 1995) (Note 4)                    2,490,069       2,025,015
    Securities available-for-sale at estimated
     market value (Note 4)                             496,358         222,724
Mortgage-backed securities
    Securities held-to-maturity (estimated
     market value of $532,631 in 1996 and
     $878,485 in 1995) (Note 4)                        531,775         872,369
    Securities available-for-sale at estimated
     market value (Note 4)                           1,633,338
Loans held for sale (estimated market value
    of $1,716,993 in 1996 and $691,301 in 1995)      1,707,883         671,600
Loans receivable, net (Note 5)                      49,779,988      46,482,054
Real estate owned                                                       73,003
Office properties, equipment and leasehold
    improvements at cost, less accumulated
    depreciation and amortization (Note 7)             508,824         454,304
Stock in Federal Home Loan Bank of
    Atlanta - at cost (Note 8)                         422,900         422,900
Accrued interest receivable (Note 6)                   432,828         378,281
Deferred taxes (Note 11)                                                70,487
Prepaid expenses                                        42,878          47,946
Other assets                                            36,160          17,945
                                                   -----------     -----------
 
             TOTAL ASSETS                          $60,263,623     $53,991,172
                                                   ===========     ===========
</TABLE>

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

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

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



                     LIABILITIES AND STOCKHOLDERS' EQUITY
                     ------------------------------------

<TABLE>
<CAPTION>
                                                                  December 31,
                                                          ----------------------------
                                                              1996           1995
                                                          -------------  -------------
<S>                                                       <C>            <C>
LIABILITIES
   Savings deposits (Note 9)                               $47,365,022    $44,649,452
   Advance payments by borrowers for                                                 
    property taxes and insurance                               711,247        489,465
   Employee stock ownership debt (Note 14)                     308,064        346,572
   Other liabilities                                           323,327        225,174
   Deferred taxes                                                2,877               
   Advances from Federal Home Loan Bank                                              
    of Atlanta (Note 10)                                     4,500,000      1,250,000 
                                                           -----------    -----------
 
             TOTAL LIABILITIES                              53,210,537     46,960,663
                                                           -----------    -----------
 
COMMITMENTS (Notes 5, 7 and 16)
 
STOCKHOLDERS' EQUITY
   Common stock, $.01 par value
      Authorized:  4,000,000 shares
      Issued and outstanding:  469,358 shares
         in 1996 and 481,361 shares in 1995                      4,694          4,814
   Additional paid in capital                                3,940,728      3,963,671
   Net unrealized gain on securities
      available-for-sale, net of deferred taxes                 13,139          2,459
   Employee stock ownership debt                              (308,064)      (346,572)
   Deferred compensation - Management
      Recognition Plan (Note 14)                              (156,047)      (193,734)
   Retained earnings, substantially
      restricted (Notes 11 and 12)                           3,558,636      3,599,871
                                                           -----------    -----------
 
             TOTAL STOCKHOLDERS' EQUITY                      7,053,086      7,030,509
                                                           -----------    -----------
 
             TOTAL LIABILITIES AND
               STOCKHOLDERS' EQUITY                        $60,263,623    $53,991,172
                                                           ===========    ===========
</TABLE>

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

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

                       CONSOLIDATED STATEMENTS OF INCOME
                       ---------------------------------

<TABLE>
<CAPTION>
                                                           Year ended December 31,
                                                     --------------------------------------
                                                        1996         1995          1994
                                                     ----------  ------------  ------------
<S>                                                  <C>         <C>           <C>
INTEREST INCOME
           Loans receivable                          $4,301,685   $3,697,693    $2,872,825
           Mortgage-backed securities                   110,195       66,017        65,261
           Investment securities                        132,425      135,950       178,979
           Other interest-earning assets                110,986       74,960       100,924
                                                     ----------   ----------    ----------
             Total interest income                    4,655,291    3,974,620     3,217,989
                                                     ----------   ----------    ----------
 
INTEREST EXPENSE
           Deposits
             NOW accounts                                69,416       74,067        60,011
             Passbook accounts                          326,166      310,396       466,988
             Money market deposit accounts               82,288       95,105       105,119
             Certificates                             1,623,518    1,346,595       916,948
                                                     ----------   ----------    ----------
           Interest expense on deposits               2,101,388    1,826,163     1,549,066
           Borrowings                                   134,567       40,890         7,860
                                                     ----------   ----------    ----------
             Total interest expense                   2,235,955    1,867,053     1,556,926
                                                     ----------   ----------    ----------
             Net interest income                      2,419,336    2,107,567     1,661,063
           Provision for loan losses                    102,500       35,000        34,500
                                                     ----------   ----------    ----------
             Net interest income after provision
                for loan losses                       2,316,836    2,072,567     1,626,563
                                                     ----------   ----------    ----------
 
NONINTEREST INCOME (LOSS)
           Loan service charges                          30,127       23,986        39,396
           Dividends on FHLB stock                       30,453       30,660        26,056
           Gain on sale of loans                         84,276       16,147        21,769
           Unrealized loss on loans held for sale                              (     3,565)
           Other                                        170,784      163,964       139,193
                                                     ----------   ----------    ----------
             Total noninterest income                   315,640      234,757       222,849
                                                     ----------   ----------    ----------
 
NONINTEREST EXPENSE
           Compensation and benefits                    973,141      997,513       769,454
           Occupancy expense                            100,400       82,338        65,722
           Equipment and data processing expense        158,129      124,326       117,474
           SAIF deposit insurance premium               391,995      110,985       111,144
           Other                                        392,201      478,736       269,866
                                                     ----------   ----------    ----------
             Total noninterest expense                2,015,866    1,793,898     1,333,660
                                                     ----------   ----------    ----------
 
             Income before income taxes                 616,610      513,426       515,752
                                                     ----------   ----------    ----------
 
INCOME TAXES
           Current                                      225,671      204,340       222,568
           Deferred                                      76,030   (    8,064)   (   21,067)
                                                     ----------   ----------    ----------
             Total income taxes                         301,701      196,276       201,501
                                                     ----------   ----------    ----------
 
NET INCOME                                           $  314,909   $  317,150    $  314,251
                                                     ==========   ==========    ==========
 
Earnings per common share and common
           share equivalent                                $.72         $.72          $.71
                                                     ==========   ==========    ==========
 
Earnings per common share - assuming
           full dilution                                   $.72
                                                     ==========
 
Cash dividends paid per common share                       $.56         $.56
                                                     ==========   ==========
 
</TABLE>

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

                                      52
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------
          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
          ----------------------------------------------------------
                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                 --------------------------------------------

<TABLE>
<CAPTION>
                                                                                           Deferred
                                                      Net Unrealized Gain    Employee    Compensation-
                                                      (Loss) on Securities     Stock       Management                     Total
                               Common       Paid-in    available-for-sale,   Ownership     Recognition     Retained    Stockholders'
                                Stock       Capital   net of Deferred Taxes    Plan           Plan         Earnings       Equity
                             -----------  ----------- ---------------------  ---------    -------------   ----------  -------------
<S>                          <C>          <C>         <C>                    <C>          <C>             <C>         <C>
BALANCE AT
      DECEMBER 31, 1993      $            $            $                     $            $               $3,216,467  $   3,216,467
 
Sale of 481,361 shares
      of common stock              4,814    3,925,163                         (  385,080)                                 3,544,897
Change in net unrealized
      loss on securities
      available-for-sale,
      net of deferred taxes                                     (     2,896)                                            (     2,896)
 
Net income                                                                                                   314,251        314,253
                             -----------  -----------  --------------------  -----------  -------------   ----------  -------------
BALANCE AT
      DECEMBER 31, 1994            4,814    3,925,163            (    2,896)  (  385,080)                  3,530,718      7,072,719
 
Change in net unrealized
      gain (loss) on
      securities available-
      for-sale, net of
      deferred taxes                                                  5,355                                                   5,355
Cash dividends paid                                                                                       (  247,997)     ( 247,997)
Repayment of ESOP debt                                                            38,508                                     38,508
Release of ESOP shares                         38,508                                                                        38,508
Net income                                                                                                   317,150        317,150
Funding of MRP trust                                                                         (  263,351)                 (  263,351)
Deferred compensation
      amortization                                                                               69,617                      69,617
                             -----------  -----------  --------------------  -----------  -------------   ----------  ------------- 
BALANCE AT
      DECEMBER 31, 1995            4,814    3,963,671                 2,459   (  346,572)    (  193,734)   3,599,871      7,030,509
 
Change in net unrealized
      gain on securities
      available-for-sale,
       net of deferred taxes                                         10,680                                                  10,680
Cash dividends paid                                                                                      (   243,671)    (  243,671)
Repayment of ESOP debt                                                            38,508                                     38,508
Release of ESOP shares                         38,508                                                                        38,508
Net income                                                                                                   314,909        314,909
Deferred compensation
      amortization                                                                               37,687                      37,687
Purchase of 24,037 shares
      of common stock             (  240)  (  240,130)                                                    (  112,473)    (  352,843)
Sale of 12,034 shares
      of common stock                120      177,381                                                                       177,501
Release of vested
      MRP shares                                1,298                                                                         1,298
                             -----------  -----------  --------------------  -----------  -------------   ----------  -------------
BALANCE AT
      DECEMBER 31, 1996      $     4,694  $ 3,940,728  $             13,139  ($  308,064)   ($  156,047)  $3,558,636  $   7,053,086
                             ===========  ===========  ====================  ===========  =============   ==========  =============
</TABLE>

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

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

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

<TABLE>
<CAPTION>
                                                                     Year ended December 31,
                                                          ----------------------------------------------
                                                               1996            1995            1994
                                                          --------------  --------------  --------------
<S>                                                       <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
           Interest and fees received on loans
             and investments                              $   4,799,315   $   4,056,250   $   3,414,430
           Cash paid to suppliers and employees            (  1,871,546)   (  1,714,039)   (  1,249,268)
           Proceeds from sale of loans                        2,572,339       1,062,447       1,679,912
           Origination of loans held for sale              (  3,307,500)   (  1,717,900)   (  1,175,412)
           Interest paid                                   (  2,235,955)   (  1,867,053)   (  1,556,926)
           Income taxes paid                               (    201,588)   (    200,745)   (    234,059)
                                                          --------------  --------------  --------------
             NET CASH PROVIDED (USED) BY
                OPERATING ACTIVITIES                       (    244,935)   (    381,040)        878,677
                                                          --------------  --------------  --------------
 
CASH FLOWS FROM INVESTING ACTIVITIES
           Proceeds from sale and maturities of
             investment securities                            3,025,000       2,500,000       5,000,000
           Proceeds from maturities of
             mortgage-backed securities                         441,671         165,426         256,157
           Purchases of investment securities              (  3,733,516)   (    997,188)   (  3,966,406)
           Purchases of mortgage-backed securities         (  1,722,837)                   (    738,667)
           Loans originated                                ( 21,293,098)   ( 17,351,174)   ( 14,354,323)
           Principal collected on loans                      15,856,640      10,022,238       9,141,506
           Proceeds from sale of loans                        1,819,178
           Purchases of office properties,
             equipment and leasehold
             improvements                                  (    102,896)   (    144,284)   (      9,073)
           Proceeds from sale of real estate owned               74,726
                                                          --------------  --------------  --------------
              NET CASH USED BY
                INVESTING ACTIVITIES                       (  5,635,132)   (  5,804,982)   (  4,670,806)
                                                          --------------  --------------  -------------- 
CASH FLOWS FROM FINANCING ACTIVITIES
           Net increase (decrease) in demand deposits,
             NOW accounts, and savings accounts              24,166,890      18,568,854    (    556,059)
           Proceeds from sales of certificates               12,103,204       9,805,826      10,946,573
           Payments of maturing certificates
             of deposits                                   ( 33,554,524)   ( 23,225,302)   ( 11,954,279)
           Increase in advance payments by
             borrowers for property taxes
             and insurance                                      221,782          97,298          18,371
           Proceeds from sale of common stock                   178,799                       3,929,977
           Advances from Federal Home Loan Bank
             of Atlanta                                       3,250,000       1,250,000
           Dividends paid                                   (   243,671)   (    247,997)
           Unearned ESOP compensation decrease                   38,508          38,508
           Net funding of MRP trust                                        (    193,734)
           Purchase of common stock                        (    352,843)
                                                          --------------  --------------  --------------  
              NET CASH PROVIDED BY
                FINANCING ACTIVITIES                          5,808,145       6,093,453       2,384,583
                                                          --------------  --------------  --------------  
NET INCREASE (DECREASE) IN CASH AND
           CASH EQUIVALENTS                                (     71,922)   (     92,569)   (  1,407,546)
 
CASH AND CASH EQUIVALENTS
           BEGINNING OF YEAR                                  2,252,544       2,345,113       3,752,659
                                                          --------------  --------------  --------------  
 
           END OF YEAR                                    $   2,180,622   $   2,252,544   $   2,345,113
                                                          ==============  ==============  ==============
</TABLE>

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

                                      54
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

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

                                  (Continued)

<TABLE>
<CAPTION>
                                                               Year ended December 31,
                                                       ----------------------------------------
                                                           1996          1995          1994
                                                       ------------  ------------  ------------
<S>                                                    <C>           <C>           <C>
RECONCILIATION OF NET INCOME TO NET CASH
           PROVIDED (USED) BY OPERATING ACTIVITIES
 
Net Income                                             $   314,909   $   317,150    $  314,251
 
Adjustments to reconcile net income to
           net cash provided (used) by operating
           activities:
             Depreciation                                   48,376        36,945        34,632
             Provision for loan losses                     102,500        35,000        34,500
             Amortization of investment
                security premiums and (discounts)      (     7,495)   (   43,906)       17,684
             Net amortization of deferred loan fees    (     1,722)   (    7,453)   (   11,370)
             Stock dividends                           (    23,576)   (   13,203)   (    9,212)
             Deferred tax effect on unrealized loss
                on securities available-for-sale                                         2,451
             Increase in accrued interest
                receivable                             (    54,547)   (   72,418)   (   18,111)
             (Increase) decrease in deferred
                taxes                                       49,236    (    8,064)   (   23,518)
             (Increase) decrease in prepaid
                expenses                                     5,068    (      342)           68
             (Increase) decrease in other assets       (    18,215)   (   11,514)        5,660
             Increase in other liabilities                 122,281        58,365        37,541
             (Increase) decrease in loans held
                for sale                               (   819,437)   (  671,600)      494,101
             Distribution from MRP Trust                    37,687
                                                       ------------  ------------  ------------
                                                           559,844    (  698,190)      564,426
                                                       ------------  ------------  ------------
                                                       ($  244,935)   ($ 381,040)   $  878,677
                                                       ============  ============  ============
 
SCHEDULE OF NON-CASH FINANCING ACTIVITIES
           Proceeds from sale of common stock
             Cash received                              $  178,799     $            $3,023,258
             Deposit accounts converted to
                purchase stock                                                       1,405,272
             Less expenses associated with
                stock offering                                                         498,553
                                                       ------------  ------------  ------------
           Net proceeds from sale of
             common stock                               $  178,799     $       0    $3,929,977
                                                       ============  ============  ============
</TABLE>

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

                                      55
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

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

                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                 --------------------------------------------



1.   SUMMARY OF SIGNIFICANT ORGANIZATION AND ACCOUNTING POLICIES

     a.   Organization and Principles of Consolidation -- Cecil Bancorp,
          --------------------------------------------                  
               Inc. (the Corporation) is a savings and loan holding company, and
               is the parent company of Cecil Federal Savings Bank (the Bank).
               The Corporation was incorporated in July 1994 and on November 10,
               1994 acquired all of the common stock of the Bank upon its
               conversion from mutual to stock form as discussed in Note 2. The
               consolidated financial statements include the accounts of the
               Corporation, the Bank, and the Bank's wholly owned subsidiaries,
               Cecil Service Corporation and Northeastern Service Corporation.

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

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

     c.   Investment Securities -- Regulations require the Bank to maintain, in
          ---------------------                                   
               cash and U.S. Government and other approved securities, an amount
               equal to 5% of savings accounts (net of loans on savings
               accounts) plus short-term borrowings. In addition, short-term
               assets must constitute at least 1% of net withdrawable savings
               and short-term borrowings.

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

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

                                      56
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

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

                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                 --------------------------------------------

                                  (Continued)



1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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

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

     g.   Loans Held for Sale -- Mortgage loans originated and held for sale in
          -------------------                                          
               the secondary market are carried at the lower of cost or market
               value determined on an aggregate basis. Gains and losses on the
               sale of loans held for sale are determined using the specific
               identification method. During 1994, the Bank determined that
               loans held for sale classified as available for sale should be
               reclassified to held to maturity at December 31, 1994, as
               management's intention was to hold all loans originated to
               maturity or earlier repayment. During 1995, the Bank resumed
               sales of eligible fixed rate loans to reduce the portfolio
               interest rate risk and improve the Bank's gap position.

                                      57
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

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

                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                 --------------------------------------------

                                  (Continued)



1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

               The Corporation and the Bank along with its subsidiaries file
               consolidated tax returns.

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

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

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

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

                                      58
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

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

                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                 --------------------------------------------

                                  (Continued)



1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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

     m.   Reclassification of 1994 Financial Statements -- Certain
          ---------------------------------------------           
               reclassifications have been made to the 1994 figures to conform
               with current year presentation.


2.   CONVERSION

     The Bank completed a conversion from a mutual association to a federally-
          chartered capital savings bank subsidiary of a newly formed savings
          and loan holding company, Cecil Bancorp, Inc. on November 10, 1994.
          Simultaneous with the conversion was the initial issuance of 481,361
          shares of common stock in the Corporation at $10 per share, totaling
          $4,813,610. This was accomplished through an offering to the Bank's
          employee stock ownership plan, eligible account holders of record and
          other members of the Bank. Costs associated with the conversion and
          stock offering amounted to $498,553, and were accounted for as a
          reduction of the proceeds from the issuance of common stock of the
          Corporation. Upon closing of the stock offering, the Corporation
          acquired all common shares issued by the Bank.

                                      59
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

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

                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                 --------------------------------------------

                                  (Continued)



3.   ADOPTION OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     Impaired Loans
     --------------
          Effective January 1, 1995, the Corporation adopted the provisions of
          Statements of Financial Accounting Standards Nos. 114 and 118,
          Accounting by Creditors for Impairment of a Loan. These statements
          define a loan as impaired when, based on the current information and
          events, it is probable that a creditor will be unable to collect all
          amounts due according to the contractual terms of a loan. If the value
          of the impaired loan is less than the recorded investment in the loan,
          the creditor shall recognize the impairment by creating a valuation
          allowance for the difference. The Corporation had no impaired loans at
          December 31, 1996 and 1995.


4.   INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES

     The amortized costs and estimated market values of investment securities
          held-to-maturity as of December 31, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
                                           Gross       Gross     Estimated
                             Amortized   Unrealized  Unrealized    Market
                                Cost       Gains       Losses      Value
                             ----------  ----------  ----------  ----------
<S>                          <C>         <C>         <C>         <C>
As of December 31, 1996
 U.S. Treasury Securities
  and obligations of U.S.
  government corporations
  and agencies               $2,490,069  $           $      895  $2,489,174
                             ==========  ==========  ==========  ==========
</TABLE> 

<TABLE> 
<CAPTION> 
                                           Gross       Gross     Estimated
                             Amortized   Unrealized  Unrealized    Market
                                Cost       Gains       Losses      Value
                             ----------  ----------  ----------  ---------- 
<S>                          <C>         <C>         <C>         <C>  
As of December 31, 1995
 U.S. Treasury Securities
  and obligations of U.S.
  government corporations
  and agencies               $2,000,015  $    3,344  $    3,500  $1,999,859
 U.S. League Stock               25,000                              25,000
                             ----------  ----------  ----------  ---------- 
                             $2,025,015  $    3,344  $    3,500  $2,024,859
                             ==========  ==========  ==========  ==========
</TABLE>

                                      60
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

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

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                  --------------------------------------------

                                  (Continued)



4.   INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (Continued)

     The amortized costs and estimated market values of investment securities
          available-for-sale as of December 31, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
                                             Gross      Gross     Estimated
                                Amortized  Unrealized  Unrealized   Market
                                   Cost      Gains       Losses      Value
                                ---------  ----------  ---------- ----------
     <S>                        <C>        <C>         <C>        <C>
     As of December 31, 1996
          Mutual Funds          $ 496,358  $           $           $ 496,358
                                =========  ==========  ==========  =========

     As of December 31, 1995
          Mutual Funds          $ 222,724  $           $           $ 222,724
                                =========  ==========  ==========  =========
</TABLE>

     The amortized costs and estimated market values for mortgage-backed
          securities held-to-maturity as of December 31, 1996 and 1995 are as
          follows:

<TABLE>
<CAPTION>
                                             Gross       Gross     Estimated
                                Amortized  Unrealized  Unrealized   Market
                                  Cost       Gains       Losses      Value
                                ---------  ----------  ----------  ---------
     <S>                        <C>        <C>         <C>         <C>
     As of December 31, 1996
          FHLMC                 $ 531,775  $      856  $           $ 532,631
                                =========  ==========  ==========  =========

     As of December 31, 1995
          FHLMC                 $ 872,369  $    6,116  $           $ 878,485
                                =========  ==========  ==========  =========
</TABLE>

     The amortized costs and estimated market values for mortgage-backed
          securities available-for-sale as of December 31, 1996 are as follows:

<TABLE>
<CAPTION>
                                              Gross        Gross    Estimated
                                Amortized   Unrealized  Unrealized    Market
                                   Cost       Gains       Losses      Value
                                ----------  ----------  ----------  ----------
     <S>                        <C>         <C>         <C>         <C>
     As of December 31, 1996
          FHLMC                 $1,633,338  $           $           $1,633,338
                                ==========  ==========  ==========  ==========
</TABLE>

                                      61 
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

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

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                  --------------------------------------------

                                  (Continued)



4.   INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (Continued)

     The amortized cost and estimated market value of debt securities at
          December 31, 1996, by contractual maturity, are shown below. Expected
          maturities will differ from contractual maturities because borrowers
          may have the right to call or prepay obligations with or without call
          or prepayment penalties.

<TABLE>
<CAPTION>
                                                            Estimated
                                                Amortized     Market
                                                   Cost       Value
                                                ----------  ----------
                  <S>                           <C>         <C>
                  Due in one year or less       $2,490,069  $2,489,174
                  Mortgage backed securities     2,165,113   2,165,969
                                                ----------  ----------
                                                $4,655,182  $4,655,143
                                                ==========  ==========
</TABLE>

     U.S. Treasury securities and obligations of U.S. government corporations
          and agencies are included in investments on the balance sheet.

     There were no sales of debt securities in 1996, 1995, and 1994.


5.   LOANS RECEIVABLE

     Mortgage loans are generally of long-term nature with loans secured by
          residential or commercial real estate in Cecil County usually made for
          terms up to thirty (30) years. Income from these loans is recognized
          using the level yield method. The Bank is also active in the making of
          short-term (normally one year) interim construction loans. Interest is
          charged on these loans as the funds are disbursed and income is
          recognized when earned.

     All first mortgage loans are secured by a first lien on real property and
          are stated at their unpaid principal balance.

                                      62
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

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

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                  --------------------------------------------

                                  (Continued)



5.   LOANS RECEIVABLE (Continued)

     A summary of mortgage loans follows:

<TABLE>
<CAPTION>
                                        1996           1995
                                    -------------  ------------
     <S>                            <C>            <C>
     First mortgage loans
       1-4 Dwelling units           $ 40,925,018    $39,855,035
       5 or more                         100,143        103,324
       Non-Residential                 2,675,285      1,635,015
       Land                            1,569,033      2,069,940
       Construction                    2,920,115        867,000
                                    ------------    -----------
                                      48,189,594     44,530,314
     Other loans
       Home equity loans                 875,286        417,777
       Commercial loans                  694,951        613,233
       Home improvement loans             12,139         22,994
       Consumer loans                  2,423,899      2,110,939
       Loans on savings deposits         631,776        604,167
       Education                          86,518         85,065
                                    ------------    -----------
                                      52,914,163     48,384,489
     Less:
       Undisbursed proceeds on
         loans in process           (  1,260,066)   (   944,869)
       Deferred loan fees           (     48,535)   (   171,554)
       Loans held for sale          (  1,707,883)   (   671,600)
       Allowance for loan losses    (    117,691)   (   114,412)
                                    ------------    -----------
                                    $ 49,779,988    $46,482,054
                                    ============    ===========
</TABLE>

     The Bank serviced loans for others in the approximate amount of $16,795,000
          and $14,738,000 in 1996 and 1995, respectively.


 
     An analysis of the allowance for loan losses for the years ended December
          31, 1996 and 1995 is as follows:
 
<TABLE> 
<CAPTION> 
                                                      1996               1995
                                                   ---------          ---------
          <S>                                      <C>                <C> 
          Balance at beginning of period           $ 114,412          $ 105,631
          Provision charged to operations            102,500             35,000
          Charge-offs, net                         (  99,221)         (  26,219)
                                                   ---------          ---------
          Balance at end of period                 $ 117,691          $ 114,412
                                                   =========          =========
</TABLE>

                                      63
<PAGE>
 
                      CECIL BANCORP, INC.AND SUBSIDIARIES
                      -----------------------------------

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

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                  --------------------------------------------

                                  (Continued)



5.          LOANS RECEIVABLE (Continued)

     In the ordinary course of business, the Bank has and expects to continue to
          have transactions, including borrowings with its officers and
          directors. In the opinion of management, such transactions were on
          substantially the same terms, including interest rates and collateral,
          as those prevailing at the time comparable transactions were entered
          into with other persons and did not involve more than a normal risk of
          collectibility or present any other unfavorable terms to the Bank.
          Loans to such borrowers, which in the aggregate exceeded $60,000 at
          December 31, 1996 are summarized as follows:

<TABLE>
                  <S>                           <C>
                  Balance beginning of year     $413,065
                  Payments                        13,881
                                                --------
                  Balance end of year           $399,184
                                                ========
</TABLE>

     A summary of slow loans follows:

<TABLE> 
<CAPTION> 
                                         Principal       Past Due
                                        Outstanding      Payments
                                        -----------     ----------
     <S>                                <C>            <C> 
     December 31, 1996
     First mortgage loans
       Conventional mortgage loans
           Single family dwellings        $  486,300   $   52,783
                                          ==========   ==========

     December 31, 1995
     First mortgage loans
       Conventional mortgage loans
           Single family dwellings        $  216,063   $    9,080
                                          ==========   ==========
</TABLE> 

     For the years ended December 31, 1996 and 1995 additional interest income
          before taxes amounting to $37,146 and $14,029, respectively, would
          have been recognized if interest on loans sixty days or more in
          arrears had been recorded based on original contract terms. The amount
          of interest included in interest income from the above loans as of
          December 31, 1996 amounted to $23,457.

     At December 31, 1996, the Bank had outstanding commitments to originate
          loans as follows:

<TABLE> 
<CAPTION> 
                                  Fixed Rate      Variable Rate
                                 (6.50%-7.25%)   (7 5/8%-9 1/8%)     Total
                                 -----------      -------------   ----------
              <S>                <C>             <C>              <C> 
              First mortgages    $  368,500      $  296,200       $  664,700
                                 ==========      ==========       ==========
</TABLE> 

                                      64
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

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

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                  --------------------------------------------

                                  (Continued)



6.   ACCRUED INTEREST RECEIVABLE

     Accrued interest receivable at December 31, 1996 and 1995, consists of the
          following:

 
<TABLE> 
<CAPTION> 
                                                   1996               1995
                                                 --------           --------
  <S>                                            <C>                <C>  
  Loans receivable                               $352,817           $335,151
  Mortgage-backed securities                       12,768              5,521
  Investment securities                            67,243             37,609
                                                 --------           --------
                                                 $432,828           $378,281
                                                 ========           ========
</TABLE> 
 

7.   OFFICE PROPERTIES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

<TABLE>
<CAPTION>
                                                         1996       1995
                                                       ---------  ---------
                  <S>                                  <C>        <C>
                  Land                                  $ 51,161   $ 51,161
                  Buildings and improvements             315,893    328,869
                  Furniture, fixtures and equipment      369,798    277,639
                  Leasehold improvements                 208,220    202,981
                                                        --------   --------
                                                         945,072    860,650
                  Accumulated depreciation               436,248    406,346
                                                        --------   --------
                                                        $508,824   $454,304
                                                        ========   ========
</TABLE>


     Depreciation expense for the years ended December 31, 1996, 1995, and 1994
          was $48,376, $36,945 and $34,632, respectively.

     Leasehold improvements relate to office space for the Bank's branch office
          and lending office. The branch office is being leased under the terms
          of an operating lease with renewal options for two successive five
          year terms which expire in May 2005. The lending office is being
          leased under the terms of an operating lease which expires in May
          2000, with renewal options for three successive five year terms. Land
          is being leased for the operation of an Automatic Teller Machine under
          the terms of an operating lease which expires May 2001, with renewal
          options for three successive three year terms. Annual rental on these
          leases was $38,380, $26,553, and $11,544 in 1996, 1995, and 1994,
          respectively.

                                      65
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

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

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                  --------------------------------------------

                                  (Continued)



7.   OFFICE PROPERTIES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS (Continued)

     The following is a schedule by years of future rental payments required
          under the operating leases for the remaining non-cancelable terms:

<TABLE>
<CAPTION>
<S>                              <C>
Year ending December 31, 1997     $ 38,550
                         1998       38,550
                         1999       38,550
                         2000       28,050
                         2001       18,650
                   Thereafter       59,500
                                  --------
                                  $221,850
                                  ========
</TABLE>


8.   FEDERAL HOME LOAN BANK STOCK

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

9.   SAVINGS DEPOSITS

<TABLE> 
<CAPTION> 
                                                     1996        1995
                                                  ----------  -----------
     <S>                                          <C>         <C> 
     A summary of savings deposits follows:
          Vacation
               3.0%                               $   18,783  $    19,488
                                                  ----------  -----------
 
          Christmas Clubs
               3.0%                                   60,693       50,644
                                                  ----------  -----------
 
          Passbook and Statement Accounts
               (weighted average 3.0%)             9,997,007   10,018,313
                                                  ----------  -----------
 
          Negotiable Order Withdrawal
               Accounts 2.00% and 2.25%            3,828,690    3,676,815
                                                  ----------  -----------
 
          Money Market Fund Accounts
               (weighted average 3.00% and 3.25%)  2,618,289    3,026,066
                                                  ----------  -----------
 
          Regular checking (non-interest bearing)    682,845      560,354
                                                  ----------  -----------
</TABLE>

                                      66
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

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

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                  --------------------------------------------

                                  (Continued)



9.   SAVINGS DEPOSITS (Continued)

<TABLE>
<CAPTION>
                                                       1996         1995
                                                    -----------  -----------
<S>                                                 <C>          <C>
     Individual Retirement Accounts
          (weighted average 5.15% and 5.83%)        $ 7,011,601  $ 7,086,240
 
     91-Day Certificates
          (weighted average 4.00% and 3.92%)          4,320,548    2,822,891
 
     Money Market Certificates (6 mos.)
          (weighted average 5.00% and 4.88%)          4,004,051    2,733,091
 
     1 Year Certificates
          (weighted average 4.25% and 5.21%)          5,265,227    5,726,004
                                                                            
     14 Month Certificates                                                  
          (weighted average 5.42% and 5.6%)           1,138,702      490,161
                                                                            
     18 Month Certificates                                                  
          (weighted average 5.30% and 5.26%)          2,000,807    2,281,338
                                                                            
     30 Month Certificates                                                  
          (weighted average 5.45% and 5.59%)          2,261,525    2,283,097
                                                                            
     3 1/2 Year Certificates                                                
          (weighted average 5.50%)                      176,717      170,420
                                                                            
     5 Year Certificates                                                    
          (weighted average 5.65% and 5.83%)          3,979,537    3,704,530 
                                                    -----------  -----------
 
                                                     30,158,715   27,297,772
                                                    -----------  -----------
 
                                                    $47,365,022  $44,649,452
                                                    ===========  ===========

     Weighted average cost of savings
          deposits for the period ended                    4.46%        4.65%
                                                         =======      =======
</TABLE> 

                                      67
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

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

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                  --------------------------------------------

                                  (Continued)



9.   SAVINGS DEPOSITS (Continued)

     A summary of certificate accounts by maturity as of December 31, 1996
          follows:

<TABLE>
<CAPTION>
                  <S>                       <C>
                  Under 12 months           $21,794,792
                  12 months to 24 months      1,262,388
                  24 months to 36 months        838,034
                  Over 36 months              6,263,501
                                            -----------
                                            $30,158,715
                                            ===========
</TABLE>

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

     Savings deposits include certificates of deposit in denominations of
          $100,000 or more aggregating $8,337,820 and $4,827,000 as of December
          31, 1996 and 1995.


10.  ADVANCES FROM FEDERAL HOME LOAN BANK

     At December 31, 1996, short-term advances consist of the following:

<TABLE>
<CAPTION>
           Maturity               Interest                                 
             Date                   Rate               December 31, 1996   
           --------              ---------             -----------------    
          <S>                    <C>                   <C>                 
          1/5/97                   ADJ-ARC                 $1,000,000      
          1/21/97                  ADJ-ARC                    750,000      
          6/6/97                 6.18% FRC                  1,750,000      
          7/8/97                   ADJ-DRC                  1,000,000      
                                                           ----------      
                                                                           
          Total short-term advances                        $4,500,000      
                                                           ==========       
</TABLE>

11.  INCOME TAXES

     Under the Internal Revenue Code in prior years, the Bank was allowed a
          special bad debt deduction related to additions to tax bad debt
          reserves established for the purpose of absorbing losses. The
          provisions of the Code permitted the Bank to deduct from taxable
          income an allowance for bad debts based on a percentage of taxable
          income before such deduction which was 8% for the years ended December
          31, 1995 and 1994. In 1996, the special bad debt deduction related to
          additions to tax bad debt reserves was repealed. In addition, the Bank
          must recapture into income the portion of its bad debt reserves above
          its 1987 level, over a six year period. The Bank qualifies for an
          additional two year deferral, therefore will begin to recapture the
          excess bad debt reserve in the tax year ending December 31, 1998. The
          Bank's excess bad debt reserve subject to recapture is approximately
          $326,000.

                                      68
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

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

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                  --------------------------------------------

                                  (Continued)



11.  INCOME TAXES (Continued)

     The Bank's income tax expense is different from amounts computed by
          applying the statutory federal income tax rate because of the
          following:

<TABLE>
<CAPTION>
                                                  1996         1995          1994
                                                ---------  ------------  ------------
              <S>                               <C>        <C>           <C>
              Current:
                Federal at 34%                   $177,262    $ 183,240   $ 189,037
                State                              48,409       37,701      41,901
 
              Increase (decrease) in
                taxes resulting from:
                  Special bad debt deduction                 (  16,601)  (  15,123)
                  Deferred income                  76,030    (   8,064)  (  21,067)
                Other                                                        6,753
                                                 --------    ---------    --------
                   Total                         $301,701    $ 196,276    $201,501
                                                 ========    =========    ========
</TABLE>


     Deferred income taxes (income tax benefits) result from timing differences
          in the recognition of income and expense for income tax and financial
          statement purposes. The source of these differences and the tax effect
          of each are as follows:

<TABLE>
<CAPTION>
                                                 1996          1995          1994
                                             ------------  ------------  ------------
             <S>                             <C>           <C>           <C>
             Loan fee income                  ($  17,639)  ($7,210)      ($   20,268)
 
             Advance interest payments on
                mortgages                     (    1,624)  (   854)      (       799)
 
             Employee benefit plans               41,662
 
             Provision for possible
                loan losses                       30,237
 
             Mortgage servicing rights            23,394
                                              ----------   -------       -----------
                                              $   76,030   ($8,064)      ($   21,067)
                                              ==========   =======       ===========
</TABLE>

                                      69
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

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

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                  --------------------------------------------

                                  (Continued)



11.  INCOME TAXES (Continued)

     The net deferred tax assets (liabilities) in the accompanying consolidated
          statements of financial condition include the following components:

<TABLE>
<CAPTION>
                                             1996       1995
                                          ----------  --------
              <S>                         <C>         <C>
              Deferred tax assets         $ 144,285    $89,156
              Deferred tax liabilities      147,162     18,669
                                          ---------    -------
              Net deferred tax assets
                 (liabilities)            ($  2,877)   $70,487
                                          =========    =======
</TABLE>

     At December 31, 1996, there is no valuation allowance maintained against
          the deferred tax assets. The Bank expects to fully realize the benefit
          of the deferred tax assets.


12.  RETAINED EARNINGS

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

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

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

                                      70
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

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

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                  --------------------------------------------

                                  (Continued)



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

     Quantitative measures established by regulation to ensure capital adequacy
          require the Bank to maintain minimum amounts and ratios of: 
          total risk-based capital and Tier I capital risk-weighted assets (as
          defined in the regulations), Tier I capital to adjusted total assets
          (as defined), and tangible capital to adjusted total assets (as
          defined). Management believes, as of December 31, 1996, that the Bank
          meets all the capital adequacy requirements to which it is subject.

     As of December 31, 1996, the most recent notification from the OTS, the
          bank was categorized as well capitalized under the regulatory
          framework for prompt corrective action. To remain categorized as well
          capitalized, the Bank will have to maintain minimum total risk-based,
          Tier I risk-based, and Tier I leverage ratios as disclosed in the
          following table. There are no events or conditions since the most
          recent notification that management believes have changed the Bank's
          prompt corrective action category.

                                      71
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

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

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                  --------------------------------------------

                                  (Continued)


13.  REGULATORY CAPITAL MATTERS (Continued)

<TABLE> 
<CAPTION> 
                                                                               To Be Well Capitalized  
                                                                                    under Prompt       
                                                                                  Corrective Action    
                                                 Actual                               Provisions       
                                         ----------------------                ----------------------- 
                                             Amount     Ratio                     Amount     Ratio     
                                         ------------ ---------                ----------- -----------  
<S>                                      <C>          <C>                      <C>         <C>         
As of December 31, 1996                       (in thousands)                        (in thousands)       
 Total risk-based capital
  (to risk-weighted assets)              $7,113         18.71%     >           $3,802    >       10.0%
                                                                   -                     -
 Tier I capital
  (to risk-weighted assets)               6,995         18.40%     >            2,281    >        6.0%
                                                                   -                     -
 Tier I capital
  (to adjusted total assets)              6,995         11.61%     >            3,013    >        5.0%
                                                                   -                     -
 Tangible capital
  (to adjusted total assets)              7,056         11.71%     >              904    >        1.5%
                                                                   -                     -
 
As of December 31, 1995
 Total risk-based capital
  (to risk-weighted assets)              $7,319         23.02%     >           $3,179    >       10.0%
                                                                   -                     -                           
 Tier I capital
  (to risk-weighted assets)               7,205         22.66%     >            1,907    >        6.0%
                                                                   -                     -
 Tier I capital
  (to adjusted total assets)              7,205         13.33%     >            2,702    >        5.0%
                                                                   -                     -
 Tangible capital
  (to adjusted total assets)              7,205         13.33%     >              811    >        1.5%
                                                                   -                     -
</TABLE>


14.  OFFICER, DIRECTOR, AND EMPLOYEE PLANS

     a.   Employee Stock Ownership Plan -- In conjunction with the plan of
          -----------------------------
               conversion, the Board of Directors approved a contributory
               Employee Stock Ownership Plan (ESOP) for employees who have
               attained age 21 and completed one year of service with the
               Corporation or its subsidiaries, effective January 1, 1994. The
               ESOP acquired 38,508 shares of common stock in November 1994 for
               $385,080 financed by a loan from the Company. Shares acquired
               with such loan proceeds are to be held in a suspense account for
               allocation among the participants as the loan is repaid. The loan
               agreement is secured by a pledge of the common stock owned by the
               ESOP and purchased with the proceeds of the loan. The outstanding
               loan balance is included as a liability in the accompanying
               consolidated statements of financial condition, and the
               Corporation's obligation related to the ESOP debt is reflected as
               a reduction in stockholders' equity. The loan is to be paid in
               annual installments of $38,508 plus interest at prime plus 1%
               (9.25% at December 31, 1996) over a ten year period. Payments
               began on December 31, 1995. The Bank contributes sufficient cash
               funds to the ESOP to repay the loan, plus such other amounts as
               the Corporation's Board of Directors may determine in its
               discretion.

                                      72
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

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

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                  --------------------------------------------

                                  (Continued)



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

     a.   Employee Stock Ownership Plan (Continued)
          -----------------------------            
               Contributions to the ESOP and shares released from the suspense
               account are to be allocated among participants on the basis of
               their annual wages subject to federal income tax withholding,
               plus any amounts withheld under a plan qualified under Sections
               125 or 401(k) of the Code and sponsored by the Corporation.
               Participants must be employed at least 500 hours in a calendar
               year in order to receive an allocation. Forfeitures will be
               reallocated to participants on the same basis as other
               contributions. Dividends paid on allocated shares are expected to
               be used to repay the ESOP loan, credited to participant accounts
               within the ESOP, or paid to participants; dividends on
               unallocated shares are expected to be used to repay the ESOP
               loan. The Corporation is to administer the ESOP.

               The Corporation accounts for its ESOP in accordance with
               Statement of Position 93-6. Accordingly, the debt of the ESOP is
               recorded as debt and shares pledged as collateral are reported as
               unearned ESOP shares, a reduction of stockholders' equity. As
               shares are released from collateral, the Bank records
               compensation expense in an amount equal to the fair value of the
               shares, and the shares become outstanding for earnings per share
               computations. Compensation expense is also recognized for
               Corporation dividends on unallocated shares paid or added to
               participant accounts. Compensation expense is reduced by the
               amount of the annual interest paid by the ESOP to service the
               loan issued to acquire the shares of stock. ESOP compensation
               expense was $36,884 and $41,548 in 1996 and 1995, respectively.
               The ESOP shares as of December 31, 1996 were as follows:

<TABLE>                                         
<CAPTION>                                       
                      <S>                                 <C>          
                      Shares released for allocation         7,702    
                      Unreleased shares                     30,806    
                                                          --------    
                       Total ESOP shares                    38,508    
                                                          ========    
                      Fair value of unreleased shares                 
                       at December 31, 1996               $485,195    
                                                          ========    
</TABLE>                                         

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

                                      73
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

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

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                  --------------------------------------------

                                  (Continued)



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

     b.   Stock-based Compensation Plans (Continued)
          ------------------------------            
               The Corporation contributed funds to the MRP to enable it to
               acquire the shares of stock that will be required to fund the MRP
               (18,174 shares). The number of shares awarded for the year ended
               December 31, 1995 was 17,507. Awards under the MRP are earned and
               non-forfeitable by a participant at the rate of one-third per
               year of service.

               The Company has elected to follow Accounting Principles Board
               Opinion No. 25, "Accounting for Stock Issued to Employees"
               (APB25) and related Interpretations in accounting for its
               employees stock option and management recognition plan because,
               as discussed below, the alternative fair value accounting
               provided for under FASB Statement No. 123, "Accounting for Stock-
               based Compensation." requires use of option valuation models that
               were developed for use in valuing employee stock. Under APB 25,
               because the exercise price of the Company's employee stock
               options equals the market price of the underlying stock on the
               date of grant, no compensation expense is recognized. 
               
               The $263,351 contributed to the MRP is being amortized to
               compensation expense as the plan participants become vested in
               those shares. Compensation expense in connection with the MRP was
               $46,187 and $69,617, in 1996 and 1995, respectively. The
               unamortized cost, which is comparable to deferred compensation,
               is reflected as a reduction of stockholders' equity.

               The Company's 1995 Stock Option Plan (Five-Year Options) has
               authorized the grant of options to management personnel for up to
               44,519 shares of the Company's common stock. All options granted
               have 5 year terms and vest ratably over their respective terms.

               The effect of applying FASB Statement No. 123 to the results of
               operations for the Company results in net earning and earnings
               per share that are not materially different than reported.

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

                                      74
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

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

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                  --------------------------------------------

                                  (Continued)


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

<TABLE>
<CAPTION>
                                                                                1996                        1995                    
                                                                     --------------------------  -------------------------          
                                                                          Weighted-Average           Weighted-Average               
                                                                      Shares    Exercise Price    Shares    Exercise Price          
                                                                                                                                    
                                                                     ---------  ---------------  ---------  --------------          
                                                                                                                                    
    <S>                                                              <C>        <C>              <C>        <C>                     
    Outstanding at                                                                                                                  
      beginning of year                                                44,519         $  11.00        -0-           $   --          
    Granted                                                                                        44,519            11.00          
    Exercised                                                        ( 12,034)                                                      
                                                                     --------                      ------ 
   Outstanding at                                                                                                                  
      end of year                                                      32,485                      44,519                           
                                                                     ========                    ========                           
                                                                                                                                    
    Options exercisable                                                                                                             
      at year end                                                       6,497                      12,034                           

    Weighted-average fair                                                                                                           
      Value of options                                                                                                              
      granted during                                                                                                                
      the year                                                                                     $11.00                           
                                                                                                                                    
    The weighted average remaining contractual life of those                                                                        
     options was 4.6 years.                                                                                                         
                                                                                                                                    
    The following table summarizes information about the                                                                            
     management recognition                                                                                                         
       plan at December 31:                                                                                                         
                                                                         1996             1995                                      
                                                                     --------         --------                                      
                                                                                                                                    
       Outstanding at beginning of year                                12,994                0                                      
       Shares awarded                                                                   17,807                                      
       Vested and paid shares                                        (  2,599)        (  4,813)          
                                                                     --------         --------                           
       Outstanding at end of year                                      10,395           12,994                                      
                                                                     ========         ========   
</TABLE>

     During 1995, the Corporation adopted a stock option plan for the benefit of
     directors, selected officers, and other key employees. The number of shares
     of common stock deliverable pursuant to awards is not to exceed 10% of the
     shares of common stock issued on the date of reorganization (48,136
     shares). The plan provides for the granting of options for the common
     shares of the Corporation at the fair market value at the time the options
     are granted. The term of each option awarded is to be determined by a
     committee of the Board of Directors, but shall not exceed ten years. The
     term of an option shall not exceed five years for employees owning more
     than 10% of the out-standing common stock at the time the option is
     granted. Discretionary stock appreciation rights may be granted in
     conjunction with, or independently of, any options granted under the Plan.
     Upon exercise of a stock appreciation right, the related option, or portion
     thereof, is cancelled. As of December 31, 1996, 6,497 stock options were
     granted. No stock appreciation rights have been granted as of December 31,
     1996.

                                      75
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

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

                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                  --------------------------------------------

                                  (Continued)


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

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

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

          The Directors' Plan is unfunded. All benefits will be paid from the
          Bank's general assets. The Bank recognizes annual compensation expense
          as the benefits become vested. The amount of compensation expense
          incurred by the Bank in connection with the plan for the years ended
          December 31, 1996 and 1995 was $42,000.


15.  PENSION PLAN

     The Bank has a defined contribution pension plan covering all full-
        time employees who meet certain eligibility requirements as to age and
        length of service. The plan is funded by annual employer contributions
        determined at the rate of 10% of compensation of eligible employees.
        Pension costs charged to operations in 1996, 1995 and 1994 amounted to
        $51,741, $61,732, and $42,861, respectively.

                                      76
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

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

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                  --------------------------------------------

                                  (Continued)



16.  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

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

     The following commitments are outstanding as of December 31:

<TABLE>
<CAPTION>
                                         1996        1995
                                      ----------  ----------
          <S>                         <C>         <C>
          Unfunded lines of credit    $  963,700  $  373,000
          Loan commitments               664,700     755,000
                                      ----------  ----------
                                      $1,628,400  $1,128,000
                                      ==========  ==========
</TABLE>

     The Bank's exposure to credit loss in the event of non-performance by the
        other party to these instruments is represented by the contractual
        amount of the instrument. The Bank uses the same credit policies in
        granting such loan commitments as it does for on-balance sheet
        instruments. The Bank generally requires collateral to support such
        financial instruments with credit risk, which generally consists of the
        right to receive a first mortgage on improved or unimproved real estate
        when performance under the contract occurs (see Note 5).

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

17.  EARNINGS PER SHARE

     During 1996, options to acquire 6,497 shares of the Corporation's
        stock for $11 per share were vested (see Note 14). The options expire
        May 2006.

                                      77
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

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

                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                 --------------------------------------------

                                  (Continued)



17.  EARNINGS PER SHARE (Continued)

     Earnings per common share and common share equivalent were computed
        by dividing net income by the weighted average number of shares of
        common stock and common stock equivalents outstanding during the year.
        The number of common shares was increased by the number of shares
        issuable on the exercise options when the market price of the common
        stock exceeds the exercise price of the options. This increase in the
        number of common shares was reduced by the number of common shares that
        are assumed to have been purchased with the proceeds from the exercise
        of the options; those purchases were assumed to have been made at the
        average price of the common stock during that part of the year when
        options were outstanding and the market price of the common stock
        exceeded the exercise price. The weighted average number of shares of
        common stock and common stock equivalents outstanding was 438,312,
        442,583 and 61,878 in 1996, 1995 and 1994, respectively.

     Earnings per common share-fully diluted were determined on the
        assumption that the options were exercised on May 31, 1996 (the date
        they became vested). Outstanding shares were increased as described
        above, except that purchases of common stock are assumed to have been
        made at the year-end price of $15.75. The weighted average number of
        shares of common stock and common stock equivalents outstanding for
        computation of earnings per common share-fully diluted was 438,375 in
        1996.


18.  FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

        Securities
        ----------

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

                                      78
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

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

                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                 --------------------------------------------

                                  (Continued)
                                        


18.  FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

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

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

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

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

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

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

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

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

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

     The estimated fair values of financial instruments at December 31, 1996 are
     as follows:

                                      79
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

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

                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                 --------------------------------------------

                                  (Continued)
                                        
18.  FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

<TABLE> 
<CAPTION> 
                                                               Estimated
                                                 Carrying         Fair
                                                  Value           Value
                                              -------------   ---------------
     <S>                                      <C>             <C> 
     Financial assets                                                        
      Cash and cash equivalents                  $ 2,180,622      $ 2,180,622
      Investment securities                                                  
       Held to maturity                            2,490,069        2,489,174
       Available for sale                            496,358          496,358
      Mortgage-backed securities                                             
       Held to maturity                              531,775          532,631
       Available for sale                          1,633,338        1,633,338
      Loans held for sale                          1,707,883        1,716,993
      Loans receivable                            49,779,988       50,720,538
      Investment in stock of FHLB                    422,900          422,900
     Financial liabilities                                                   
      Savings deposits                            47,365,022       47,401,778
      Employee stock ownership plan debt             308,064          308,064
</TABLE>

     The estimated fair values of financial instruments at December 31, 1995 are
as follows:

<TABLE>
<CAPTION>
                                                                 Estimated
                                                     Carrying       Fair
                                                       Value        Value
                                                    -----------  -----------
     <S>                                            <C>          <C>
     Financial assets
       Cash and cash equivalent                     $ 2,252,544  $ 2,252,544
       Investment securities                                                
         Held to maturity                             2,025,015    2,024,859
         Available for sale                             227,724      227,724
       Mortgage-backed securities                                           
         Available for sale                             872,369      878,485
       Loans held for sale                              671,600      691,301
       Loans receivable                              46,482,054   47,702,207
       Investment in stock of FHLB                      422,900      422,900
     Financial liabilities                                                  
       Savings deposits                              44,649,452   44,935,164
       Employee stock ownership plan debt               346,572      346,572 
</TABLE>

                                      80
<PAGE>
 
                     CECIL BANCORP, INC. AND SUBSIDIARIES
                     ------------------------------------

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

                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                 --------------------------------------------

                                  (Continued)


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

     The following condensed statement of financial position as of December 31,
        1996 and 1995 and condensed statements of income and cash flows for the
        years then ended for Cecil Bancorp, Inc. should be read in conjunction
        with the consolidated financial statements and notes thereto. The
        Corporation was incorporated July 1994 and on November 10, 1994,
        acquired all of the capital stock of the Bank upon its conversion from
        mutual to stock form. Prior to the conversion, the Corporation did not
        engage in any material operations.


                       Statements of Financial Condition

<TABLE> 
<CAPTION> 
                                     Assets

                                                                   December 31,       
                                                             ------------------------ 
                                                                1996         1995     
                                                             ----------  ------------ 
     <S>                                                     <C>         <C>          
     Cash                                                    $  260,996    $  149,072 
     Investment in Cecil Federal Savings Bank                 3,568,977     3,718,976 
     Deferred taxes                                               8,119         6,440 
     Prepaid expenses                                            50,364        30,001 
                                                             ----------    ---------- 
                                                                                      
                                                             $3,888,456    $3,904,489 
                                                             ==========    ========== 
                                                                                      
                         Liabilities and Stockholders' Equity                                                 
                                                                                      
      Other Liabilities                                      $   27,254    $   16,676 
      Employee stock ownership debt                             308,064       346,572 
                                                             ----------    ---------- 
                                                                335,318       363,248 
                                                             ----------    ----------  
                                                                                      
      Stockholders' Equity                                                            
         Common stock, $.01 par value                                                 
           Authorized:  4,000,000 shares                                              
           Issued and outstanding:  481,361 shares                4,694         4,814 
         Additional paid in capital                           3,940,728     3,963,671 
      Employee stock ownership debt                            (308,064)     (346,572)
      Deferred Compensation Management                                                
         Recognition Plan                                      (156,047)    ( 193,734)
      Retained earnings                                          71,827       113,062 
                                                              ---------    ---------- 
                                                                                      
             Total stockholders' equity                       3,553,138     3,541,241 
                                                              ---------     ----------  
                                                                                    
             Total liabilities and stockholders' equity      $3,888,456    $3,904,489 
                                                             ==========    ==========
</TABLE>

                                      81
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

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

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                  --------------------------------------------

                                  (Continued)



19.  CECIL BANCORP, INC. - HOLDING COMPANY ONLY FINANCIAL INFORMATION
     (Continued)

                              Statements of Income

<TABLE>
<CAPTION>
                                                                        Year ended December 31,
                                                                    -------------------------------
                                                                         1996            1995
                                                                    ---------------  --------------                   
     <S>                                                            <C>              <C> 
     Equity in earnings of Cecil Federal Savings Bank                  $ 400,001       $ 375,067 
                                                                                                 
     Operating expenses                                                                          
        Compensation and benefits                                         88,203          71,277 
        Other                                                             25,959          23,081 
                                                                       ---------       --------- 
                                                                         114,162          94,358 
                                                                       ---------       --------- 
     Net income before income taxes                                      285,839         280,709 
                                                                                                 
     Income taxes                                                                                
        Current                                                       (   27,391)    (    30,001)
           Deferred                                                   (    1,679)    (     6,440)
                                                                      ----------     -----------
                                                                      (   29,070)    (    36,441)
                                                                      ----------     -----------                           
     Net income                                                        $ 314,909       $ 317,150 
                                                                      ==========     =========== 
</TABLE> 

                            Statements of Cash Flows

<TABLE> 
<CAPTION> 
                                                                       Year ended December 31,
                                                                    ------------------------------
                                                                         1996              1995
                                                                    ------------       ------------
     <S>                                                            <C>                <C>
     Cash flows from operating activities
        Cash paid to suppliers and employees                         ($   65,897)      ($   86,544)
        Dividends received from Cecil Federal Savings Bank               550,000                   
        Income taxes refunded                                              7,028                   
                                                                      ----------       -----------            
     Net cash provided (used) by operating activities                    491,131       (    86,544)
     Cash flows from financing activities                                                          
        Proceeds from sale of common stock                               178,799                   
        Unearned ESOP compensation decrease                               38,508            38,508 
        Dividends paid                                               (   243,671)      (   247,997)
        Purchase of MRP stock                                                          (   193,734)
        Purchase of common stock                                     (   352,843)                  
                                                                    ------------        -----------
     Net cash used by financing activities                           (   379,207)      (   403,223)
                                                                    ------------      ------------

     Net increase (decrease) in cash                                     111,924       (   489,767)
                                                                                                   
     Cash                                                                                          
        Beginning of year                                                149,072           638,839  
                                                                      ----------       ------------  
                                                                                                   
        End of year                                                   $  260,996        $  149,072  
                                                                      ==========       ===========  
</TABLE>

                                      82
<PAGE>
 
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, 1996.

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."

     (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 are
          --------------------                                         
incorporated by reference in Item 7 hereof:


               Independent Auditors' Report

                                      83 
<PAGE>
 
               Consolidated Statements of Financial Condition as of December 31,
               1996 and 1995

               Consolidated Statements of Operations for the Years Ended
               December 31, 1996, 1995 and 1994

               Consolidated Statements of Shareholders' Equity for the Years
               Ended December 31, 1996, 1995 and 1994

               Consolidated Statements of Cash Flows for the Years Ended
               December 31, 1996, 1995 and 1994

               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 *

     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 ***

     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.

                                      84
<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 21, 1997              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.
 
 
By: /s/ Mary B. Halsey                               Date:  March 21, 1997
    ---------------------------------------------- 
    Mary B. Halsey
    President and Chief Executive Officer
    (Principal Executive Officer)
 
By: /s/ Mary B. Halsey                               Date:  March 21, 1997
    ----------------------------------------------
    Mary B. Halsey
    President and Chief Executive Officer
    (Principal Financial and Accounting Officer)
 
By: /s/ Bernard L. Siegel                            Date:  March 21, 1997
    ----------------------------------------------
    Bernard L. Siegel
    Chairman of the Board
 
By: /s/ Thomas L. Foard                              Date:  March 21, 1997
    ----------------------------------------------
    Thomas L. Foard
    Secretary and Director
 
By: /s/ William F. Burkley                           Date:  March 21, 1997
    ----------------------------------------------
    William F. Burkley
    Director
 
By: /s/ Howard J. Neff                               Date:  March 21, 1997
    ----------------------------------------------
    Howard J. Neff
    Director
 
By: /s/ Michael J. Scibinico                         Date:  March 21, 1997
    ----------------------------------------------
    Michael J. Scibinico
    Director
 
By: /s/ Doris P. Scott                               Date:  March 21, 1997
    ----------------------------------------------
    Doris P. Scott
    Director
 
By: /s/ Howard B. Tome                               Date:  March 21, 1997
    ----------------------------------------------
    Howard B. Tome
    Director
<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 ***
         
   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).