<PAGE>
 
                              CECIL BANCORP, INC.

                               ANNUAL REPORT FOR
                                THE YEAR ENDED
                               DECEMBER 31, 1997
<PAGE>
 
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>

                                                                For the Year Ended                    
                                                                   December 31,            Change     
                                                               --------------------  ---------------- 
                                                                 1997       1996     Amount   Percent 
                                                               --------   ---------  ------   ------- 
                                                                  (In thousands)      (In thousands)  
<S>                                                            <C>        <C>        <C>      <C>      
Results of Operations:
---------------------
  Interest income........................................       $  5,018   $  4,655   $  363     7.8%
  Interest expense.......................................          2,438      2,236      202     9.0
  Net interest income....................................          2,580      2,419      161     6.7
  Provision for loan losses..............................             87        103      (16)  (15.1)
  Net interest income after provision
   for loan losses.......................................          2,493      2,316      177     7.6
  Non-interest income....................................            352        316       36    11.6
  Non-interest expense (a)...............................          1,843      2,015     (173)   (8.6)
  Federal income taxes...................................            437        302      134    44.8
  Net earnings (b).......................................            566        315      251    79.6
</TABLE>
 
<TABLE>
<CAPTION> 
                                                                   December 31,            Change     
                                                               --------------------  ---------------- 
                                                                 1997       1996     Amount   Percent 
                                                               --------   ---------  ------   ------- 
                                                              (In thousands, except shares outstanding) 
<S>                                                            <C>        <C>        <C>      <C>                    
Financial Position:
------------------
  Total assets...........................................       $ 63,660   $ 60,264   $3,396     5.6%
  Loans receivable and mortgage-backed
   securities (c)........................................         56,495     53,653    2,842     5.3
  Deposits...............................................         52,954     47,365    5,589    11.8
  Stockholders' equity...................................          7,484      7,053      431     6.1
  Number of shares outstanding (actual)..................        470,182    469,358      824     0.2
 
-------------------------
</TABLE>
(a)  For the year ended December 31, 1996, includes a one-time special
     assessment of $270,000 imposed by the Omnibus Consolidated Appropriations
     Act of 1996 to fully fund the Savings Association Insurance Fund ("SAIF").
(b)  For the year ended December 31, 1996, after-tax effect to net income of the
     special assessment to fund the SAIF was $166,000.  Without the premium, net
     earnings would have been $481,000, a 51.7% increase over net earnings for
     1995.
(c)  Includes loans held-for-sale and mortgage servicing rights.

                                       1
<PAGE>
 
SELECTED CONSOLIDATED FINANCIAL INFORMATION

<TABLE> 
<CAPTION> 

                                                   At December 31,                  
                                    ----------------------------------------------- 
                                      1997      1996      1995      1994      1993  
                                    --------  --------  --------  --------  -------- 
                                                   (In Thousands)                   
<S>                                 <C>       <C>       <C>       <C>       <C>      
Total amount of:
  Assets..........................   $63,660   $60,264   $53,991   $47,517   $44,783
  Loans receivable, net (a).......    54,678    51,488    47,154    39,181    34,485
  Cash and investment securities..     5,368     5,167     4,500     6,045     8,498
  Mortgage-backed securities......     1,817     2,165       872     1,026       545
  Savings accounts................    52,954    47,365    44,649    39,500    41,064
  Borrowings......................     1,750     4,500     1,250        --        --
  Stockholders' Equity............     7,484     7,053     7,031     7,073     3,216
                                                                           
Number of:                                                                 
  Real estate loans outstanding...     1,202     1,194     1,131     1,328     1,023
  Savings accounts................     7,222     6,755     6,533     6,326     6,302
  Offices.........................         2         2         2         2         2
 
-------------------------
</TABLE>
(a)  Includes loans held for sale and mortgage-servicing rights.



CONSOLIDATED SUMMARY OF OPERATIONS

<TABLE> 
<CAPTION> 
 
                                                 Year Ended At December 31,                                                   
                                    -------------------------------------------------                                  
                                      1997      1996       1995      1994      1993                                   
                                    --------  --------   --------  --------  --------                                 
                                                   (In Thousands)                  
<S>                                 <C>       <C>        <C>       <C>       <C>      
Interest income..................     $5,018    $4,655     $3,975    $3,218    $3,249
Interest expense.................      2,438     2,236      1,867     1,557     1,609
Net interest income before                                                  
 provision for loan losses.......      2,580     2,419      2,108     1,661     1,640
Provision for loan losses........         87       103         35        34        28
                                      ------    ------     ------    ------    ------
Net interest income after                                                  
 provision for loan losses.......      2,493     2,316      2,073     1,627     1,612
Noninterest income...............        352       316        234       223       257
Noninterest expense..............      1,843     2,015 (a)  1,794     1,334     1,209
Income before income taxes and                                              
 cumulative effect of accounting                                            
 change..........................      1,003       617        513       516       660
Federal income tax expense.......        437       302        196       202       257
                                      ------    ------     ------    ------    ------
Income before cumulative effect                          
 of accounting change............        566       315        317       314       403
Cumulative effect of accounting                          
 change..........................         --        --         --        --        10
                                      ------    ------     ------    ------    ------
Net income.......................     $  566    $  315 (b) $  317    $  314    $  413
                                      ======    ======     ======    ======    ======
 
-------------------------
</TABLE>
(a)  For the year ended December 31, 1996, includes a one-time special
     assessment of $270,000 imposed by the Omnibus Consolidated Appropriations
     Act to fully fund the SAIF.
(b)  After-tax effect to net income of the special assessment to fully fund the
     SAIF which was $166,000.  Without the special assessment, net earnings
     would have been $481,000.

                                       2
<PAGE>
 
KEY OPERATING RATIOS
<TABLE>
<CAPTION>
 
 
                                                           At or for the
                                                     Year Ended December 31,
                                                   ---------------------------
                                                    1997      1996      1995
                                                   -------  -------    -------
<S>                                                <C>      <C>        <C>
 
PERFORMANCE RATIOS:
   Return on average assets (net income divided
      by average total assets)...................     .90%     .54% (a)    .62%
 
   Return on average equity (net income
      divided by average equity).................    7.72     4.50  (b)   4.53
 
   Equity-to-assets ratio (average equity
      divided by average total assets)...........   11.66    12.07        13.77
 
   Interest rate spread..........................    4.01     3.90         3.88
 
   Net interest margin...........................    4.35     4.32         4.33
 
   Average interest-earning assets as a
     percentage of average interest-bearing
     liabilities.................................  108.32   110.63       111.69
 
ASSET QUALITY RATIOS:
   Nonperforming loans as a percentage
      of total loans.............................    1.10      .50          .46
 
   Nonperforming assets as a percentage
      of total assets............................     .95      .43          .40
 
   Net charge-offs to average loans..............     .06      .04          .06
 
   Allowance for loan losses as a
     percentage of total loans...................     .32      .23          .24
 
   Allowance for loan losses as a
     percentage of non-performing loans..........   29.31%   40.14%       52.77%
 
-------------------------
</TABLE>
(a)  For the year ending December 31, 1996, this number is net of after-tax
     effect of special SAIF assessment.  Without the special assessment, this
     ratio would have been .83%.
(b)  For the year ending December 31, 1996, this number is net of after-tax
     effect of special SAIF assessment.  Without the special assessment, this
     ratio would have been 6.88%.

                                       3
<PAGE>
 
                     BUSINESS OF THE COMPANY AND THE BANK

CECIL BANCORP, INC.

     Cecil Bancorp, Inc. (the "Company") was incorporated under the laws of the
State of Maryland in July 1994 at the direction of the Board of Directors of
Cecil Federal Savings Bank (the "Bank" or "Cecil Federal") for the purpose of
serving as a savings institution holding company of Cecil Federal upon the
acquisition of all of the capital stock issued by Cecil Federal in its
conversion from mutual to stock form (the "Conversion").  Substantially all of
the Company's assets consists of the outstanding capital stock of Cecil Federal.
The Company's principal business is the business of Cecil Federal and its wholly
owned subsidiaries.  Therefore, most of the discussion in this Annual Report
relates to the business of the Bank rather than the business of the Company.

CECIL FEDERAL SAVINGS BANK

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

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

     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.


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

GENERAL

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

                                       4
<PAGE>
 
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.

YEAR 2000 ISSUES

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

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

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

     In June 1997, the Bank prepared an action plan to begin evaluating our
systems and software products.  The Bank has implemented a strategy to arrive at
a solution to meet the Year 2000 requirements.

     The Bank's plan consists of the following:

     Problem Awareness : The Bank is aware of the problems that could
     -----------------                                               
potentially arise with the year 2000 problem.  As of June 1997, the Bank began
to analyze what systems and software needed to be reviewed to prepare well in
advance.

     Assessment Phase : The Bank assessed and implemented a program needed to
     ----------------                                                        
meet system and software requirements prior to December 31, 1997.  The Bank has
implemented plans that will limit its exposure to the Year 2000 problem.  The
Bank has made contacts with all its third party vendors to assess the Bank's
exposure to the problem.  These include those that provide Account & Item
Processing, System Hardware Setup and ATM Software; General Ledger Software; ATM
Transaction Processing; the ATM Service Provider; ATM Software; Financial
Reporting Software; Fed-Line Software; On-Line Bank Service Software; Loan Sales
Software; Loan Documentation Software; HMDA/Geocoding Software; Payroll
Processing; Computer Hardware; Spreadsheet Software; and Word Processing
Software.

     All of the bank's vendors have been proactive in addressing the Year 2000
problem.  The Bank's vendors have in place or will have in place procedures to
minimize the Bank's risk to the Year 2000 problem by December 31, 1998.

     Renovation Phase : The Bank will review the status of its vendor's systems
     ----------------                                                          
and software as of February 1998 and determine the processes that need to be
updated.  The assessment phase will be reviewed and problem areas will be
identified.  Solutions to the problems will be discussed and procedures to
eliminate the problems will be established

                                       5
<PAGE>
 
and reviewed with the Board of Directors and management of the Bank.  This
process will be completed by March 31, 1998.

     Initial steps have been completed to assure compliance with the Year 2000
problem.  The Bank has contracted with its major software vendor to implement a
new front-end processing system to be installed in the third quarter of 1998.
This system is already Year 2000 compliant.  This system replaces our previous
teller system which was not compliant.  In addition, the Bank plans to install
20 new personal computers and two file server computers, which are also Year
2000 compliant.  These two major investments along with continued evaluation of
our existing systems and software products will provide some assurances as to
compliance to Year 2000 issues.

     Validation Phase:  The Bank will validate any decision making by thoroughly
     ----------------                                                           
assessing the systems compatibleness with the Year 2000 issues.  Validations
will be recorded and presented to the Board of Directors.  The target date for
the validation phase is June 30, 1998.

     Implementation Phase: The Bank will monitor the implementation of the Year
     --------------------                                                      
2000 assessment and report results to the Board of Directors.  The Bank will
continue to stress with its vendors the importance of this project.  The Bank
will keep in continual contact with its vendors until a final solution and
implementation has been completed.  All plans are to be completed as outlined
above.  The implementation phase is to be completed by December 31, 1998.

     The Bank has budgeted $150,000 for the Year 2000 issues which consists of
expenditures for computer systems, computer hardware, software updates, and
installation.  In addition, compliance assessment and compliance testing will be
budgeted.  The impact of these expenditures are expected to have a minor effect
upon the company's results of operations, liquidity, and capital resources.  The
majority of the expenditures will be capital expenditures that will be
depreciated over a five year period.

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,
1997, adjustable rate mortgage loans constituted approximately 73.9% 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.

                                       6
<PAGE>
 
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996.

     The Company's assets increased by $3,396,607, or 5.6% to $63,660,230 at
December 31, 1997 from $60,263,623 at December 31, 1996.  The Company's emphasis
on expanding the loans receivable portfolio continued.  The loans receivable
portfolio increased by $3,492,106, or 7.0% to $53,211,517 at December 31, 1997
from $49,719,411 at December 31, 1996.  Cash and interest-earning cash increased
as a result of increased savings deposits, the sale of mortgage loans and
prepayments of the loan portfolio.  The Company's investments held to maturity
increased by $507,447, or 20.4% to $2,997,516 at December 31, 1997 from
$2,490,069 at December 31, 1996.  Mortgage backed securities held to maturity
decreased by $120,134, or 22.6% to $411,641 at December 31, 1997 from $531,775
at December 31, 1996.  Mortgage backed securities held for investment decreased
by $227,855, or 14.0% to $1,405,483 at December 31, 1997 from $1,633,338 at
December 31, 1996.  The decreases in the mortgage backed securities were due to
regular principal reductions on mortgage loans securing these investments.
Plant, Property, and Equipment increased by $150,640, or 29.6% to $659,464 at
December 31, 1997 from $508,824 at December 31, 1996.  The increases were due
mainly to remodeling costs at the main office and North East branches, the
installation of our new remote ATM in Chesapeake City and the installation of
safe deposit boxes at the main office and North East branch.

     The Company's liabilities increased $2,966,110, or 5.6% to $56,176,647 at
December 31, 1997 from $53,210,537 at December 31, 1996.  During the year ended
December 31, 1997, the Company was able to increase savings deposits as a result
of additional marketing campaigns, and also reduce advances due to the Federal
Home Loan Bank of Atlanta.  Savings Deposits increased $5,588,676, or 11.8% to
$52,953,698 at December 31, 1997 from $47,365,022 at December 31, 1996.
Advances from the Federal Home Loan Bank of Atlanta decreased $2,750,000, or
61.1% to $1,750,000 at December 31, 1997 from $4,500,000 at December 31, 1996.
Other liabilities increased $196,943, or 61.4% to $517,604 at December 31, 1997
from $320,661 at December 31, 1996.

     The Company's stockholder's equity increased by $430,497, or 6.1% to
$7,483,583 at December 31, 1997 from $7,053,086 at December 31, 1996.  The
increase was primarily due to an increase in retained earnings of $289,025, or
8.1%.  For the year ended December 31, 1997, the Company paid its regular
annualized dividends of $.40 per share plus a special dividend of $.23 per
share.

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 1997, 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 increased $250,757, or 79.6% to $565,666 for the
     ----------                                                             
year ended December 31, 1997, from $314,909 for the same period in 1996.  The
annualized return on average assets and annualized return on average equity were
0.90% and 7.72% respectively, for the year ended December 31, 1997.  This
compares to an annualized return on average assets of 0.54% and 4.50%
respectively for the same period in 1996.

     Net Interest Income. Net interest income, the Company's primary source of
     -------------------                                                      
income, increased $160,887, or 6.7% to $2,580,223 for the year ended December
31, 1997, from $2,419,336 for the year ended December 31, 1996. The weighted
average yield on all interest earning assets increased from 8.32% for the year
ended December 31, 1996, 

                                       7
<PAGE>
 
to 8.46% for the year ended December 31, 1997. The weighted average rate paid on
interest bearing liabilities increased from 4.42% for the year ended December
31, 1996 to 4.45% for the year ended December 31, 1997.

     Interest on loans receivable increased by $287,228, or 6.7% to $4,588,913
for the year ended December 31, 1997 from $4,301,685 for the year ended December
31, 1996.  The increase is attributable to both an increase in the weighted
average yield and an increase in the average balance outstanding.  The weighted
average yield increased from 8.60% for the year ended December 31, 1996 to 8.68%
for the year ended December 31, 1997.

     Interest on mortgage backed securities increased $24,228, or 22.0% to
$134,423 for the year ended December 31, 1997 from $110,195 for the year ended
December 31, 1996.  The increase is a result of an increase in the average
balance outstanding.  Although the bank purchased additional mortgage backed
securities during the quarter ended September 1996, there have been no new
purchases of mortgage backed securities during 1997.

     Interest on investment securities increased $10,444, or 7.9% to $142,869
for the year ended December 31, 1997 from $132,425 for the year ended December
31, 1996.  The increase is a result of an increase in the weighted average
yield.  Interest on other investment securities increased $41,175, or 37.1% to
$152,161 for the year ended December 31, 1997 from $110,986 for the year ended
December 31, 1996 as a result of an increase in both the weighted average yield
and the average balance outstanding.  Other investments primarily are short term
liquidity accounts with variable rates.

     Interest paid on savings deposits increased $170,335, or 8.1% to $2,271,723
for the year ended December 31, 1997 from $2,101,388 for the year ended December
31, 1996.  The increase was the result of an increase in the average balance
outstanding.  Interest expense paid on borrowings increased $31,853, or 23.7% to
$166,420 for the year ended December 31, 1997 from $134,567 for the year ended
December 31, 1996.  The increase was a result of an increase in the average cost
of funds.

     Provision for Loan Losses. Provisions for loan losses decreased $15,500, or
     -------------------------                                                  
15.1% to $87,000 for the year ended December 31, 1997 from $102,500 for the year
ended December 31, 1996.  The provision was decreased 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 realized value of the
underlying collateral.  The evaluation process in ongoing and results in
variations in Cecil Federal's provision for loan losses in various periods.

     Noninterest income.  Noninterest income increased $36,500, or 11.6% to
     -------------------                                                   
$352,140 for the year ended December 31, 1997 from $315,640 for the year ended
December 31, 1996.  Loan servicing fees increased 16.1%, up $4,844 for the year
ended December 31, 1997 over the same period in 1996.  This was a result of the
increase in balances of the servicing portfolio.  Gains on sale of loans
decreased $37,371, or 44.3% to $46,905 for the year ended December 31, 1997 from
$84,276 for the year ended December 31, 1996.  The decrease was attributable to
a decline in the dollar volume of loan sales and the decreased yield spread
between the market value at the time of origination and the sale of fixed-rate
loans.  Other fees increased $57,173 or 95.2% to $117,244 for the year ended
December 31, 1997 from $60,071 for the year ended December 31, 1996.  Increases
were primarily attributable to increases in fee income from savings transaction
accounts.

     Noninterest Expense.  Noninterest expense decreased $173,087, or 8.6% to
     --------------------                                                    
$1,842,779 for the year ended December 31, 1997 from $2,015,866 for the year
ended December 31, 1996.  The Company experienced an increase in compensation
and benefits of $58,837, or 6.0% to $1,031,978 for the year ended December 31,
1997 from $973,141 for the year ended December 31, 1996.  The increase can be
attributable to general merit increases and costs of benefits and the hiring of
an additional full-time employee.  Equipment and data processing expense
increased $27,378, or 17.3% to $185,507 for the year ended December 31, 1997 
from $158,129 for the year ended December 31, 1996.  The increase 

                                       8
<PAGE>
 
can be attributed to overall company growth of accounts and the installation of
a new remote ATM. The Company also experienced a decline in the amount paid to
the Savings Association Insurance Fund during the year ended December 31, 1997.
Lower premium rates became effective January 1, 1997. The Company's SAIF premium
declined $345,403, or 88.1% to $46,592 for the year ended December 31, 1997 as
compared to $391,995 for the year ended December 31, 1996. The Company paid the
lowest premium for FDIC/SAIF insurance among savings institutions during 1997,
being 6.48 cents per thousand dollars of deposits. Other expenses increased
$75,918, or 19.4% to $468,119 for the year ended December 31, 1997 from $392,201
for the year ended December 31, 1996. The increase is attributable to an
increase in advertising & promotion expense, loan expense, stationery & office
supplies, postage, meeting expense, and charitable contributions.

     Income Taxes.  Income tax expense for the year ended December 31, 1997 and
     -------------                                                             
December 31, 1996 was $436,918 and $301,701 respectively, which equates to
effective rates of 43.6% and 48.9%, respectively.

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.

                                       9
<PAGE>
 
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS

     The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated.  Such yields and costs
are derived by dividing income or expense by the average monthly balance of
assets or liabilities, respectively, for the periods presented.  Average
balances are derived from month-end balances.  Management does not believe that
the use of month-end balances instead of daily balances has caused any material
difference in the information presented.
<TABLE>
<CAPTION>
 
                                                                          Year Ended December 31,
                                             -----------------------------------------------------------------------------------
                                                   1997                              1996                        1995
                                             ---------------------------  ---------------------------  -------------------------
                                                                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)...................  $52,884    $4,589     8.68%  $50,049    $4,302     8.60%  $44,243    $3,698   8.36%
   Investment securities...................    2,498       143     5.72     2,557       132     5.16     2,387       136   5.70
   Mortgage-backed securities..............    2,004       134     6.69     1,646       110     6.68       948        66   6.97
   Other interest-earning assets...........    1,931       152     7.87     1,726       111     6.43     1,159        75   6.47
                                             -------    ------            -------    ------            -------    ------
     Total interest-earning assets.........   59,317     5,018     8.46    55,978     4,655     8.32    48,737     3,975   8.16
                                                        ------                       ------                       ------
Noninterest-earning assets.................    3,504                        1,944                        2,116
                                             -------                      -------                      -------
     Total assets..........................  $62,821                      $57,922                      $50,853
                                             =======                      =======                      =======
 
Interest-bearing liabilities:
  Advances from FHLB.......................    2,608       166     6.37     2,443       126     5.16       792        34   4.26
  Deposits.................................   51,431     2,264     4.40    47,481     2,102     4.43    42,369     1,826   4.31
  Advances from borrowers for taxes
    and insurance..........................      745         8     1.07       677         8     1.18       474         7   1.51
                                             -------    ------            -------    ------            -------    ------
     Total interest-bearing liabilities....   54,784     2,438     4.45    50,601     2,236     4.42    43,635     1,867   4.28
                                                        ------                       ------                       ------
Non-interest-bearing liabilities...........      739                          328                          217
                                             -------                      -------                      -------
     Total liabilities.....................   55,523                       50,929                       43,852
Retained earnings..........................    7,298                        6,993                        7,001
                                             -------                      -------                      -------
     Total liabilities and retained
       earnings............................  $62,821                      $57,922                      $50,853
                                             =======                      =======                      =======
Net interest income........................             $2,580                       $2,419                       $2,108
                                                        ======                       ======                       ======
Interest rate spread.......................                        4.01%                        3.90%                      3.88%
                                                                   ====                         ====                      =====
Net yield on interest-earning assets.......                        4.35%                        4.32%                      4.33%
                                                                   ====                         ====                       ====
Ratio of average interest-earning assets
  to average interest-bearing liabilities..                      108.32%                      110.63%                    111.69%
                                                                 ======                       ======                     ======
-------------------------
</TABLE>

(1)  Includes loans held-for-sale.

                                       10
<PAGE>
 
RATE/VOLUME ANALYSIS

     The table below sets forth certain information regarding changes in
interest income and interest expense of 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,
                                      ---------------------------------------------------------------------------
                                         1997            vs.          1996        1996        vs.          1995
                                      ---------------------------------------  ----------------------------------
                                       Increase (Decrease) Due to                Increase (Decrease) 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)..............      $ 244      $ 40    $   3       $287     $ 484   $106      $14    $ 604
  Mortgage-backed securities........         24        --       --         24        48     (2)      (2)      44
  Investment securities.............         (3)       15       (1)        11         8    (13)       1       (4)
  Other interest-earning assets.....         13        25        3         41        37     (1)      --       36
                                          -----      ----    -----       ----     -----   ----      ---    -----
     Total interest-earning assets..        278        80        5        363       577     90       13      680
 
Interest expense:
  Advances from FHLB................          9        29        2         40        70      7       15       92
  Deposits..........................        175       (14)       1        162       220     50        6      276
  Advances from borrowers for
    taxes and insurance.............          1        (1)      --         --         3     (1)      (1)       1
                                          -----      ----    -----       ----     -----   ----      ---    -----
     Total interest-bearing
       liabilities..................        185        14        3        202       293     56       20      369
                                          -----      ----    -----       ----     -----   ----      ---    -----
Change in net interest income.......      $  93      $ 66    $   2       $161     $ 284   $ 34      $(7)   $ 311
                                          =====      ====    =====       ====     =====   ====      ===    =====
--------------------
</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 4%.  Cecil
Federal's liquidity ratio at December 31, 1997, was approximately 13.33%.  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, 1997 to
originate adjustable-rate and fixed-rate mortgage loans were approximately
$1,576,000, expiring in 60 days or less.  Cecil Federal believes its liquidity
is adequate to fund its future commitments.

     Cecil Federal has $27.4 million in certificates due within one year and
$18.6 million in other deposits without specific maturity at December 31, 1997.
Management estimates that most of the deposits will be retained or replaced by
new deposits.

                                       11
<PAGE>
 
IMPACT OF INFLATION

     The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation.  The primary impact of
inflation on the operations of 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 Impairment of a Loan.   Effective January 1, 1995, the
Company 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
Company had no impaired loans at December 31, 1997 and 1996.

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

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

     Disclosure of Capital Structure.  In February 1997, the FASB issued
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure."  Statement 129 consolidates existing guidance and
requires entities (public and non-public) to disclose certain information about
the entity's capital structure.  This Statement is effective for financial
statements for periods ending after December 15, 1997.  It contains no change in
disclosure requirements for entities such as the Company that were previously
subject to the requirements of Opinions

                                       12
<PAGE>
 
10 - "Omnibus Opinion - 1966" and 15 - "Earnings Per Share" and Statement 47 -
"Disclosure of Long-Term Obligations."  Accordingly, this Statement will impose
no new reporting requirements on the Company.

     Reporting Comprehensive Income.  In June 1997, the FASB issued Statement
No. 130, "Reporting Comprehensive Income," which will require reporting of
"comprehensive income" and its components in financial statements.
"Comprehensive income" will include net income and other items of comprehensive
income, such as unrealized gains and losses on available-for-sale securities and
minimum pension liability adjustments, which are excluded from net income.  This
statement is effective for periods beginning after December 15, 1997 and
requires the restatement of all prior periods presented.  Upon adoption, this
statement will result in additional financial statement disclosures.

     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.

                                       13
<PAGE>
 
                       CONSOLIDATED FINANCIAL STATEMENTS

                               TABLE OF CONTENTS
                               -----------------
<TABLE>
<CAPTION>
 
 
                                                             PAGE
<S>                                                          <C>
 
            Independent Auditors' Report                      15
 
            Consolidated Statements of Financial Condition    16
 
            Consolidated Statements of Income                 18
 
            Consolidated Statements of
            Stockholders' Equity                              19
 
            Consolidated Statements of Cash Flows             20
 
            Notes to Consolidated Financial Statements        22
</TABLE>

                                       14
<PAGE>
 
                      [SIMON, MASTER & SIDLOW LETTERHEAD]



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, 1997 and
1996 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,
1997. These financial statements are the responsibility of the Company'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, 1997 and 1996 and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.



                                                    SIMON, MASTER & SIDLOW, P.C.


January 21, 1998

                                       15
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

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


<TABLE> 
<CAPTION> 
                                     ASSETS
                                     ------

                                                                   December 31,
                                                            --------------------------
                                                               1997         1996
                                                            -----------  -----------
<S>                                                         <C>          <C>
Cash                                                        $   961,993  $ 1,678,415
Cash - Interest bearing                                         880,809      502,207
Investment securities
           Securities held-to-maturity (estimated
            market value of $2,997,188 in 1997 and
            $2,489,174 in 1996) (Note 3)                      2,997,516    2,490,069
           Securities available-for-sale at estimated
            market value (Note 3)                               528,043      496,358
Mortgage-backed securities
           Securities held-to-maturity (estimated
             market value of $410,332 in 1997 and
             $532,631 in 1996) (Note 3)                         411,641      531,775
           Securities available-for-sale at estimated
             market value (Note 3)                            1,405,483    1,633,338
Loans held for sale (estimated market value
   of $1,380,439 in 1997 and $1,716,993 in 1996)              1,362,969    1,707,883
Loans receivable, net (Note 4)                               53,211,517   49,719,411
Real estate owned                                               171,229
Office properties, equipment and leasehold
  improvements at cost, less accumulated depreciation 
  and amortization (Note 6)                                     659,464      508,824
Stock in Federal Home Loan Bank of
  Atlanta - at cost (Note 7)                                    438,100      422,900
Accrued interest receivable (Note 5)                            466,610      432,828
Mortgage servicing rights                                       103,605       60,577
Prepaid expenses                                                 37,455       42,878
Other assets                                                     23,796       36,160
                                                            -----------  -----------
 
             TOTAL ASSETS                                   $63,660,230  $60,263,623
                                                            ===========  ===========
 
</TABLE>

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

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

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


                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------
<TABLE> 
<CAPTION> 
 
                                                                December 31,
                                                        ----------------------------
                                                            1997           1996
                                                        -------------  -------------
<S>                                                     <C>            <C>
LIABILITIES
           Savings deposits (Note 8)                     $52,953,698    $47,365,022
           Advance payments by borrowers for
             property taxes and insurance                    665,734        711,247
           Employee stock ownership debt (Note 13)           269,556        308,064
           Other liabilities                                 517,604        320,661
           Deferred taxes                                     20,055          5,543
           Advances from Federal Home Loan Bank
             of Atlanta (Note 9)                           1,750,000      4,500,000
                                                         -----------    -----------
 
             TOTAL LIABILITIES                            56,176,647     53,210,537
                                                         -----------    -----------
 
COMMITMENTS (Notes 4, 6 and 15)
 
STOCKHOLDERS' EQUITY
           Common stock, $.01 par value
             Authorized:  4,000,000 shares
             Issued and outstanding:  470,182 shares
                in 1997 and 469,358 shares in 1996             4,702          4,694
           Additional paid in capital                      4,000,351      3,940,728
           Net unrealized gain on securities
             available-for-sale                               18,786         13,139
           Employee stock ownership debt                    (269,556)      (308,064)
           Deferred compensation - Management
             Recognition Plan (Note 13)                     (118,361)      (156,047)
           Retained earnings, substantially
             restricted (Notes 10 and 11)                  3,847,661      3,558,636
                                                         -----------    -----------
 
             TOTAL STOCKHOLDERS' EQUITY                    7,483,583      7,053,086
                                                         -----------    -----------
 
             TOTAL LIABILITIES AND
                STOCKHOLDERS' EQUITY                     $63,660,230    $60,263,623
                                                         ===========    ===========
 
</TABLE>

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

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

                       CONSOLIDATED STATEMENTS OF INCOME
                       ---------------------------------
<TABLE>
<CAPTION>
 
 
                                                          Year ended December 31,
                                                    ------------------------------------
                                                       1997        1996         1995
                                                    ----------  ----------  ------------
<S>                                                 <C>         <C>         <C>
INTEREST INCOME
           Loans receivable                         $4,588,913  $4,301,685   $3,697,693
           Mortgage-backed securities                  134,423     110,195       66,017
           Investment securities                       142,869     132,425      135,950
           Other interest-earning assets               152,161     110,986       74,960
                                                    ----------  ----------   ----------
             Total interest income                   5,018,366   4,655,291    3,974,620
                                                    ----------  ----------   ----------
 
INTEREST EXPENSE
           Deposits
             NOW accounts                               88,431      69,416       74,067
             Passbook accounts                         287,166     326,166      310,396
             Money market deposit accounts              72,786      82,288       95,105
             Certificates                            1,823,340   1,623,518    1,346,595
                                                    ----------  ----------   ----------
           Interest expense on deposits              2,271,723   2,101,388    1,826,163
           Borrowings                                  166,420     134,567       40,890
                                                    ----------  ----------   ----------
             Total interest expense                  2,438,143   2,235,955    1,867,053
                                                    ----------  ----------   ----------
             Net interest income                     2,580,223   2,419,336    2,107,567
           Provision for loan losses                    87,000     102,500       35,000
                                                    ----------  ----------   ----------
             Net interest income after provision
                for loan losses                      2,493,223   2,316,836    2,072,567
                                                    ----------  ----------   ----------
 
NONINTEREST INCOME (LOSS)
           Loan service charges                         34,971      30,127       23,986
           Dividends on FHLB stock                      31,231      30,453       30,660
           Gain on sale of loans                        46,905      84,276       16,147
           Checking account fees                       121,789     110,713       92,183
           Other                                       117,244      60,071       71,781
                                                    ----------  ----------   ----------
             Total noninterest income                  352,140     315,640      234,757
                                                    ----------  ----------   ----------
 
NONINTEREST EXPENSE
           Compensation and benefits                 1,031,978     973,141      997,513
           Occupancy expense                           110,583     100,400       82,338
           Equipment and data processing expense       185,507     158,129      124,326
           SAIF deposit insurance premium               46,592     391,995      110,985
           Other                                       468,119     392,201      478,736
                                                    ----------  ----------   ----------
             Total noninterest expense               1,842,779   2,015,866    1,793,898
                                                    ----------  ----------   ----------
 
             Income before income taxes              1,002,584     616,610      513,426
                                                    ----------  ----------   ----------
 
INCOME TAXES
           Current                                     422,406     225,671      204,340
           Deferred                                     14,512      76,030       (8,064)
                                                    ----------  ----------   ----------
             Total income taxes                        436,918     301,701      196,276
                                                    ----------  ----------   ----------
 
NET INCOME                                          $  565,666  $  314,909   $  317,150
                                                    ==========  ==========   ==========
 
Basic earnings per common share                          $1.29        $.72         $.72
                                                    ==========  ==========   ==========
 
Diluted earnings per common share                        $1.28        $.72
                                                    ==========  ==========
 
Cash dividends paid per common share                      $.63        $.56         $.56
                                                    ==========  ==========   ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

                                       18
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
           ----------------------------------------------------------
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------
<TABLE>
<CAPTION>
 
                                                    Net Unrealized Gain                 Deferred
                                                    (Loss) on Securities  Employee   Compensation-
                                                    available-for-sale,    Stock      Management                          
                               Common    Paid-in      net of Deferred     Ownership   Recognition     Retained      Total      
Stockholders'                   Stock    Capital           Taxes            Plan         Plan         Earnings      Equity
                               ------   ----------  --------------------  ---------  --------------  ----------  ------------- 
<S>                            <C>      <C>         <C>                   <C>        <C>             <C>         <C>
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 on securities
 available-for-sale                                                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                                               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
Change in net unrealized
 gain on securities
 available-for-sale                                                5,647                                                 5,647
Cash dividends paid                                                                                    (276,641)      (276,641)
Repayment of ESOP debt                                                       38,508                                     38,508
Release of ESOP shares                      38,508                                                                      38,508
Net income                                                                                              565,666        565,666
Deferred compensation
 amortization                                                                                37,686                     37,686
Sale of 824 shares
 of common stock                    8       14,617                                                                      14,625
Release of vested
 MRP shares                                  6,498                                                                       6,498
                               ------   ----------  --------------------  ---------  --------------  ----------  -------------   
BALANCE AT
 DECEMBER 31, 1997             $4,702   $4,000,351             $  18,786  $(269,556) $     (118,361) $3,847,661     $7,483,583
                               ======   ==========  ====================  =========  ==============  ==========  =============
 
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

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

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     -------------------------------------
<TABLE>
<CAPTION>
 
 
                                                                            Year ended December 31,
                                                                    ----------------------------------------------
                                                                         1997            1996            1995
                                                                    --------------  --------------  --------------  
<S>                                                                 <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
           Interest and fees received on loans
             and investments                                         $   5,207,393   $   4,859,892   $   4,056,250
           Cash paid to suppliers and employees                         (1,672,955)     (1,871,546)     (1,714,039)
           Proceeds from sale of loans                                   3,010,289       2,572,339       1,062,447
           Origination of loans held for sale                           (2,833,100)     (3,307,500)     (1,717,900)
           Interest paid                                                (2,438,143)     (2,235,955)     (1,867,053)
           Income taxes paid                                              (276,591)       (201,588)       (200,745)
                                                                    --------------  --------------  --------------  
             NET CASH PROVIDED (USED) BY                                                                
                OPERATING ACTIVITIES                                       996,893        (184,358)       (381,040)
                                                                    --------------  --------------  -------------- 
 
CASH FLOWS FROM INVESTING ACTIVITIES
           Proceeds from sale and maturities of
             investment securities                                       4,500,000       3,025,000       2,500,000
           Proceeds from maturities of
             mortgage-backed securities                                    352,652         441,671         165,426
           Purchases of investment securities                           (4,998,750)     (3,733,516)       (997,188)
           Purchases of mortgage-backed securities                                      (1,722,837)
           Loans originated                                            (17,986,830)    (21,293,098)    (17,351,174)
           Principal collected on loans                                 14,622,354      15,796,063      10,022,238
           Proceeds from sale of loans                                                   1,819,178
           Purchases of office properties,
             equipment and leasehold
             improvements                                                 (207,366)       (102,896)       (144,284)
           Proceeds from sale of real estate owned                                          74,726
           Purchase of real estate owned                                  (171,229)
           Purchase of stock in Federal Home Loan                        
             Bank of Atlanta                                               (15,200)
                                                                    --------------  --------------  --------------  
              NET CASH USED BY
                INVESTING ACTIVITIES                                    (3,904,369)     (5,695,709)     (5,804,982)
                                                                    --------------  --------------  --------------   
CASH FLOWS FROM FINANCING ACTIVITIES
           Net increase (decrease) in demand deposits,
             NOW accounts, and savings accounts                         31,360,699      24,166,890      18,568,854
           Proceeds from sales of certificates                           8,831,888      12,103,204       9,805,826
           Payments of maturing certificates
             of deposits                                               (34,603,911)    (33,554,524)    (23,225,302)
           Increase (decrease) in advance payments
             by borrowers for property taxes
             and insurance                                                 (45,513)        221,782          97,298
           Proceeds from issuance of common stock                           14,626         178,799
           Advances from (repayments to) Federal
             Home Loan Bank of Atlanta                                  (2,750,000)      3,250,000       1,250,000
           Dividends paid                                                 (276,641)       (243,671)       (247,997)
           Unearned ESOP compensation decrease                              38,508          38,508          38,508
           Net funding of MRP trust                                                                       (193,734)
           Purchase of common stock                                                       (352,843)
                                                                    --------------  --------------  --------------  
              NET CASH PROVIDED BY
                FINANCING ACTIVITIES                                     2,569,656       5,808,145       6,093,453
                                                                    --------------  --------------  --------------
NET DECREASE IN CASH AND CASH
           EQUIVALENTS                                                    (337,820)        (71,922)        (92,569)
                                                                    --------------  --------------  --------------   
CASH AND CASH EQUIVALENTS
           BEGINNING OF YEAR                                             2,180,622       2,252,544       2,345,113
                                                                    --------------  --------------  --------------  
 
           END OF YEAR                                               $   1,842,802   $   2,180,622   $   2,252,544
                                                                    ==============  ==============   =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

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

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

                                  (Continued)



<TABLE>
<CAPTION>
 
                                                               Year ended December 31,
                                                       ----------------------------------------
                                                           1997          1996          1995
                                                       ------------  ------------  ------------ 
<S>                                                    <C>           <C>           <C>
 
RECONCILIATION OF NET INCOME TO NET CASH
 PROVIDED (USED) BY OPERATING ACTIVITIES
 
Net Income                                               $ 565,666     $ 314,909     $ 317,150
 
Adjustments to reconcile net income to
 net cash provided (used) by operating
 activities:
      Depreciation                                          56,726        48,376        36,945
      Provision for loan losses                             87,000       102,500        35,000
      Amortization of investment                           
         security premiums and (discounts)                  (8,743)       (7,495)      (43,906)
      Net amortization of deferred loan fees                              (1,722)       (7,453)
      Stock dividends                                      (30,655)      (23,576)      (13,203)
      Increase in accrued interest                                                      
         receivable                                        (33,782)      (54,547)      (72,418)
      (Increase) decrease in deferred                                               
         taxes                                              14,512        49,236        (8,064)
      (Increase) decrease in mortgage                      
         servicing rights                                  (43,028)       60,577
      (Increase) decrease in prepaid                       
         expenses                                            5,423         5,068          (342)
      (Increase) decrease in other assets                   12,364       (18,215)      (11,514)
      Increase in other liabilities                        196,943       122,281        58,365
      (Increase) decrease in loans held                 
         for sale                                          130,284      (819,437)     (671,600)
      Distribution from MRP Trust                           44,183        37,687
                                                       -----------   -----------   ----------- 
                                                           431,227       499,267      (698,190)
                                                       -----------   -----------   ----------- 
                                                         $ 996,893     $(184,358)    $ 381,040)
                                                       ===========   ===========   ===========
 
</TABLE>


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

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------



1.   SUMMARY OF SIGNIFICANT ORGANIZATION AND ACCOUNTING POLICIES

     a. Organization and Principles of Consolidation -- Cecil Bancorp,
        --------------------------------------------                  
Inc. (the Company) is a savings and loan holding company, and is the parent
company of Cecil Federal Savings Bank (the Bank).  The Company 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. The consolidated financial
statements include the accounts of the Company, the Bank, and the Bank's wholly
owned subsidiaries, Cecil Service Corporation and Cecil Financial Services
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 10, 11 and 12.

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

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

The Company 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 Company 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.

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)


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

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

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

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

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

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

     h. Income Taxes -- Deferred taxes on income result from the
        ------------                                            
recognition of the income tax effect of temporary differences in reporting
transactions for financial and tax purposes.  Such temporary differences relate
primarily to deferred loan fees, interest received in advance, accrued
compensation to directors, and the recapture of a special bad debt deduction
(See Note 10).

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

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)



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

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

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

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

The Company 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.

     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.

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)



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

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

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

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

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

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

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)


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

     n.  Other Matters - The Company has established a company-wide task
         -------------                                                  
force to review all computer-based systems and applications and develop a
company-wide action plan for the century date change for the year 2000. The
Company's goal is to have all systems and applications compliant with the
century change by December 31, 1998. Preliminary cost estimates have not been
finalized, but remediation efforts will be expensed. None of these costs is
anticipated to have a material impact on the Company's results in any one
period. In addition, the Company could possibly be affected by the century
change to the extent other entities not affiliated with it are unsuccessful in
addressing this issue on a timely basis.

     o. Reclassification of 1996 and 1995 Financial Statements -- Certain
        ------------------------------------------------------           
reclassifications have been made to the 1996 and 1995 figures to conform with
current year presentation.

2.   ADOPTION OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     Effective January 1, 1995, the Company 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 Company had no impaired loans at
December 31, 1997 and 1996.

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

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)


2.   ADOPTION OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)

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

     In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure."
Statement 129 consolidates existing guidance and requires entities (public and
non-public) to disclose certain information about the entity's capital
structure. This Statement is effective for financial statements for periods
ending after December 15, 1997. It contains no change in disclosure requirements
for entities such as the Company that were previously subject to the
requirements of Opinions 10 - "Omnibus Opinion -1966" and 15 - "Earnings Per
Share" and Statement 47 - "Disclosure of Long-Term Obligations." Accordingly,
this Statement will impose no new reporting requirements on the Company.

     In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," which will require reporting of "comprehensive income" and its
components in financial statements. "Comprehensive income" will include net
income and other items of comprehensive income, such as unrealized gains and
losses on available-for-sale securities and minimum pension liability
adjustments, which are excluded from net income. This statement is effective for
periods beginning after December 15, 1997 and requires the restatement of all
prior periods presented. Upon adoption, this statement will result in additional
financial statement disclosures.

                                       27
<PAGE>
 
                      CECIL BANCORP, INC. AND SUBSIDIARIES
                      ------------------------------------

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)



3.   INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES

     The amortized costs and estimated market values of investment securities
held-to-maturity as of December 31, 1997 and 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, 1997
 U.S. Treasury Securities
  and obligations of U.S.
  government corporations
  and agencies               $2,997,516  $           $      328  $2,997,188
                             ==========  ==========  ==========  ==========
 
<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>

      The amortized costs and estimated market values of investment securities
available-for-sale as of December 31, 1997 and 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, 1997
 Mutual Funds                $  527,946  $        97  $           $  528,043
                             ==========  ===========  ==========  ==========
 
As of December 31, 1996
 Mutual Funds                $  497,292  $            $      934  $  496,358
                             ==========  ===========  ==========  ==========
</TABLE>

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)



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

     The amortized costs and estimated market values for mortgage-backed
securities held-to-maturity as of December 31, 1997 and 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, 1997
              FHLMC                     $411,641   $              $1,309   $410,332
                                       =========  ==========  ==========  =========
 
            As of December 31, 1996
              FHLMC                     $531,775        $856      $        $532,631
                                       =========  ==========  ==========  =========
</TABLE>


      The amortized costs and estimated market values for mortgage-backed
securities available-for-sale as of December 31, 1997 and 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, 1997
              FHLMC                    $1,390,245     $15,238   $          $1,405,483
                                       ==========  ==========  ==========  ==========
 
            As of December 31, 1996
              FHLMC                    $1,622,718     $10,620   $          $1,633,338
                                       ==========  ==========  ==========  ==========
</TABLE>

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)



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

     The amortized cost and estimated market value of debt securities at
December 31, 1997, 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.


                                                                 Estimated
                                                     Amortized    Market
                                                        Cost       Value
                                                     ----------  ----------

                  Due in one year or less            $2,997,516  $2,997,188
                  Mortgage backed securities          1,801,886   1,815,815

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

     Investment securities and mortgage backed securities carried at
approximately $998,829 at December 31, 1997, were pledged to secure public
deposits.


4.  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.

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)



4.   LOANS RECEIVABLE (Continued)

     A summary of mortgage loans follows:
<TABLE>
<CAPTION>
 
                                               1997           1996
                                           -------------  -------------
<S>                                        <C>            <C>
            First mortgage loans
              1-4 Dwelling units           $ 41,865,880   $ 40,925,018
              5 or more                       1,065,865        100,143
              Non-Residential                 2,470,091      2,675,285
              Land                            1,389,904      1,569,033
              Construction                    3,134,181      2,920,115
                                           ------------   ------------
                                             49,925,921     48,189,594
            Other loans
              Home equity loans                 973,887        875,286
              Commercial loans                1,621,686        694,951
              Home improvement loans              9,000         12,139
              Consumer loans                  2,593,147      2,423,899
              Loans on savings deposits         542,116        631,776
              Education                          75,654         86,518
                                           ------------   ------------
                                             55,741,411     52,914,163
            Less:
              Undisbursed proceeds on
                loans in process               (892,917)    (1,260,066)
              Deferred loan fees               (100,467)      (109,112)
              Loans held for sale            (1,362,969)    (1,707,883)
              Allowance for loan losses        (173,541)      (117,691)
                                           $ 53,211,517   $ 49,719,411
                                           ============   ============
</TABLE>

     The Bank serviced loans for others in the approximate amount of $18,832,000
and $16,795,000 in 1997 and 1996, respectively.
 
     An analysis of the allowance for loan losses for the years ended December
31, 1997 and 1996 is as follows:

<TABLE> 
<CAPTION> 
 
                                                           1997            1996
                                                      ---------       ---------
<S>                                                   <C>             <C> 
              Balance at beginning of period          $ 117,691       $ 114,412
              Provision charged to operations            87,000         102,500
              Charge-offs, net                          (31,150)        (99,221)
                                                      ---------       --------- 
              Balance at end of period                $ 173,541       $ 117,691
                                                      =========       =========
</TABLE>

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)

4.   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 employees. 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, 1997 are summarized as follows:

<TABLE> 
<CAPTION> 
<S>                                              <C> 
                  Balance beginning of year      $  343,768
                  Payments                          103,369
                                                 ----------
                  Balance end of year            $  240,399
                                                 ==========
</TABLE> 

 
     A summary of slow loans follows:

<TABLE> 
<CAPTION> 

                                                Principal    Past Due
                                                Outstanding  Payments
                                                -----------  --------
<S>                                             <C>          <C> 
            December 31, 1997
            First mortgage loans
              Conventional mortgage loans
              Single family dwellings            $1,031,090   $45,014
            Consumer loans                           56,223     8,749
                                                 ----------   -------
              Total                              $1,087,313   $53,763
                                                 ==========   =======
 
            December 31, 1996
            First mortgage loans
              Conventional mortgage loans
              Single family dwellings            $1,218,359   $57,760
            Consumer loans                           11,201     1,888
                                                 ----------   -------
              Total                              $1,229,560   $59,648
                                                 ==========   =======
</TABLE> 

     For the years ended December 31, 1997 and 1996 additional interest income
before taxes amounting to $31,541 and $26,976, 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, 1997 amounted to $83,645.

     At December 31, 1997, 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                 $120,000            $669,000      $789,000
 
                                (9.00%-9.50%)
                                -------------
  Land development                $787,000                          $787,000
</TABLE>

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)



5.   ACCRUED INTEREST RECEIVABLE
 
     Accrued interest receivable at December 31, 1997 and 1996, consists of the
following:
<TABLE> 
<CAPTION> 

                                                         1997         1996
                                                       --------     --------
<S>                                                    <C>          <C> 
                  Loans receivable                     $407,922     $352,817
                  Mortgage-backed securities              9,726       12,768
                  Investment securities                  48,962       67,243
                                                       --------     --------
                                                       $466,610     $432,828
                                                       ========     ========
 
</TABLE>

6.   OFFICE PROPERTIES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

     Office properties, equipment and leasehold improvements are summarized by
major classifications as follows:
<TABLE>
<CAPTION>
 
                                                          1997       1996
                                                       ----------  ---------
<S>                                                    <C>         <C>
 
                  Land                                 $   51,161   $ 51,161
                  Buildings and improvements              384,630    315,893
                  Furniture, fixtures and equipment       475,842    369,798
                  Leasehold improvements                  225,493    208,220
                                                       ----------   --------
                                                        1,137,126    945,072
                  Accumulated depreciation                477,662    436,248
                                                       ----------   --------
                                                       $  659,464   $508,824
                                                       ==========   ========
</TABLE>
     Depreciation expense for the years ended December 31, 1997, 1996, and 1995
was $56,726, $48,376 and $36,945, 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 two
Automatic Teller Machines under the terms of operating leases which expire
through July 2002, with renewal options for three successive three year terms.
Annual rental on these leases was $39,750, $38,380, and $26,553 in 1997, 1996,
and 1995, respectively.

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)



6.   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, 1998     $ 40,950
                         1999       40,950
                         2000       30,450
                         2001       21,050
                         2002       19,050
                   Thereafter       41,650
                                  --------
                                  $194,100
                                  ========
</TABLE>


7.  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.
<TABLE>
<CAPTION>
 
 

8.   SAVINGS DEPOSITS
                                                           1997        1996
                                                       ----------  ----------
<S>                                                    <C>         <C> 
      A summary of savings deposits follows:
         Vacation
           3.0%                                        $   19,049  $   18,783
                                                       ----------  ----------
     
         Christmas Clubs
           3.0%                                            59,780      60,693
                                                       ----------  ----------
     
         Passbook and Statement Accounts
           (weighted average 3.0%)                      9,314,931   9,997,007
                                                       ----------  ----------
     
         Negotiable Order Withdrawal
           Accounts 2.00%                               4,514,632   3,828,690
                                                       ----------  ----------
     
         Money Market Fund Accounts
           (weighted average 3.00%)                     2,648,733   2,618,289
                                                       ----------  ----------
     
      Regular checking (non-interest bearing)           1,492,303     682,845
                                                       ----------  ----------
</TABLE>

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)


8.   SAVINGS DEPOSITS (Continued)
<TABLE>
<CAPTION>
 
                                                       1997         1996
                                                    -----------  -----------
<S>                                                 <C>          <C>
 
            Individual Retirement Accounts
              (weighted average 5.45% and 5.15%)    $ 7,520,379  $ 7,011,601
 
            91-Day Certificates
              (weighted average 4.00%)                6,224,487    4,320,548
 
            Money Market Certificates (6 mos.)
              (weighted average 5.12% and 5.00%)      4,919,335    4,004,051
 
            1 Year Certificates
              (weighted average 5.25% and 4.25%)      5,956,193    5,265,227
 
            14 Month Certificates
              (weighted average 5.53% and 5.42%)      1,061,177    1,138,702
 
            18 Month Certificates
              (weighted average 5.44% and 5.30%)      2,446,595    2,000,807
 
            30 Month Certificates
              (weighted average 5.58% and 5.45%)      2,498,861    2,261,525
 
            3 1/2 Year Certificates
              (weighted average 5.50%)                   52,003      176,717
 
            5 Year Certificates
              (weighted average 5.65%)                4,225,240    3,979,537
                                                    -----------  -----------
 
                                                     34,904,270   30,158,715
                                                    -----------  -----------
 
                                                    $52,953,698  $47,365,022
                                                    ===========  ===========
 
            Weighted average cost of savings
              deposits for the period ended           4.27%       4.46%
                                                    =======     =======
</TABLE> 

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)

8.   SAVINGS DEPOSITS (Continued)

     A summary of certificate accounts by maturity as of December 31, 1997
follows:


                  Under 12 months           $27,367,369
                  12 months to 24 months      5,334,755
                  24 months to 36 months      1,424,656
                  Over 36 months                777,490
                                            -----------
                                            $34,904,270
                                            ===========

     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 $8,771,314 and $8,337,820 as of December 31, 1997
and 1996.

     The bank held deposits of approximately $1,606,595 for related parties at
December 31, 1997.


9.   ADVANCES FROM FEDERAL HOME LOAN BANK

     At December 31, 1997, short-term advances consist of the following:

                   Maturity           Interest
                     Date               Rate         December 31, 1997
                   --------           -------        -----------------

                  6/10/98             6.08%             $1,750,000
                                                        ==========

     Wholly owned first mortgage loans on 1-4 dwelling units with unpaid
principal balances of approximately $27,520,000 were pledged to the FHLB as
collateral on advances.

10.  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 year ended December 31, 1995. 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.

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)



10.  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>
 
 
                                            1997       1996         1995
                                          ---------  ---------  ------------
<S>                                       <C>        <C>        <C>
        Current:
          Federal at 34%                   $340,621   $177,262    $ 183,240
          State                              81,785     48,409       37,701
    
        Increase (decrease) in
          taxes resulting from:
            Special bad debt deduction                              (16,601)
            Deferred income                  14,512     76,030       (8,064)
                                           --------   --------    ---------
    
            Total                          $436,918   $301,701    $ 196,276
                                           ========   ========    =========
 
</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>
 
                                           1997          1996         1995
                                       ------------  ------------  -----------
<S>                                    <C>           <C>           <C>
    
       Loan fee income                   $   3,338   ($   17,639)  ($  7,210)
    
       Advance interest payments on
          mortgages                         (2,025)       (1,624)       (854)
    
       Employee benefit plans              (20,057)       41,662
    
       Provision for possible
          loan losses                        7,653        30,237
    
       Depreciation                          8,986
    
       Mortgage servicing rights            16,617        23,394
                                       ------------  ------------  -----------
    
                                         $  14,512    $   76,030   ($    8,064) 
                                         =========    ==========   ===========
 
</TABLE>

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)



10. INCOME TAXES (Continued)

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

<TABLE>
<CAPTION>
 
                                                 1997        1996
                                              ----------  -----------
<S>                                           <C>         <C>
 
              Deferred tax liabilities        ($  93,828) ($  147,162)
              Deferred tax assets                 73,773      144,285
                                              ----------  -----------
                                                        
              Net deferred tax liabilities    ($  20,055) ($    2,877)
 
</TABLE>
        At December 31, 1997 and 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.


11. 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 12).

        Payment of dividends on the common stock of the Company 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.

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)



12.     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, 1997, that the Bank meets all the capital adequacy requirements to
which it is subject.

        As of December 31, 1997, 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.

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)
12.  REGULATORY CAPITAL MATTERS (Continued)
<TABLE>
<CAPTION>
 
                                                            To Be Well Capitalized
                                                                 under Prompt
                                                               Corrective Action
                                    Actual                        Provisions
                                ---------------             ----------------------
                                 Amount  Ratio               Amount       Ratio
                                -------  ------             --------      -----
As of December 31, 1997        (in thousands)                  (in thousands)
<S>                             <C>      <C>                <C>              <C>  
 Total risk-based capital                           Greater           Greater                            
  (to risk-weighted assets)      $7,326   18.08%     Than   $  4,052   Than   10.0%                         
                                                    or = to           or = to 
 Tier I capital                                     Greater           Greater                                   
  (to risk-weighted assets)       7,150   17.65%     Than     2,431    Than    6.0%
                                                    or = to           or = to 
 Tier I capital                                     Greater           Greater
  (to adjusted total assets)      7,150   11.23%     Than     3,183    Than    5.0%
                                                    or = to           or = to 
 Tangible capital                                   Greater           Greater
  (to adjusted total assets)      7,160   11.25%     Than       955    Than    1.5%
                                                    or = to           or = to 
                                                                       
As of December 31, 1996                                                
 Total risk-based capital                           Greater           Greater 
  (to risk-weighted assets)      $7,113   18.71%     Than   $ 3,802    Than   10.0%
                                                    or = to           or = to 
 Tier I capital                                     Greater           Greater 
  (to risk-weighted assets)       6,995   18.40%     Than     2,281    Than    6.0%
                                                    or = to           or = to 
 Tier I capital                                     Greater           Greater 
  (to adjusted total assets)      6,995   11.61%     Than     3,013    Than    5.0%
                                                    or = to           or = to 
 Tangible capital                                   Greater           Greater 
  (to adjusted total assets)      7,056   11.71%     Than       904    Than    1.5%
                                                    or = to           or = to 
</TABLE>

13.     OFFICER, DIRECTOR, AND EMPLOYEE PLANS

        a.  Employee Stock Ownership Plan -- In conjunction with the plan of
            -----------------------------                                   
conversion, he 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 Company 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 Company'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% (9.5% at
December 31, 1997) 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 Company's Board of Directors may determine in its
discretion.

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)

13.     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 Company.
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 Company is to administer the
ESOP.

        The Company 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 Company 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 $43,751, $36,884, and $41,548 in
1997, 1996 and 1995, respectively. The ESOP shares as of December 31, 1997 were
as follows:

<TABLE>
<CAPTION>
 
<S>                                <C>
Shares released for allocation        11,552
Unreleased shares                     26,956
                                    --------
 Total ESOP shares                    38,508
                                    ========
 
Fair value of unreleased shares     
 at December 31, 1997               $539,120
                                    ======== 
</TABLE>

        b.  Stock-based Compensation Plans -- The Company has stock-based
            ------------------------------                               
compensation plans which are described below. The Company applies APB Opinion 25
and related Interpretations in accounting for its plans. The exercise price of
the Company's employer stock option equals the market price of the underlying
stock on the date of grant, therefor no compensation expense has been
recognized. Had the compensation cost for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates for awards
under those plans as consistent with the methods prescribed under SFAS No. 123
"Accounting for Stock-based Compensation", the results in net income and
earnings per share would not be materially different than reported.

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)

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

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

            During 1995, the Company 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 Company in a manner designed to encourage
such employees to remain with the Company.

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

        The $263,351 contributed to the MRP is being amortized to compensation
expense as the plan participants become vested in those shares. Compensation
expense in connection with the MRP was $50,627, $46,187, and $69,617 in 1997,
1996 and 1995, respectively. The unamortized cost, which is comparable to
deferred compensation, is reflected as a reduction of stockholders' equity.
<TABLE>
<CAPTION>
 
        The following table summarizes information about the management
recognition plan at December 31:
<S>                                               <C>         <C>
                                                     1997        1996
                                                  -------     -------
    
     Outstanding shares at beginning of year       10,395      12,994
     Vested and paid shares                       ( 2,599)    ( 2,599)
     Outstanding shares at end of year              7,796      10,395
                                                  =======     =======
</TABLE>

During 1995, the Company 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 Company 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 canceled. As of December 31, 1997, 6,497 stock options were granted. No stock
appreciation rights have been granted as of December 31, 1997.

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)

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

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

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

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

<TABLE>
<CAPTION>
 
 
                                                  1997                         1996
                                        --------------------------  ---------------------------
                                                  Weighted-Average             Weighted-Average
                                         Shares    Exercise Price    Shares     Exercise Price
                                        --------  ----------------  ---------  ----------------
<S>                                     <C>       <C>               <C>        <C>
                 Outstanding at
                   beginning of year     32,485         $11.00         44,519        $11.00
                 Exercised              (   824)                     ( 12,034)
                 Outstanding at
                   end of year           31,661                        32,485
                                         ======                      ========
 
                 Options exercisable
                   at year end           12,170                         6,497
                                         ======                      ========
 
</TABLE>
The weighted average remaining contractual life of those options was 4.6 years.

        c.  Retirement Plan for Non-Employee Directors -- Effective 
            ------------------------------------------                     
January 1, 1995 the Company 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.

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)


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

        c.  Retirement Plan for Non-Employee Directors (Continued)
            ------------------------------------------            

        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, 1997, 1996, and
1995 was $42,000 per year.

14.     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 1997, 1996 and 1995 amounted to $57,768, $51,741, and $61,732,
respectively.

15.     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>
 
                                         1997        1996
                                      ----------  ----------
<S>                                   <C>         <C>
        
          Unfunded lines of credit    $2,890,000  $  963,700
          Loan commitments             1,576,000     664,700
                                      ----------  ----------
                                      $4,466,000  $1,628,400
                                      ==========  ==========
</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 4).

        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.









               

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)



16.     EARNINGS PER SHARE

        During 1997 and 1996, options to acquire 12,170 and 6,497 shares,
respectively of the Company's stock for $11 per share were vested and
exercisable (see Note 13). The options expire through May 2006.

        Basic earnings per common share were computed by dividing net income by
the weighted average number of shares of common stock outstanding during the
year. The weighted average number of shares of common stock outstanding was
438,857, 437,230 and 442,583 in 1997, 1996 and 1995, respectively.

        Diluted earnings per common share were determined on the assumption that
the options were exercised on May 31, 1997 and May 31, 1996 (the date they
became vested). The number of common shares was increased by the number of
shares issuable on the exercise options when the market price of the common
stock exceeds the exercise price of the options. This increase in the number of
common shares was reduced by the number of common shares that are assumed to
have been purchased with the proceeds from the exercise of the options; those
purchases were assumed to have been made at the year-end price of $20 and $15.75
at December 31, 1997 and 1996, respectively. The weighted average number of
shares of common stock outstanding for computation of diluted earnings per
common share was 443,358 and 438,375 in 1997 and 1996, respectively.

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

                                      1997
                                     --------
<TABLE>
<CAPTION>
 
                                   Income        Shares       Per-Share
                                 (Numerator)  (Denominator)     Amount
                                 -----------  -------------  ------------
<S>                              <C>          <C>            <C>
 
Basic EPS
            Net income             $565,666        438,857        $ 1.29
 
Effect of dilutive securities
            Stock options                            4,501       (   .01)
                                   --------        -------   -----------
 
Diluted EPS
            Net income             $565,666        443,358        $ 1.28
                                   ========        =======   ===========
</TABLE>

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)


16.         EARNINGS PER SHARE (Continued)

                                      1996
                                     --------
<TABLE>
<CAPTION>
 
                                   Income        Shares      Per-Share
                                 (Numerator)  (Denominator)   Amount
                                 -----------  -------------  ---------
<S>                              <C>          <C>            <C>
 
Basic EPS
            Net income             $314,909        437,230        $.72
 
Effect of dilutive securities
            Stock options                            1,145
                                 ----------   ------------   ---------
 
Diluted EPS
            Net income             $314,909        438,375        $.72
                                   ========   ============   =========
 
</TABLE>
                                      1995
                                     --------
<TABLE>
<CAPTION>
 
                                   Income        Shares      Per-Share
                                 (Numerator)  (Denominator)   Amount
                                 -----------  -------------  ---------
<S>                              <C>          <C>            <C>
 
Basic EPS
            Net income             $317,150        442,583        $.72
 
Effect of dilutive securities
            Stock options        ----------   ------------   ---------
 
Diluted EPS
            Net income             $317,150        442,583        $.72
                                 ==========   ============   =========
 
</TABLE>
17.     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.

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)
                                        


17.     FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

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

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

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

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

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

        The fair value of the 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.

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)
                                        


17.     FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

        The estimated fair values of financial instruments at December 31, 1997
are as follows:
 
<TABLE>
<CAPTION>
                                                                             Estimated
                                                              Carrying       Fair
                                                              Value          Value
                                                              -----------    -----------
<S>                                                           <C>            <C>
      Financial assets                                                     
         Cash and cash equivalents                            $ 1,842,802    $ 1,842,802
         Investment securities                                             
           Held to maturity                                     2,997,516      2,997,188
           Available for sale                                     528,043        528,043
         Mortgage-backed securities                                        
           Held to maturity                                       411,641        410,332
           Available for sale                                   1,405,483      1,405,483
         Loans held for sale                                    1,362,969      1,380,439
         Loans receivable                                      53,211,517     54,483,581
         Investment in stock of FHLB                              438,100        438,100
      Financial liabilities                                                
         Savings deposits                                      52,953,698     52,937,812
         Employee stock ownership plan debt                       269,556        269,556
 
</TABLE> 

The estimated fair values of financial instruments at December 31, 1996 are as
follows:
<TABLE> 
<CAPTION>   
                                                                             Estimated
                                                              Carrying       Fair
                                                              Value          Value
                                                              -----------    -----------
<S>                                                           <C>            <C>
      Financial assets                                                     
         Cash and cash equivalent                             $ 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                                      49,719,411     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>

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)

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


        The following condensed statement of financial position as of December
31, 1997 and 1996 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 Company 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 Company did not engage in any material operations.


                       Statements of Financial Condition

                                     Assets
<TABLE>
<CAPTION>
 
                                                       December 31,
                                                  ----------------------
                                                     1997        1996
                                                  ----------  ----------
<S>                                               <C>         <C>
Cash                                              $  516,087  $  260,996
Investment in Cecil Federal Savings Bank           3,673,195   3,568,977
Deferred taxes                                        11,956       8,119
Prepaid expenses                                      74,442      50,364
                                                  ----------  ----------
                                              
                                                  $4,275,680  $3,888,456
                                                  ==========  ==========
 
                  Liabilities and Stockholders' Equity
 

Other Liabilities                                 $   28,136  $   27,254
Employee stock ownership debt                        269,556     308,064
                                                  ----------  ----------
                                                     297,692     335,318
                                                  ----------  ----------
                                                
Stockholders' Equity                            
  Common stock, $.01 par value                  
   Authorized:  4,000,000 shares                
   Issued and outstanding:  470,182 shares      
    in 1997 and 469,358 shares in 1996                 4,702       4,694  
  Additional paid in capital                       4,000,351   3,940,728
Employee stock ownership debt                       (269,556)   (308,064)
Deferred Compensation Management                
 Recognition Plan                                   (118,361)   (156,047)
Retained earnings                                    360,852      71,827
                                                  ----------  ----------
                                                
   Total stockholders' equity                      3,977,988   3,553,138
                                                  ----------  ----------
                                                
   Total liabilities and stockholders' equity     $4,275,680  $3,888,456
                                                  ==========  ==========
 
</TABLE>

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

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

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                  --------------------------------------------

                                  (Continued)



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

                              Statements of Income
<TABLE>
<CAPTION>
                                                               Year ended December 31,
                                                              --------------------------
                                                                  1997          1996
                                                              ------------  ------------
<S>                                                            <C>           <C>
                                                   
Equity in earnings of Cecil Federal Savings Bank                $ 604,218     $ 400,001
Operating expenses                                 
   Compensation and benefits                                       43,979        88,203
   Other                                                           22,488        25,959
                                                                ---------     ---------
                                                                   66,467       114,162
                                                                ---------     --------- 
Net income before income taxes                                    537,751       285,839
                                                   
Income taxes                                       
   Current                                                        (24,078)      (27,391)
   Deferred                                                        (3,837)       (1,679)
                                                                  (27,915)      (29,070)
                                                   
Net income                                                      $ 565,666     $ 314,909
                                                                =========     =========
                                                   
</TABLE> 
<TABLE> 
<CAPTION> 

              Statements of Cash Flows             
                                                               Year ended December 31,
                                                              --------------------------
                                                                  1997          1996
                                                              ------------  ------------
<S>                                                           <C>           <C> 
Cash flows from operating activities
   Cash paid to suppliers and employees                       $    (21,402) $    (65,897)
   Dividends received from Cecil Federal Savings Bank              500,000       550,000
   Income taxes refunded                                                           7,028
                                                                 ---------     --------- 
Net cash provided by operating activities                          478,598       491,131

Cash flows from financing activities
   Proceeds from sale of common stock                               14,626       178,799
   Unearned ESOP compensation decrease                              38,508        38,508
   Dividends paid                                                 (276,641)     (243,671)
   Purchase of MRP stock
   Purchase of common stock                                                     (352,843)
                                                                ----------    ----------
Net cash used by financing activities                             (223,507)     (379,207)
                                                                ----------    ----------
Net increase in cash                                               255,091       111,924

Cash
   Beginning of year                                               260,996       149,072
                                                                ----------    ----------

   End of year                                                  $  516,087    $  260,996
                                                                ==========    ==========
</TABLE>

                                       50
<PAGE>
 
                        MARKET AND DIVIDEND INFORMATION

TRADING IN THE COMMON STOCK

        The Company's common stock is listed over-the-counter through the
National Daily Quotation System "Pink Sheets" published by the National
Quotation Bureau, Inc. There are currently 470,182 shares of the common stock
outstanding and approximately 597 holders of record of the common stock (not
including shares held in "street name") as of March 10, 1998.

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


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.

                                       51
<PAGE>
 
     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 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.

                                       52

<PAGE>
 
<TABLE>
<CAPTION>
                                                        BOARD OF DIRECTORS
<S>                                                          <C>                                 <C>
BERNARD L. SIEGEL                                            MICHAEL J. SCIBINICO                DORIS P. SCOTT
Chairman of the Board of the Company and the Bank            Treasurer and Director of the       Director of the Bank
                                                             Company and the Bank
  
MARY B. HALSEY                                               THOMAS L. FOARD                     HOWARD B. TOME
President, Chief Executive Officer and Director of the       Secretary and Director of the       Director of the Bank
 Company and the Bank                                        Company and the Bank
 
WILLIAM F. BURKLEY                                           HOWARD J. NEFF
Vice President and Director of the Company and the Bank      Director of the Bank
 
 
                                                        EXECUTIVE OFFICERS
 
BERNARD L. SIEGEL                                            WILLIAM F. BURKLEY                  MICHAEL J. SCIBINICO
Chairman of the Board of the Company and the Bank            Vice President and Director of      Treasurer and Director of the
                                                             the Company and the Bank            Company and the Bank
 
MARY B. HALSEY                                               THOMAS L. FOARD
President, Chief Executive Officer and Director of the       Secretary and Director of the
 Company and the Bank                                        Company and the Bank
 
</TABLE> 
<TABLE> 
<CAPTION> 
 
                                                OFFICE LOCATIONS
<S>                                                                     <C>  
                       MAIN OFFICE:                                     BRANCH OFFICE:
                       127 North Street                                 108 North East Plaza
                       Elkton, Maryland 21921-5547                      North East, Maryland 21901
</TABLE> 
<TABLE> 
<CAPTION> 
  
                                                GENERAL INFORMATION
<S>                                             <C>                                              <C> 
INDEPENDENT PUBLIC ACCOUNTANTS                   ANNUAL MEETING                                  ANNUAL REPORT ON FORM 10-K
Simon, Master & Sidlow, P.A.                     The 1998 Annual Meeting of                      A copy of the Company's Annual
Certified Public Accountants                     Stockholders will be held at the                Report on Form 10-KSB for the
                                                 Swiss Inn, Elkton, Maryland on                  fiscal year ended December 31,
GENERAL COUNSEL                                  Wednesday, April 15, 1998 at 9:00               1997 as filed with the Securities
William B. Calvert, Esq.                         a.m.                                            and Exchange Commission will be
101 Courthouse Plaza                                                                             furnished without charge to
Elkton, Maryland  21921                          TRANSFER AGENT AND REGISTRAR                    stockholders as of the record date
                                                 Registrar and Transfer Company                  for the 1998 Annual Meeting upon
SPECIAL COUNSEL                                  10 Commerce Drive                               written request to Mary B. Halsey,
Housley Kantarian & Bronstein, P.C.              Cranford, New Jersey  07016                     127 North Street, P.O. Box 568,
1220 19th Street, N.W.  Suite 700                                                                Elkton, Maryland  21922-0568.
Washington, D.C.  20036
 
</TABLE>

                                       53