CECIL BANCORP INC - Quarter Report: 2009 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________

 

FORM 10-Q

 

 

OR

 

 

Commission File Number 0-24926

 

 

 

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[ x ] YES         [ ] NO

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[ ] YES           [ x ] NO

 

APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

At October 30, 2009, there were 3,689,346 shares of common stock outstanding

CECIL BANCORP INC. AND SUBSIDIARIES

 

CONTENTS

 

 

 

 

 

CECIL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

 

 

See accompanying notes to consolidated financial statements.

 

CECIL BANCORP, INC. AND SUBSIDIARIES

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

(dollars in thousands, except per share data)

 

 

 

 

CECIL BANCORP, INC. AND SUBSIDIARIES

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

(dollars in thousands, except per share data)

 

(Continued)

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

 

CECIL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(dollars in thousands)

 

 

See accompanying notes to consolidated financial statements.

 

CECIL BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

 

 

In the opinion of Cecil Bancorp, Inc. and subsidiaries (the “Company”), the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2009 and the results of its operations and cash flows for the three and nine months ended September 30, 2009 and 2008. These statements are condensed and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The statements should be read in conjunction with the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year or for any other period. The Company has evaluated subsequent events for potential recognition and/or disclosure through November 13, 2009, the date the consolidated financial statements included in this Form 10-Q are being issued.

 

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used when accounting for uncollectible loans, depreciation and amortization, intangible assets, deferred income taxes, and contingencies, among others. Actual results could differ from those estimates.

 

 

In April 2009, the Financial Accounting Standards Board (“FASB”) issued Financial Statement of Position FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2/124-2”), now included in the Codification as part of FASB ASC 320-10-35. FASB has issued the staff positions to address concerns regarding (1) determining whether a market is not active and a transaction is not orderly, (2) recognition and presentation of other-than-temporary impairments and (3) interim disclosures of fair values of financial instruments. The staff positions will be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted the staff positions effective for the period ending June 30, 2009, but that adoption did not result in a material effect on consolidated results of operations.

 

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”), now included in the Codification as part of FASB ASC 270-10-05. This standard requires disclosures about fair value of financial instruments in interim and annual financial statements. The Company adopted this standard effective for the quarter ending June 30, 2009, but the adoption did not result in a material effect consolidated financial position or results of operations.

 

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), now included in the Codification as part of FASB ASC 855-10-55. This standard is intended to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. This standard is effective for interim or annual financial periods ending after June 15, 2009.

 

In June 2009, the FASB issued SFAS No. 166 (not incorporated into the Codification yet), a revision to SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and will require more information about transferred of financial assets and where companies have continuing exposure to the risks related to transferred financial assets. SFAS 166 is effective at the start of a company’s first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis.

 

In June 2009, the FASB issued SFAS No. 167 (not incorporated into the Codification yet), a revision to FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities,” and will change how a company determines when an

 

 

entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. Under SFAS No. 167, determining whether a company is required to consolidate an entity will be based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 is effective at the start of a company’s first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis.

 

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162.”  The change initiated by this Statement is now included in the Codification as FASB ASC 105-10-10 and establishes the Financial Accounting Standards Board (FASB) Accounting Standards Codification as the source of authoritative principles and standards recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP).  Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this standard, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative. This standard is effective for financial statements issued for interim and annual periods ending after September 15, 2009. In the FASB’s view, the Codification does not change GAAP, except for those nonpublic nongovernmental entities that must apply the American Institute of Certified Public Accountants Technical Inquiry Service Section 5100, “Revenue Recognition,” paragraphs 38–76, now included as part of FASB ASC Topic 985. The Company adopted FASB ASC Topic 105-10-10 effective for the quarter ending September 30, 2009. The adoption did not have an impact on the Company’s financial position or results of operations.

 

 

Basic earnings per common share are computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are computed after adjusting the denominator of the basic earnings per share computation for the effects of all dilutive potential common shares outstanding during the period. The dilutive effects of options, warrants, and their equivalents are computed using the “treasury stock” method. For the three and nine months ended September 30, 2009, all options and warrants were excluded from the diluted earnings per share calculation because their effect was antidilutive. For the three and nine months ended September 30, 2008, there were no options excluded from the diluted earnings per share calculation because their effect was antidilutive.

 

 

 

 

5.      ACCOUNTING FOR STOCK OPTIONS

 

No options were granted or vested during the three and nine months ended September 30, 2009 and 2008. A summary of the Company’s stock option activity, and related information for the periods indicated is as follows:

 

 

 

 

In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements”, now included in the Codification as part of FASB ASC 820-10-50. ASC 820-10-50 establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. While the Statement applies under other accounting pronouncements that require or permit fair value measurements, it does not require any new fair value measurements. ASC 820-10-50 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In addition, the Statement establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 assets are valued based on readily available pricing sources for transactions involving identical assets. Level 2 assets are valued based on transactions in less active markets. Valuations are obtained from third parting pricing services which use observable inputs for comparable assets other than level 1 assets. Level 3 assets are valued based on unobservable inputs that are supported by little or no market activity that are significant to the fair value. Lastly, ASC 820-10-50 requires additional disclosures for each interim and annual period separately for each major category of assets and liabilities. The following table shows the value (in thousands) at September 30, 2009 of each major category of assets measured at fair value on the consolidated balance sheets, which consists solely of investment securities available-for-sale. The changes in fair value were reflected as a component of other comprehensive income and did not affect net income.

 

 

 

We may be required from time to time to measure certain other financial assets and liabilities at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower of cost or market accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis at September 30, 2009, the following table provides (in thousands) the level of valuation assumptions used to determine each adjustment and the carrying value of the assets. For both other real estate owned and impaired loans, Level 3 assets are valued at the lesser of the unpaid principal balance of the loan, or the appraised value of the underlying collateral, as determined by a third party appraiser.

 

 

 

 

 

SFAS No. 107 “Disclosure About Fair Value of Financial Instruments”, now included in the Codification as part of FASB ASC 825-10-50 requires that the Company 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 Company’s financial instruments. Changes in estimates and assumptions could have a significant impact on these fair values.

 

Cash and Cash Equivalents - The fair values of cash and cash equivalents approximate their carrying values.

 

Investment Securities - The fair values of investment securities 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 - 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.

 

Accrued Interest Receivable - The fair value of the Company’s interest receivable approximates its carrying value.

 

Restricted Investment Securities - The fair value of the Company’s investment in stock of the FHLB and FRB approximates its carrying value.

 

Deposits - The fair values of deposits are estimated using a discounted cash flow calculation, adjusted for estimated decay rates, that applies interest rates currently offered for funding sources with similar maturities. Assumptions regarding discount rates and decay estimates are judgmentally determined by using available market information.

 

Advances from the FHLB - The fair value of FHLB advances was estimated by computing the discounted value of contractual cash flows payable at current interest rates for obligations with similar remaining terms.

 

Commitments to Extend Credit - The Company charges fees for commitments to extend credit. Interest rates on loans for which these commitments are extended are normally committed for periods of less than one month. Fees charged on standby letters of credit and other financial guarantees are deemed to be immaterial and these guarantees are expected to be settled at face amount or expire unused. It is impractical to assign any fair value to these commitments.

 

 

 

 

 

The estimated fair values of financial instruments (in thousands) at September 30, 2009 are as follows:

 

 

 

 

 

Investment securities have been classified in the consolidated balance sheets according to management’s intent and ability to hold the investment. Investment securities at September 30, 2009 and December 31, 2008 are summarized in the following table (in thousands).

 

 

 

As of September 30, 2009, unrealized losses (in thousands) on securities were comprised of the following based on the length of time that the securities have been in a continuous loss position:

 

 

 

The securities with unrealized holding losses are impaired due to declines in fair value resulting from changes in interest rates. None of these securities have exhibited a decline in value due to changes in credit risk. Additionally, the Company has the intent and ability to hold the mortgage-backed securities until they mature, and the equity securities until the foreseeable future, and does not expect to realize losses on any of the investments. Therefore, management does not consider the declines in fair value to be other than temporary.

 

 

CECIL BANCORP, INC. AND SUBSIDIARIES

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008

 

Forward-Looking Statements. This Management’s Discussion and Analysis of financial condition and results of operations and other portions of this report include forward-looking statements such as: statements of the Company’s goals, intentions, and expectations; estimates of risks and of future costs and benefits; assessments of loan quality and of possible loan losses; and statements of the Company’s ability to achieve financial and other goals. These forward-looking statements are subject to significant uncertainties because they are based upon: future interest rates, market behavior, and other economic conditions; future laws and regulations; and a variety of other matters. Because of these uncertainties, the actual future results may be materially different from the results indicated by these forward-looking statements. In addition, the Company’s past growth and performance do not necessarily indicate its future results.

 

You should read this Management’s Discussion and Analysis of the Company’s consolidated financial condition and results of operations in conjunction with the Company’s unaudited consolidated financial statements and the accompanying notes.

 

General

Cecil Bancorp, Inc. (the “Company”) is the holding company for Cecil Bank (the “Bank”). The Company is subject to regulation by the Federal Reserve System. The Bank is a community-oriented Maryland chartered commercial bank, is a member of the Federal Reserve Bank (“FRB”) of Richmond and the Federal Home Loan Bank (“FHLB”) of Atlanta, and is an Equal Housing Lender. Its deposits are insured by the Deposit Insurance Fund (“DIF”) of the Federal Deposit Insurance Corporation (“FDIC”). The Bank commenced operations in 1959 as a Federal savings and loan association. On October 1, 2002, the Bank converted from a stock federal savings bank to a commercial bank. Its deposits have been federally insured up to applicable limits, and it has been a member of the FHLB system since 1959.

The Bank conducts its business through its main office in Elkton, Maryland, and branches in Elkton, North East, Fair Hill, Rising Sun, Cecilton, Aberdeen, Conowingo, and Havre de Grace, Maryland.

 

The Bank’s business strategy is to operate as an independent, community-oriented commercial bank dedicated to real estate, commercial, and consumer lending, funded primarily by retail deposits. The Bank has sought to implement this strategy by (1) continuing to emphasize residential mortgage lending through the origination of adjustable rate mortgage loans while increasing its commercial and consumer lending portfolios; (2) investing in adjustable rate and short-term liquid investments; (3) controlling interest rate risk exposure; (4) maintaining asset quality; (5) containing operating expenses; and (6) maintaining “well capitalized” status. The Bank offers a full range of brokerage and investment services through a relationship with Community Bankers Securities, LLC.

 

In December, 2008, the Company sold 11,560 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) at $1,000 per share and simultaneously issued a ten-year warrant to purchase 261,538 shares of the Company’s common stock at $6.63 per share to the United States Department of the Treasury as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program. The Series A Preferred Stock pays cumulative quarterly dividends at a rate of 5% per annum for the first five years, and, unless earlier redeemed, 9% per annum thereafter. We may not declare or pay a dividend or other distribution on our common stock (other than dividends payable solely in common stock), and we generally may not directly or indirectly purchase, redeem or otherwise acquire any shares of common stock unless all accrued and unpaid dividends on the Series A Preferred Stock have been paid in full. Whenever six or more quarterly dividends, whether or not consecutive, have not been paid, the holders of the Series A Preferred Stock will have the right to elect two directors until all accrued but unpaid dividends have been paid in full. Holders of the Series A Preferred Stock will also have the right to vote as a class on certain amendments to our Articles of Incorporation and on certain mergers. Until the third anniversary of the issuance of the Series A Preferred Stock or its earlier redemption or transfer by the Department of Treasury to an unaffiliated holder, the Company may not increase the dividend on the common stock or repurchase any shares of common stock. In the event of any liquidation or dissolution of the Company, holders of the Series A Preferred Stock will have priority over holders of the common stock to the extent of (i) the liquidation amount of $1,000 per share and (ii) the amount of any accrued and unpaid dividends.

 

 

Asset/Liability Management

 

The ability to maximize net interest income is largely dependent upon the achievement of a positive interest rate spread (the difference between the weighted average interest yields earned on interest-earning assets and the weighted average interest rates paid on interest-bearing liabilities) that can be sustained during fluctuations in prevailing interest rates. The Company’s asset/liability management policies are designed to reduce the impact of changes in interest rates on its net interest income by achieving a favorable relationship between the maturities or repricing dates of its interest-earning assets and interest-bearing liabilities. The Bank’s lending policy emphasizes the origination of one-year, three-year, or five-year adjustable rate mortgage loans, adjustable rate commercial loans and lines of credit, and short-term consumer loans. The Bank is currently originating residential mortgage loans for sale in the secondary market through the Federal Home Loan Mortgage Corporation. Management has been monitoring the retention of fixed rate loans through its asset/liability management policy.

 

Comparison of Financial Condition at September 30, 2009 and December 31, 2008

 

The Company’s assets increased by $4.8 million, or 1.0%, to $497.2 million at September 30, 2009 from $492.4 million at December 31, 2008 primarily as a result of increases in loans receivable, other assets, and other real estate owned, partially offset by an increase in the allowance for loan losses and decreases in investment securities available-for-sale and cash and cash equivalents. This increase was funded by increases in deposits and other liabilities.

 

Cash and cash equivalents decreased by $8.7 million, or 20.1%, to $32.7 million at September 30, 2009 from $41.4 million at December 31, 2008 primarily due to growth in the loans receivable portfolio and the repayment of brokered deposits. Investment securities available-for-sale decreased by $10.0 million, or 85.2%, to $1.7 million at September 30, 2009 from $11.7 million at December 31, 2008 primarily due to the maturity of a FNMA discount note. Restricted investment securities, which consist of Federal Home Loan and Federal Reserve Bank stock, increased by $478,000, or 12.2%, to $4.4 million at September 30, 2009 from $3.9 million at December 31, 2008 as a result of the ongoing review of the investment requirements by the FHLB and the FRB.

 

Gross loans receivable increased by $25.7 million, or 6.3%, to $433.8 million at September 30, 2009 from $408.1 million at December 31, 2008, primarily as a result of increased marketing efforts of our business development and loan departments. During the period, we realized a $23.4 million (16.4%) increase in commercial real estate loans, a $4.8 million (30.1%) increase in commercial business loans, and a $3.3 million (2.5%) increase in one-to-four family residential and home equity loans, offset in part by a $5.4 million (5.2%) decrease in construction loans. The allowance for loan losses increased by $7.8 million, or 122.9%, during the period (see “Analysis of Allowance for Loan Losses” below). The increase in the allowance for loan losses is a result of the consequences of an unpredictable economy and an unstable financial and real estate market, which has led to an increase in nonperforming assets and charge-offs during 2009. Additional provisions have been added for several development loans whose progress has slowed due to the slowdown in home sales. Management is anticipating that developers will have to carry projects for a longer period than anticipated. The Bank has added additional provisions based on the current condition of the economy. A now sustained period of slow home sales, higher unemployment, and increased delinquencies have been taken into consideration when reviewing the methodology. Management has determined that increased provisions for all of these factors are necessary to reflect the losses within the portfolio as of the balance sheet date.

 

Other real estate owned increased by $2.4 million, or 85.3%, to $5.3 million at September 30, 2009 from $2.8 million at December 31, 2008 due to the acquisition of properties securing nonperforming loans receivable. Other assets increased by $2.6 million, or 44.7%, to $8.5 million at September 30, 2009 from $5.9 million at December 31, 2008 primarily as a result of an increase in income taxes receivable arising from the income tax benefit associated with the net loss.

 

The Company’s liabilities increased $7.8 million, or 1.7%, to $459.8 million at September 30, 2009 from $452.0 million at December 31, 2008. Deposits increased $6.7 million, or 1.8%, to $371.2 million at September 30, 2009 from $364.6 million at December 31, 2008. Increases in certificates of deposit (up $40.3 million, or 20.3%), NOW accounts (up $5.2 million, or 25.5%), checking accounts (up $4.0 million, or 20.3%), IRA certificates (up $3.2 million, or 21.5%), money market accounts (up $1.8 million, or 28.9%), and statement savings accounts (up $1.2 million, or 13.8%), partially offset by a decrease in money market certificates (down $1.1 million, or 15.9%), were primarily due to marketing campaigns and product specials focused on local core funding. These core deposit changes were negatively impacted by a decline of $47.6 million, or 60.8%, in national certificates of deposit as part of the Bank’s continuing effort to pay off all brokered deposits during the second and third quarters of 2009. Other liabilities increased by $1.2 million, or 17.8%, to $7.9 million at September 30, 2009 from $6.7 million at December 31, 2008 primarily due to increases in SERP payable and the amount owed to MoneyGram Payment Systems for the official checks written on September 30, 2009.

 

 

The Company’s stockholders’ equity decreased by $3.0 million, or 7.5%, to $37.4 million at September 30, 2009 from $40.4 million at December 31, 2008. This decrease is primarily the result of a net loss of $2.2 million, the Company’s regular cash dividend of $0.075 per common share, or $277,000, preferred stock dividends paid totaling $517,000, and a $5,000 decrease in the Company’s accumulated other comprehensive income, partially offset by $17,000 in proceeds received from the sale of common stock associated with new shares issued through the Company’s dividend reinvestment plan.

 

Comparison of Results of Operations for the Three Months Ended September 30, 2009 and 2008

 

Net loss for the three month period ended September 30, 2009 was $2.2 million, a decrease of $3.1 million, or 341.2%, from net income of $920,000 earned over the same period in 2008. This decrease was primarily the result of an increase in the provision for loan losses, partially offset by increases in net interest income and noninterest income and a decrease in income tax expense. Net loss available to common stockholders for the three-month period ended September 30, 2009 was $2.4 million as compared to net income available to common stockholders for the same period in 2008 of $920,000. Net loss available to common stockholders for the 2009 period reflects $177,000 in dividends and discount accretion on the Series A Preferred Stock in addition to the net loss for the period. Basic and diluted loss per common share was $0.65 for the third quarter of 2009 as compared to basic and diluted earnings per common share of $0.25 for the third quarter of 2008. The annualized return on average assets and annualized return on average equity were -1.71% and -22.18%, respectively, for the three-month period ended September 30, 2009. This compares to an annualized return on average assets and annualized return on average equity of 0.84% and 12.71%, respectively, for the same period in 2008.

 

Net interest income, the Company’s primary source of income, increased 15.9%, or $638,000, to $4.6 million for the three months ended September 30, 2009, from $4.0 million over the same period in 2008. The weighted average yield on interest earning assets decreased to 6.52% for the three months ended September 30, 2009 from 7.36% for the three months ended September 30, 2008. The weighted average rate paid on interest bearing liabilities decreased to 2.63% for the three months ended September 30, 2009 from 3.40% for the three months ended September 30, 2008. The interest rate spread and the net interest margin were 3.88% and 3.91%, respectively, for the quarter ended September 30, 2009, as compared to 3.96% for both ratios for the quarter ended September 30, 2008.

 

Interest and fees on loans receivable increased by $362,000, or 4.9%, to $7.7 million for the three months ended September 30, 2009 from $7.3 million for the three months ended September 30, 2008. The increase is attributable to an increase in the average balance outstanding, partially offset by a decrease in the weighted-average yield. The average balance outstanding increased by $28.6 million to $421.9 million for the three months ended September 30, 2009 from $393.3 million for the three months ending September 30, 2008. The weighted-average yield decreased to 7.29% for the three months ended September 30, 2009 from 7.45% for the three months ended September 30, 2008.            

 

Interest income on investment securities decreased $38,000, or 61.3%, to $24,000 for the three months ended September 30, 2009 from $62,000 for the three months ended September 30, 2008. The average balance outstanding decreased $2.4 million to $2.1 million for the three months ended September 30, 2009 from $4.4 million for the three months ended September 30, 2008. The weighted-average yield decreased to 4.66% for the three months ended September 30, 2009 from 5.56% for the three months ended September 30, 2008.

 

Dividends on FHLB and FRB stock decreased $20,000, or 52.6%, to $18,000 for the three months ended September 30, 2009 from $38,000 for the three months ended September 30, 2008 due to a decrease in the crediting rate paid by FHLB. The average balance outstanding decreased $605,000 to $4.4 million for the three months ended September 30, 2009 from $5.0 million for the three months ended September 30, 2008. The weighted-average yield decreased to 1.59% for the three months ended September 30, 2009 from 3.10% for the three months ended September 30, 2008.

 

Interest expense on deposits decreased $175,000, or 7.4%, to $2.2 million for the three months ended September 30, 2009 from $2.4 million for the three months ended September 30, 2008. The average balance outstanding increased $92.6 million, or 31.2%, to $389.5 million for the three months ended September 30, 2009 from $296.9 million for the same period in 2008. The weighted-average rate decreased to 2.25% for the three months ended September 30, 2009 from 3.19% for the three months ended September 30, 2008.

 

 

There was no interest expense on fed funds purchased for the three months ended September 30, 2009 as compared to $13,000 for the three months ended September 30, 2008 since there were no fed funds purchased during the quarter. The average balance of fed funds purchased outstanding was $1.7 million and the weighted-average rate was 3.12% for the three months ended September 30, 2008.

 

Interest expense on advances from the FHLB decreased $145,000, or 18.9%, to $622,000 for the three months ended September 30, 2009 from $767,000 for the three months ended September 30, 2008. The average balance outstanding decreased $23.9 million to $63.7 million for the three months ended September 30, 2009 from $87.6 million for the three months ended September 30, 2008. The weighted average rate increased to 3.91% for the three months ended September 30, 2009 from 3.50% for the three months ended September 30, 2008.

 

The provision for loan losses increased by $6.1 million to $6.5 million for the three months ended September 30, 2009 from $330,000 over the same period in 2008 (see “Analysis of Allowance for Loan Losses” below).

 

Noninterest income increased 106.0%, or $369,000, to $717,000 for the three months ended September 30, 2009, from $348,000 over the same period in 2008. Deposit account fees increased $21,000 to $186,000 for the three months ended September 30, 2009 from $165,000 for the same period in 2008. Commission income decreased $11,000 to $2,000 for the three months ended September 30, 2009 from $13,000 for the three months ended September 30, 2008. Gain on sale of loans increased by $273,000 to $305,000 for the third quarter of 2009 as compared to $32,000 during the three months ended September 30, 2008 primarily due to one loan that was sold for a gain of $250,000. There were no investment gains or losses during the three months ended September 30, 2009 as compared to a $106,000 impairment loss on the Company’s investment in Triangle Capital Corporation for the three months ended September 30, 2008. Income from bank owned life insurance decreased by $35,000, or 43.2%, to $46,000 for the three months ended September 30, 2009 from $81,000 for the three months ended September 30, 2008 due to a decrease in the crediting rate paid by the carriers.

 

Noninterest expense increased $77,000, or 3.0%, to $2.6 million for the three months ended September 30, 2009, from $2.5 million over the same period in 2008. Salaries and employee benefits decreased $93,000, or 6.0%, to $1.5 million for the three months ended September 30, 2009 as compared to $1.6 million over the same period in 2008 primarily due to declines in supplemental executive retirement plan expense and bonuses. Occupancy expense decreased by $19,000, or 10.6%, to $161,000 for the three months ended September 30, 2009 from $180,000 for the same period in 2008 primarily due a decrease in utilities expense. Equipment and data processing expenses decreased $56,000, or 15.8%, to $298,000 for the three months ended September 30, 2009 from $354,000 for the three months ended September 30, 2008 primarily due to a decrease in fees for the Company’s data service provider. The FDIC insurance premium expense increased by $101,000, or 146.4%, to $170,000 for the three months ended September 30, 2009 from $69,000 for the three months ended September 30, 2008 partially due to the significant increase in deposits over the period. Additionally, beginning in January 2009, the FDIC doubled the assessment rate for most insured institutions. In order to increase the funds available to the Deposit Insurance Fund, the FDIC is requiring all insured depository institutions to prepay their federal deposit insurance assessments through 2012. The prepayment will be due December 30, 2009 and will be based on the institution’s assessment base and assessment rate as of September 30, 2009 assuming a 5% annual growth in deposits  and three basis point increase in the assessment rate  during years 2011 and 2012. Based on our deposits and assessment rate at September 30, 2009, we estimate that our prepayment amount will be approximately $2 million. We expect that we will be able to make the prepayment from available cash on hand. Other expenses increased $144,000, or 38.0%, to $523,000 for the three months ended September 30, 2009 from $379,000 for the three months ended September 30, 2008, primarily as a result of increases in other real estate owned expense due to an increase in the number of properties, as well as valuation adjustments resulting from the unstable real estate market.

 

Income tax benefit for the three-month period ended September 30, 2009 was $1.5 million as compared to income tax expense of $565,000 for the same period in 2008, which equates to effective rates of 40.3% and 38.0% respectively.

 

Comparison of Results of Operations for the Nine Months Ended September 30, 2009 and 2008

 

Net loss for the nine month period ended September 30, 2009 was $2.2 million, a decrease of $4.8 million, or 187.7%, as compared to net income of $2.6 million for the same period in 2008. This decrease was primarily the result of an increase in the provision for loan losses and noninterest expense, partially offset by increases in net interest income and noninterest income and a decrease in income tax expense. Net loss available to common stockholders for the nine-month period ended September 30, 2009 was $2.9 million as compared to net income available to common stockholders for the same period in 2008 of $2.6 million. Net loss available to common stockholders for the 2009 period reflects $614,000 in dividends and discount accretion on the Series A Preferred Stock in addition to the net loss for the period. Basic and diluted loss per common share were both $0.77 for the first nine months of 2009, a decrease of 211.6% from the earnings per common share of $0.69 for the first nine months of 2008. The

 

 

annualized return on average assets and annualized return on average equity were -0.60% and -7.49%, respectively, for the nine month period ended September 30, 2009. This compares to an annualized return on average assets and annualized return on average equity of 0.81% and 12.08%, respectively, for the same period in 2008.

 

Net interest income, the Company’s primary source of income, increased 16.6%, or $1.9 million, to $13.3 million for the nine months ended September 30, 2009, from $11.4 million over the same period in 2008. The weighted-average yield on interest earning assets decreased to 6.65% for the nine months ended September 30, 2009 from 7.54% for the nine months ended September 30, 2008. The weighted average rate paid on interest bearing liabilities decreased to 2.81% for the nine months ended September 30, 2009 from 3.62% for the nine months ended September 30, 2008. The interest rate spread and the net interest margin were 3.84% and 3.88%, respectively, for the nine-month period ended September 30, 2009 as compared to 3.92% for both ratios for the same period in 2008.

 

Interest and fees on loans receivable increased by $1.1 million, or 5.3%, to $22.6 million for the nine months ended September 30, 2009 from $21.5 million for the nine months ended September 30, 2008. The average balance outstanding increased $37.1 million, or 9.9%, to $413.7 million for the nine months ended September 30, 2009 from $376.6 million for the nine months ended September 30, 2008. The weighted-average yield decreased to 7.28% for the nine months ended September 30, 2009 from 7.60% for the nine months ended September 30, 2008.

 

Interest income on investment securities decreased $75,000, or 40.5%, to $110,000 for the nine months ended September 30, 2009 from $185,000 for the nine months ended September 30, 2008. The average balance outstanding decreased $532,000, or 11.2%, to $4.2 million for the nine months ended September 30, 2009 from $4.7 million for the nine months ended September 30, 2008. The weighted-average yield decreased to 3.49% for the nine months ended September 30, 2009 from 5.20% for the nine months ended September 30, 2008.

 

Dividends on FHLB and FRB stock decreased $151,000 to $30,000 for the nine months ended September 30, 2009 from $181,000 for the same period in 2008. The Federal Home Loan Bank of Atlanta discontinued dividend payments for the first half of 2009, and although a dividend was received during the third quarter, it was at a much lower rate than the corresponding period in 2008. The weighted-average yield decreased to 0.92% for the nine months ended September 30, 2009 from 4.92% for the nine months ended September 30, 2008. The average balance outstanding decreased $630,000, or 12.8%, to $4.3 million for the nine months ended September 30, 2009 as compared to $4.9 million for the nine months ended September 30, 2008.

 

Interest expense on deposits decreased $573,000, or 7.8%, to $6.8 million for the nine months ended September 30, 2009 from $7.4 million for the nine months ended September 30, 2008. The average balance outstanding increased $86.7 million, or 30.7%, to $369.2 million for the nine months ended September 30, 2009 from $282.5 million for the nine months ended September 30, 2008. The weighted-average rate decreased to 2.46% for the nine months ended September 30, 2009 from 3.49% for the nine months ended September 30, 2008.

 

Interest expense on fed funds purchased decreased by $12,000, or 92.3%, to $1,000 for the nine months ended September 30, 2009 from $13,000 for the nine months ended September 30, 2008. The average balance outstanding decreased by $402,000, or 69.6%, to $176,000 for the nine months ended September 30, 2009 from $578,000 for the nine months ended September 30, 2008. The weighted-average rate decreased to 0.97% for the nine months ended September 30, 2009 from 3.10% for the nine months ended September 30, 2008.

 

Interest expense on advances from the FHLB decreased $394,000, or 17.6%, to $1.8 million for the nine months ended September 30, 2009 from $2.2 million for the nine months ended September 30, 2008. The weighted average cost of funds increased to 3.87% for the nine months ended September 30, 2009 from 3.46% for the nine months ended September 30, 2008. The average balance outstanding decreased $22.5 million, or 26.1%, to $63.7 million for the nine months ended September 30, 2009 from $86.3 million for the nine months ended September 30, 2008.

 

The provision for loan losses increased by $9.4 million to $10.3 million for the nine months ended September 30, 2009 from $930,000 over the same period in 2008 (see “Analysis of Allowance for Loan Losses” below).

 

Noninterest income increased 29.8%, or $364,000, to $1.6 million for the nine months ended September 30, 2009, from $1.2 million over the same period in 2008. Deposit account fees increased $15,000, or 3.1%, to $497,000 for the nine months ended September 30, 2009 from $482,000 for the same period in 2008. ATM fees increased $25,000, or 9.1%, to $299,000 for the nine months ended September 30, 2009 from $274,000 for the nine months ended September 30, 2008 due to an increase in fees from increased use of debit cards. Commission income decreased $42,000 to $7,000 for the nine months ended September 30, 2009 from $49,000 for the nine months ended September 30, 2008. Gain on sale of loans increased $287,000, or 205.0%, to

 

 

$427,000 for the nine months ended September 30, 2009 from $140,000 for the nine months ended September 30, 2008 primarily due to one loan that was sold for a gain of $250,000. Gain on sale of other real estate owned increased by $140,000 to $151,000 for the nine months ended September 30, 2009 as compared to $11,000 during the nine months ended September 30, 2008. There were no investment gains or losses during the nine months ended September 30, 2009 as compared to a $106,000 impairment loss on the Company’s investment in Triangle Capital Corporation for the nine months ended September 30, 2008. Income from bank owned life insurance decreased by $153,000, or 82.7%, to $32,000 for the nine months ended September 30, 2009 from $185,000 for the nine months ended September 30, 2008 due to a decrease in the crediting rate paid by the carriers, as well as surrender charges incurred during the period due to a change in insurance carriers. Other income decreased $14,000 to $171,000 for the nine months ended September 30, 2009 from $185,000 for the nine months ended September 30, 2008 primarily due declines in income from the Company’s investment in Maryland Title Center LLC, as well as decreases in rental income and miscellaneous fees.

 

Noninterest expense increased $775,000, or 10.3%, to $8.3 million for the nine month period ended September 30, 2009 from $7.5 million for the nine months ended September 30, 2008. Salaries and employee benefits decreased $87,000, or 1.8%, to $4.7 million for the nine months ended September 30, 2009 from $4.8 million over the same period in 2008 primarily due to declines in supplemental executive retirement plan expense and bonuses. Equipment and data processing expenses decreased $84,000, or 8.4%, to $921,000 for the nine months ended September 30, 2009 from $1.0 million over the same period in 2008 due to decreased fees from the Company’s data service provider, a decrease in depreciation expense on furniture, fixtures, and equipment, and a decline in small equipment purchases. The FDIC insurance premium expense increased by $421,000, or 182.3%, to $652,000 for the nine months ended September 30, 2009 from $231,000 for the nine months ended September 30, 2008 partially due to the significant increase in deposits over the period. Additionally, beginning in January 2009, the FDIC doubled the assessment rate for most insured institutions. In addition, the FDIC imposed a special assessment on all FDIC-insured institutions equal to 5 basis points of assets less Tier 1 capital as of June 30, 2009. For the bank, the special assessment totaled $240,000. Other expenses increased $529,000, or 54.1%, to $1.5 million for the nine months ended September 30, 2009 from $978,000 million for the nine months ended September 30, 2008, primarily as a result of increases in other real estate owned expense due to an increase in the number of properties, as well as valuation adjustments resulting from the unstable real estate market. Legal fees have increased primarily due to increased collection efforts associated with the increase in past due and other problem loans.

 

Income tax benefit for the nine month period ended September 30, 2009 was $1.5 million as compared to income tax expense of $1.6 million for the same period in 2008, which equates to effective rates of 39.6% and 38.5% respectively.

 

Loans Receivable

 

The Company’s lending activities are predominantly conducted in Cecil and Harford Counties in the State of Maryland. The following table shows the composition of the loan portfolio (in thousands) at the indicated dates.

 

 

 

 

 

Management reviews and identifies loans and investments that require designation as nonperforming assets. Nonperforming assets are: loans accounted for on a non-accrual basis, loans past due by 90 days or more but still accruing, restructured loans, and other real estate (assets acquired in settlement of loans). The increase in nonperforming assets is a result of the consequences of an unpredictable economy and an unstable financial and real estate market.

 

The following table sets forth certain information with respect to nonperforming assets.

 

 

 

Analysis of Allowance for Loan Losses

 

The Bank records provisions for loan losses in amounts necessary to maintain the allowance for loan losses at the level deemed appropriate. The allowance for loan losses is provided through charges to income in an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible, based upon evaluations of the collectibility of loans and prior loan loss experience. The allowance is based on careful, continuous review and evaluation of the credit portfolio and ongoing, quarterly assessments of the probable losses inherent in the loan portfolio. The Bank employs a systematic methodology for assessing the appropriateness of the allowance, which includes determination of a specific allowance, a formula allowance, and an unallocated allowance. During the first nine months of 2009, there were no changes in the Bank’s methodology for assessing the appropriateness of the allowance.

 

Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss may be incurred in an amount different from the amount determined by application of the formula allowance.

 

The formula allowance is calculated by applying loss factors to corresponding categories of outstanding loans, excluding loans for which specific allocations have been made. Allowances are established for credits that do not have specific allowances according to the application of these credit loss factors to groups of loans based upon (a) their credit risk rating, for loans categorized as substandard or doubtful either by the Bank in its ongoing reviews or by bank examiners in their periodic examinations, or (b) by type of loans, for other credits without specific allowances. These factors are set by management to reflect its assessment of the relative level of risk inherent in each category of loans, based primarily on historical charge-off experience.

 

The unallocated allowance is based upon management’s evaluation of various conditions that are not directly measured in the determination of the specific and formula allowances. These conditions may include the nature and volume of the loan portfolio, overall portfolio quality, and current economic conditions that may affect the borrowers’ ability to pay. In addition to these conditions, management has identified land acquisition and development loans, as well as construction speculation loans, as higher risk due to economic factors. Additionally, management has identified commercial business loans as higher risk based on the change in the nature and the volume of the portfolio over the last several periods. Therefore, management has allocated additional reserves to these two pools of loans over and above the specific and formula allowances.

 

Determining the amount of the allowance for loan losses requires the use of estimates and assumptions, which is permitted under accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates. While management uses available information to estimate losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, as noted above, federal and state financial institution examiners, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses, and may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

 

 

Management determined that the appropriate allowance for loan losses at September 30, 2009 was $14.0 million, (3.24% of total loans), an increase of $7.8 million (122.9%) from the $6.3 million allowance (1.55% of total loans) at December 31, 2008. Annualized net charge-offs for the first nine months of 2009 were 0.81% of average loans, as compared to net charge-offs of 0.05% of average loans for the year 2008. The provision for loan losses required for the first nine months of 2009 and 2008 was $10.3 million and $930,000, respectively. The increase in the allowance and provision for loan losses is a result of the consequences of an unpredictable economy and an unstable financial and real estate market, which has led to an increase in nonperforming assets and charge-offs during the first nine months of 2009. Additional provisions have been added for several development loans whose progress has slowed due to the slowdown in home sales. Management is anticipating that developers will have to carry projects for a longer period than anticipated. The Bank has added additional provisions based on the current condition of the economy. A now sustained period of slow home sales, higher unemployment, and increased delinquencies have been taken into consideration when reviewing the methodology. Management has determined that increased provisions for all of these factors are necessary to reflect the losses within the portfolio as of the balance sheet date.

 

A summary of activity in the allowance (in thousands) is shown below.

 

 

 

 

Analysis of Deposits

 

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

 

 

Capital Adequacy

 

Capital adequacy refers to the level of capital required to sustain asset growth and to absorb losses. The Board of Governors of the Federal Reserve System (“Federal Reserve”), which is the Bank’s principal federal regulator, has established requirements for total and tier 1 (core) risk-based capital and tier 1 leverage capital. The following table sets forth applicable capital ratios of the Bank as of September 30, 2009 and December 31, 2008.

 

 

 

As of September 30, 2009 and December 31, 2008, the Bank exceeded all applicable capital requirements to be classified as a well capitalized institution under the rules promulgated by the Board of Governors of the Federal Reserve System. Designation as a well capitalized institution under these regulations does not constitute a recommendation or endorsement by the Bank’s regulators.

 

 

 

 

Cecil Bancorp’s management, under the supervision and with the participation of its Chief Executive Officer and its Chief Financial Officer, evaluated as of the last day of the period covered by this report, the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There were no significant changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the quarter ended September 30, 2009, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II.         OTHER INFORMATION

 

 

 

Not Applicable

 

 

 

 

 

 

 

 

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.